This is not about TEOTWAWKI (The End of the World as We Know It), nor about the Crash of the Industrial Age (Wait! The acronym for that’s CIA!) that we expect. But it is about a very hard time we are all about to go through, most likely beginning before next year is out and ending God knows when. Most probably, it will not end, but like the last Great Recession simply deliver us to a new plateau of diminished expectations that will become the New Normal. This imminent event is being forecast by a rising chorus of voices like those who warned us 10 years ago that a prosperity based on subprime mortgages, and financial derivatives thereof, could not stand. These voices — actually some of them the very same people — are telling us that we face not one, but two, train wrecks that will be nearly simultaneous, in that one will bring on the other.
Train Wreck Number One could come at any time, and it is being brought on by the same people that caused the last one. Playing with Other Peoples’ Money, with borrowed money and with play money in the casinos otherwise known as stock, bond and commodity markets, the banksters (as someone has brilliantly labelled them) have inflated a number of bubbles, most smaller than the housing bubble was, but together capable of doing as much damage. They include:
- The Car Bubble. Same formula, different asset. Sub-prime, low-interest-rate, long-term loans for cars, with the loans bundled, securitized, sold, resold and resold again. Everybody involved is making tons of money (25 per cent of all car loans are now subprime, and another 25 per cent are leases, many designed for people who can’t qualify for a subprime loan) until the music stops and the whole system folds.
- The Housing Bubble (The Sequel). In which the Masters of the Universe, having driven millions into foreclosure or under water (with mortgages exceeding the value of their homes) snap up bargains via short sales and rent them out. What could go wrong with that>? Being a landlord is easy, right? These cash purchases are giving the appearance that the housing market is recovering much faster than it is.
- The New Covenant Bubble. Business lending has become dominated by a new instrument known as the “covenant-lite” loan. Previously, business loans included a covenant signed by the borrower to the effect that the proceeds would not be used for non-productive things, such as buying in stock or paying bonuses to CEOs. Not so much anymore. The result is that instead of flowing into the economy, helping to create jobs, products and services, loan proceeds are going into the pockets of those who play in the Car Bubble and Housing Bubble casinos.
- The Stock Bubble. This is the big one. Stock prices on average are at all-time highs, for no good reason. Price-earnings ratios are in the stratosphere, right where housing prices were in 2006. Phoenix Capital Research recently put it this way:
“The market is extremely tired and the systemic risks underlying the Financial Crisis are in no way resolved. With investor complacency (as measured by the VIX) at record lows, the Fed withdrawing several of its more significant market props, and low participation coming from the larger institutions, this market is ripe for a serious correction.”
Among the authoritative people (we are not referencing those doomer quotes down where you see “One Simple Trick to Cure Cancer” links, okay?) who have recently run up storm flags:
David Stockman: “the watchword at this point is stay out of harm’s way. We are headed into a perfect storm of policy failures. Train wreck is a pretty good term to describe what is coming.”
John Ficenek: “Investors are dumping riskier debt faster than during the financial crisis in 2008. The money is rushing to safe havens such as US government bonds and gold. The staggering shift in investment strategy marks a reversal of the chase for returns that has been in place for five years.The credit market usually leads the equity market during turning points, as happened when credit markets cracked first in 2008.”
Bob Buckland: Citi Bank analyst Buckland has defined four phases the economy typically goes through, Phase One following a recession and Phase Four being the next one. He says we’re in Phase Three.
Train Wreck Number One, then, which could begin at any moment, is a “serious correction,” aka “crash,” of the stock market, with all the attendant collateral damage, much amplified because these guys are playing with borrowed money. Personal and corporate wealth will evaporate, banks that are too big to fail, will fail, and we may need swift, decisive action from the government to save the system, as we did in 2009. Wish us good luck with that.
And then there’s Train Wreck Number Two. More on that next time.
UPDATE: To inspect the storm flags — aka charts — more closely, check out these on Ponzi World (Over 3 Billion Not Served).