[Home] [Headlines] [Latest Articles] [Latest Comments] [Post] [Sign-in] [Mail] [Setup] [Help]
Status: Not Logged In; Sign In
|
Business/Finance See other Business/Finance Articles Title: When $14 Trillion Goes "Poof" Well, now... It sure looks like a "risk-off" day. Indeed, there's a perfect storm of rotten news. And only yesterday, our Jim Rickards warned of a chilling possibility -- "an economic meltdown at least six times the size of the 2007 subprime mortgage meltdown." More about that in a bit. Let's get immediate matters out of the way first... "Dr. Copper" is looking positively sickly. If you haven't heard that moniker before, a quick explanation: Copper has a reputation as "the metal with a Ph.D. in economics." That is, as copper goes, so goes the economy... because copper is used in so many everyday industrial and consumer goods. Whether that's true or not is another issue for another time. Sometimes, it's perception that matters more than reality. Overnight, the World Bank issued a gloomy economic outlook for the rest of 2015. It was an excuse to sell copper yet again. This morning, it's down 5% on the day, at $2.55 a pound -- a level last seen in late 2009. If you've been keeping up with The 5, you're not exactly surprised: Greg Guenthner of our trading desk alerted us to trouble for the red metal in early December. The word this morning? "The breakdown we're seeing now," says Greg, "could easily send copper prices to $2 or lower over the next couple of years." Bummer for us: We've had no shortage of fun in recent years mocking thieves who did daring and/or stupid things to get their hands on pricey copper. Our favorite remains the case from Kansas City in which thieves snagged copper tubing filled with scalding-hot fluid from a live TV transmitter crackling with 35,000 volts. At least the manhole covers in your neighborhood are safe once again... But wait, the hits keep coming: The mighty American consumer snapped his wallet shut over the holidays. Or so we're told in this morning's retail sales report from the Commerce Department. After the usual "seasonal adjustments," the figure slipped 0.9% from November to December. Even if you factor out auto sales (because they're volatile) and gasoline sales (because the price is falling), the number dropped 0.3%... while the "expert consensus" on Wall Street expected a 0.6% increase. And with that, stocks are sliding. Well, it didn't help that JPMorgan Chase delivered an earnings "miss." At last check, the S&P 500 is down nearly 1%, at 2,004. That's on top of yesterday -- when a big rally in the morning faded by the close. For all the volatility so far in 2015, the S&P remains well within its upward channel dating back to August 2011. "We're retracing toward support," says STORM Signals editor Jonas Elmerraji, "but at this point, there's nothing remarkable about what we're seeing this month." When will it be time to really worry? "1,950," Jonas says, "looks like the line in the sand that we don't want to see violated." Hot money is flooding out of stocks and into Treasuries, sending prices up and yields down. As we write, a 10-year Treasury note is yielding 1.82% -- another low last seen in May 2013, when Ben Bernanke told Congress he was thinking about "tapering" the Federal Reserve's bond purchases. Gold sits about where it did 24 hours earlier, at $1,238. "The next financial collapse, already on our radar screen, will not come from hedge funds or home mortgages," says our Jim Rickards -- turning our attention back to an approaching crisis. Problem is, that's where financial regulators are looking for a potential crisis... because that's where the last two happened. You've heard the expression about generals fighting the last war? "The same mistake is made in financial circles," says Jim. "The last two global meltdowns, in 1998 and 2008, are cases in point." Get Paid $12,250 Each and Every Month? There's a report floating around saying how people across the U.S. are bringing in as much as $12,250 each month. The most interesting part is how they're doing it. They aren't chasing after stocks, buying options, or selling their bodies. Click here now for more details. Case Study No. 1: In 1998, Russia defaulted on its debt -- triggering huge losses at the hedge fund Long-Term Capital Management. "As LTCM's lead counsel," Jim explains, "I was at every executive committee meeting during the height of the crisis that August and September. We were losing hundreds of millions of dollars per day. Total losses over the two-month span were almost $4 billion. But that wasn't the most dangerous part. "Our losses were trivial compared with to the $1 trillion of derivatives trades we had on our books with the biggest Wall Street banks. If LTCM failed, those trillion dollars of trades would not have paid off and the Wall Street banks would have fallen like dominoes. Global markets would have completely collapsed." Jim negotiated a bailout with the Federal Reserve and the 14 biggest U.S. banks: "We got $4 billion of new capital from Wall Street, the Federal Reserve cut interest rates and the situation stabilized." The regulators vowed never to let it happen again. "They ordered banks to monitor their hedge fund exposures more closely, improve their legal documentation and require more collateral to secure the performance on open trades." Which did absolutely squat to prevent Case Study No. 2. "When the Panic of 2008 hit," Jim explains, "they were surprised that problems were not in hedge funds but in something new -- subprime mortgages. The mortgage market collapse quickly spun out of control and once again brought global capital markets to the brink of collapse. "After the 2008 debacle, regulators again set out to fight the last war. They made mortgage lending much safer by requiring larger down payments, better documentation, proof of income, proof