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How To Tell If The Next Financial Crisis Is Upon Us
From Howard Hill of Mind on Money
Three Conditions and Three Warning Signs
How to Tell if the Next Financial Crisis is Upon Us.
In the last post, it was suggested that the rapid collapse in oil prices might have set up a repeat of the 2008 financial crisis. Before we all run for the bunkers and the freeze-dried food, we should know the conditions needed for a crisis to happen, and the signposts we’ll see if the crisis gets going.
For a sector correction to become a meltdown, and for that to turn into a global crisis, several preconditions need to be in place.
The first condition is a serious market sector correction.
According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.
That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.
If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.
The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.
The unknown is how much of the $2.77 trillion of junk CDS on bank balance sheets on June 30 this year was energy-related. If history is any indicator, the CDS in the distressed energy sector already far outweighs its 18% share of the junk bond market.
But if we watch for the following three signposts, we’ll know that the crisis play is happening again:
- One sign would be for non-energy junk bonds to begin dropping in price. That would mean large holders are exiting from all junk bonds, not just those companies affected by low oil prices.
- Another sign would be sudden drops in share prices for banks or insurance companies that hold small amounts of energy-related bonds or bank loans, a clue that some market participants think they have derivative exposure.
- A third sign to look for would be the rumors or news that the big, investment-grade energy companies are having trouble renewing their Commercial Paper, bank loans or maturing bonds (the Exxon-Mobils and Shells of the world).
If we see all these signs in a matter of days or weeks, then our global financial system is being tested once again by the small community of speculators that profit from betting against industries, countries, or markets. They made a fortune betting against mortgages. Most of them didn’t retire to enjoy that wealth. They moved on to the next trade, and every day they try to repeat their investing success.
The next time their presence was really visible was the European Debt Crisis of 2011/2012. That didn’t take down the global financial system, but it was close. If Spain, Portugal, Italy and Ireland had followed Greece into debt restructuring, we would have had another global crisis, most likely even larger than the 2008/2009 episode. Only a major commitment from Germany kept the rest of Europe’s weaker countries from failing on their debt, too.
In March of 2012, the Greek “credit event” that triggered payment on CDS was estimated to apply to CDS that equaled 30% of the €300 billion Euro Greek sovereign debt market, or roughly €90 billion, (about $118 billion in US dollars at the time). The “settlement price” for that CDS event was 21.5%. So the winners in the CDS bet took home 78.5% times $118 billion, or approximately $93 billion. That was nearly twice the size of the CDS payoff when Fannie Mae and Freddie Mac went into receivership. Nice trade for those who made it.
Do we need to remind ourselves that Fannie and Freddie were the Exxon-Mobil and Shell of the mortgage business? Or that no target is too big if trillions of dollars can be used to make the bets?
So where will the “next trade” be?
Anywhere there might be weakness.
This month, it’s in energy companies that borrowed more than $200 billion while planning on oil prices staying over $100 a barrel, and gasoline staying over $3 a gallon.
Only time will tell whether there have been enough bets against those optimistic energy companies to make it a problem for everyone, and not just them.
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US debt held by the Fed: Just another chart
... or maybe another way to understand whether a big financial crisis is about to explode
http://failedevolution.blogspot.gr/2014/11/us-debt-held-by-fed-just-anot...
Yellen comes on the teevee in the middle of the night and says, "UN troops have been positioned in all major cities to assist with the bank holiday. Just kidding!"?
No liquidity crunch. If Greece can borrow, anyone can borrow.
I think the problem will be real estate. Is there a shopping mall in America that isn't sucking gas?
When the SHTF let's all promise to hang Krugman first
Be realistic: plan for a miracle
http://www.philiacband.com/propaganda.html
If your neighbour loses his job.. it's a recession.
If Bitcoin goes under $300... it's a depression.
OR... Your investment broker doesn't answer his phones... AND being concerned you drive down to your broker's offices and they are closed... peeking through the windows and seeing between the blinds, the office is completely empty.
You rush to your bank, only to find a very long line...
IF you hadn't paid attention up until now... Consider yourself a pauper.
