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What Will Trigger The Next Round of the Financial Crisis?
Last week we touched upon the “white elephant” in the room: that the biggest, most important bubble investors should worry about is in bonds, NOT stocks.
Consider the following…
The financial system is based on debt. US Treasuries, the benchmark for an allegedly “risk free” rate of return, is the asset against which all other assets are priced based on their relative riskiness.
This “risk free” rate has been falling steadily for over 25 years.
As a result of this, 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.
The ultimate example of this is the derivatives market, which is now over $700 trillion in size. This entire mess is backstopped by about $100 trillion (at most) in bonds posted as collateral.
This formula of ever increasing leverage works relatively well when the underlying asset backstopping a trade is rising in value (think of the housing bubble, which worked fine as long as housing prices rose). However, if the asset ever loses value, you very quickly run into trouble because you need to post more as collateral to backstop your trade. If you can’t do this easily, the margin calls start coming and you can find yourself having to unwind a massive position in a hurry.
This is how crashes occur. This is what caused 2008. And it’s what will cause the next crisis as well.
Despite all of the rhetoric, the world has not deleveraged in any meaningful way. The only industrialized country to deleverage since 2008 is Germany.
This is not unique to sovereign nations either. As McKinsey recently noted, there has been no meaningful deleveraging in any sector of the global economy (the best we’ve got is households and financial firms which have basically flat-lined since 2008).
In the simplest of terms, the 2008 collapse occurred because of too much leverage fueled by cheap debt. This worked fine until the assets backstopping the leveraged trades fell in value, which brought about margin calls and a selling panic.
The big problem however is that NO ONE got the message that leverage was a problem. Instead, everyone has become even MORE leveraged than they were in 2008. And they did this against an ever-smaller pool of quality assets (the Fed and other Central Banks’ QE programs have actually removed high grade collateral from the financial markets).
Thus, we now have a financial system that is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.
The next round of the crisis is coming, and it’s going to make 2008 look like a picnic.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
You can pick up a FREE copy at:
http://www.phoenixcapitalmarketing.com/roundtwo.html
Best Regards
Graham Summers
Phoenix Capital Research
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Another massive fraud like the one that became apparent in 2008 and remains unrepairable.
I really hate a decent article that leaves you hanging with a lame sales pitch at the end. Shame on your integrity and sense of decency!
Me too. But I'm used to it now. Hint: They can't tell you the magic formula because then they can't charge you more money. Their only hope is to sell you the hope that they will reveal the magic formula. They can sell you as much hope as you can buy. And they can sell you some more hope tomorrow. The best information is ALWAYS hidden.
I do recommend Liar's Poker and The Big Short (Inside The Doomsday Machine) by Michael Lewis. My apologies to anyone who has read me plugging those two books before. No, my name is not Michael. Borrow a copy from a library. No, it won't tell you what will trigger the next round of the financial crisis. But you will have fun being informed. And then you'll be on your own again.
A minute ago I said I am rambling and need to go to bed. I shall try again.
Re "What will trigger the next round of the financial crisis?" :
I asked that question here a couple of years ago. No-one knew back then either.
Hmmm, lemme think. Banks get bailed out. Or the carcass gets divvied amongst the vultures and the vultures get bailed out. Poor people just borrow more money. When things get too bad, their stuff gets repossessed - but poor people, by definition, can't fight back anyways. Stock prices can be set anywhere at any time - earnings don't matter. Real estate can be held off market until priced right - with borrowed money that has no correlation to income. When the oligarchs want more money they just "borrow" it from the Fed. CDS events only get "triggered" with permission from TPTB. Retailers are powerless to stop themselves from going broke, no matter how rich they originally were. You know, half the reason Holden Barinas are cheap is because they make so many of them. If there was only one or two being buil- oh hang on, rich people buy Audis and Beemers. They probably won't notice. Errr, maybe it will be the Maserati manufacturers who won't notice. I mean, if Ferrari lost half it's customers, chances are the other half would end up with the spoils and Ferrari would just sell half as many cars but at twice the price. Hell, they might even add a few extra features to justify the extra hundred grand or three.
Surviving retailers already offer "50 months interest free". I honestly think one day in the future there will be idiots taking out 20 year loans so they can buy one week's worth of groceries. And if anyone else also wants groceries then they will also have to take out a new 20 year loan each week too. Or starve - you know, supply and demand! The idiot with the most pretend money sets the price. Somewhere along the line I expect some of the mathematicians-who-are-careful-with-their-money will say, "Phuket! In for 5 cents, in for a grand" and just borrow shitloads of money and do whatever they like with it - fancy car, mansion, factory for making fantasy gadget that looks really cool on paper but is impossible to build or no-one wants it after all - not when it costs another 50 year loan of 120% of the wage that the average consumer might earn next year. You mathematicians had better get in quick. The instant the banksters realize that you are having fun they'll close that loophole.
So I still haven't got any closer to answering, "What will be the trigger?" Financially, I can't see one. We've already passed the theoretical peak-pretend. As long as people are hungry and can't see past real estate, the credit card, the factory and the supermarket, the Ponzi can continue. The trigger will occur when a PTB can't get his share. And with money printing and cheap labour, why can't he? There's not that many of them and there is a world of weakness and stupidity to provide for him.
What happens when TPTB can't be bothered providing for their military? I guess that could be a trigger. Or when they piss off their HFT algo programmers. Maybe when some higher ups in the MIC realize that they are going to be replaced by robots they might decide they liked the old-fashioned way better. If they get that choice.
Nope. I still don't feel any smarter.
