Tag Archives: unlimited debt

The “Experience” Market Bubble

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May31_Secret

“There is truth deep down inside of you that has been waiting for you to discover it, and that Truth is this: you deserve all good things life has to offer. You know that inherently, because you feel awful when you are experiencing the lack of good things. All good things are your birthright!” – The Secret (2007), 41 weeks in top the five NY Times Hardcore Advice List; it opens my article, Fear and Perception, released on November 1, 20017, two days after Hong Kong’s Hang Seng stock index hit its highest level ever. So much for “all good things” being a “birthright”.

 

Four months earlier, on Thursday, July 19, 2007, I released a group email to all paid and free subscribers of Best Minds Inc. The email stated the following:

“Evidence is mounting that we are in the final throes of this worldwide, credit-fueled bubble. The wobbling dominoes certainly merit the attention of all investors and advisors.”

That same day, the Dow closed above 14,000 for the first time. It began its descent the next day, but roared back up to close 8 days above this level in October 2007 before starting its downward march through what is now known as the Great Recession. It would take until February 1, 2013, and the public watching the largest ongoing bailout of global banks ever, before the Dow would once again close above 14,000.

So if investors wanted to “experience” wealth, why was July 2007 a harbinger that their wealth was about to be taken from them? Because financial facts at the top of financial bubbles are very different from financial feelings.

By July 2007 I had already seen the Philly Banking Index decline since February. I had contacted a few of my Wall Street level sources for areas I should be watching. One individual told me to pay close attention to two big hedge funds at Bear Stearns that were close to being shut down. Their total value at the end of 2006 was close to $20 billion. On July 16, 2007, the two funds were closed. One source stated that one fund’s assets were valued at zero and the second at 9 cents on a dollar.

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Two Big Funds At Bear Stearns Face Shutdown, WSJ, June 20, 2007

“Two big hedge funds at Bear Stearns Cos. were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall Street and investors.

Merrill Lynch & Co., one of the hedge funds’ lenders, said it would move to seize collateral — much of it mortgage-backed debt — from the two funds and sell it, according to documents reviewed by The Wall Street Journal.”

Since this is all history now, everyone can say, “Oh, I knew that the markets were going to fall.” However, in July 2007, the mood was very different.

On Sunday, July 22nd, I ran into a financial advisor at my church. He had signed up for my free educational services, so had received the group email on the 19th.

“Hey, are you still looking for a collapse?” he said sarcastically.

“We all have our opinions”, I stated, and walked off.

A few weeks later, anyone reading headlines knew we had entered a credit crisis. However, since we are wired to desire more, and the financial industry feeds the idea that every decline is merely a correction before soaring higher, by October, breaking 14,000 again was seen as normal, and looking for prices to be cut in half seen as nothing more than “naysayers”.

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However, we all know today, that history was about to change the perception of investors in 2008. By the time these comments were made by President George W. Bush to the American people, we had already seen the collapse of Bear Stearns in March and the bankruptcy of Lehman Brothers and the nationalization of AIG in September. Like today, these events did not come because there were no financial facts supporting we were living in a financial bubble in 2007, but because the feeling from rising prices built on “unlimited” cheap debt was far more “positive” while it lasted.

[President George W. Bush, The Economy & The Bailout: Primetime Address to the Nation, Washington, DC, September 24, 2008]

“Good evening. This is an extraordinary period for America’s economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We’ve seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.

 

We’re in the midst of a serious financial crisis, and the federal government is responding with decisive action….

 

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday. First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow….”

It is no longer September 2008. It is now June 2016. The problems from the ultra cheap loans into the trillions that lead to the credit crisis of 2008 were never addressed. Global debt is now over $200 trillion, an increase of over $60 trillion since Q4 2007 when the Dow left its 14,000.

At the end of May 2016, the Dow is still hanging close to its all time high from over a year ago, and yet has seen two plunges from its 18,000 twice, both declines taking the Dow down over 2500 points in less than a month.

Yet even the most powerful financial organizations in the world continue to reveal that 7 years of “unlimited debt and intervention” have not created a strong growing economy.

The IMF Slashes World Growth Forecasts Again, CNBC, April 12, 2016

Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long,” IMF Chief Economist Maurice Obstefeld told a media conference on Tuesday, according to prepared remarks.

G7: Global Economic Growth An ‘Urgent Priority’, Al Jazeera, May 27, 2016

The leaders of the G7 group have said the world economy is an urgent priority and cautioned that a British vote to leave the European Union would seriously threaten global growth.

Act Now, Or Risk Another Deep Downturn, OECD Warns Policymarkets, Yahoo Finance, June 1, 2016

In the OECD’s (an international economic organization of 34 nations) latest economic outlook published on Wednesday, the organization said that global growth had “languished over the past eight years as OECD economies have struggled to average only 2 percent per year, and emerging markets have slowed, with some falling into deep recession”….

