Housing starts: surprise, sharp downturn.

Why is oil production (mainly shale) STILL rising? (2 min)

Why is oil production (mainly shale) STILL rising? (2 min)

"When this bubble bursts, 2008 will look like a picnic."

January 21, 2015

The Biggest Bubble In Financial History is Bursting

The mainstream financial media likes to focus on stocks because:

1)   The stories are a lot sexier than bonds or currencies

2)   They make for better hype jobs than bonds or currencies

If your job is to sit in front of a camera selling the notion of getting rich from investing, you’re not going to talk about bonds or currencies (maybe the latter is of interest but only with insane amounts of leverage which usually bankrupts a trader in his or her first trade).

However, today stocks are in fact a very minor story. They are, in a sense, the investing equivalent of picking up pennies in front of a steamroller.

That steamroller is the $100 trillion bond bubble.

For 30+ years, Western countries have been papering over the decline in living standards by issuing debt. In its simplest rendering, sovereign nations spent more than they could collect in taxes, so they issued debt (borrowed money) to fund their various welfare schemes.

This was usually sold as a “temporary” issue. But as politicians have shown us time and again, overspending is never a temporary issue. This is compounded by the fact that the political process largely consists of promising various social spending programs/ entitlements to incentivize voters.

This type of social spending is not temporary… this is endemic.

The US is not alone… Most major Western nations are completely bankrupt due to excessive social spending. And ALL of this spending has been fueled by bonds.

This is why Central Banks have done everything they can to stop any and all defaults from occurring in the sovereign bonds space. Indeed, when you consider the bond bubble everything Central Banks have done begins to make sense.

1)   Central banks cut interest rates to make these gargantuan debts more serviceable.

2)   Central banks want/target inflation because it makes the debts more serviceable and puts off the inevitable debt restructuring.

3)   Central banks are terrified of debt deflation (Fed Chair Janet Yellen herself admitted that oil’s recent deflation was an economic positive) because it would burst the bond bubble and bankrupt sovereign nations.

The bond bubble, like all bubbles, will burst. When it does, everything about investing will change.
Bonds have been in bull market since the early ‘80s. Thus, an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

Today, that leverage has resulted in $100 trillion in bonds with over $555 trillion in derivatives based on bonds.

This bubble, literally dwarfs all other bubbles. To put this into perspective, the Credit Default Swap  (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

When this bubble bursts, 2008 will look like a picnic."

(Source: Graham Summers, Phoenix Capital Research)

"China will NOT have a soft landing. It will fall like an elephant."

China’s Ultimate Debt Bubble:
27 Times Growth in 14.5 Years

"We have shown many times in the past how the U.S. debt bubble mushroomed in the boom that started in 1983. U.S. debt grew 839% in 25 years into the bubble peak of the first quarter of 2009. That was 2.68 times GDP growth.

How can you have debt grow 2.68 times GDP and not have a debt crisis?

Any economist that didn’t and doesn’t see that as a problem (think Paul Krugman) should be driving a limo instead. At least they could keep the suit that way.

But as you would suspect, China makes that look like nothing. Just since 2000, or 14.5 years, China’s total debt grew from $1 trillion to $27.35 trillion or 2,635% while GDP grew from $1 trillion to $9 trillion.

Look at this chart…

China’s debt grew 3.43 times GDP for 14.5 years. That has got to be the fastest growth rate of any major country ever.

Yet many economists praise China’s new state-driven capitalist model. Yes, now governments can take debt and leverage to extremes that the free market system could never dream of… That’s a good thing?

The U.S. and most developed countries have now taken over the economy and are setting short and long-term interest rates at zero or less when you adjust for inflation and target growth and inflation rates.

The central bankers want to run our economies like a machine as if it were an inorganic process when it is actually a very dynamic organic process that plays on opposing forces: boom and bust, innovation and creative destruction, inflation and deflation, and success and failure. That’s the secret to the golden goose of free market capitalism.

