Reading time: 4,335 words, 19 pages 10 to 17 minutes.
Despite the puerile propaganda about the so-called economic recovery of the U.S., we never left the recession that began in 2000, sank into an economic depression with the implosion of the financial system in 2008, papered it over and ‘kicked the can down the road’ with $220 trillion more debt that increased the amplitude and frequency of bubbles as well as the size and scope of their bursting’s destruction until, in 2015, the biggest bubble of all, the debt bubble started collapsing and there isn’t enough money in the entire world to pay for it in 2016.
Now, a one-sentence paragraph may be unusual and you might also think a money-shortage is strange considering the huge volume of counterfeit fiat and liquidity the various global Quantitative Easing (QE) programs have created (it’s now Europe’s turn). But, you need to remember that ‘modern money creation’ is based on debt so there’s never enough money to pay both the principal and the interest. Consequently, ever more ‘debt’ money is needed and continually created until we finally hit the wall when we can no longer make the monthly payments.
The cracks appeared in 2015 with the melt-down of junk bonds and hedge funds as covered below. We are hitting the wall in 2016 with melt-downs, bankruptcies and bail-ins.
I haven’t written a major ‘Collapse Update’ for a while, so here’s an update. First, a brief synopsis:
Amerika’s Middle Class is Disappearing
Collapsing Commodity Prices
Collapsing Oil Prices
Collapsing Stock Markets
Fed Rate Rise
Hedge Fund Horror
Junk Bond Horror
War on Cash
Amerika’s Middle Class is Disappearing
Two thirds of the U.S. economy is based on consumer consumption. Most of the consumption is done by the middle class. Unfortunately, the U.S. middle class is shrinking and taking Amerika’s economy with it.
According to MarketWatch Amerika’s middle class has lost nearly 30% of its wealth. “There are now more middle-income families — with less of the country’s wealth.” It’s not surprising that in the U.S. almost half of 25 year-olds are still living with their parents compared with a quarter in 1999. As well, one in five children live in homes receiving food stamps compared with one in eight in 2007 before the last Great Recession. Some recovery!
LA Times reports that “Rapid growth of upper-income households, coupled with an increase in less-educated low earners, has driven the decline of the middle-income population to a hair below 50% of the total this year, Pew found. In 1971, the middle class accounted for 61% of the population, and it has been declining steadily since.” Pew also found that the middle class took home 62% of income in 1970 and only 43% today. This makes the U.S. 19th in the world for median wealth per adult.
It’s no coincidence that 1971 was the year President Richard Nixon took the U.S. off the gold standard (closing the ‘gold window’) thus ending the dollar convertibility into gold. There was no longer any restraint on endless money printing resulting in an unprecedented credit binge and the slow death of the middle class we are now seeing.
There has been so much grim Canadian economic news recently that I’ll devote an entire article to it shortly. Stay tuned.
China’s IMF vote was recently expanded by 50% once again signaling the decline of the U.S. dollar as a reserve currency. Long term this heralds pricier imports and a lower standard of living for Amerikans living in the U.S.
More ominous, the world’s second largest economy has slowed more sharply than economists predicted. This says much about the stupidity of mainstream economists who believed China’s arcane accounting and fabricated economic statistics.
The Financial Times reports that China’s GDP growth is the lowest since 1990 and their first fall in steel output in 25 years.
For years I’ve pointed out the impossibility of any country meeting its forecasts to the decimal place and do so month after month and year after year. Chinese officials are starting to admit they faked economic data to meet targets mandated by their central planners.
As you can see from the chart above, China was also affected by the ’08 – ’09 Great Recession. Only massive and unprecedented spending on infrastructure (ghost cities, empty malls, bridges to nowhere) bolstered the Chinese economy and increased GDP. However, as you can see in the chart above, the long term trend is down.
Reuters reports that “China’s output of electric power and steel fell for the first time in decades in 2015, while coal production dropped for a second year in row, illustrating how a slowing economy and shift to consumer-led growth is hurting industrial consumers.
“China’s economy grew at its weakest pace in a quarter of a century in 2015 and efforts to restructure have not only slashed demand but also exposed massive overcapacity in industrial sectors such as coal, steel and power.”
