3 Uncommon Signs That An Economic Collapse Could Happen Soon

Tyler Durden's picture

Originally published The Birch Gold Group, via Alt-Market.com,

As stocks continue to climb and the U.S. economy sustains its third longest period of expansion in history, market forecasters are seeking clues for when our next crisis may strike. So far, three uncommon signals have them worried.

Here’s an explanation of the three uncommon signs causing alarm, and what they mean for your savings…

Sign #1: Resurgence of Synthetic CDOs

The riskiest plays on Wall Street are made using financial instruments known as derivatives.

Derivatives are named for how they “derive” their value from the underlying assets on which they’re based. They give investors the ability to leverage assets — that is, control large quantities of an asset without actually buying or selling it.

Depending on how the underlying asset performs, derivatives can generate either massive gains or crushing losses.

But it’s when big banks and financial institutions start gambling in derivatives that things become especially dangerous. And that’s exactly what happened in the case of our last crisis: A slew of “too big to fail” organizations took on excessive risk through derivatives (mortgage-backed securities and others), and they couldn’t shoulder their losses when the bets went bad.

Now one of the most potentially destructive derivatives is regaining popularity after being shunned by Wall Street for years because of its role in the 2008 collapse.

The derivative is called a synthetic collateralized debt obligation (CDO), and Citigroup is spearheading its resurgence.

Granted, post-2008 regulations do make the market for these kinds of derivatives less liable to spark another collapse, and Citigroup executives claim to be pursuing this endeavor responsibly (we can trust them, right?). But Bloomberg reports the positive trend toward CDOs is still a negative sign (emphasis ours):

This time, Citigroup says, it’s doing things differently. The deals are tailored in a way that insulates it from any losses, while giving yield-starved buyers a chance to reap returns of 20 percent or more. The market today is also just a fraction of its size before the crisis, and few see corporate defaults surging any time soon. But as years of rock-bottom interest rates have pushed investors toward riskier products, the revival of synthetic CDOs may be one of the clearest signs yet of froth in the credit markets.

Pay very close attention to that last sentence. In essence, it’s saying that today’s low yield environment is slowly pushing investors to engage in increasingly risky behavior to make satisfactory returns. Eventually, those risks get too big — just like they did in 2008 — and the whole house of cards comes toppling down.

Sign #2: Lenders Loosening Mortgage Standards

When banks lend money to people who can’t pay it back, bad things happen. It’s called “reckless lending” for a reason. And on a large enough scale, reckless lending can be a strong catalyst for systemic financial crisis.

So what encourages banks to practice reckless lending in the first place?

Well, there are two main incentives for banks to lend recklessly:

  1. Increasing competition from other banks, and…
  2. Decreasing demand for credit.

In the case of our last crisis, both of those incentives came into play.

The mortgage lending sector transformed from a duopoly into a tightly competitive market of various lenders, which drove lenders to loosen standards in an attempt to woo borrowers. On top of that, credit demand from high quality borrowers was sparse, further encouraging lenders to approve loans for risky borrowers.

Today, the same thing is happening again.

WolfStreet.com reports (emphasis ours):

The toxic combination of “competition from other lenders” and slowing mortgage demand is cited by senior executives of mortgage lenders as the source of all kinds of headaches for the mortgage lending industry.


Primarily due to this competition amid declining of demand for mortgages, the profit margin outlook has deteriorated for the fourth quarter in a row, according to Fannie Mae’s Q3 Mortgage Lender Sentiment Survey. And the share of lenders that blamed this competition as the key reason for deteriorating profits “rose to a new survey high.”


And how are lenders combating this lack of demand and the deteriorating profit margins that are being pressured by competition? They’re loosening lending standards.

Worse yet, house prices across the country remain grossly inflated. In fact, they’ve far surpassed their pre-2008 housing bubble levels, according to the Case-Shiller US Home Price Index. This means lenders are loosening mortgage standards and pushing borrowers into an inflated housing market, just like they did during the years leading to 2008.

If interest rates rise too fast — a very real possibility considering the Fed plans to start unwinding its $4.5 trillion balance sheet and hike rates once more this year — millions of homeowners could find themselves underwater just like they did nearly 10 years ago.

Loosening mortgage standards at a time like this can only do one thing: Set us up for yet another wave of defaults and foreclosures… which could easily pop the housing bubble and wreck the entire economy.

Sign #3: The “Skyscraper Index”

Analyzing variables with a direct relationship to the market is the first step in forecasting potential future outcomes. But taking a broader look at more obscure correlations can give even deeper insight.