STING III... The Movie Redux...
The opposite of a liquidity crunch......A liquidity flood, folks they TPTB are getting taken under by the flood of liquidity, next up...(occuring now!) currency crisis....
Who is buying the Greek bonds and who is selling the CDS on them? Remember the NINJA securities? Investors were gobbling them up because they bought CDS from AIG. When AIG neared collapsed, the entire financial system had a stroke.
Standing next to her will be Paul Krugman holding his cat.
Do you know the cat's name?
Krugman's cat's name is Cupid
To understand the modern dynamic, you must read this:
http://isitnormal.com/story/i-fuck-my-cat-seriously-1983/
+1 http://thechive.com/2014/12/13/cat-saturday-27-photos-13/cat-saturday-0-...
(note:the above link is not an image of interspecies erotica; SFW)
Confucius say: Wise man take pussy when it fall in lap.
Confucius say:
with medicated collar, your pussy will not get freas.
Foolish man give wife grand piano. Wise man give wife upright organ.
and let tulip mania begin yet again !!!
Looks like he has his thumb up that cats bunghole in the picture.
It just ain't right.
That's not completely normal.
Wiil they bring back tanks I the street Paulson?
Please edit your comment.
My eyes!!!!
We forgot to mention that during this public service announcement, Yellen is wearing pasties and leopard skin (real deal) bikini bottoms with knee-high dominatrix boots. She is smoking a blunt. And knuks is right, Cupid is there perched on Krugmans ample cat-ledge.
And just a reminder...keep plenty of petty cash at home, denominations UNDER 20 dollars. In the event of a bank problem, ATMs will spit 20's into the local economy like there's no tomorrow. Vendors will soon run out of the ability to make change.
There could still be plenty of 'stuff' on the shelves, but everything will end up costing 20 bucks. They'll give you a receipt, tell you to come back after the banks open to settle up, but...really...
The guy who can pay exact for that quart of milk will be able to get it for less than 20 dollars.
The guy who can pay exact for that quart of milk will be able to get it for less than 20 dollars.
Not if the guy next to him only has a $20 from the ATM, and really wants that quart of milk.
That's silly.
If the ATM's are still working then so are the banks and you should be able to buy everything using debit/credit cards.
If the banks go down, it'll be Ferguson pretty much everywhere.
I was referring to a bank panic, when ATM's will be drained by people afraid they won't be able to access funds for awhile. These folks will take their daily limit as long as they can. They are full of 20's, so, everyone will be flush with 20's and need stuff, and those who HAVE change will run out quickly, or hoard. (They can't get those coin rolls from the bank until it opens..)
It's the panic part, not the event itself. Of course it is mindless, but that's what people DO in a crisis. I just try to imagine the scenarios and put together some ideas of how to deal with shit. I think the '20 dollar bill and a Bank
Panic/ATM Run' scenario is possible, and having plenty of petty cash on hand takes care of that problem. In any case, petty cash IS cash, and is STILL in my possession to spend if I need, and making the adjustment only requires I alter the form...keeping it in under 20$ denominations.
I draw the line at pennies and nickels though, that's getting a little too financially anal for me. Seriously, keep the change...
Fourth condition:
Congress passes a bill putting taxpayers on the hook for trillions and trillions of derivative exposure.
Check. And orders up a few million hollow points.
Our only question is will they rehydrate our bungholes before the NWO rerererehypothecation initiation commences?
million, with a b, right?
Fifth condition:
The CME goes batshit with their new trading collars for all precious metals starting the 22nd of December.
No Santa Claus this Christmas.
Just the Satan Clause.
NOOOOOO.... Evil Speculators!!
Run for the hills!
Let's just hope they finally sink the fucker proper this time.
No half measures. Torpedos in all tubes, lads.
Further:
http://failedevolution.blogspot.gr/2014/11/us-debt-held-by-fed-further-i...
Is Exxon having trouble rolling their CP?
That would be Doomy.
I'd dust off my Dow 10K hat.
Not even close, they have almost no leverage.
"Whenever I see things getting worse I assume that's the first step towards progress."