Chinese banks are making it more difficult transferring money out of China as Dan Harris writes. The ‘China miracle’ is being exposed for the lie it is. This is not surprise considering command economies have never worked. What are the Chinese leaders but a bunch of former communist apparatchiks who, having introduced capitalism, don’t know enough to leave it alone and whose constant interventions are now destroying it.
Forbes reports that China will continue to slow, will continue cutting interest rates, will continue to depreciate its currency and will continue to watch money fleeing the country. During the last Great Financial Crisis, it was China’s insatiable demand for commodities that floated oil- and resource-rich markets like Australia, Brazil and Canada and likely prevented an outright global depression. However, with China’s slowing economy, it is no longer in a position to save the world this time.
Collapsing Commodity Prices
As well, China’s slowdown reduces demand for natural resources and they became a net seller rather than a buy of materials this year. This also drives down commodity prices. Below is a chart of the U.S. CRB index which measures nineteen commodities and has now dropped below the 2009 level of the Great Recession.
Even diamond prices are collapsing with the collapse in demand. Commodities are the ‘canary in the coal mine’, an economic indicator that measures the health of an economy. Jay Taylor writes, “A glut of commodities on the world markets suggests we are in a depression, as do various shipping indexes, which are at historical lows.”
Collapsing Oil Prices
Oil is another commodity whose prices were bolstered by Chinese demand. Falling oil prices are shown in the chart below. This does not bode well for oil-producing nations.
Last week, OPEC announced they are not lowing production. This means they are in a price war that will hurt the U.S. oil industry and will probably destroy the so-called ‘miracle’ of the U.S. shale oil industry by squeezing their finances. The bond value of two of the largest issuers of junk bonds; Chesapeake and California Resources are in free-fall as you can see from the chart below.
Falling oil prices will also continue to weaken Russia whose petroleum exports are a significant part of their GDP. As well, Canada, Mexico, Venezuela and other oil producers will also suffer collateral damage. Don’t expect the price of oil to rebound for a long time.
Collapsing Stock Markets
According to David Rosenberg, the recent market ‘corrections’ “shaved $4 trillion out the global market cap for equities” in the first week of the year. This is not an auspicious start to the year. “The ex-U.S. global market is in an official bear market, if defined as down 20 per cent or more from the highs, and that includes the TSX as it endures seven straight days of decline.”
If you thought 2015 was a volatile year in the markets, 2016 will see even wilder swings according to UBS. Since we no longer have free markets because of constant intervention, it’s impossible to predict market trends. Some call for a crash while others see the DOW going over 30,000. Traditional value investing is dead. It’s a sad state of affairs when the only when way to profit in equities is speculating by short-term trading this wild volatility. It’s also a good way to lose money.
Fed Rate Rise
In what will be ‘one for the history books’, U.S. Fed Chairperson Janet Yellen raised interest rates for the first time in almost forever and she did so in the face of obvious weakening of the U.S. and global economies which anyone with half a brain could have seen since about last summer. If idiots could fly, the U.S. Federal Reserve would be an airport.
Bank of England’s Carney refuses to raise rates saying that “the world is weaker and UK growth has slowed”.
The Fed, having painted itself into a corner enriching its crony bankster buddies by destroying both the real economy and the middle class, finally raised interest rates by a symbolic 0.25% thus taking the world’s largest economy ‘off life-support’. According to The Burning PlatformFed Chairperson Janet Yellen “would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake.”
It will take generations to overcome the economic damage from nine years of interest rate manipulation and seven years of near-zero rates. And, that’s assuming we return to free markets. My own view is that will never happen because we are so far beyond the point-of-no-return that global economies will eventually collapse rather than the globalists admitting they screwed up.
At any rate (no pun intended), Casey Research puts this “historic rate rise” into perspective with the graph below.
Typically a central bank needs to lower rates by about 3% to stave off a recession. When the next big one hits, likely in 2016, rates won’t be high enough for that much of a reduction. Central banks are out of ammunition. Neither China nor central banks will save us this time. Expect negative interest rates and more ‘Quantitative Easing’ (QE 4ever aka legalized counterfeiting) because all they know how to do is print more fiat currency. Of course, they’ll call it something else to fool the ass media and gullible public.
