Coming Financial Collapse Could Be Worse Than 2008
The collapse of U.S. financial markets sparked a stock market crash in 2008. You would think investors would’ve learned their lesson, but with global financial markets drowning in debt, the world is once again on the verge of a financial collapse in 2016. The coming financial collapse could be worse than anything seen before.
Americans sighed in relief over the recent signs of economic recovery noted in October, especially regarding employment growth (unemployment is now at five percent). However, the optimism does not stand up to scrutiny. Still, the numbers betray the fact that many “chronically” unemployed and underemployed people have simply given up on looking for work, dropping off the statistical indices.
Apart from the volatile stock market performance, the continued retreat of the value of the euro against the dollar will likely reach parity by the start of 2016. As for oil, the lower price of gasoline is an understandably and enthusiastically welcomed phenomenon by the population. This, combined with many other factors, fails to convey much confidence about the markets’ prospects next year; indeed, there is an air of financial collapse in 2016.
This Could Ignite a Stock Market Crash in 2016
In early 2015, The New York Times expressed concern about the real estate market. This alone should have raised concerns. (Source: “Banks to Settle With Investors in Suit Over Financial Crisis,” The New York Times, September 11, 2015.) The famous newspaper denounced the instrument of “financial swaps,” derivatives that essentially act as an insurance mechanism against credit risk, which has prompted the financial markets to become nothing short of a casino, attracting gamblers rather than serious investors. The result is that the global financial market has become more vulnerable to shocks.
Indeed, derivatives are financial “instruments” that have polluted, perhaps even poisoned, the financial markets over the past few years. In no small part, derivatives contributed to the reckless lending and risk-taking that formed the basis of the 2008 financial crisis. There was either a deliberate avoidance of responsibility or a total ignorance of the risks deriving (no pun intended) from derivative trading. (Source: “Big Banks and Derivatives: Why another Financial Crisis Is Inevitable,” Forbes, January 8, 2013.)
All of the major banks took part in the derivative game and risky practices that contributed in a major way to the economic collapse. The fact that these practices were so widespread meant that there was no way of knowing which one of these financial institutions faced the biggest risk of failure. Nobody seems to have learned from 2008 and the risk of derivatives has been ignored once again, hence the coming financial collapse of the global financial market in 2016.
Derivatives are contracts that represent a contractual transfer of risk from one economic subject to another without the transfer of an underlying asset. The derivatives market accounts for the largest market segment in international banking, amounting to tens of trillions of dollars. Derivatives have been promoted as tools contributing to the establishment of a more efficient market, allegedly distributing risks between the various economic stakeholders.
Buyers achieve a profit if prices rise, while sellers benefit if prices decrease. The speculative investment occurs, for example, by means of forward contracts (futures) in which the parties agree to exchange a certain commodity (such as oil, wheat, cotton, coffee, securities, loans, etc.) at a future date.
Here’s the Problem with the U.S. Financial Market
The heart of the problem, which the 2008 financial crisis has failed to resolve, is that finance has not resumed its natural function, which is to sustain the production of goods and services. It is a given that some form of financial profitability should be involved; however, the industry has gone far beyond that point.
Derivatives have pushed the financial area into becoming an industry that has enriched the few, impoverishing the masses and even entire countries. Considering such terms, a financial collapse in 2016 seems rather likely. One cannot overlook the fact that the main reason the crisis of 2007–2008 was launched was due to the real estate sector, with the securitization of receivables arising from housing loans (the notorious “subprime mortgages”).
Since the Obama administration has failed (with the Dodd-Frank Act) to put a stop to the bad habit, the popularity of derivative transactions and the risk of bubbles are as high now as they ever were. The Republicans who control both houses of Congress are not about to step up checks and balances on the financial system, adding more instability to the house of cards that is speculative finance.
Coming Financial Crisis Will Wake Up Complacent Media
At best, complacent financial media will speak of a “substantial correction” of all stocks in the financial sector in 2016, when they should be warning of a financial collapse in 2016. Statisticians might revel in the fresh evidence to add to their models, predicting cyclical recessions while regular working people despair at the loss of their savings.
Egon von Greyerz, founder and managing partner of Swiss Matterhorn Asset Management, is famous for having predicted quantitative easing moves and the Swiss National Bank’s heavy losses has also suggested that a real “financial apocalypse” could occur in 2016. He is also targeting the world of derivatives, which are said to be worth some $1.5 quadrillion dollars (that is $1,500 trillion). Von Greyerz has officially warned about the coming financial collapse in 2016. (Source: “A stock market collapse and surge in gold is imminent; What will be the trigger?,” Gold Switzerland, October 10, 2015.)
