A credit crisis occurs when there is a reduction in the availability of loans and/or funding for a given entity. Generally, this involves the market losing confidence in the ability of the borrower to pay back borrowed funds. This leads to lower funding ability and higher interest rates. The credit crisis then moves into a liquidity crisis, as the borrower can’t pay the higher rates and is unable to fund daily operations. A credit crisis could then lead to insolvency.
My colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.
Here it is:
“The actions of the Federal Reserve (how far they went to ‘stabilize’ the economy) after the Credit Crisis of 2008 is unprecedented in American history. Of course, I’m talking about the Federal Reserve printing nearly $4.0 trillion in new U.S. dollars while keeping interest rates artificially low for almost six years now.
These actions have caused an ‘era of financial insanity’ that penalizes seniors, savers, and prudent investors, while rewarding borrowers, those who leverage, and risk-takers.
It encourages public companies to doctor their own bottom lines by borrowing money (at cheap interest rates) to repurchase their own shares. This reduces the denominator of their earnings numbers—giving only the illusion of prosperity—and also reduces share float, thereby putting upward pressure on stock prices since more money is suddenly chasing fewer shares.
Articles have appeared in several well-known financial publications, with sources, citing central banks around the world have injected $29.0 trillion into equity markets because they themselves simply could not manage a return at the very same rates they were inflicting on others!
The prime beneficiaries of these insane monetary policies are the banks themselves and the government itself. Because low interest rates allow Washington (and other, similar, fiat regimes) to manage debt payments that could not otherwise be managed in a ‘normal’ interest … Read More
In 2012, I predicted that if the Federal Reserve couldn’t get the economy growing again, it would take interest rates into the negative zone.
Well, yesterday, the European Central Bank (ECB), the second-biggest central bank in the world, trumped the Fed and became the first major central bank to offer depositors negative interest rates.
What does “negative interest rates” mean?
Each night, major banks in the eurozone collectively deposit USD$1.0 trillion with the ECB. By cutting its overnight rate to negative, these banks will end up paying the ECB to hold their funds.
The ECB hopes that instead of getting a negative return on their money, the major banks in the eurozone will start lending their money out to borrowers, which will get the economy in the eurozone moving again.
This won’t work. Here’s why:
1) Preservation of capital is the most important thing for banks in the eurozone. If they can deposit their $1.0 trillion with the ECB, even if they have to pay for the safekeeping, it’s a more secure move than lending money to businesses that are still far too risky because the eurozone economy is far too weak. The government regulation of opening and running a business in the eurozone is overwhelming.
2) If the eurozone banks are getting a negative return on their money, how can they possibly pay savers a return on the money they have sitting in the bank? Yes, savers are punished once again with this latest central bank move.
3) Smaller countries like Sweden and Denmark tried negative interest rates during 2009 and 2012; they didn’t work in stimulating those economies…. Read More
While the Federal Reserve has cut back on its money printing program, the fact of the matter is that the “official” U.S. national debt is closing in on $18.0 trillion. The unofficial national debt (when obligations like Social Security, Medicare, Medicaid, welfare, and now Obamacare are taken into consideration) is closer to $200 trillion.
The Japanese national debt just hit one quadrillion yuan.
Many countries in the eurozone are drowning under debt. The European Central Bank recently started talking about printing money to finally get the eurozone out of its mess.
All of this is very well-known to Profit Confidential readers.
Why do I bring this up again today? I’m back focusing on debt because it is becoming more and more apparent that the only way to reduce the record national debt many industrialized countries have accumulated since the Credit Crisis of 2008 is to print even more money.
And the collapse in the volatility of gold bullion prices could be pointing to just that. To see what I’m talking about, take a look at this chart:
In April of 2013, when the sharp decline in gold bullion prices began, volatility for gold prices was very high. Since then, the volatility index for gold, an index that essentially gauges investors’ fear factor for gold bullion prices, has collapsed.
And when we look at the price chart of gold bullion (see next chart below), we see strong support for the metal just below the $1,200-an-ounce level. This level has been tested twice and on both occasions, gold failed to fall below $1,200. In technical analysis, this is … Read More
The housing market that lured institutional investors in during 2012 and 2013 is showing signs of cracking.
Before I go into more detail, you have to keep in mind that affordability is the key to the housing market and affordability for housing only increases once home buyers’ wages increase. Right now, incomes in the U.S. economy are declining. And you can add to the problem the fact that mortgage rates have been rising, too, putting further pressure on affordability for home buyers.
Last week, the chief economist of the California Association of Realtors said, “Housing affordability is really taking a bite out of the market… We haven’t seen this issue since 2007.” (Source: “Southland home prices surge but sales plummet,” Los Angeles Times, April 15, 2014.)
Zillow, Inc. (NYSE/Z), a real estate information company, expects home values in more than 1,000 U.S. cities to be more expensive than ever within the year. The chief economist at the firm said, “The lows of the housing recession are becoming an increasingly distant memory as home values reach new highs and homes become more expensive than ever in many areas… As affordability worsens, more residents will be forced to search for affordable housing farther from urban job centers, and home values in some areas may have to come down.” (Source: “Home Values in More Than 1,000 U.S. Cities Expected to Be More Expensive than Ever Within the Next Year,” Zillow, Inc. web site, April 22, 2014.)
Don’t get me wrong. The U.S. housing market has definitely improved since the Credit Crisis of 2008. But, as I have been writing, it is not … Read More
In 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.
And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.
The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)
And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.
You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.
Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.
Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More
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