The stock market remained relatively calm for several weeks after the so-called rate rise, but then it’s manipulated (as is everything else). The stock markets are now weakening globally and the Federal Reserve’s James Bullard now has second thoughts about even that modest rate rise. Along with dropping oil prices, the Fed’s targeted 2% inflation just does not seem to be happening.
We’ll be lucky if we don’t do a replay of the Ghost of 1937 when interest rate hikes in the middle of the Great Depression and the economy collapsed further. Zero Hedge cites Kindleberger “The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on an illusion.” Doesn’t this sound just like the so-called recovery illusion I’ve been warning about for many years? Those clueless clowns never learn.
Hedge Fund Horror
My failing memory seems to recall Hedge Funds being in trouble at the start of the last ‘Great Recession’. History seems to be repeating because they’re in trouble again. John Rubino points it out here and here.
How could an ordinary investor make money in the markets when even brilliant Hedge Fund managers are unable to do so? Hedgies are dropping like flies and, unable to meet calls for redemptions, many are folding and returning their money to investors. We can expect record closures for 2016.
Junk Bond Horror
Seven years of zero interest rates had investors ‘chasing yield’ wherever they could find it including excessively risky junk bonds. This powder keg of dynamite is now blowing up as mutual funds are halting redemptions and liquidating themselves. Propaganda mothership, the New York Times is wishfully calling it “The Junk Bond Rout That Wasn’t” as the carnage continues in the chart below.
So who you gonna believe: the ass media or your own lyin’ eyes?
Doomstead Diner’s Reverse Engineer offer’s a scary scenario. “Liquidity Lockup in the Junk Bond Market could migrate to the Sovereign Bond Market, overnight lending between the TBTF Banks collapses because everybody’s Tier 1 Capital is impaired and ATMs globally shut down, along with everybody’s Credit and Debit cards, and no letters of Credit are available for shippers.” That would make the following pale in comparison.
It was once termed ‘Physical Distribution’, but at some point when I wasn’t paying attention, the military term Logistics. snuck in. Here’s a simple definition: whereas a travel agent (remember them?) arranges the movement of people, logistics specialists arrange the movement of things. Now it gets a bit complicated. The world of logistics includes material handling, production, packaging, inventory control, transportation, customs, warehousing, mode & carrier selection, freight rate negotiation and numerous other arcane activities involved in the movement of goods. Yes, I know that’s a mouthful, but it’s a testament to the magic performed by the largely invisible and unsung logistics specialists that move stuff from the field or mine to the manufacturer and then to your favorite store where many people never give a second thought to how it got on the shelf or on-line. Don’t forget to hug a logistics specialist today (if you even know where to find one).
Logistics is an integral part of every economy. In Europe it accounts for about 10% of GDP, in the U.S. about 12%, in Canada about 15% and in other countries it’s even higher. Logistics is a bellwether and an economic indicator of how well an economy is doing.
Worldwide, logistics is slowing down. That means that the global economy is also slowing down. Regular readers have seen me using the falling Baltic Dry Index as a reliable leading economic indicator for many years.
As of January 19, 2016 the chart hit an all-time low of 369 compared to an all-time high of over 11,000. Some will say this is largely a result of over-capacity i.e. too many new ships were recently built. I don’t buy that. We’ve had eight years since the beginning of the last slowdown to clear the surplus of ships. This is confirmed by Maersk CEO who states, “We believe that global growth is slowing down … Trade is currently significantly weaker than it normally would be under the growth forecasts we see.” As well, Business Insider does a commendable explanation.
As well, there are other logistics indicators that also portend a slowdown. Wolf Richter writes that “the Dow Jones Transportation Average is back where it was in April 2014, and down 18% from its peak a year ago.” As well, ‘Class 8’ truck sales dropped 59% year over year.
The Cass Freight Index is another measure of North American freight volumes as they process $26 billion in freight transaction in the U.S., Canada and Mexico annually. The chart below compares 2015 to 2014 and graphically demonstrates the slowdown since February.
U.S. sea container imports also declined in 2015 as per Econinterest. “A summary for 2015 is that imports insignificantly declined from 2014 – but export contraction continued for the second year. Imports more closely align with USA economic health, and imports are saying there was NO economic growth in 2015.”
