Tag Archives: financial collapse

Contagion! By James Rickards

In a massively over-indebted and interconnected world, financial collapse can spread like wildfire. The Chinese property sector may be the beginning of the conflagration. From James Rickard at dailyreckoning.com:

There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia.

It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power.

When that happens, a loss of confidence in the U.S. dollar is not far behind.

And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China.

Greatest Ponzi Ever

I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not.

They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants.

Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors.

That’s what gave the product its Ponzi characteristic.

The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs.

Now the entire edifice is collapsing as I predicted it would.

The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects.

China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China.

It comes back to contagion.

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Everything Is On Fire, by Egon von Greyerz

So far it’s just a few isolated fires here and there, but a massive global financial and economic conflagration is inevitable. From Egon von Greyerz at goldswitzerland.com:

“Everything is on fire” – Heraclitus (535-475 BC)

What Heraclitus meant was that the world is in a constant state of flux. But the big problem in the next few years is that the world will experience a fire of a magnitude never seen before in history.

I have in many articles and interviews pointed out how predictable events are (and people). This is particularly true in the world economy. Empires come and go, economies boom and bust and new currencies come and without fail always go. All this happens with regularity.

A GLOBAL FIRE IS COMING

But at certain times in history, the fire will be cataclysmic. And that is where the world is now.

Explosive fires have started everywhere already. Stock markets are on fire and so are property markets, as well as bond and debt markets. The problem is that fires are initially explosive but always end up implosive.

So right now we are in the explosive phase of the fires with markets all going parabolically exponential or should it be exponentially parabolic!

We are now at the end of a secular bull market in the world economy which on a global level has reached extremes never seen before in history.

Never before has the world seen an explosive fire of this magnitude, fuelled by uber-profligate money printing and credit expansion by central and commercial banks.

We have talked about inflation running wild and it is not just happening in stocks. Property markets are literarily exploding, especially the high end. We see this all over the world and not just in the US. In the UK for example, HSBC stated that March saw the highest number of mortgages EVER issued. In Sweden properties sell for up to 40% above asking price in a frenzied bidding war and second hand leisure boats are in such demand that they cost virtually the same as a new boat. And if you want a new boat, there is none available until 2022. It also seems that people are desperate for company after the lockdowns as prices for puppies in the UK are up to 100% higher than last year.

Yes, everything is really on fire as people are desperate to just spend, spend, spend after a year of lockdowns and restrictions.

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Why Buy Gold When There Is Bitcoin And Tesla? by Egon von Greyerz

Egon von Greyerz has twenty-four reasons to buy gold. From von Greyerz at goldswitzerland.com:

nstant gratification is what drives the world and especially investment markets. I often hear complaints that gold is a useless investment since it doesn’t go up fast enough.

We have invested heavily into gold for ourselves and our investors since 2002 when the price was $300.  Since then gold is up just under 6X.

Sure it has not been a straight line and there have been major corrections on the way.

STOCKS ARE TODAY A GARGANTUAN RISK

But Bitcoin and Tesla are much more exciting so why should an investor hold gold – an incredibly dull investment for the majority of people.

If I tell investors that it is absolutely critical to hold gold for wealth preservation purposes as the world financial system is the biggest bubble in history, most would ignore or ridicule me.

And if I tell them that the dollar and most currencies are down 97-99% since 1971 against gold and down 85% since 2000, they would yawn. They are only interested in their nominal stock market gains not understanding that they have gained nothing in real terms.

But if I proclaim that gold in 2021 could reach $3,000 some will prick their ears. (More about gold reaching that level, and higher, later in the article.)

Still most people prefer to stay in stocks totally unaware that the majority of stock investors are going to ride the stock market all the way to the bottom. And this time it won’t be a V bottom like March 23, 2020 but an L bottom lasting at least a decade or longer.

Both fundamentally and technically a stock market crash of massive proportions is guaranteed. Whether it starts tomorrow or we first see a final meltup is unimportant. Regardlessly, THE RISK IS GARGANTUAN!

CASSANDRA WAS ALWAYS RIGHT BUT ……

I can hear voices calling me a Cassandra and a doom sayer. For the ones who don’t remember Greek mythology, Cassandra was the daughter of king Priam and was given the gift of prophecy by Apollo. But as Cassandra did not respond to Apollo’s approaches, he gave her a curse that although all her “dark” prophecies were accurate, nobody would believe her.

I am not a Cassandra predicting doom and gloom but just someone who has spent his life analysing and understanding risk.