Take the Barclays “Skyscraper Index,” for example. Gathering data from the past 100+ years, the index examines historical booms in large commercial construction projects (primarily skyscrapers), and their tendency to precede economic downturns.

Barclays’ breakdown of the relationship is compelling, to say the least… the index tracks a firm correlation between completion of record-height skyscrapers and severe market downturns — from our last major recession all the way back to The Long Depression of 1873.

Followers of the index today believe conditions are shaping up for it to be proven right once again, as cities across China, India, Saudi Arabia, and the U.S. erect another round of the tallest skyscrapers in history.

A good example of this is in Denver where a Manhattan developer is moving forward with plans to build a 1,000-foot skyscraper, which would dwarf all the other buildings in Denver.

Proven Security For Uncommon Times

One of the wisest ways investors can respond to these uncommon indicators is to seek security in proven, tangible assets. Unlike stocks, bonds, ETFs, mutual funds, and the like, these tangible “real assets” can never go to zero, regardless of what havoc grips traditional markets. Which “real assets” work best for protection? Well, there are several options… But physical precious metals have been investors’ first choice for centuries. In light of the signs discussed above, it’s no wonder metals prices have steadily risen in recent months. And you can expect them to climb higher as more investors come to grips with the reality of our current situation.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
balz's picture

A skyscraper in Denver... Come on.

Five Star's picture

Commercial and industrial lending growth hasn't been this low and not caused a recession, ever...


Creepy_Azz_Crackaah's picture

Wait... this is the same story as last year.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

At some point it will come true. But when?

serotonindumptruck's picture

That Wall Street Bull looks like it's made out of chocolate.


Mr. Universe's picture

The only collapse will come when they say it will come. What part of "The Fed can put any amount of money anywhere at any time." do we not understand? There are no markets, just illusions of such.

pods's picture

"Pods clicks on the 'I make $7 grand a month while at home" link from the sheer boredom of the always upwards bound honey badger market."


El Vaquero's picture

Synthetic CDOs...great.  It's not bad enough that they take a bunch of debt and pool it together in a bankruptcy remote master trust somewhere, then tranche that and sell corporate paper to investors, and often each other, but they're buying that corporate paper and tranching that and doing the same thing.  Or buying a bunch of CDSs and tranching that.  Jesus, I fucking hate Ponzi schemes.  Fucking black box shadow banking instruments are evil. 

pods's picture

Makes your head spin when you really think about it. They cannot make $$ fast enough the old fashioned way of creating it out of thin air and lending it at interest. They have to come up with something out of thin air to steal the money you managed to squirrel away from them for when you need cat food when you are old and cannot work.

The entire system needs to implode.  Governments, banking system, the works.  No saving anything. And kill with prejudice the next (((bastard))) who has a great idea for a currency for you.


Manthong's picture


“A good example of this is in Denver where a Manhattan developer is moving forward with plans to build a 1,000-foot skyscraper, which would dwarf all the other buildings in Denver”

Ok… Let’s see, Denver is about 5,280 feet above sea level, add another thousand feet…

Does that developer know what hypoxia is?

They are going to need a warning sign at the bottom elevator door for people with respiratory problems… ..and

El Vaquero's picture

Meh, 6,000 feet isn't really that bad if you're not being physically active or used to living at a mile high.

jemlyn's picture

You're right, Vaq.  That is for people living in Denver, like me, with no heart or lung problems and relatively good physical shape.  But my neighbor's daughter with heart trouble visits from Seattle and has to bring oxygen and special prescriptions.  She can't drive here because some mountain passes are much higher and could be fatal for her.  The ski resorts see people die every year because they are not acclimated to the elevation.  I assume this building will be used for business and maybe hotel rooms.  Another thousand feet will make a difference for those from the lowlands.


Throat-warbler Mangrove's picture

And then for us lowlanders, there is the dry air.  Constant nosebleeds.

spieslikeus's picture

Because Physics, Maff and Shit

AssN9's picture

"No sex higher than 69"

canisdirus's picture

The mean elevation in the state of Wyoming is well above the altitude of the top of this building. People aren't dying from that. In fact, the mean elevation in the state of Colorado is even higher... The maximum elevation of both is more than double that.

El Vaquero's picture

It doesn't really make my head spin, becuase I've seen it all before.  And I have a great idea for a currency:  .999 PMs. 


And I called synthetic CDOs a Ponzi, which is synonomous with a pyramid scheme.  I'd like to point out that not all incarnations of CDOs are going to be pyramid schemes.  Some will have to be more like Jenga towers.  The Jenga scheme. 