And, according to Otterwood Capital “Last week rail carload data showed volumes fell 10.1% on a year-over-year basis resulting in the longest period of sustained weakness since 2009. Rail carloads have now fallen 5% on a year-over-year basis for the past 11 consecutive weeks. Over the last 30 years this has only happened five times and each occurrence either overlapped or preceded a recession by a few quarters.”
The traffic deterioration began mid-year 2015 and worsened as they year progressed.
As a bellwether and an indicator of economic performance, declining logistic volumes of all sorts, not just the Baltic Dry Index, tell us that global economies are rapidly deteriorating.
Retail sales in the U.S. are declining along with everything else. According to MarketWatch excuses include warmer weather that hurt apparel outlets and some of the year’s weakness in sales are due to plunging gasoline prices. Retail sales declined despite record auto sales. Unreported is the fact that consumers are broke. Although more Americans are buying goods online than ever before, it wasn’t enough to overcome the drop in bricks & mortar and lift overall sale figures.
The number of store closings keeps increasing as U.S. retail sales keep declining. Sears is closing another 235 stores The mystery of Wal-Mart closing half a dozen U.S. stores last summer ostensibly for plumbing issues has now been solved. It wasn’t plumbing. Wal-Mart recently announced they are closing 269 money-losing stores affecting some 16,000 employees worldwide including 10,000 ‘associates’ in the U.S.
The old king is dead, long live the new king. How much longer he reigns remains to be seen. Saudi Arabia has been on a Saudi Arabia – Headed for a Downfall? for a long time.
According to Tom Lewis the Saudis are faced with three possibilities:
1) The oil could run out
2) The price of oil could crash
3) Increasing Saudi oil consumption could reduce oil exports and oil revenue
According to Tom, “The Saudis appear to have hit the negative trifecta” by scoring all three. Their production has been declining and their own oil consumption increasing for decades. Their cash reserves are not infinite and their latest annual deficit is their largest in history. So-called “reforms”, higher gas and utility prices, and more taxes in the past have generated protest and public unrest. It’s unlikely they’ll be any more successful this time. A destabilized Saudi Arabia will destabilize the Middle-East even more than it is now and likely drag the rest of the world down with it.
According to Zero Hedge Amerikan manufacturing has contracted for 5 months and the “average workweek collapses to its lowest since the peak of the crisis in 2009.”
Some so-called recovery this is!
In April, 2009, Congress leaned on the U.S. Financial Accounting Standards Board (FASB) to allow the banksters to transform the value of their assets from ‘Market’ (what they would actually sell for) to ‘Book’ (what they paid for.) Confidence is the basis of all financial systems and this ‘mark to myth’ destroys confidence. Now they’ve done it again with the Fed advising banks to cover up major energy-related losses. Let’s hope they can print confidence faster than they’re destroying it.
The Congressional Budget Office (CBO) already raised its estimate for the budget deficit for fiscal 2016. This will not be the last revision you hear.
According to Zero Hedge JPMorgan just cut its U.S. fourth quarter 2015 GDP forecast from 1.0% to 0.1%. Regular readers know how laughable this is. The real inflation rate as calculated by ShadowStats is closer to 8% rather than the official ‘less than 2% (0.50%). In other words, official numbers disguise the fact the economy is shrinking. ShadowStats calculates the U.S. economy ‘grew’ by negative (i.e. declined) 1.43% as of December 22, 2015. Some so-called recovery this is!
Don’t forget that we can be in a recession, but it can take up to a year before it is official. The last Great Recession in the U.S. started December 2007, but it wasn’t officially announced by the National Bureau of Economic Research (NBER) until December 2008.
Jim Sinclair, Martin Armstrong and other analysts forecast 2016 to be the ‘Great Levelling’ and 2020 to be the ‘Great Reset’. John Hussman changed his forecast from “risk” to “guarded expectation of recession” and that from a fellow who wouldn’t say shit if his mouth was full of it. He writes, “The singular consequence of years of intentional Fed-induced speculation and zero interest rate policy has been the third speculative bubble in 15 years. We view this bubble as being in a late-stage top-formation.” In other words, the stock market bubble will burst just as the housing bubble did and the dot.bombcom bubble before it.