Von Greyerz accuses the apparent lack of controls at major banks. He cites the example of Deutsche Bank, where a junior employee admitted to having mistakenly transferred a sum of $6.0 billion to a customer: “How can a junior employee in a major bank pay the incredible sum of $6B without any controls whatsoever?” (Source: $1.5 Quadrillion Derivatives Bomb And The Great Financial Disaster, King World News, October 20, 2015.)
This world has gone mad. Governments are printing trillions, while banks are issuing derivatives worth quadrillions of dollars and perform transactions worth hundreds of billions of dollars every week. The zeroes do not mean anything anymore; they apparently have no value. All this has become routine for the people who run these sums and nobody has a clue about the real risk or exposure.
Global Financial Markets Are Out of Control
Major banks have derivative exposure in the tens of trillions, despite their being undercapitalized. At any moment, even marginal losses, given the exposure to derivatives, can bring down even the biggest banks. This derivative exposure is where the “global” component in “global financial collapse” reveals its unpleasant head.
Such is the derivative exposure that a single bank has derivatives worth several times a country’s gross domestic product (GDP). To this effect, von Greyerz once again cites the Deutsche Bank (DB) example. This allegedly stable financial institution “is also too big for Germany. DB’s derivatives position is 24 x German GDP and equal to global GDP,” he writes. (Source: Ibid.)
Yet the Bundesbank (Germany’s equivalent of the Federal Reserve) and the European Central Bank are ready to save it, thus creating “a new hyperinflationary Weimar Republic for Germany.” (Source: Ibid.) (As a reference, the Weimar Republic suffered under tremendous inflation in the post-WWI years, creating the conditions that facilitated the rise of the Nazi party.)
The derivatives and the massive exposure of both financial institutions and governments, through institutional mechanisms, are leading to another financial crisis in 2016, or rather a great financial collapse in 2016. The financial system is engulfed in a series of bubbles affecting all asset classes governments and central banks have created over the last 25 years.
Von Greyerz, who’s not exactly a socialist, suggests that before the global economy can regain any kind of normalcy, the bubble must implode before we can return to real growth. In order to hedge against the eventuality, or the high probability, of a financial collapse in 2016, the Swiss financial guru advises those lucky enough to have some gold or silver to preserve this wealth, because the two precious commodities remain the best protection against both hyperinflation and deflation.
IMF Outlook for 2016 Fuels Negative Outlook
Considering the global economy is growing at a slower pace than the International Monetary Fund (IMF) and other observers have forecasted, the probability of a financial collapse in 2016 is all the more likely. Indeed, away from the institutions, those who have to make real decisions based on the status of the global economy like one Nils Smedegaard Andersen, chief executive at The Maersk Group, perhaps the largest global shipping company in the world (it handles about 15% of the transport of goods by sea), are not optimistic. (Source: “Global GDP Worse Than Official Forecasts Show, Maersk Says,” Bloomberg Business, November 8, 2015.)
Andersen’s point of view is privileged, given his business. He told Bloomberg that global growth is slowing down, noting that “trade is currently significantly weaker than it normally would be under the growth forecasts we see.” (Source: Ibid.)
The IMF, in its World Economic Outlook for October 2015, has cut estimates for global economic growth from 3.3% to 3.1% this year and from 3.8% to 3.6% for 2016. (In 2014, global GDP growth came in at 3.4%.) (Source: “World Economic Outlook: October 15,” International Monetary Fund, last accessed November 11, 2015.)
Nevertheless, even these revisions, according to Andersen, are too optimistic. His company’s own macroeconomic forecasts, which, unlike those from the IMF, have a direct impact on the bottom line, show reduced growth, particularly in developing countries, compared to what others expect for 2016, suggesting more pessimism is in order.
The less optimistic economic outlook only fuels the chance of a global financial collapse in 2016. Nevertheless, given its weight in the global financial system, one of the main signs of erosion is what is happening to the U.S. financial market: Wall Street is collapsing and the U.S. economy is likely to disintegrate if protective measures are not adopted.
Global Financial Markets on Verge of Collapse in 2016
Many analysts attribute the Great Depression to falling demand and loss of confidence, or trust, in the markets on a massive scale, which led to a sudden reduction in consumption and investment. Once the panic spiked and deflation arrived, many people believed that they could avoid further losses by bailing out of the markets in a flood of bearish sentiment.
The monetarists believe that the Great Depression started as a normal recession, but that the contraction of the money supply greatly aggravated the economic situation, causing a recession that then descended into the Great Depression. Today, analysts have intensified warnings to investors that soon there may be a new stock market crash and that a financial collapse 2016 is “trending,” to use a 21st Century euphemism.