Terence McKenna
"Whenever I see things getting worse I assume that's the first step towards progress.....or.....I took a few grams more than I should have.."
Terence McKenna
"We can't stop here, this is bat country."
Hunter S Thompson
http://twinpeaks.wikia.com/wiki/Lawrence_Jacoby
https://m.youtube.com/watch?v=8nguoNxwycc
You won't see this on the network news
Gentile giant my ass
Don't know what happened with Wilson. ...
But I believe in Karma .....and he deserved a bullet in the top of the head for what he did to that old man...the other thug, better sleep with one eye open, Karma is waiting for him too. ..
???
Don't know!?
A preponderance of various types of evidence clearly showed that Officer Wilson CORRECTLY blew away an utterly useless, aggressive, violent savage.
It should happen more often.
Don't agree with me now? You will soon....
That isn't Mike Brown. Mike Brown was BIGGER.
Jamie Dimon by going on a mad frenzy with Congress appears to be announcing that JP Morgan is a sinking ship and he needs a taxpayer life raft.
don't you mean when the current Depression deepens?
I'll give em a trillion to backstop the derivatives and not a penny more !!!
303 trillion, thats Ridiculous !!!
/but not as ridiculous as the survival kits. Give me a break...
I don't have a trillion but I can donate 10 bucks and a roll of t-paper if that will help.
So far three bucks have walked by and more are expected tonight - they have been fleecing sheeple for years so skinning bucks should be no problem.
Yeah, what good is a survival kit without M & Ms and breath mints?
What were they thinking?
No T.paper, or will they use greenbacks ?
Asswipes need no Asswipes...
Personally, if Me was a banker, I'd be wanting some serious neck protection in that kit, a stretch and slice preventer for sure...
Hummm. Only 25,000 rounds so far - I better get busy - a lot of work to do and so little time.
edit. But the cat will live
big oil doesn't really have that much debt. if you are looking for a corporate debt crisis indicator watch GGP, GE, or F. I would say watch the overnight rate for bank distress but that is indicative of nothing anymore.
Governments that are counting on all that oil tax revenue are carrying the debt - check the quality of your water and avoid that big pot hole out front.
agreed, big financials will fail before big oil has a problem, when the price of oil got hit last time the integrateds faired pretty well, i guess they fuck with refining margins enough to be ok, i'm sure if anybody looked into that it would show that big oil puts a fix on margins but I don't know that much about it, all I know is earnings on big oil have done surprisingly well when oil is cheap
Yes, this piece goes totally haywire. Equating highly leveraged piece of garbage, politically motivated financial companies like Freddie Mac and Fannie Mae with unlevered AAA companies like Exxon which have no debt to speak of is ridiculous. Some of the shale oil guys are screwed, but Exxon and Shell will be around for quite a while. Judging by the relative performance of the majors versus the shale companies, the market has already figured this out.
Can someone wake me up when the flaming chunks of rock start falling from the sky? I've heard this all before, thanks.
Out of curiousity who would be on the wrong side of the variuus hedged futures contracts that are used by oil companies for protection?
Us
Pour yourselves a double, or just get the bottle, and let Doug Noland give you the lengthly details on how bad the 6 year world credit binge has become, with the warning that it is beyond rescue or repair:
http://www.prudentbear.com/2014/12/the-collapsing-periphery.html
A double did you say? OMG: that's a catalogue of disaster news(!) I need two bottles to get thru it!
A great deal of the shadow banking world falls into and overlaps into the grey world of derivatives. There is no single commonly adopted definition of derivative or derivative contract in the European Union. This plays havoc with what and when reporting rules apply. It also highlights divisions in how national regulators view reporting rules for the $693 trillion over-the-counter derivatives market.
Remember this is only part of a much larger market, it is estimated the total derivatives market includes hundreds of trillions of dollars in non-reported agreements and private contracts. Everyone paying attention knows that the size of the derivatives market is 20 times larger than the global economy. The article below explores some of its ins and outs of derivatives and why they could collapse the economic system.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
There is also a change in Basel III requirements starting Jan. 1, 2015.