The International Monetary Fund (IMF) slashed their global outlook again. This is the fourth time they’ve done so over the previous twelve months. There may be a certain amount of butt-covering in this. When the bottom falls out, they can say they warned us. As if there’s anything we can do about it!
U.S. Stock Market
Part of the reason the stock markets have done so well is corporate stock buy-backs are keeping stock prices up. As well, most of the market’s strength lies in the ‘FANG’ stocks (Facebook, Amazon, Netflix, Google) whose strength masked a lot of underlying weakness in the rest of the stock market. I wonder if it’s coincidence that none of these mega-corporations actually produce anything? It reminds me of the ‘Emperor’s new clothes’.
War on Cash
The article Hang Onto Your Wallets: Negative Interest, the War on Cash, and the $10 Trillion Bail-in reveals that governments cannot control cash once we have our hands on it. Governments are broke and desperate to get THEIR hands on YOUR cash and the best way to do that is ban cash altogether and force us to use government-approved digital cash which they can control, rob, steal and tax to their heart’s content.
Dozens of countries have already limited the maximum amount of money that can be transferred without reporting. Sweden is trying to eliminate cash altogether. Greeks have to declare cash, jewellery and precious stones valued at over certain amounts and divulge the location of the safe deposit boxes.
Launched for the first time in history, negative interest rate policy (NIRP) is another form of war on cash. Rather than you paying the bank to hold your money, the government wants to use NIRP to persuade you to withdraw your money out of the bank and spend it to stimulate the economy. Prime rates are already at zero. That didn’t help, but governments are desperate and they’ll do anything to tax you to death.
The war on cash will intensify as government desperation increases. What can you do to protect your cash? You can move it (while you still can) to a safer country or you can convert it to assets that governments are unlikely to confiscate.
WW III Forever War
Reading about the last Republican election debate, what David Stockman calls the “Warmonger’s Brawl”, there appears to be no peace candidate remaining in either of the so-called political parties. Regardless who is elected, in a vain effort to retain their power, they will expand this Forever War of create-your-own-terrorists-then-bomb-them. The military-industrial complex creates its own customers.
Zero Hedge summarizes some of the landmines we face going into 2016
• soaring junk bond redemptions;
• rising investment grade (and high yield) yields pressuring corporate buybacks;
• record corporate leverage and sliding cash flows;
• Chinese devaluation back with a vengeance;
• capital outflows from [Emerging Markets] accelerating as dollar strength returns;
• corporate profits and revenues in recession;
• CEOs most pessimistic since 2012,
• oh and the Fed’s first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity
As ominous as all of that most assuredly is, the geopolitical outlook is even scarier.
• Syria’s seemingly intractable civil war
• the still simmering conflict in Ukraine
• Brazil’s political crisis which threatens to keep one of the world’s most important emerging markets mired in a stagflationary nightmare
• a migrant crisis that threatens to tear Europe apart at the seams
• the resurgence of the far left and far right as voters lose faith in the political status quo
Wordsmith James Howard Kunstler writes, “The class of people who formerly trafficked in political ideas have been too busy celebrating the wondrous valor of transgender. Well, now the wheels are going to come off the things that actually matter, such as being able to get food and pay the rent, and might perforce shove aside the neurotic preoccupations with race, gender, privilege, and artificial grievance that have bamboozled vast swathes of citizens wasting a generation of political capital on phantoms and figments.”
In other news, crude oil is under $30, France admits its socialist economy is screwed, record high U.S. business inventory to sales ratio, Saudi Arabia is running out of money, Italian banks are collapsing, the Chinese stock market has been cratering since last summer, European stocks are crashing, global currencies are weakening compared to the $U.S., Japan is out of fiscal and monetary ammunition, Norway’s oil industry is in panic mode, Europe is over-run with free-loading refugees that threaten civil war and the destruction of the Eurozone project, and next we’ll see massive economic migrations from destabilizing resource-countries. I could go on and on with more data and endless charts, but I think you get the picture by now.
What I’m beginning to find tiresome with these updates is they’re all the same; it just gets worse in new and interesting ways. So, stay tuned for more new and interesting doom & gloom.
And, remember the mantra I’ve been chanting for years:
We cannot borrow our way out of debt.
We cannot spend our way to prosperity.
We cannot pretend our way out of trouble.
January 21, 2016
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