Many investments will always fail, that is how we learn and evolve. But governments in a top-down and less accountable process will almost always make worse investments than the bottoms-up free market system.

China now has 27% of urban homes vacant, excess capacity of 30% to 40% in major industries from cement to aluminum, and hordes of empty malls, offices, roads, bridges and rail systems. Real estate has gone up over 7 times since 2000 – does that sound like a bubble to you? The U.S. real estate bubble was a mere 2.2 times.

The government has suddenly pushed 220 million unskilled people from rural areas into urban areas where they’re not even registered citizens. What happens to these people when the bubble bursts?

China is going to finally prove once and for all that top-down, centrally planned economies are far inferior to bottoms-up free market ones. Russia wasn’t enough proof for clueless economists. They’re going to have to eat their words on this.

You could look at China’s debt to GDP ratio of 2.64 times versus that of the U.S. and say that’s not as high as us at 3.54 times. But emerging countries have much lower debt ratios than developed ones as their consumers have much lower incomes and are much less credit worthy.

China’s debt ratios are more than twice that of similar countries like Brazil or India.

China’s capital investment from the government has been far higher and has lasted far longer than any other emerging country. This investment and debt binge is truly unprecedented!

The best comparison with the U.S. would be to compare China’s debt growth for a similar time frame into the peak of the U.S. bubble, or 14.5 years from the third quarter of 1994 into the first quarter of 2009 as the chart below shows.

China’s total debt grew 8.74 times as fast as U.S. debt in 14.5 years. Holy crap, we have no idea what a debt bubble is!

China will NOT have a soft landing. It will fall like an elephant.

Those 220 million people that they forced into urban areas are screwed. They will be jobless and likely not even have the option to go back to their rural farms for self-subsistence as those areas have now been paved over with empty condos.

At least they’ll have those empty condos for squatter rights.

We’ve also been warning that the Chinese government will start restricting the growing exodus of the most affluent Chinese (the smart money getting the hell out of Dodge). They just announced a crackdown on taxes owed for foreign income.

The next step could be restrictions on leaving the country without a major exit tax.

We are about to witness the greatest economic and social disaster in modern history."

Harry Dent

DentResearch.com

Next... Merry Crash?

"...Since 2009, we’ve had the Fed and central banks from around the world deliver decent to better Christmas seasons… but this should be the last one for now.

The economy is the best it’s been since late 2007. Car sales are higher than ever. The affluent, which comprises many of our subscribers, are doing better than ever.

But clouds are gathering on the horizon and there are thunderstorms ahead.

Since 2000, the average household has seen a decline in real wages and going back even further to 1983, there has been little in the way of progress throughout this entire boom. How can the wealthy keep getting wealthier and leave the average person behind without an outright revolt?

Oil and commodity prices are collapsing, as we forecast years ago, along with the most solid of commodities like gold and silver.

Emerging countries are underperforming because they depend on these commodity exports, while the populations of the developed and wealthy nations get older every year. Demographic trends continue to point downward as they have for years and in many cases, it’s been for decades.

By looking at the numbers in the U.S., both the affluent and car sales are projecting down for the coming years. And as for Europe, it’ll see the brunt of its demographic cliff as we did after 2007 and Japan when it fell off in 1989 and in 1996.

Even countries like South Korea will follow after 2018.

Everyone knows I am a lover of history; it’s in my nature to go back and dig around for facts and figures that most don’t even see. So when I look back at all of the things I’ve learned from my research and from reviewing my own life, I’ve come to a conclusion that stands out… you don’t get something for nothing.

That’s what we’ve gotten for several years now: $14 trillion in global money printed out of thin air to offset the greatest debt crisis, deflation and depression, and the most global, since the 1930s.

I wish I could bring more tidings of good cheer this year… but I can’t.

The more we go into denial and kick the proverbial can down the road, the harder we’ll land when the chickens come home to roost. This is proven by all addictions, including every debt and financial asset bubble in history.

