“Even God Himself could not sink this ship.”
– Titanic crewman… The ship sank four days later
“It is our will that this state shall endure for a thousand years.”
– Adolf Hitler… 10 years before the Reich was destroyed
“Long-Term Capital Management”
– Hedge fund headed by Nobel Prize winner, bet against things that “couldn’t happen in a billion years”… Four years later, the fund blew up
“I have returned from Germany with peace for our time.”
– Neville Chamberlain… 11 months before the start of World War II
“Argentina Plans to Offer 100-Year Bond” (priced to yield only 7.9% until 2117)
– Bloomberg, June 19, 2017…
DUBLIN – Ring the bell. Open up the gates. Unleash the hounds of Hell.
Here’s Janet Yellen’s latest contribution to the Famous Last Words club:
Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.
This must be what the gods have been waiting for… What bread doth Ms. Yellen eat? What ale doth she drink? What is she thinking?
The weather has been so nice, Ms. Yellen is building a house without a roof!
We don’t know any more than the Fed chief about when the next crisis will come. But we’re not fool enough to tempt Fate. And not vain enough to think we could do anything to stop it.
Financial crises come around from time to time. Generally, they come when you least expect them… that is, when they can do the most damage.
Our guess is that a crisis will begin before the end of this year. Why?
First, because falling oil prices and bond yields signal a slowing economy. A recession is already overdue.
Second, debt levels are higher than ever. There is said to be more than $250 trillion worth of debt worldwide. And running up debt is like stacking blocks of wood. The higher you stack them, the more likely they are to fall over.
Ms. Yellen says the banks are better-regulated and less likely to fail in a crisis. But the latest stress test shows bank vulnerability to credit card debt has actually increased.
Besides, bank debt is only a part of the picture. The U.S. government is bumping up against a debt ceiling, for example.
What will happen when the feds run out of money… with the ceiling still in place? Will Congress raise it in an orderly way?
Or will it be another circus of tweets and recriminations… like Russiagate or Obamacare… leading investors to quietly take their money off the table and head for the exits?
Consumers are running into a debt ceiling of their own. They’ve got $14 trillion of household debt.
Without real job and income growth, they can only maintain standards of living by borrowing more. But they already owe more than they did on the eve of the 2008 financial crisis; their knees are beginning to buckle.
Used auto prices are falling, putting the whole structure of $1.2 trillion worth of auto debt in danger.
Student loans – another $1.2 trillion of debt – are increasingly uncollectable.
And states and local governments have $5 trillion worth of unfunded pension liabilities.
Corporate debt is at record levels, too, near $8.5 trillion.
In the next crisis, many marginal borrowers will have trouble paying back their loans. Write-offs, defaults, and bankruptcies will blow up.
And don’t forget that the whole world economy is interconnected.
That whiff of smoke you smell could be coming from China. That country has become a giant Debt Depot.
And somewhere… in the corner of some abandoned warehouse, a small pile of debt-soaked rags smolders.
When the flames break out… sparks will fly across the Pacific in a matter of seconds. Minutes later, the entire world’s finances will be aflame.
But the flash point in the coming crisis could also be U.S. asset markets.
There, price discovery by honest and diligent investors has given way to price manipulation by conniving Fed (and other central bank) employees.
Now, with little connection between price and value, just a little bit of selling is likely to set off a “sell cascade” as these “smart systems” hit automatic stop-loss orders and begin selling trillions’ worth of ETFs, robo-trader pools, algo-driven hedge funds, and quant-managed accounts.
There will be no calm walk to the exits… but a catastrophic surge, with millions of investors crushed on the carpet.
What will be the trigger? Again, we don’t know any more than Ms. Yellen. But she might want to turn on the TV news. She is likely to be appalled. Every day brings new reasons to head for cover.
She might want to look out the window, too.
For all we know, it will never, ever rain again. But we keep an umbrella next to the door, just in case.
By James Wells, Executive Editor, Bonner & Partners
Legendary investor Warren Buffett has said that one of his favorite ways to gauge the health of U.S. stock is to look at the ratio of market capitalization to GDP.
Back in 2001, Buffett first warned that when this ratio approaches the highs it hit in 1999 and 2000… “you are playing with fire.”
As you can see in today’s chart, the so-called “Buffett Indicator” is nearing the 1999–2000 high.
– James Wells
Americans’ Credit Scores Have Never Been Higher
As Bill mentioned above, Americans are racking up staggering levels of household debt. But the average American’s credit score has never been higher. And here’s where the trouble starts…
No Investor Is Fully Passive
A growing number of investors are pouring into ETFs and quant funds in order to practice “passive investing.” But here’s the dirty secret: No investor is ever fully passive.
An Escape Hatch for Your Life Savings
If the worst should happen and you were forced to flee your home, how would you bring your wealth with you? In gold? Cash? Colleague Greg Wilson has a better idea.
In response to Tuesday’s Diary, discussion on sound monetary theory.
Only a government can acquire two valuable commodities, ink and paper, and turn them into something utterly worthless (fiat currency). And don’t get me started on cryptocurrencies. Bitcoin does not have a commodity connection!
– Leonard H.
The idea of returning to gold backing for the U.S. dollar, or any other fiat currency, would not work. Returning to “real” money of the pre-1971 era would not create any more “real” wealth than the current fake money. It would only be fake money of a different type.
The banks, the Fed and other central bankers and financiers ensured there would never be a return to the sanity of the gold standard when they created gold derivatives and gold ETFs. Has anybody ever asked themselves how many claims on each ounce of physical gold these ETFs and derivatives created? Millions? Billions? The mind boggles. Any return to a gold standard would be the creation of the fake gold-money system, no different than today’s fake-dollar system.
All the holders of the new “gold dollar” would have is an equity interest in the finite supply of gold in the world. The Fed and the bankers would continue to dilute the equity stake as they are doing with the fake money (dollars) today. They would shout from the mountain tops (and pronouncements high from Fed meetings) that this time it’s different because it’s backed by gold!
– Arley C.
The Centers for Disease Control and Prevention recently released a study…
There is an undiagnosed epidemic in America killing one person every 24 seconds. And it’s growing faster than diabetes, heart disease, and cancer combined. Researchers believe they have now identified the source of this global health scare: the cell phone in your hands. Get the full story right here.