That’s why for example in 1999 I told my partner in an e-commerce business that we must sell the company at the then ridiculous valuation of 10X sales with no profit. The buyer was a Nasdaq company which went bankrupt a few years later after an acquisition spree paying grossly inflated prices.

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The Global Financial End-Game, by Charles Hugh Smith

It’s going to end badly, and here’s a blow-by-blow from Charles Hugh Smith at oftwominds.com:

The over-indebted, overcapacity global economy an only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

For those seeking a summary, here is the global financial endgame in fourteen points:

1. In the initial “boost phase” of credit expansion, credit-based capital ( i.e. debt-money) pours into expanding production and increasing productivity: new production facilities are built, new machine and software tools are purchased, etc. These investments greatly boost production of goods and services and are thus initially highly profitable.

2. As credit continues to expand, competitors can easily borrow the capital needed to push into every profitable sector. Expanding production leads to overcapacity, falling profit margins and stagnant wages across the entire economy.

Resources (oil, copper, etc.) may command higher prices, raising the input costs of production and the price the consumer pays. These higher prices are negative in that they reduce disposable income while creating no added value.

3. As investing in material production yields diminishing returns, capital flows into financial speculation, i.e. financialization, which generates profits from rapidly expanding credit and leverage that is backed by either phantom collateral or claims against risky counterparties or future productivity.

In other words, financialization is untethered from the real economy of producing goods and services.

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Party Like It’s 1984, by James Howard Kunstler

There’s no way Americans are going to allow themselves to be herded into The Great Reset. So says James Howard Kunstler at kunstler.com:

Chalk up a fatal blow to The Patriarchy. That avatar of toxic masculinity, Mr. Potato Head has been dumped into the same humid chamber of perdition where the ghosts of Nathan Bedford Forrest, Theodore Bilbo, and Phyllis Schlafly howl and squirm — liberating the billions of potatoes world-wide from the mental prison of binary sexuality. The move by Hasbro (bro? really??) may yet disappoint the legions in Wokesterdom as a-bridge-not-far-enough while they await the debut of Transitioning Potato Head, complete with play hormone syringe and play scalpel, so that the under-six crowd can begin to map out their own gender reassignments without the meddling of Adult 1 and Adult 2, formerly known as Mommy and Daddy.

Was it mere coincidence that the action in Toyland happened the same week that one Rachel Levine was grilled in hir Senate confirmation hearing for the post as Assistant Secretary for Health in the Department of Health and Human Services? The hearing tilted toward transphobia when Senator Rand Paul (R-KY) asked zie, a little too aggressively, if they were in favor of pubescent children opting for sexual reassignment in opposition to xyr parents. The nominee, who hirself transitioned from “male” to “female” in 2011, answered that transgender medical issues are “complex and nuanced.” True (perhaps). And probably more than a Senator who transitioned from ophthalmologist to politician might appreciate.

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Can 20 Years of Deflation Be Compressed into Two Years? We’re About to Find Out, by Charles Hugh Smith

Things always look best at the top. From Charles Hugh Smith at oftwominds.com:

Extremes become more extreme right up until they reverse, a reversal no one believes possible here in the waning days of 2020.

The absolutely last thing anyone expects is a collapse of all the asset bubbles, i.e. a deflation of assets that reverses the full 20 years of bubble-utopia since 2000. The consensus is universal: assets will continue to loft ever higher, forever and ever, because the Fed has our back, i.e. central banks will create trillions out of thin air without any consequence other than assets lofting ever higher.

This research paper from the San Francisco Federal Reserve begs to differ. Here is an excerpt from Longer-Run Economic Consequences of Pandemics (San Francisco Federal Reserve)

“Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods–over multiple decades–with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.”

Allow me to translate: wars launch 20-year booms of rebuilding, pandemics launch 20 years of deflation. Oops! Not only do wars destroy physical assets that must be rebuilt, they also tend to kill off a consequential percentage of the labor force, generating a labor shortage that pushes up wages.

So capital wins funding the rebuilding and labor wins because workers are scarce and in demand: win-win baby! Pandemics are considerably less warm and fuzzy, especially Covid-19. Pandemics are like neutron bombs, they leave the built environment intact so there’s no impetus to invest.

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The emerging evidence of hyperinflation, by Alasdair Macleod

According to Alasdair Macleod, we are not that way from a hyperinflationary collapse of fiat currencies. From Macleod at goldmoney.com:

Note: all references to inflation are of the quantity of money and not to the effect on prices unless otherwise indicated.