 

“The need is urgent. The longer the global economic remains in the low-growth trap, the more difficult it will be to break the negative feedback loops, revive market forces, and boost economies to the high-growth path. As it is, a negative shock could top the world back into another deep downturn,” Mann said.

World Bank Cuts Global Growth Forecast on Weak Demand, Commodity Prices, Financial Express, June 7 ’16

The World Bank slashed its 2016 global growth forecast on Wednesday to 2.4 percent from the 2.9 percent estimated in January due to stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows….

 

The downgraded World Bank forecast follows a similar move by the International Monetary Fund, which cut its growth forecasts two months ago.

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With all the strong concerns about the global economy slowing from the world financial organizations listed above, shouldn’t both investors and advisors be asking WHY does the Dow keep returning to its first in history 18,000 level, and ignoring headlines like the ones above?

Remember 2007 when the Dow went to 14,000 for the first time in 2007? Remember how the KBW Bank Index was dropping months ahead of the broader US stock indices. As of May 31, 2016, the KBW Bank Index, after two big drops, and two big rallies, is still down 12.4% lower than its 2015 high. Are the big banks telling everyone something?

Unlimited Debt and State Intervention Was Wrong From the Start

We are quickly running out of time to sit silent and ignore this 800-pound gorilla. We must choose between two paths. The first is to continue to ignore this problem, the lessons from the 2000-2002 and 2007-2009 collapse, and the destruction straight ahead to the lives of people all over the world. We must embrace the expansion of the state and the constant “assistance” we have seen since 2009 by central banks around the world through additional trillions in ongoing bailouts in our financial markets, even the direct actions to buy up certain markets in order to artificially inflate them for a few years.

The second is to face these real world problems. We must start quickly by talking about these problems, that will impact every individual, community, school, and place of worship across our nation, and for that matter, world.

Will we speak out? Will we sit silent? One thing is for certain, hoping for more corruption of our markets and economy by central bankers and global politicians is immoral.

The trouble is finding ways to talk about what our globalist, materialist centered world has come to believe is permanent, which never was: the path to riches from bankrupting the nations.

Everyone needs to consider the hard facts presented in one of my recent articles, When Rare Data Screams, Listen. Anyone who remembers the double-digit CD rates from the early 1980s really needs to check this one out. This is history!

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* 1981 – Annual high in the Dow was 1,050. US national debt crosses $1 trillion for the first time. 2015 – Annual high in the Dow hits 18,351 on May 19th. The last day of 2015 the national debt hits 18.9 trillion.

 

A Curious Mind

 

 

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Do Money Rail Lines End?

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TrainRailsEnd

Since 1971, the world has been on the train of unlimited debt. With the US dollar being removed from its gold standard, all checks against a continuing extension of the rail lines have been removed. Unlimited debt is now the “solution” to “random” financial crises caused by too much debt. “Prosperity” has evolved into a permanent rail line, or so we are lead to believe.

What individual getting on a train in California and riding to Virginia would be surprised when told they had come to the end of the line? Would they expect someone to extend the track another hundred or two hundred miles over the Atlantic? Even if that were the case and the ride was smooth for a little longer, there would be an uneasy feeling that consequences were coming.

This is not an American view, this is a world view. Anyone taking a train into Hong Kong, Tokyo, Sydney, or Rio de Janeiro would face the same problem if those lines were extended out over the ocean.

Yet this is exactly what is embedded in the minds of the public; the longer the line can be extended, the more prosperity can come from unlimited debt and state intervention.

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We know that a business or individual is not on a long-term sustainable path by taking on more and more debt to create wealth without paying down debt. So why believe that a nation can do this? Simple. Our experience.

An Italian Rail Line

For the individual reading this in 2024, you will see clearly how this story unfolded. But today, in 2016, the majority view is that global rail lines have infinite possibilities. Yet the minority voice is getting louder as the waves of problems get higher.

January news stories showed a rising level of non-performing loans in Italian Banks, loans where payments were either behind or had stopped.

This reached a level by the end of last year not seen since 1996.

Italian Bank’s Bad Loans Continue To Mount, MarketWatch, Jan 20 ’16

According to data published Tuesday by Italy’s banking lobby ABI, Italian banks’ gross bad loans, measured at their face value, stood at EUR201 billion in November, 11% higher than the same period a year prior.

Gross bad loans were 10.4% of total loans in November, the highest percentage figure since 1996.

Had the European Central Bank (big global central bank) provided bailouts for European banks before 2016? Of course, and at levels never seen in history.

