Rickards: Here's Where The Next Crisis Starts

Authored by James Rickards via The Daily Reckoning,

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this...

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% — a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.

Many investors will be caught completely unprepared.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular over-borrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector.

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.

Comments

Free This Tue, 07/10/2018 - 16:48 Permalink

Not only do we have communists fomenting war here, we do have this financial mess. $120 trillion in debt + unfunded liabilities (usdebtclock.org), and there are untold trillions in derivatives, of which $360 trillion in bail ins have been written into the 2016 Omnibus Act. I think Trump can slow it down, but not fix it.

The central banks are the problem and control our money supply and interest rates - what free market. Then we have globalists in our gov't - the 5th column is the illegals flooding in...

Companies are cutting expenses to the bone to make the earnings seem plausible, but we seem to ignore the revenues.

Free Trade has stripped us of our manufacturing base.

I don't pretend to know what follows, but it is going to be wicked indeed. Too many intricacies to figure out, what happens for the average Joe. Will it be default, depression or stagflation, I got no clue, nor do you.

I know this, we are the cleanest dirty shirt in the laundry worldwide, but that does not make me feel any better.

Bring the Gold El Oregonian Tue, 07/10/2018 - 17:20 Permalink

To all the people misusing the term. Communism is a very specific political philosophy that is 100% predicated on total state control of all assets. The last several administrations have expended enormous effort to privatize as many government functions as possible. There are a great many threats to the United States. However, Communism is about as threatening as big foot because neither exist in the United States. 

In reply to by El Oregonian

Bring the Gold putaipan Tue, 07/10/2018 - 19:23 Permalink

It’s not Communism for fucks sake. The US government has many factions of PRIVATE actors who are attempting to exert undue control through secrecy and various power plays. None of them are Communist.

 

Not sure how all these commentators are getting online while living in 1950. Proof of time travel or lack of education on definitions, you decide!

I’m so sick of everyone being called a “communist” or “Nazi”. Translation their identity politics are to the left or right of mine respectively.  Meanwhile, we all live under crony capitalism in the mould of inverted totalitarianism. While people are busy slapping patently incorrect political labels on one another, the Oligarchs pick all our pockets and laugh. How anyone expects to be taken seriously tilting at windmills like that is beyond me. For fucks sake crack open a dictionary!

In reply to by putaipan

Bring the Gold Bring the Gold Tue, 07/10/2018 - 19:15 Permalink

Zerohedge average IQ has plummeted into below average. People arguing there were communists in the founding fathers era? Jesus Christ, Marx wasn’t even born yet! Some seriously fucking stupid people.

 

There are zero Communists anywhere in US government as far as anyone wielding even a scrap of policy making power. Quite the opposite in fact. The government is used almost exclusively to siphon wealth into private hands. There is ZERO attempt to have state control of ALL resources and markets.

zero has turned into a dumpster fire set off when the clown car of commentators below each article crashed off the cliff of fact based analysis into some kind of blind ideological rage. Fucking pathetic. You guys down voting me are as stupid as the butch lesbians on msnbc comment section saying anyone disagreeing with children being given opposite sex hormones are “Nazis”  you fucking uneducated retards deserve each other.  

 

The most cursory effort on ANY search engine yields the fact that I am correct and 18+ down voters have their heads wayyyy up their asses:

Communism:

  1. a theory or system of social organization based on the holding of all propertyin common, actual ownership being ascribed to the community as a whole or to the state.

 

http://www.dictionary.com/browse/communism

 

In reply to by Bring the Gold

Free This Bring the Gold Tue, 07/10/2018 - 20:20 Permalink

I never said they were in our gov't - they ARE on the street. Have you seen the antifa carrying CCCP flags man?

I sure never said our Founding Fathers were communists, LOL, you are correct, Marx was 19th century.

But You need to open your eyes. What is Bernie Sanders and Pocahontas if not socialists, one hop from communism, and that new girl elected, same thing.

You best wake up.

In reply to by Bring the Gold

marsrecords Bring the Gold Tue, 07/10/2018 - 22:15 Permalink

Exactly Mr. Gold.

Freehold property is not permitted in the United States. It is owned by States that charge rent on that property, called "Property Taxes". Think you "own" property? Try not paying the taxes and you will see the real owner.

People are not permitted to own Financial instruments in the United States. All instruments and all stocks of corporations creating instruments are OWNED by the DTC - Depository Trust Corporation. The individuals are merely given title to the instruments. They never actually own ANYTHING.

So the system is Communist. The State (Corporations) and the Federal (corporations) own all property.

In reply to by Bring the Gold

samsara Free This Tue, 07/10/2018 - 20:30 Permalink

"... I think Trump can slow it down, but not fix it."

A good many of us that voted for him knew he couldn't stop it.
We thought that least he wouldn't throw gas on the fire like Hillary et el

If he could build a wall, bring troops home, form a dialogue with Putin all the better.

But he ain't gonna stop it and lots of things will be different.

In reply to by Free This

bshirley1968 Okienomics Tue, 07/10/2018 - 16:57 Permalink

He left out the auto loan bubble, the housing bubble 2.0, the bond bubble, and the MASSIVE pension bubble.  So many bubbles looking for a pin.

Keep nay-saying it, you'll get what's coming to them......and since you realize that this has been going on for a while, you ought to have sense enough to know we are now close......and this bitch could go any day.

In reply to by Okienomics

Kram FBaggins Tue, 07/10/2018 - 17:28 Permalink

Sorry, what??
In the days before the collapse of the stock market in 2008, gold was around $890/oz. 3 years later it had more than doubled. 

If you held it for too long once the fear had subsided, you missed out on the biggest gains, but if you kept it for the ride til now you're up 40% still. 

Sure, if you bought the S&P in the days leading up to the crash instead, you'd be up 65% instead of 40% But if you were a betting man, which would you say has a more sustainable price over the next 3 years? 

If you were even smarter/luckier and bailed on gold when you doubled your money and moved it to the S&P you'd have 400% of what you had in 2008. 

Since you asked... I'm 30% phyz, 10% gold miners, 20% Short S&P, 7.5% Oil, 7.5% short EM and 25% cash (HISA) {was 100% principal residence til recently}

In reply to by FBaggins

MrAToZ UmbilicalMosqu… Tue, 07/10/2018 - 19:42 Permalink

About 4 years ago I saw a very impressive interview with Rickards. He put it out there convincingly. Since then he puts it out there again and again and again and again and, he has not been right yet. He is the Taco Bell of forecasters - same shit wrapped differently.

That's not to say he does not hit a few marks. There is gonna be a crash I predict, he  predicts,  we predict and, a broken clock is right twice a day. One day we are all going to be geniuses.  Buy gold no matter who says what.

 

In reply to by UmbilicalMosqu…

ReturnOfDaMac Tue, 07/10/2018 - 16:59 Permalink

Look if you scream recession for 10 years straight, eventually you'll get it right.  But, I as an investor have lost a decade of gains, and also lost a decade I can never ever get back.  Love the "wall of worry" though.  However, remember it's not better to be early than to be late, it's better to just be right. Between David, Rickards, and Gartman, I get more courage to stay long each and every day!