Global Economic Red Alert

9 07 2015

I knew it.  Just as we are on the cusp of selling Mon Abri, bloggers everywhere, and some economists, are warning that we are in for a shock or major correction, this year.  Ever since I started Damn the Matrix, but especially since the 2008 GFC, I have been predicting such an event, even though such forecasts are fraught with possibilities of getting it wrong…..

Red-Alert-Button-460x306Based on information that I am bombarded with daily, I have come to the conclusion that a major financial collapse is imminent.  Therefore, I am reluctantly joining the blogosphere by issuing a RED ALERT for the last six months of 2015.

When I say ‘imminent’ I don’t mean that it will occur in the next couple of days…..  And I am in no way saying that our predicaments will be ‘over’ once we get to the end of 2015.  In fact, this correction will only be the beginning of worse things to come as we enter 2016.

Let’s start with some discussion about the U.S. economy.  Most of the time, when I say ‘economic collapse’ I actually mean ‘financial collapse’.  And that’s because the entire economy has been hijacked by the financial sector over the past 20 or so years, with the job almost finished.  Just because the stock markets have recently been hitting all-time record highs does not mean that the overall economy has been doing well.  The stock market is not the economy.  I contend that we are in the middle of a long-term economic collapse, and it has been ongoing for many years, and is happening right now as you read this article; the difference now is that will accelerate over the coming months.

I have already published info about the velocity of money.  When an economy is healthy, money circulates fairly rapidly.  I buy something from you, then you take that money and buy something from someone else, etc.  In a stable, healthy, and growing economy, people generally feel good about things and they are not afraid to spend.  They have confidence in the Matrix.  But during hard times, the exact opposite happens, which is why the velocity of money almost always slows down during a recession.  The chart below demonstrates how the velocity of money has indeed gone pear shaped during every recession since 1960.  Once a recession is over, the velocity of money goes back up.  But a funny thing happened after the last recession ‘ended’ (it never actually ended…).  The velocity of money continued to go down, and it has now hit an all-time record low…

Velocity Of Money M2

This is the kind of chart that you would expect from a very sick economy.  And without a doubt, the US economy is very sick.  Official government numbers paint a picture of an economy that is deeply troubled.  Corporate profits have declined for two quarters in a row, U.S. exports drpped by 7.6 percent during the first quarter of 2015, U.S. GDP shrunk by 0.7 percent during the first quarter, and manufacturing has declined year on year for six months in a row.  How long before Australia joins the club?

Were the stock market connected to reality, it too would be going down the gurgler.  But instead, it just keeps going up.  And up.  A classic case of an irrational financial bubble.  Of course, where else would any greedy capitalist invest when banks pay near zero interest?  Just about every pattern that has popped up prior to previous stock markets crashes is happening right now.

Without a doubt, financial markets are primed for a crash.

Only twice before has the S&P 500 been up by more than 200% over a six year time frame.

The first was in 1929, and the stock market subsequently crashed.

The second was in 2000, right before the dotcom bubble burst.

And by just about any measure that you care to imagine, stocks are hugely overvalued at present.

For instance, just check out the chart below.  It comes from Doug Short, and it shows that the ratio of corporate equity prices to GDP has only been higher once since 1950.  That was in 2000 just before the dotcom bubble burst…

The Buffett Indicator from Doug Short

Now look at this chart.  This one comes from Phoenix Capital Research; it shows that the CAPE ratio (cyclically adjusted price-to-earnings ratio) has rarely been higher.  The only times that it has been higher, we have seen stock market crashes immediately afterwards…..

CAPE - Phoenix Capital Research

Yale economics professor Robert Shiller is also deeply concerned about the CAPE ratio

I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what’s going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, “Do you think the stock market is overvalued, undervalued, or about right?” Lately, what I call “valuation confidence” captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000.

This next chart is another one from Doug Short.  It shows the average of four of his favorite valuation indicators.  There is only one other time when stocks have been more overvalued than they are today according to the average of his four favorite indicators, and that was just before the stock market crashed when the dotcom bubble burst…

Four Valuation Indicators - Doug Short

Another one of the things that points to a financial bubble is the level of margin debt.  This is no doubt caused by the fact the whole world now runs on nothing but debt….  Whenever margin debt has gone over 2.25% of GDP a stock market crash has always followed.  As I write, it is far above that level.  From the chart below, it can be seen that there have been three major peaks in margin debt in modern U.S. history.  The first one just before the dotcom bubble burst, the next just before the financial crisis of 2008, and the third is happening right now…

Margin Debt - Doug Short

Something else that we would expect to see just before a major financial crisis is the decoupling of high yield debt and stocks.  This happened just prior to the 2008 stock market crash, and it is happening again, right now.  The following chart comes from Zero Hedge, which demonstrates this brilliantly…


Are you starting to get the picture?

‘The smart money’ is beginning to pull their investments out of stocks while they still can.  According to USA Today, mutual fund investors have pulled more money out of stocks than they have put into stocks for 16 weeks in a row

In a sign of stock market nervousness on Main Street, mutual fund investors have yanked more money out of U.S. stock funds than they put in for 16 straight weeks.

The last time domestic stock funds had positive net cash inflows was in the week ending Feb. 25, according to data from the Investment Company Institute, a mutual fund trade group.

In the week ended June 17, the most recent data available, mutual funds that invest in U.S. stocks suffered net outflows of $3.45 billion, according to the ICI.

Since late February, U.S. stock funds have suffered estimated outflows of nearly $55 billion. Those net withdrawals come despite the fact the benchmark Standard & Poor’s 500 hit a fresh record high of 2130.82 on May 21 and the Dow Jones industrial average notched a fresh record on May 19.

