This $207.0-Trillion
Market Could Trigger the Next Financial Crisis
Derivatives Markets Could Cause a
Financial Crisis
A financial crisis could be looming and investors could be in a
world of hurt in the coming years.
You see, a call for a financial crisis may sound like an
out-of-this-world idea at the moment, and there isn’t anyone talking about it.
But there’s one place that says it could be possible and not many are paying
attention to it.
Look at
the derivatives market. Warren Buffett calls derivatives financial weapons of
mass destruction. But over the past few years, we have seen banks get more
active in this market.
Remember,
it was derivatives that caused the previous financial crisis. This time around,
they could do the same.
Consider
that at the end of the third quarter of 2018, the top 25 banks in the U.S. had
derivatives that had a notional value of close to $207.0 trillion. Please
note that is not a misprint.
The U.S. gross domestic product is roughly around $19.0
trillion. So, the notional derivative amount is roughly 11 times bigger than
the size of the U.S. economy.
One could ask, “Aren’t the derivatives used to hedge portfolios
and business transactions?”
Yes, surely, derivatives could be used as a hedging tool.
But know that derivatives are essentially a contract between two
parties. The funny thing is, both parties think they are correct until the time
of maturity of the contract comes.
So What’s Really the Issue?
Of the $207.0 trillion worth of derivatives, nearly 76% are
based on interest rates.
If you even remotely follow the financial world, you would know
that the Federal Reserve is raising interest rates. As this is happening, we
are seeing yields on bonds and other interest rates sensitive instrument moving
higher as well.
This is where the problem comes in…
If we assume just a small portion of these derivates go “bad,”
given the uncertainty around interest rates, what will happen?
Dear reader, I believe derivatives are worth watching closely.
I know $207.0 trillion is just the notional value and their
actual value is completely different. However, derivatives are very
complicated. Remember the famous “Whale trade” by a trader at JPMorgan Chase & Co. (NYSE:JPM)?
It was a derivative trade where a trader lost a massive amount of money for the
bank. And that was just one trade going bad.
If just 10% of these derivatives go bad, that’s $20.7 trillion
on the line. I think that amount would be more than enough to do a lot of
damage. We could see a bunch of bank failures and have a financial crisis
at hand.
Know that the top 25 banks in the U.S. don’t even remotely have
enough assets to cover for all the derivatives out there. At the end of
the third quarter of 2018, their assets amounted to just $11.04 trillion.
So for every $1.00 of assets, they have derivatives of over $18.00.
I will end with this; in case there’s a financial crisis, it
could be much more severe than the last one. I reiterate, be very careful.
Boom-time America, Brace For Economic &
Financial Impact
As credit-asset bubbles pop, the dominoes start
falling. The economy is far more precarious than the surface boom and bubbles
suggest…As credit-asset bubbles pop, the dominoes start falling.
The economy is far
more precarious than the surface boom/bubble suggests. A great many households, enterprises and
municipalities are in overloaded boats whose gunwales are just a few inches
above the water; the slightest wave will swamp and sink them.
The cost structure of
the economy is completely out of whack with what households and enterprises can
afford. There are
several dynamics in play:
1. Enterprises have
already stripped out all the expenses they can: head count has been cut, quality has
been gutted, quantity has been reduced, supply chains have been squeezed,
inventory controls trimmed to just-in-time and so on. There are no easy, quick
cost reductions available except laying off employees. Every other cost-cutting
strategy has been milked dry.
2. Costs are soaring
despite the low rate of officially measured inflation. I recently found some notes from 1995–a
long time ago, 24 years. The dot-com bubble–the first of this era’s three great
asset bubbles–was inflating rapidly but official inflation was low, around 2.5%
to 3% annually.
A slice of pizza was
$1.50, a main dish in a Chinese restaurant was $4.50 and rent for a one-bedroom
apartment in the S.F. Bay Area was $650/month. Now the pizza slice is $4.25 plus 9.25%
tax, $4.65; the main dish is $11.95 plus 9.25% tax, $13.05, and rents for
one-bedroom apartments far exceed $2,000/month in desirable neighborhoods.
Official inflation is
$1 in 1995 equals $1.67 today. So a $1.50 slice of pizza in 1995 should cost
$2.50 today, the $4.50 main dish should cost $7.50, and the $650 monthly rent
should be $1,085. Real-world inflation has outstripped the bogus official rate
in sector after sector. So TVs have dropped in price; big deal. How often do
you buy a TV?
Costs have tripled in
24 years, but have wages tripled? No. In many cases, they haven’t even kept pace with official
inflation, much less real-world inflation. How many people earning $40,000 in
1995 are now earning $67,000, the minimum increase needed to match the rise in
official inflation? Nobody I know. How many positions paying $40,000 in 1995
are now paying $120,000 for the same job? I think we can safely say none.
3. The majority of
gains in income and wealth have flowed to the top 5%, and most of the gains in the top 5% have
flowed to the apex of that income bracket. So when we read that average
household wealth has increased or median wages have increased, the reality is
these statistics mask the actual distribution of income and wealth gains, which
are skewed heavily to the top 5% income/wealth brackets.