In last week’s article I showed why empirical evidence of fiat money collapses are relevant to monetary conditions today. In this article I explain why the purchasing power of the dollar is hostage to foreign sellers, and that if the Fed continues with current monetary policies the dollar will follow the same fate as John Law’s livre in 1720. As always in these situations, there is little public understanding of money and the realisation that monetary policy is designed to tax people for the benefit of their government will come as an unpleasant shock. The speed at which state money then collapses in its utility will be swift. This article concentrates on the US dollar, central to other fiat currencies, and where the monetary and financial imbalances are greatest.

Introduction

In last week’s Goldmoney Insight, Lessons on inflation from the past, I described how there were certain characteristics of Germany’s 1914-23 inflation that collapsed the paper mark which are relevant to our current situation. I drew a parallel between John Law’s inflation and his Mississippi bubble in 1715-20 and the Federal Reserve’s policy of inflating the money supply to sustain a bubble in financial assets today. Law’s bubble popped and resulted in the destruction of his currency and the Fed is pursuing the same policies on the grandest of scales. The contemporary inflations of all the major state-issued currencies will similarly risk a collapse in their purchasing powers, and rapidly at that.

The purpose of monetary inflation is always stated by central banks as being to support the economy consistent with maximum employment and a price inflation target of two per cent. The real purpose is to fund government deficits, which are rising partly due to higher future welfare liabilities becoming current and partly due to the political class finding new reasons to spend money. Underlying this profligacy has been unsustainable tax burdens on underperforming economies. And finally, the coup de grace has been administered by the covid-19 shutdowns.

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The Power of Ones, by Robert Gore

Your first duty is to think for yourself.

Humanity’s greatest scourge is groupthink. Millions have marched off to war, convinced of their side’s goodness and the enemy’s evil, and didn’t come back or came back in coffins. Billions have embraced politics and political philosophies with warning labels for anyone who cared to look: destruction and death sure to follow. Against the death toll from groupthink, the Black Plague, Spanish Flu, cancer, heart disease, and every other human malady shrink to insignificance.

If you could somehow open the brains of those who followed leaders and malignant idiocies to their deaths, the one thing you would find is the thought—actually the stale remnant of a thought, a trite rationalization—because everyone is doing it. Fortunately, it’s never everyone doing it, there are always those who oppose; it’s how the human race has survived. When word and deed become too dangerous, they oppose in thought.

Those times when it has been too dangerous to overtly express opposition to groupthink have been humanity’s darkest ages, lived under its most corrupt and barbaric regimes. We are entering such a time now. These descents are always presaged by a deterioration in thought—mob think and mob rule that become increasingly deranged and dangerous. The specifics of the various manifestations are trivial details, the important commonality is their reflexive hostility to independent thought and the truth.

“Probably. But not quite. I’m not afraid any more. But I know that the terror exists. I know the kind of terror it is. You can’t conceive of that kind. Listen, what’s the most horrible experience you can imagine? To me—it’s being left, unarmed, in a sealed cell with a drooling beast of prey or a maniac who’s had some disease that’s eaten his brain out. You’d have nothing then but your voice—your voice and your thought. You’d scream to that creature why it should not touch you, you’d have the most eloquent words, the unanswerable words, you’d become the vessel of the absolute truth. And you’d see living eyes watching you and you’d know that the thing can’t hear you, that it can’t be reached, not reached, not in any way, yet it’s breathing and moving there before you with a purpose its own. That’s horror. Well, that’s what’s hanging over the world, prowling somewhere through mankind, that same thing, something closed, mindless, utterly wanton, but something with an aim and a cunning of its own. I don’t think I’m a coward, but I’m afraid of it. And that’s all I know—only that it exists. I don’t know its purpose, I don’t its nature.”

Stephen Mallory to Howard Roark, Ayn Rand, The Fountainhead, 1943

Having lived through the Russian Revolution, Ayn Rand knew well the nature of the mob—a drooling beast of prey or a maniac who’s had some disease that’s eaten his brain out…closed, mindless, utterly wanton, but something with an aim and a cunning of its own.

