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Interest rates will not rise again in our lifetime. Why, you ask? Because the leverage
in the system would collapse the very financial assets and governments which underpin the global financial systems. It is INFLATE or DIE and it provides the additional benefit of feeding insolvent welfare states and the socialist politicians to feed their “useful idiot” supporters. Today’s missive will put some meaning into that observation.
The above introductory comments are edited excerpts from an article* by Ty Andros (TedBits.com) entitled When LEVERAGE FAILS and HOPE turns to FEAR.
Andros goes on to say in further edited excerpts:
This is the state of the world today:
- The financial system and governments would collapse if credit could not expand and steal from the future. It’s their lifeblood.
- A world has been created where they always can borrow, but have made no provision for the repayment. It’s a Ponzi scheme. The math can no longer work anywhere you look.
- Since the math can’t be made to work it is obvious that covert techniques of money printing are fully engaged and no one within the system dares yell, “Fire!” and call them out on their betrayals.
- Since Bretton Woods II in August 1971, when our leaders betrayed us by substituting IOUs for money, our world has become one big credit expansion, everywhere and always, REAL growth has INCREASINGLY ceased. If there wasn’t lending for consumption called growth, the world’s economies would rightly be called in a depression.
- It truly is INFLATE or DIE. Without it, our Ponzi economies and welfare states would collapse in the insolvency they inhabit. It is why our economies have become financialized to extract every penny in one way or another that they can from the public and transfer it to the government and the financial systems which control them (central banks and the their shareholders). We are debt slaves and serfs to global socialist elites, which are morally and fiscally bankrupt.
- Easy money creation out of thin air has allowed politicians to cover up poor policy decisions and buy votes for decades, and the accumulated poison is now overwhelming the ability of the global economies to grow.
- Clearing out those DECADES of bad policies choices will be almost impossible. To do so has turned what would have been a roadside bomb of POLICY adjustment into a NUCLEAR BOMB of systemic changes.
- The governments that have put these anti-growth policies in place now have no memory of the policies required to create growth.
- Freedom and free markets – capitalism (more for less) sound money and private property rights – have all gone the way of the DODO bird: EXTINCT. Thus, the restoration of these things is INCONCEIVABLE to them. Nothing less will avoid the demise Von Mises spoke of when he said “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”. Unfortunately, what Mises foresaw looms dead ahead!
Debt cannot compound relentlessly without the economic growth to service it. It is called debt spirals and imminent leverage failures and it is everywhere. We will show you several today.
EU Bank Assets as % of GDP Is Extremely High
First, let’s look at some parts of the global banking systems as a percentage of GDP in their respective economies:
Notice the average in the Eurozone is a GIGANTIC 349% of GDP in 2013 (600% in the Swiss banking giants). If those assets declined in value by a mere 10% (hardly a correction), the average checks those governments would have to write is 35% of a year’s GDP. Where would that money come from as these countries have surrendered the printing press to the ECB (a political exercise to gather power)? Their financial systems would collapse instantly. Since those same banks also have gorged on Eurozone debt, their toxic assets would be quite a bit larger although, keep in mind the Eurozone has passed laws calling sovereign debt risk “free” so it wouldn’t cause them to have to raise reserves, but the falling prices of everything outside will. In reality, I believe some of that decline has already occurred and a regulatory approved cover-up is underway.
Credit Expansion At All-time High
Since Bretton Wood II removed the shackles of semi-sound money redeemable in gold, growth has become a function of credit expansion as illustrated by the following chart of all credit market debt from the St Louis Federal Reserve:
The brief downturn, which began in 2008, almost destroyed the global financial system, but those losses remain embedded in the system and RISKS have grown as the world has created another $30 Trillion dollars of debt according the Bank of International Settlements. Yes, that is $57.5 trillion dollars ($57.5 million million) of debt (US only). Spread equally among the U.S. it is $183,300 per person. If the average interest rate on that debt is just 4% (I believe it is much higher) then the USA needs to generate $2.301 trillion just to pay the interest on it, not including principal payment.
Debt Creation At All-time High
Debt creation for GDP expansion is dying as it now it prohibitively expensive and has reached the point of diminishing returns:
Now for every $1 of new debt the U.S. gets 8 cents of GDP!
Real Gross Domestic Product At All-time High
The reported GDP of the USA is now approaching $16 Trillion ($16 million million).
If you subtract phantom GDP, which is about 17% of this number you are looking at $13.3 trillion. (Phantom GDP is economic activity in which no money is exchanged, for example if you own your house free and clear but could rent it out for $2500 they call that GDP, or a free checking account which they may estimate would cost $200 dollars a year, unfunded pensions called paid wages, etc.) To service the debt using the previous calculation of interest due, that $13.3 trillion must generate 17.3% just to service the debt before any wealth can be created. That 17.3% is being paid into the financial systems (banksters) and the lenders to the government.