Cycles are still in place and markets will crash again. However, if we've learned one thing from the last decade there is nothing and I mean nothing those in power won't do to keep the game going. Think negative interest rates of 25 basis points or budget deficits of 11% of GDP are odd. Next time it might be negative 5% and 25% of GDP, combined with who know what else. Just know that power will be concentrated even tighter when the next cycle is over. We'll be down to three or four big banks then.
The metals are good candidates. They can paper over anything paper, but they can't print the metals. They're trying (paper gold), but this will fail miserably. Then all hell will break loose. Silver is probably an even bigger lynchpin than gold at ~69 G/S-ratio, when it comes out of the ground at 1/10 (gold/silver mined), and >half of the silver mined is consumed by industry and gone for good. Time will tell soon enough what of the many things that could go wrong, went wrong first.
Collapse of paper gold. That's a likely trigger! The existence of a conspiricy to drive the price of gold down is no longer a theory, yet it continues - and can't last much longer. The refusal to return Germany's gold, the "relocation" of Ukraine's gold reserves (what was it? $50 billion worth? Why bother, unless they're seen as chips in a desperate game). But as CHX suggests, the trigger is unknown.
btw. where is Germany in this game? How much paper gold has been issued by whom backed by the reserves that Germany evidently doesn't really have?
Since fiat needs debt/credit expansion to survive, it continually needs to appropriate more hard assets that can be leveraged against. 50 billion in gold isn't much perhaps but it a high-grade asset that can be leveraged against.
Other such things would be natural resources such as oil, coal and natural gas, rare-earth metals, and then on down the line through foodstuffs and durable goods to more basic things like arable land or water rights.
In that sense, i see the Anglo-US bloc absolutely in a desperate fight to get more high-grade assets that can underpin the leveraging game of fiat.
If Russia and China are not able to stem the march of the Anglo-US fiat, mother earth and resource exhaustion finally will... Of course, that would be the ultimate collapse...
How to "print" metal:
1. Sell metal to your enemies ( for oil and gas, perhaps? )
2. Steal it back again ( because they're your enemies and have WMD and terrrrsts!)
3. Go to 1.
I wonder if that has been tried before.
What does it mean when Russia stacks metal or China stacks metal? Sure, they can buy stuff. Until they run out of metal. But no-one else can buy from them because no-one else has any metal. Better to evenly distribute the metal amongst the populace. It's very easy for a foreign power to loot a vault. Not so easy to collect every damn ounce from every goddamn citizen in every square inch of the country-side. And then the citizens can swap labour and goods for metal. Oh hang on, just sell knick-knacks to the impoverished, indebted citizens and you'll have all them ounces back by nightfall. My bad.
Sorry, it's past my bed time and I'm rambling now. Hope there was some coherence in there somewhere. Cheers!
How to avoid getting punished for the banksters crimes (again)? Turn into a greedy psychopath and essentially print your own metal:
1. Use someone else's money = borrow as much money as humanly possible (preferrably unsecured).
2. Buy PMs.
3. Boating accident.
4. Declare banruptcy.
5. Go to Step 1
The above is just a variation of what corporations are doing right now. The PMs (or other wealth) is thrown over the wall to become the personal wealth of the directors - it is essentially 'lost at the bottom of the lake' to shareholders, never to be seen again. Humans are somewhat limited in this kind of crime because bankruptcy gives you a time-out for a few years, while corporations have no such restrictions (they just disappear and create a new, 'clean' corp).
Nonetheless, you can borrow an amazing amount of money even if you have declared bankruptcy. It's difficult and you can't borrow as much, but you would be amazed.
No, I don't speak from personal experience. I would not lower my moral standards to that of a corporation.
How did Germany manage that deleveraging while every other country was piling it on? What does that say about Germany's structure, or the role it can play in the world? How could they do this given that their own mega-banks are controlled by the same global interests as ours? How can they swim against the tide like that when they're still an occupied country which, as the Ukraine crisis shows, is apparently not fully in control of their own foreign policy?
Was it driven somehow by a national strategy? Exactly whose strategy is it, who's on board with it, how is it implemented and enforced, at whose expense?
Germany is on the hook for the rest of the EU-debt. There is no deleverage in debt for Germany IMO. They are on the hook by means of the common currency, at least as long as there is the Euro and the EU.
Could Germany now shrug off the burden of Europe's cumulative debt by ditching the Euro?
And this doesn't answer the first question, which is how did they avoid running up government and corporate debt like everyone else?
Are you suggesting it is because they were able to capture and feed off of the stimulative effect of everyone else in the Eurozone running up debt? If so how were they able to do this? And was it a conscious policy choice made and enforced by some group inside Germany?
Germany is destined to emerge as a global player. The German ruling class, defeated and humiliated in two world wars, was not destroyed, replaced or disbanded, and ruling classes have long memories - but are not doomed to repeat the past. And Germany has certainly had a unique historical experience.
As the world economy collapses and the unravelling Anglo-American Empire moves to cut off their access to their essential relationship to Russia, what can we expect from them - and how might their unique debt position affect (or reflect) their choices?
Thanks CHX for picking up this thread.
I can't answer your questions for CHX, but I will remark that that single chart showing how Germany has deleveraged against the backdrop of all others' increasing leverage is scary and makes me certain that they are going to side with Russia/China against the Anglo-US fiat bloc. France seems to have made a late change of course, which may presage a leaning that direction of the whole of continental europe, minus the vehemently anti-russian ones like Poland...
I'd imagine that Germany made out pretty well since they are a net exporter of high-tech goods that cannot be gotten anywhere else. Also, they have made extremely significant investments in renewable energy resources that may be lowering their energy costs against the backdrop of others' increased energy costs AND money printing.
Of course, I would need a lot of hard data to REALLY prove this, but, if the story I've been able to put together is at all indicative, it would seem that Germany has been able to look a bit farther around the bend than the lot of the Anglo-US bloc has...