This chart is a few
years old but the trend hasn’t changed.
Long-term distribution
of gains continues to favor the top 1%.
Enterprises are
precarious because their costs are high and there’s nothing left to cut. A relatively modest decline in revenues
will cut profits / owners’ incomes to less than zero.
Households in high-cost
regions are barely above water. Any reduction in household income will push these
households into insolvency.
As credit-asset
bubbles pop, the dominoes start falling. As real estate rolls over, lending and construction
activity decline, triggering layoffs. As household income takes a hit, the days
of spending $15 for lunch every day plus a $5 coffee and $4 bagel go away. The
only way for enterprises absorbing revenue declines to survive is to lay off
employees, which reduces the pool of consumers with disposable income.
Relying on the
free-spending top 5% is also a recipe for fragility. The highest paid employees are the last
plum target left for corporate cost-cutters, and the biggest targets for
software/AI/automation. The janitors making minimum wage ($15/hour now in many
locales) are not that exposed to automation, and the gains would be modest any
way. But reducing the head count of employees earning $120,000 and up makes a
significant positive impact on the bottom line as revenues stagnate or plummet.
Sorry, boom-time
America: the lifestyle
you ordered in now out of stock and we have no indication it will be in stock
again within the foreseeable future.
David Stockman: Central Banks Created A
Fiscal Doomsday Machine
David says gold is the alternative asset to a
bubble ridden financial system that is driven by the central banks. Here’s what
else David says…Reagan White House Budget Director and
best-selling author David Stockman says, “Yields are going to go up, and we are
going to have a day of reckoning in terms of this whole massive artificial
structure of debt that’s been created. . . . The growth rate is a third of what
it was historically . . . there is no magic way out of it. So, I call it a
‘Fiscal Doomsday Machine.’”
Stockman has been
touting gold as a must-have insurance policy. Stockman says, “The essential
attribute of gold is that it is a contra central bank asset. It’s the one asset
that can’t be influenced, manipulated, created or destroyed, for that matter,
by the central banks. It’s the one asset that history has proven, without a
doubt, can retain its value regardless of the mayhem and financial disorder
caused by governments. . . . Gold is the alternative asset to a bubble ridden
financial system that is driven by the central banks.”
Join Greg Hunter as he
goes One-on-One with David Stockman, best-selling author of the brand new book
called “Peak Trump.”
The Trade War Is Having CATASTROPHIC Effects
On America’s Farmers
The trade war between the US and China has
had significant effects on American agriculture and American farmers. Here
are the details…The trade war between the United States
and China is proving to be a disaster for American farmers: the ones who grow
and supply our food. This catastrophe is already smacking Americans in the
wallets, but a bigger loss would be those who actually supply the food we pay
for.
The trade war has had significant effects on
American agriculture and farmers throughout the last year, ranging from soybeans, beef, dairy, wheat,
and more. Not to mention the added costs of the trade war contributing to American farmers going bankrupt in record numbers.
We hate to say we told you so, but we told you so. The
trade war was a bad idea and everyday average Americans are footing the bill
for this asinine policy of tariffs. Now, the food supply could be in
jeopardy because of political posturing and that will not bode well for already
cash-strapped American families.
A
total of 84 farms in the upper Midwest filed for bankruptcy between July 2017
and June 2018, according to the Minneapolis
Star Tribune. That’s more than double the number of Chapter 12 filings
during the same period in 2013 and 2014 in Wisconsin, Minnesota, North Dakota,
South Dakota, and Montana, reported Vox. –SHTFPlan
As the trade war and the tariffs (taxation aka theft) that come
with it remain stagnant in the minds of most, it’s wholly escalating to those
who are affected by it directly. “I hope they’ll make strides on that,”
Oklahoma-based wheat farmer Hope Pjesky said recently according to Yahoo Finance. “But
we really don’t have any way of knowing what’s happening with those
negotiations now. And we need things to get back to normal.”
“We’re getting closer. … Negotiations [with China] are going
very well,” president Donald Trump stated during a recent interview with
the New York Times. But
that’s hardly comforting to those farmers stuck between a rock and a hard
place. And the tariffs on other goods are still in effect, forcing prices higher for already cash strapped Americans living paycheck to paycheck.
Although China has promised to buy more soybeans from the United
States, farmers are worried that the damage done by the trade war is far from
over and could be permanent. “It’s a good movement,” said John Wesley
Boyd, a mid-scale farmer from southern Virginia producing on 375 acres of the
soybean crop. “But I don’t see the pendulum swinging back towards me as a
producer in the field,” he added according to the South China Morning Post.
Until 2018, the US was the largest exporter of soybeans to
China, averaging at 30 million to 35 million metrics tonnes a year. That
largely ended last summer when soybeans were caught in the crossfire of the
trade dispute. Boyd and his fellow soybean farmers have been crushed under the
weight of these trade policies and an ever-expanding government.
As the seemingly never-ending trade war soldiers on, farmers,
who are directly in the crosshairs, are going to be feeling the financial
burden of this unnecessary political posturing for years after it smoothes
out…if it ever does.
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