But it’s not just stocks that are going to crash during the next financial crisis.  Bonds are going to crash as well.   But the real elephant in the room are derivatives.

Derivatives are going to play a starring role in the next major financial crisis.  This form of legalised gambling is going to destroy “too big to fail” banks everywhere, including Australia, during the coming downturn.  The “too big to fail” banks in the U.S. alone have 278 trillion dollars of total exposure to derivatives, but they only have 9.8 trillion dollars in total assets.  Globally, they add up to 500 trillion dollars.

For much more on the coming derivatives crisis read “Warren Buffett: Derivatives Are Still Weapons Of Mass Destruction And ‘Are Likely To Cause Big Trouble’“.

Where do I get all this info from?  The list is long…….

Ron Paul has just released a new video in which he warned all of us to “prepare for a bear market in bonds“.

Carl Icahn says that financial markets are “extremely overheated—especially high-yield bonds“.

Martin Armstrong says that his Economic Confidence Model predicts that the “Big Bang” is coming in “2015.75“.

Jeff Berwick of the Dollar Vigilante says that “we’re getting very, very close to the next crisis collapse” and he has specifically pointed to the month of September.

James Howard Kunstler has predicted that stocks are going to “crater in Q3 as faith in paper and pixels erodes“.  Of course, JHK has got it wrong before……

Lindsey Williams recently sent out an email alert in which he warned that his elite friend has told him that “they have a World Wide Financial Collapse scheduled between September and the end of December 2015“.

Gerald Celente has warned about “the Great Panic of 2015“, though at times I’ve regretted publishing Gerald’s dire warnings when he’s got things wrong too….

Bill Fleckenstein has said that 2015 could be the year of the “big accident“.

Ray Gano has stated that we will see a financial collapse “probably starting in the third quarter of 2015″.

Legendary investor Jim Rogers recently said that he believes that “we will see some kind of major, major problems in the world financial markets” within the next year or two.

And then we have Greece…….  where that will lead Europe, nobody knows.

The Chinese stock market is tanking big time too.  And I doubt China’s too worried about Greece, something far bigger is happening in the far East…..  now all I have to do is worry about where to park our money from selling Mon Abri.

The Energy Cliff Revisited

22 10 2014

Gough Whitlam died yesterday.  The whole country seems to have paused for thought, many media outlets are even saying things like “where to from here”, and the cluelessness abounds.  Where to from here indeed……  Today, our politicians are elected to office based on false promises.  They promise things they can’t deliver, and we continue to be perpetually shocked when they don’t deliver.  We never seem to get tired of this game, we always lose.

I have spent little time posting here, mainly for fear of simply repeating myself.  As I am doing now, really…. but once you ‘get it’, what else is there to say?  As the price of oil fell to $80 last week, much wringing of hands and gnashing of teeth occurred on the subject of how long the unconventional oil drillers of oil would last….  while some commentators were despairing at the thought that cheaper fossil fuels would mean the end of the current push for renewables, if you can still call it that.

When I pointed out to these people that the fossil fuel companies were actually going broke, I was met with the derision I am now accustomed to.  I’m getting quite immune to that now, if you don’t believe me, it’s your problem, not mine…  mind you, as we approach ‘the knee’ of the energy cliff curve, it is baffling as to why the price of oil dropped so much, when it should have in fact risen, and risen substantially.  The answer of course is that the global economy is on its knees.  Growth is fetid at best, and in Europe, things are going from bad to worse, even prompting some people to predict that ‘the big one’ was going to occur on the 27th anniversary of the Black Monday crash.  Didn’t happen, unfortunately…..  but the ducks have all lined up in waiting.

Most of us here have surely heard of the seven stages of grief…. Shock, Denial, Anger, Bargaining, Guilt, Depression, Acceptance. Where are we in our journey through these stages when it come to the financial crisis, and to growth? There’s only one stage that even remotely sounds right: Denial. We’re not even close to Anger yet, not when it comes to the larger population.  Me, I’d like to add another stage:  REACTION….!

justwalkawayIf enough people just walked away, the whole mess would end.  Any time people post whinges on FB these days, I reply with that picture.

Apart from denial, there is of course ignorance.  The concept of the energy cliff is foreign to just about anyone who doesn’t follow blogs such as this one.  It occurred to me that we have been sliding down the edges of the energy cliff for a very long time.  At the beginning of the oil era, when the ERoEI was 100:1, everything was easy.  We just had to invent it, and we had so much surplus energy that we could fumble our way around and build outrageous cars and airplanes, steel skyscrapers, huge ships, growth was easy…..  and when the ERoEI of oil dropped to 50:1, who noticed?  We still had 100:1 oil to make the equipment needed to get that oil (which, let’s face it, was still amazing value…)

As the easy pickings were exploited, it was still easy to burn 25:1 and even 15:1 energy sources…. but it is at this stage that we approach ‘the knee’ of the nett energy curve, and start falling off its cliff.

Building 5:1 solar energy gizmos with 15:1 oil, let alone with more 5:1 PVs or those appallingly inefficient tar sands and shale oil suddenly becomes a struggle.  This is what people who argue that we don’t need fossil fuels to make renewables do not understand.  Bad ERoEI compounds when you use one low source to get another.  Social complexity utterly relies on surplus energy.  It was with surplus energy that Europe’s cathedrals were build during the middle ages, and the same applies to building wind and solar farms.

If you are new to these concepts, I urge you to watch the video below from Chris Martenson’s excellent crash course series, a must watch program of videos for anyone who doesn’t yet know why the world is going to hell in a handbasket……  NOTE:  This video shows solar as having an ERoEI somewhere around 20:1.  This is because it was made in 2009, and in the intervening 5 years, it has been established that it is fact less than 5…. maybe even less than 3!  This is displayed more accurately in the more recent chart above……