of employment and higher credit scores before a home loan could be made. But once again, regulators today are fixing the last problem and totally ignoring the next one. "The next financial collapse," says Jim, "will come from junk bonds, especially energy-related and emerging-market corporate debt." Total corporate debt issuance for energy exploration between 2009-2014 works out to $5 trillion. That's a problem with the loans made on the assumption of oil at $80-110 and oil now at [checking our screens] $45.94. Meanwhile, companies in emerging markets have issued dollar-denominated debt to the tune of $9 trillion. That's a problem with a slowing global economy and a strong dollar. "The result," says Jim, "is a $14 trillion pile of corporate debt that cannot possibly be repaid or rolled over under current economic conditions. "If default rates are only 10% -- a conservative assumption -- this corporate debt fiasco will be six times larger than the subprime losses in 2007." "The good news for investors is that this fiasco will not happen overnight," says Jim. [Hey, don't say we never look for silver linings around here...] The first hints of the September 1998 crisis came more than a year earlier when Thailand ran into trouble. The first hints of the September 2008 crisis -- the really obvious ones -- came more than a year earlier when a European bank froze three investment funds exposed to U.S. subprime and Jim Cramer was screaming on CNBC for the Fed to "open the discount window!" "This new junk debt fiasco," says Mr. Rickards, "started in the summer of 2014 but will not reach its peak until 2016 or later. Even companies and countries with dim prospects often have enough cash on hand to make payments for a while before they actually default." [Bottom line: You still have time to prepare. But you'd best make the most of it. New subscribers to Rickards' Strategic Intelligence receive a comprehensive package of intelligence briefings including The Financial Warning You Were Never Supposed to Hear. You'll receive the latest issue when it comes out next week, and you'll have access to Jim's next live online briefing exclusively for his subscribers on Feb. 9. For access, go here.] "This economy is never truly coming back unless we reverse the birth and death trends of American businesses," says Jim Clifton, CEO of the Gallup polling firm. Mr. Clifton is getting a lot of clicks today via Breitbart and Drudge. "We are behind in starting new firms per capita," he writes, "and this is our single most serious economic problem." Uhhh... We're not sure where Mr. Clifton has been the last six months. Back in July, we published the same chart he's talking about now -- showing businesses are now going defunct faster than they're coming into existence... This is important because the Kauffman Foundation has demonstrated that new businesses -- less than five years old -- are the real job creators in the United States. "When new businesses aren't being born," Clifton goes on, "the free enterprise system and jobs decline. And without a growing free enterprise system, without a growing entrepreneurial economy, there are no new good jobs. "That means declining revenues and smaller salaries to tax, followed by declining aid for the elderly and poor and declining funding for the military, for education, for infrastructure -- declining revenues for everything." Gee, wasn't there a documentary a few years ago that made the same point? Oh, yeah... [Ed. note: If you're a newer reader and missed out on I.O.U.S.A., our fearless leader Addison Wiggin's foray into the film world, we'll begin releasing a serial version in short clips at The Daily Reckoning's website. Look for it starting Sunday, Feb. 1.] For the record: The feds are once again making things up with their deficit numbers. "The government ended the calendar year with a deficit of $488 billion," says this morning's Wall Street Journal, "$72 billion less than the 2013 tally, according to data from the U.S. Treasury... The deficit in 2014 was just under 3% of GDP, using the most recently available figures for the size of the economy. That's below the average since the 1980s." Hmmm... We're looking at other data from the U.S. Treasury that show the national debt totaled $17.352 trillion on Dec. 31, 2013... and $18.141 trillion on Dec. 31, 2014. That's a $789 billion increase in the national debt. Just a wee bit more than the "official" deficit of $488 billion, no? Anyone in the private sector who tried to use Uncle Sam's accounting methods would be doing time in Club Fed... Here's a bullish indicator for the price of oil -- sort of. Gallery Furniture in Houston -- its owner Jim McIngvale is known to locals as "Mattress Mack" -- has a promotion going called "85 and It's Free!" It goes like this: Buy $7,000 or more in merchandise and you'll get your money back if the price of West Texas Intermediate is $85 or more at the close of trading on Dec. 31. The Houston Chronicle points out McIngvale "tends to end up on the losing side of friendly wagers with customers." For example: Last year, he bet customers the woeful Houston Astros would lose fewer than 100 games. The team went 70-92... so he refunded $4.2 million to customers who bought $6,300 or more in furniture during his "Leap of Faith" promotion. Generous? Maybe. In the case of oil prices, "It would be pretty cheap for Mattress Mack to hedge this trade and protect his sale," ventures the economics blogger Robert Wenzel. Best regards, Dave Gonigam The 5 Min. Forecast P.S. In case you missed it last week... If you believe wealth must come with effort... you must absolutely, positively NOT click on this link. If you click anyway and you're offended, it's your own fault. Post Comment Private Reply Ignore Thread
|
||
|
[Home]
[Headlines]
[Latest Articles]
[Latest Comments]
[Post]
[Sign-in]
[Mail]
[Setup]
[Help]
|
||