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Fourth Turning Accelerating Towards Climax, by Jim Quinn

The Fourth Turning appears to have reached an inflection point. From Jim Quinn at theburningplatform.com:

“At some point, America’s short-term Crisis psychology will catch up to the long-term post-Unraveling fundamentals. This might result in a Great Devaluation, a severe drop in the market price of most financial and real assets. This devaluation could be a short but horrific panic, a free-falling price in a market with no buyers. Or it could be a series of downward ratchets linked to political events that sequentially knock the supports out from under the residual popular trust in the system. As assets devalue, trust will further disintegrate, which will cause assets to devalue further, and so on. Every slide in asset prices, employment, and production will give every generation cause to grow more alarmed.” – Strauss & Howe – The Fourth Turning

Economists Predict Great Depression II for US Economy: Fast or V ...

I’ve been writing articles about the Fourth Turning for over a decade and nothing has happened since its tumultuous onset in 2008, with the global financial collapse, created by the Federal Reserve and their Wall Street co-conspirator owners, that has not followed along the path described by Strauss and Howe in their 1997 book – The Fourth Turning.

Like molten lava bursting forth from a long dormant (80 years) volcano, the core elements of this Fourth Turning continue to flow along channels of distress, long ago built by bad decisions, corrupt politicians and the greed of bankers. The molten ingredients of this Crisis have been the central drivers since 2008 and this second major eruption is flowing along the same route. The core elements are debt, civic decay, and global disorder, just as Strauss & Howe anticipated over two decades ago.

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Financial collapse leads to war, by Dmitry Orlov

Only in the bizarro-world we are in does this article make sense, but make sense it does, sadly. From Dmitry Orlov at cluborlov.blogspot.com:

Scanning the headlines in the western mainstream press, and then peering behind the one-way mirror to compare that to the actual goings-on, one can’t but get the impression that America’s propagandists, and all those who follow in their wake, are struggling with all their might to concoct rationales for military action of one sort or another, be it supplying weapons to the largely defunct Ukrainian military, or staging parades of US military hardware and troops in the almost completely Russian town of Narva, in Estonia, a few hundred meters away from the Russian border, or putting US “advisers” in harm’s way in parts of Iraq mostly controlled by Islamic militants.

The strenuous efforts to whip up Cold War-like hysteria in the face of an otherwise preoccupied and essentially passive Russia seems out of all proportion to the actual military threat Russia poses. (Yes, volunteers and ammo do filter into Ukraine across the Russian border, but that’s about it.) Further south, the efforts to topple the government of Syria by aiding and arming Islamist radicals seem to be backfiring nicely. But that’s the pattern, isn’t it? What US military involvement in recent memory hasn’t resulted in a fiasco? Maybe failure is not just an option, but more of a requirement?

Let’s review. Afghanistan, after the longest military campaign in US history, is being handed back to the Taliban. Iraq no longer exists as a sovereign nation, but has fractured into three pieces, one of them controlled by radical Islamists. Egypt has been democratically reformed into a military dictatorship. Libya is a defunct state in the middle of a civil war. The Ukraine will soon be in a similar state; it has been reduced to pauper status in record time—less than a year. A recent government overthrow has caused Yemen to stop being US-friendly. Closer to home, things are going so well in the US-dominated Central American countries of Guatemala, Honduras and El Salvador that they have produced a flood of refugees, all trying to get into the US in the hopes of finding any sort of sanctuary.

Looking at this broad landscape of failure, there are two ways to interpret it. One is that the US officialdom is the most incompetent one imaginable, and can’t ever get anything right. But another is that they do not succeed for a distinctly different reason: they don’t succeed because results don’t matter. You see, if failure were a problem, then there would be some sort of pressure coming from somewhere or other within the establishment, and that pressure to succeed might sporadically give rise to improved performance, leading to at least a few instances of success. But if in fact failure is no problem at all, and if instead there was some sort of pressure to fail, then we would see exactly what we do see.

In fact, a point can be made that it is the limited scope of failure that is the problem. This would explain the recent saber-rattling in the direction of Russia, accusing it of imperial ambitions (Russia is not interested in territorial gains), demonizing Vladimir Putin (who is effective and popular) and behaving provocatively along Russia’s various borders (leaving Russia vaguely insulted but generally unconcerned). It can be argued that all the previous victims of US foreign policy—Afghanistan, Iraq, Libya, Syria, even the Ukraine—are too small to produce failure writ large enough to satisfy America’s appetite for failure. Russia, on the other hand, especially when incentivized by thinking that it is standing up to some sort of new, American-style fascism, has the ability to deliver to the US a foreign policy failure that will dwarf all the previous ones.

http://cluborlov.blogspot.com/2015/03/financial-collapse-leads-to-war.html

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