Europe is on the Cabal's Menu:
http://winteractionables.com/?p=17202
so, will it blend ?
It was unavoidable when the gold intervention in 2011 happened. You cannot tell the 90% of the world which saves in gold their gold is worth 40% less to the paper banking system. The world could not even handle a housing crisis in one country, and then they pull some crap like that? Stupid. The worst part of it is that because of the nature of gold, the midset of the market which understands it, and how the takedown was done, it put the banking system and sovereign governments far deeper in the hole than thy already were. They should have just let gold bail them out by owning it.
When the ship tilts to a 15% incline astern, bring the band out to the desk to play "Also sprach Zarathustr".
Crisis. How to tell?
Western world is directly in a crisis.
The normalcy bias report, searching for shock effect credit during a bombing.
In a Bering Sea winter storm, of course one looks for the rouge wave.
Been there.
On land, one can only be a conformation biased fool...
To wait for rouge wave amongst 40ers @ 8 degrees F, and the breeze is increasing.
On the radio you can here the Cpt's of a sinking vessel voice, he knows.
Ship is going down BITCHEZ.
And then the Captain said:
Boys, it's been good to know 'ya ...
When the bull market in bonds that began in the 80's goes bearish, that's when...
A rising 10 YR yield would be one good indicator...
http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...
I don't know about that third condition. Exxon and Shell are not Fannie and Freddie. With some a few cutbacks Exxon in particular could have zero net debt very easily even with $40 oil. Don't forget oil touched $10 a barrel in 1989 and neither company was seriously stressed.
Anything that makes the few last working people in America Stop.. will be a real good indicator.
Governments fear riots, not because of the destruction, insurances pay for that.. they fear riots because nobody Goes to Work.. and when America stops working, the Shit hits the Fan.
I always use to defer to the phrase its all where you are standing from, and now I will have to add who you are talking to. Certainly we will find more of these folx than you you will find one of the finanncial experts standing on a neighborhood street corner passing out algebra books. We can get one of their books with proven equations that have no relevance to real life or talk to the neighbors.
http://www.wsj.com/articles/health-law-hurts-some-free-clinics-1418429551
By STEPHANIE ARMOUR
Dec. 12, 2014 7:12 p.m. ET
18 COMMENTS
Some free health clinics serving the uninsured are shutting their doors because of funding shortfalls and low demand they attribute to the Affordable Care Act’s insurance expansion.
Nearly a dozen clinics that have closed in the past two years cited the federal health law as a major reason.
The closings have occurred largely in 28 states and Washington, D.C., which all expanded Medicaid, the federal-state insurance program for low-income people, and are being heralded by some clinic officials as a sign the health law is reducing the number of uninsured.
But the closures have irked some patients and left pockets of uninsured people not covered by the law with fewer venues for care. Some of the roughly 1,200 U.S. free and charity clinics are struggling with a drop in funding because donors believe there is no longer a need for free or low-cost care in the wake of the health law. That is making it particularly difficult for clinics that still report strong demand, especially in states that didn’t expand Medicaid.
Over the past two years, donations to free and charity clinics, which in some cases charge nominal or sliding fees, have dropped 20%, according to a report this year by the National Association of Free and Charitable Clinics. During that time, patient demand has risen 40%.
Savannah’s Community Health Mission in Georgia still had a waiting list for appointments but closed Oct. 30 because of funding problems that included a decline in donations.
“As soon as there was the perception of universal health care, the likelihood of receiving donations goes down,” said Colin McRae, a lawyer who served on the board. “You fight a battle of perception.”
Indeed, we look for the big one, while a hundred small ones gnaw at us from the ankles up. It is already over for some before the big one arrives.
RE: "There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing"
The repo market will show.
The sweet drying up of credit, this is when we see credit-lines not renewed and banks adverse to risk cover their pockets and slam closed their vault. At some point the return on loaning money is simply not worth the risk! Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless?
The term "liquidity trap" that has been used by Allen Greenspan and others can be difficult to understand. When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward.
When this happens we are at the end game. The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.
http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit-can.html