Stock Market At All-time Highs
Next let’s look at the stock market [which is,] in my opinion, a levitation completely spawned by:
- the Fed’s balance sheet expansion,
- friendly HFT,
- leveraging corporate balance sheets with buybacks, and
- the plunge protection team at the Federal Reserve’s headquarters on Liberty Street in New York.
When you subtract the balance sheet expansion from stock prices, the bull market in stocks since 2009 would DISAPPEAR! It is an illusion provided by unsound money and debasement, stocks repricing to reflect the lower purchasing power of what they are denominated in.
Corporate Buying & Equity Buybacks Very High
Look at the mountain of stocks bought back at the highs with LEVERAGE:
Corporate Debt & Leverage At All-time High
CORPORATIONS are more LEVERAGED than EVER, foolish CEOs and bitten the poison fruit and at previous lows they will be in negative equity. Think IBM!
Earnings growth and stock markets on all time high are a MAIN STREAM MEDIA and WALL STREET MIRAGE. This leverage boosts earnings when revenues don’t grow and reduces taxes as the interest is DEDUCTIBLE. FINANCIAL ENGINEERING to fool the fools among us. The stock market is out on a limb, once again of leverage.
Investor Credit At All-Time High
The chart below from dshort.com lays out the tremendous amount of leverage underpinning the stock market:
Stocks are AFLOAT on a SEA of LEVERAGE never before seen in HISTORY. I thought we had the final spike high last spring, but those highs in price were confirmed by many things such as advance decline lines, rsi and other internals. The most recent highs are all with bearish divergences across the board.
Tobin’s Q Ratio At All-time High
This next chart is Tobin’s Q ratio and it is also is at all-time highs excluding the mania high tech bubble in 2000:
Notice how previous highs preceded every major crash since 1900!
S&P 500 Price/Sales Ratio At All-time High
When speaking of PRICE to sales ratios levels are at all-time highs and nosebleed levels!
Trading Volume DOWN 60%
[As the chart below illustrates] the whole rally since 2009 has been on plummeting volume:
The cyclical bull market since March 2009 has occurred on declining volume. In true bull markets, volume accompanies price. Since this is purely a bull market that has been financial engineered by the powers that be, price is higher and volume has crashed. This says it all.
To make this DOUBLY Dangerous, HFT (high frequency trading) has become 60 to 80% of all the trading during this period. In 2008-9 it was less than 25%. Thus the REAL trading (HFT trade last seconds, not minutes, hours or days, it is a ghost of real trading and the volume is an illusion) that is occurring is probably down 80% from the highs. The HFT industry says they are bringing liquidity but during a crash and disorderly markets you can expect them to TURN OFF until orderly markets resume. They won’t show up when needed… I promise!
Hindenburg Omen Signal Flashing
The next chart is courtesy of Bob Hoye…and it is giving a Hindenburg Omen signal similar in magnitude to that last seen in March 2000. Quoting Bob: “These are hard facts based what happened previously based on two and a half decades of pure Hindenburg Omen history.”
The last time he saw these levels were February 29th to March 7th, 2000. Do you remember what happened then? Are we at the next episode of credit contraction?
Investors Intelligence Sentiment Index Showing Extreme Optimism
Now let’s look below at one last stock market chart that is set up at an extreme not seen since just before the CRASH of 1987. This chart is self-explanatory: BEARISH sentiment is at multi-decade lows… can you say be contrarian?
Moral hazard is at superhuman levels courtesy of the Feds actions since 2008, levels rarely seen in history.
Dow Jones Industrial Average At All-time High
The markets are in a WOLF wave similar to the 1970s but to a much BIGGER degree…and should soon plummet below the 2009 lows [as] it heads into the 2016 elections and the economy crumbles under the damage wrought by “District of Corruption” in Washington and the “chosen one” since 2008:
Global Interest Rates Lower Than In U.S.
U.S. interest rates are the highest in the developed world by a considerable margin. Take a gander at this yield chart which is now 90 days old:
Most of those countries are quite a bit lower at this time but the U.S. is virtually unchanged.
Rotation Into US Treasuries Is Soaring
The rotation into US treasury debt is ROARING. In many EU countries 2 year yields are at ZERO while 2 years in the U.S. yield [is] over 50 basis points. Can you say dollar friendly? As the bond bull off the 2000 lows has exploded in supply, Dodd Frank has destroyed market liquidity:
Interest Rates On Non-government Debts Turning Higher
Meanwhile, interest rates on non-government debts are TURNING higher, led by the JNK (junk). Lets look at an excerpt from the most recent Myrmikan update by Dan Oliver:
Debt Maturity By Year
The chart below shows the maturity wall that will have to be met into a rising interest environment courtesy of the Fed:
The “Smart Money” is getting out while the getting is good as they can read the TEA LEAVES! Would you want to be long at all-time highs heading into an ill-conceived tightening and maturity wall of that magnitude?