Most analysts said they wouldn’t be surprised if one day, the stock market falls. Indeed, they feel it is necessary to expect such an event. Nobody should be surprised that not only is a stock market crash likely, but that it is also serious and imminent. Mark Spitznagel, a hedge fund manager who made billions during the 2008 crisis, believes this. (Source: “Billionaire warns: Horrific stock market crash is coming, and the next bust will be ‘unlike any other’,” Sott.net, April 4, 2014.)
Similar to other arm’s-length observers, Spitznagel believes that we are in the midst of a financial bubble that could burst any day. Monetary policy is the culprit, accented by the Fed’s insistence on low interest rates, which penalizes savers and their income.
Warren Buffett, whom some have called the greatest investor of all time, also senses that a financial collapse is imminent, because the ratio of market capitalization to GDP is in the red, suggesting a collapse could occur at any time.
Higher Interest Rates Could Spark Financial Collapse in 2016
The experts are blaming low interest rates for the financial bubble, but while an increase could enhance investor confidence, it could also hurt much of the world, making a financial collapse in 2016 inevitable. The intention of the Fed is to stimulate the sluggish world economic outlook and reduce inflation. However, the Fed must also contend with the effects of a strong U.S. dollar and U.S. economy. The greenback has been trading at its highest-ever levels compared to the euro, at a six-year high compared to the Canadian dollar, and is setting record-highs against the Mexican peso.
Chart courtesy of www.StockCharts.com
As the dollar becomes stronger, it attracts foreign investors. But there’s a catch: a higher dollar intensifies competition between U.S. companies. Those companies that fail to adequately respond to the change may be forced to close.
The result is no mystery: unemployment and instability at the national level, which would then lead to a worldwide slowdown due to the U.S.’s continued role as the economic engine of the global economy. Everything hangs on the value of the dollar. In addition, for all of the U.S.’s continued dominance on the world stage, China’s stock market crash and concerns of a possible major crash in 2016 have shown that the two economies are hand and glove with each other.
This would be the first increase after almost 10 years, leaving a generation of analysts, about one-third of analysts, unprepared. Indeed, they are unequipped to deal with the shift, having never seen the frequent interest rate fluctuations of the past.
For many young traders and finance professionals, the very idea of what to do after a rate hike itself will come as a shock. For example, the effect of a rate hike on the international markets is one of the biggest potential pitfalls. There is a risk that emerging markets will react to a Fed increase in interest rates with excessive volatility. How would these young traders manage that risk?
There is the danger that after an extended period of comfort, monetary policies will explode in different directions, fueling volatility, especially in the emerging markets and China. The risk is that authorities in China may not see a hike in economic terms, choosing to react politically. Doubtless, there will be some (it’s not a matter of “if”) immediate and negative implications for the country. A rate hike is not welcome in Beijing and the People’s Bank of China may try to further decouple from U.S. monetary policy, given that at this time, China has no room for monetary tightening due to its weak economic situation. China could then respond with a further devaluation.
The strength of the dollar, after all, is no accident. It has resulted from the heavy capital outflow from investors in emerging economies, leaving financial systems weak and forcing governments to adopt high interest rates to avoid currency collapse and hyperinflation.
This then weakens industrial and agricultural investments, generating a stalemate, such that economic crisis leads to financial crisis and back again. More alarming is the possibility of a Greece collapse, a situation that would affect most emerging economies. Most emerging economies have funded their growth after a long period of credit expansion.
Precious Metals Best Hedge Against Financial Collapse in 2016
Needless to say, a stock market crash brought about by a financial crisis in 2016 would devastate retirement portfolios. So how can investors prepare for the coming financial crisis?
The low borrowing rates stimulated the rise of the economic and financial sectors as well as private individuals’ debt (in U.S. dollars). Should emerging economies collapse, it will be next to impossible for many emerging market citizens to honor their huge debt burdens, compounded by the fact that the debts are in dollars. How will these emerging markets repay their debts if their currencies depreciate against the rising dollar, which will be an inevitable effect of rising interest rates?
In the background are the overly low prices of raw materials from oil to iron, copper, and other metals needed for the modern economy to function. A further strengthening of the dollar will reflect the weakness of the global economy.
In 2016, given the circumstances mentioned above, there is the risk of a financial and economic collapse much more intense and dramatic than the collapse of Lehman Brothers in 2008. This could cause the collapse of the world monetary system and sovereign wealth funds. Only precious metals like gold and silver would be spared by such a grand-scale failure. These commodities could see their prices increase, given that physical precious metals are the only asset that central banks and governments cannot control, making them the best hedge against a financial collapse in 2016.