Eurozone Bank Lending Slows Despite ECB’s 1 Trillion Cheap Loans, The Telegraph, April 20, 2012

ECB Poised To Launch 1 Trillion Quantitative Easing, The Guardian, January 22, 2015

So what was the solution for extending the rail lines recently?

Next Stop on the ECB Adventure: $980 Billion in Corporate Bonds, Bloomberg, March 10, 2016

Life goes on as abnormal, right? Yes, for the time being, but now without a great deal of misinformation to the public and yields plummeting so low on European government bonds that rebellion eventually comes.

Let me illustrate.

Mish Shedlock reveals one glaring problem from laying down this recent track to prosperity by the ECB. A reader of Shedlock’s writings, “Lars”, makes this observation:

The Italian central bank has under Target2 borrowed €250 billion, mainly from Bundesbank. The loan is unsecured, not a single € in collateral. The 250 billion is then lent to Italian banks, all of them insolvent. [Is the ECB Bailing Out Banks on the Sly?, Mish Shedlock, May 1 ‘16]

Will lowering borrowing costs, pushing interest rates to negative, and artificially stimulating short term rallies fix these large financial problems?

Richard Koo, Chief Economist at Nomura Securities in 2003, made it clear what needed to be done to reboot Japan’s financial institutions after years and years of constant bailouts.

BalanceSheetRecessionThe NPLs (non performing loans) should be disposed of in an orderly and predictable manner. The pace of disposal should be determined collectively by the banking authorities and the private-sector banks to ensure that the resulting deflationary impact on the economy is minimized. [Balance Sheet Recession: Japan’s Struggle With Uncharted Economics and Its Global Implications (2003), Dr. Richard Koo, pg 273]

Anyone following the headlines knows that Japan chose to bury these loans with more debt, rather than deal with this structural problem.

 

If we look at charts of Italian and German bond yields, we see that once these “rescue” programs STARTED, government bond yields went higher, now lower. Oops.

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Germany_10YearGovtBondYields_RecordLows.April2016

How can the problem of too much debt be corrected by creating trillions out of thin air to push borrowing costs to historic lows? Yes it extends the tracks, but for how long and at what long term cost? When the time comes to sell the assets the central banks are buying, who will have a few trillion lying around to buy them? Who wants bond yields at three CENTURY lows?

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Shedlock presented the chart below three months ago. By using the ECB’s own data, it is clear that the 2 trillion in bailout programs announced and launched since December 2011 did not stop Spain and Italy’s banks from experiencing massive capital outflows by December 2015.

Italy’s banks experienced the highest monthly outflow of capital on record.

Flows_MishShedlock_Feb2016

[Chart from Capital Flight Intensifies in Italy and Spain; Curiously, Money Flows Into French Banks, Mish Shedlock, Feb 9 ‘16]

 

What is very clear from Europe and Japan, is that time is running out on the use of more debt to extend the tracks without severe consequences. The public is starting to wake up to real world realities that no amount of central planning can stall. The actions of some passengers show they want to get off the train.

Italian Banks Under Pressure As Popolare di Vicenza IPO Fails, The Guardian, May 2 ‘16

Italian banking shares have come under pressure after the planned listing of regional lender Popolare di Vicenza flopped and the latest government measures aimed at tackling the sector’s bad loans fell short of expectations.

The stock market in Milan said it could not allow Popolare di Vicenza to list after investors bought just 7.7% of its €1.5 bn share issue….

Italian bank shares have lost nearly a third of their value this year due to concerns about €360 bn of bad debts accumulated during a three-year recession, while negative interest rates are also eroding bank profits.

May2.16_EuroStoxx50

Japan’s Negative Interest Rates Are Driving up Sales of Safes, Fortune, Feb 23 ‘16

That’s not great news for the Bank of Japan.

The Japanese are spending—but not in a way that is likely to strengthen the country’s economy.

Following the Bank of Japan’s decision to lower interest rates below zero in January, many consumers have reportedly rushed to hardware stores in search of one thing: safes.

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As we continued to watch what is taking place around the world, could the day come when the Dow at 18,000 is a thing of the past, a reflection of a society that had placed its faith in an unstoppable train built on unlimited debt and central banking intervention?

May3_Dow34years.DebtToo

“Ordinary people have the ability not to think about things they do not want to think about”  Blaise Pascal

74438614, 23/1/06, 2:44 pm, 8C, 5320x4923 (0+900), 67%, bent 5 stops, 1/60 s, R96.7, G73.4, B86.1

74438614, 23/1/06, 2:44 pm, 8C, 5320×4923 (0+900), 67%, bent 5 stops, 1/60 s, R96.7, G73.4, B86.1

 

A Curious Mind

 

 

 

 

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