Manthong's picture


I'm just waiting for the opportunity to go to $8K/month.



El Vaquero's picture

Just wait until a major player in the whole derivatives daisy chain goes tits up.  You may have an opportunity to work from home for $8 trillion/month after the fallout from that.

swmnguy's picture

Yeah, if that happens, it would be the biggest financial crisis since...

[wait for it]


Justin Case's picture

“By failing to prepare, you prepare to fail”

Ramesees's picture


Yes, we know a recession is coming, as they always do. But the calling or one has been incessant.

El Vaquero's picture

Despite all the hype, we never really recovered from the last recession.  It has just been papered over. 

Justin Case's picture

Fortunately we know the financial and political elite have implemented effective fiscal and monetary policies to maintain high employment, no inflation, and strong moral values. Our economies are intelligently managed for the benefit of everyone. With no hints of oncoming catastrophes, currency crashes, corrections in over-valued stocks, or other disturbances … we should feel financially safe and secure.

Student loan and sub-prime auto loans total less than $3 trillion, so not to worry… Real estate, currency, and bond bubbles are no big deal, and the U.S. pension crisis is well under $10 trillion, so nothing to see here…

A crisis/crash can occur at any time but might be delayed indefinitely:

El Vaquero's picture

They don't maintain high employment.  They do maintain low unemployment, however.  And yes, there can be a huge difference.

debtor of last resort's picture

Wait, bought some gold and silver last year.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

And the year before that.

Blue Dog's picture

So because they predicted it before and were wrong it can't ever happen?

That's the reserve of "are we there yet?"

Eventually the answer has to be yes.



Sam Clemons's picture

It is the post collapse capital of North America after all

ToSoft4Truth's picture

Clean shots all the way into Aurora from the skyscraper in Denver. 

aliens is here's picture

I am getting tired of hearing collapses. All we can is prepare and let it come. It's unavoidable and constant worrying is not good for the mental health.

kahplunk's picture

ahmen I let this crap eat me up for years  dam near lost my wife over it. I will never worrie about this cap anymore. I stacked some led n Pm's food water fuel and the rest is up to my grit and luck or Gods will.

MANvsMACHINE's picture

I guess your wife doesn't read Zero Hedge.  Mine didn't either until Trump won.  I had told her that he would win and she said I was crazy for thinking that.  In her words, "he has no shot!!!"

I believe that is the time when she began checking in on ZH and more accepts the crash scenario as a coming reality.

FixItAgainTony's picture

You fellas were fortunate, mine left a year ago over my being "difficult and pessimistic" about the future.

lasvegaspersona's picture

Why, did theirs leave 2 years ago?

consider me gone's picture

That really is the long and the short of it. The only reason I read this stuff is that I don't want to be caught with my pants totally down like last time. Fortunately last time, I didn't panic and just stayed pat. Rightly or wrongly, the Fed took care of the rest (Wrongly). Next time I doubt I will be so fortunate.

Toxicosis's picture

So don't read the articles concerning possible collapse then.  Personally I prefer to keep myself vigilant, taking in and observing as many angles possible.  I have prepared as best I feel I possibly can but most people have not a clue what's coming and less are proactive much less active.  Sure collapse burnout has also effected myself and others, but rather that than addiction to drugs, booze, social media, reality soap operas, social irresponsibility, and personal and financial irresponsibility.  My concern is most people who are totally unprepared and are impulsive, selfish, and entitled and will have to dealt with, with probably some extraordinary measures.

JRobby's picture

Seems Citi is usually first with shitty risky "instruments". I believe they were first with negative amo mortgages in the early 80's ??

2banana's picture

Bankers in perp walks?

Grandad Grumps's picture

Not in a fraudulently controlled market. Maybe when you say "will" instead of "could" some people will take it seriously.

wisehiney's picture

Hey daddy, how much longer until we get to Disasterland?

Are we there yet?

Are we there yet?

Are we there yet?

KimAsa's picture

We got there a long time ago, kids. Did ya miss it?

jamesmmu's picture
Here’s Why the Time to Worry About the “Fear Index” is NOW, Not Later


Dr. Engali's picture

It’s a coming. Any day now...., still waiting...., getting sleepy...,

mjcarr51's picture

"IT'S GONNA HAPPEN" was a Chicago Cubs' slogan for years prior to last November.

Took them 108 years to win, sooooo ........................


consider me gone's picture

I've noticed that when I'm trolling (no, really trolling), the fish hits after I've nodded off.