So, if you want to have merry Christmas seasons for all the years to come, you need to do the opposite of what all the experts, economists and politicians are recommending: protect your assets and hunker down for the greatest financial crisis and stock market crash we’ll see in our lifetimes.

Yes, I know that stocks keep defying gravity.

But that’s what happens as every bubble has done throughout history… it keeps expanding, overtaking everything in its path until it bursts so violently that it destroys debt, wealth, businesses and jobs faster than ever.

Yes, with the recent strong showings in the markets against increasingly risky factors like the junk bond debacle in the fracking industries: How could stocks be so ignorant after a subprime crisis in just four states in the U.S. triggered the last global financial crisis?

The markets are on crack and they will end like every crack addict in history — in detox!"

Harry S. Dent JR. Senior Editor, Economy & Markets

What is Going On? Current Economic Fundamentals & FedSpeak Explained. Danger Ahead! Outstanding Commentary.

"The Fed is Absolutely Terrified Of This...

As we keep emphasizing, the Fed’s real concern is the bond bubble… NOT stocks.

We get more evidence of this from Janet Yellen’s press conference after the Fed’s Wednesday FOMC meeting.

During the conference, Yellen repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy.

And yet, on Wednesday, the head of the Fed admitted, in public, that deflation can in fact be positive.

How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?

The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.

Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.

However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.

This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping.

This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.

This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.

If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET.

However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.


I fully expect that 2015 will be the year when the second round of the Great Crisis really hits. And when it does, entire countries will go bust... ."

From: Graham Summers, Phoenix Capital Research.

Still Riding the Wave? Fed Official Warns Of a Potential Collapse. The Fed’s reputation is on borrowed time.

December 03, 2014

"Fed Official Warns Of a Potential Collapse

The Fed’s reputation is on borrowed time.

Much of the so called “economic recovery” that began in 2009 has been based on the Fed’s credibility as a Central Bank to rein in the collapse.

However, at this point even the financial media has begun to realize that the Fed has elevated asset prices (stocks, homes, etc.) and nothing else. Incomes have not moved in line with stocks nor has GDP growth nor has the employment picture.

Put another way, everyone now realizes that the Fed has boosted stocks and don’t little else. This has lead some to accuse the Fed of targeting the markets rather than boosting the economy (see the recent wave of legislation meant to increase Congressional oversight of the Fed being introduced in Congress).

The Fed isn’t doing itself any favors in terms of defending its track record.

Enter Bill Dudley: former Goldman Sachs bank turned NY Fed President.

Dudley made a speech yesterday regarding the Fed’s policies. Early on he states that when the Fed starts raising rates, it will gauge the market’s reaction closely to see how the financial system adjusts:

First, when lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves.  If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach….

A few minutes later, he claims the Fed doesn’t care about stocks or bond yields or other items… the very same “conditions” he claimed the Fed will pay close attention to just a few moments before…

Let me be clear, there is no Fed equity market put.  To put it another way, we do not care about the level of equity prices, or bond yields or credit spreads per se.  Instead, we focus on how financial market conditions influence the transmission of monetary policy to the real economy

http://www.newyorkfed.org/newsevents/speeches/2014/dud141201.html

Suffice to say, Dudley is aware that the Fed is now considered to be a stock market prop and nothing else. The fact he is trying to explicitly dissuade the markets of this belief says a lot about the Fed’s thinking on this topic (read: we need to distance ourselves from the markets).

Between this and Fed #2 Stanley Fischer’s statement that the Fed’s primary concern is on when and how to raise interest rates, stocks are on borrowed time. Not only will rates be rising in the next 12 months, but even the biggest stock cheerleader at the Fed (Dudley) is now trying to break the belief that the Fed is an “equity market put”

Stocks are on borrowed time. The next round of the Financial Crisis is approaching."

Graham Summers, Phoenix Capital Research