The academics at the Fed are about to learn a lesson: credit expansion IS NOT economic growth. Look no further than the aforementioned ETF of the JNK bonds, the duration mismatch of daily liquidity combined with the illiquidity of the bonds themselves at trading desks will be a debacle in my opinion. ETFs in general suffer from this malady and could be a big catalyst for market crashes when liquidity disappears but RETAIL sellers are anxious to exit! That is a prediction.
Commodity Index Signals DEFLATION
Now let’s look at a MONTHLY…commodity index chart and what these issues are doing there going back to January 2004:
Look at that HUGE Head and Shoulder top: under construction for 8 years – and it became active THIS MONTH!
- Falling through the right shoulder and support is a BIG DEAL and signals DEFLATION.
- Those are 5 year lows with momentum, which does not symbolize a recovery in the GLOBAL economy…[or] signal economic growth and recovery. It is just the opposite. Look when the deflation began again: when they started the TAPER!
- The rising trend line is the trend line since the 2000-2002 lows, so the secular bull is alive but the cyclical bear is going to put it to the test. If Yellen allows the rising trend line to be punctured, things could get out of hand very quickly!
The U.S. Dollar Going Higher
To affirm this picture look no further than the U.S. dollar since 2004, a huge MULTI-YEAR bottom looks to be in place in my opinion:
The U.S. dollar is on a monthly buy signal and based on the chart should RUMBLE HIGHER and is a picture of an unfolding disaster for the world economies; it is a freight train full of looming disasters pulling out of the station with lots of momentum yet to emerge.
- Every bit of debt issued outside the U.S., which is dollar denominated, is BECOMING a lot less SERVICABLE as the debtors must convert their local currencies into dollars to make payments to lenders. The higher it goes, the more they must pay! Dollar denominated debt is actually a short position equal to the size of the borrowing.
- An example is the Ukraine whose debt is over a quarter of a trillion dollars and whose currency is off 50% since January, thus their external debt in local currency terms is up 50% to $375 billion.
- Or Russia, with $650 billion in external debt and their currency is off 30% pushing their obligation near a trillion.
Would you rather be the lender or the borrower? The lender is holding the bag, think banking systems and fools who believe bombs are RISK free. They are not risk free in a debt spiral world with no growth.
As the next phase of the crisis unfolds, and Yellen tightens (rush for yield in a yield-less world) investor’s worldwide will behave like Pavlov’s dog and rush to the dollar for safety. This rush has already begun. With the dollar rallying those metrics are NOW playing out around the world.
The principle export of the U.S. for DECADES is, and has been, DOLLARS and many of the people off shore are short of them because of dollar denominated DEBT. That is why many markets crash when the dollar rises. They must liquidate other investments to SERVICE the debt, a margin call to levered economies. They are in a huge short squeeze globally. A rising dollar is ECONOMIC and FISCAL poison to a dollar debt denominated world. Can you hear the printing presses?
Conclusion
In closing, it’s still Inflate or Die and it is now more imperative than ever. …The FED can never remove the liquidity, ever. The ability to do so ended in 2008 when interest rates went to ZERO, the financial system died (now on life support known as QE) and have remained there. Tops are a process and look to be completing now as you can see [in the above charts]. Everything is set to trigger a number of concurrent setbacks for investors caught in the matrix of misinformation and the mainstream media.
…I believe an economic and market crash is imminent.
- The Alibaba IPO was a bell ringer for stocks.
- A close look at the corporate structures, and valuations spells recklessness rarely seen,
- the Russell 2000 just had a death cross and
- approximately 40% of all Nasdaq stocks are in bear markets.
DING DING DING!
I have said many times that they can never end QE as it covers the negative cash flows of so many including insolvent governments and have done a lot to move toxic assets to central bank balance sheets where they can die a quiet death. The fingerprints of the next contraction in the credit and global economic crash are all front and center…
The next crisis is clearly in front of us and it is much larger than the 2008 version. The elites have only expanded the economy by issuing DEBT; remember the boom [was] brought on by credit expansion.
Yellen will fail in her tapering and ignite the next leg down in global economies; the markets are telling us so in macro! The world is at the edge of a knife and the tightening and dollar bottom is the trigger for the next contraction. Stock and bombs er bonds are on their highs, gold is on its lows, and reversals are at hand in my opinion…
There is no way to dodge the bullet as it is sociopaths and psychopaths leading us to our doom. The system is now made to create failure and create money out of thin air to cover it up. This will end [and it will present]…the greatest transfer of wealth in history looms from those that hold it in paper to those that don’t.
Von Mises’ quote “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” looms dead ahead.
May God Bless you all.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.zerohedge.com/news/2014-09-26/when-leverage-fails-and-hope-turns-fear
(Author’s Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which are designed with the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me CLICK HERE! Also, don’t miss the next issue of TedBits, the economic and financial no spin zone and our weekly wraps on breaking events through the Austrian lens: subscriptions are free at CLICK HERE. Check out our new blog at www.TedBits.com It has thousands of the hottest posts on the net. )
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