The Economic Collapse Blog Has Issued A RED ALERT For The Last 6 Months Of 2015

[Ognir]

By Michael Snyder, on June 25th, 2015

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Red Alert ButtonI have never done anything like this before.  Ever since I started The Economic Collapse Blog in late 2009, I have never issued any kind of "red alert" for any specific period of time.  As an attorney, I was trained to be level-headed and to only come to conclusions that were warranted by the evidence.  So this is not something that I am doing lightly.  Based on information that I have received, things that I have been told, and thousands of hours of research that have gone into the publication of more than 1,300 articles about our ongoing economic collapse, I have come to the conclusion that a major financial collapse is imminent.  Therefore, I am issuing a RED ALERT for the last six months of 2015.

To clarify, when I say "imminent" I do not mean that it will happen within the next 48 hours.  And I am not saying that our problems will be "over" once we get to the end of 2015.  In fact, I believe that the truth is that our problems will only be just beginning as we enter 2016.

What I am attempting to communicate is that we are right at the door of a major turning point.  About this time of the year back in 2008, my wife and I went to visit her parents.  As we sat in their living room, I explained to them that we were on the verge of a major financial crisis, and of course the events that happened a few months later showed that I was right on the money.

This time around, I wish that I could visit the living rooms of all of my readers and explain to them why we are on the verge of another major financial crisis.  Unfortunately, that is not possible, but hopefully this article will suffice.  Please share it with your friends, your family and anyone else that you want to warn about what is coming.

Let's start with a little discussion about the U.S. economy.  Most of the time, when I use the term "economic collapse" what most people are actually thinking of is a "financial collapse".  And we will talk about the imminent "financial collapse" later on in this article.  But just because stocks have recently been hitting all-time record highs does not mean that the overall economy has been doing well.  This is a theme that I have hammered on over and over again.  It is my contention that we are in the midst of a long-term economic collapse that has been happening for many years, that is happening as you read this article, and that will greatly accelerate over the coming months.

Let me give you just one quick example.  When an economy is healthy, money tends to circulate fairly rapidly.  I buy something from you, then you take that money and buy something from someone else, etc.  In a stable and growing economy, people generally feel good about things and they are not afraid to spend.  But during hard times, the exact opposite happens.  That is why the velocity of money almost always slows down during a recession.  As you can see from the chart below, the velocity of money has indeed gone down during every recession since 1960.  Once a recession is over, the velocity of money is supposed to go back up.  But a funny thing happened after the last recession ended.  The velocity of money continued to go down, and it has now hit an all-time record low...


This is the kind of chart that you would expect from a very sick economy.  And without a doubt, our economy is sick.  Even the official government numbers paint a picture of an economy that is deeply troubled.  Corporate profits have declined for two quarters in a row, U.S. exports plunged by 7.6 percent during the first quarter of 2015, U.S. GDP contracted by 0.7 percent during the first quarter, and factory orders have declined year over year for six months in a row.

If the stock market was connected to reality, it would be going down.  But instead, it has just kept going up.  As I discussed yesterday, this is a classic case of an irrational financial bubble.  If I was writing an economic textbook and I wanted to include an example of what a run up to a major financial crash looks like, it would be hard to come up with anything more ideal than what we have watched unfold over the last six months.  Just about every pattern that has popped up prior to previous stock markets crashes is happening again, and this is something that I have written about so much that many of my readers are sick of it.

And without a doubt, our financial markets are primed for a crash.

Only two times before has the S&P 500 been up by more than 200 percent over a six year time frame.

The first was in 1929, and the stock market subsequently crashed.

The second was in 2000, right before the dotcom bubble burst.

And by just about any measure that you can possibly imagine, stocks are massively overvalued right now.

For instance, just check out the chart posted below.  It comes from Doug Short, and it shows that the ratio of corporate equity prices to GDP has only been higher one time since 1950.  That was in 2000 just before the dotcom bubble burst...

Let's take a look at another chart.  This one comes from Phoenix Capital Research, and it shows that the CAPE ratio (cyclically adjusted price-to-earnings ratio) has rarely been higher.  In fact, the only times that it has been higher we have seen stock market crashes immediately afterwards...

Yale economics professor Robert Shiller is also deeply concerned about the CAPE ratio...

    I think that compared with history, US stocks are overvalued. One way to assess this is by looking at the CAPE (cyclically adjusted P/E) ratio that I created with John Campbell, now at Harvard, 25 years ago. The ratio is defined as the real stock price (using the S&P Composite Stock Price Index deflated by the CPI) divided by the ten-year average of real earnings per share. We have found this ratio to be a good predictor of subsequent stock market returns, especially over the long run. The CAPE ratio has recently been around 27, which is quite high by US historical standards. The only other times it has been that high or higher were in 1929, 2000, and 2007—all moments before market crashes.

    But the CAPE ratio is not the only metric I watch. In my book Irrational Exuberance (3rd Ed., Princeton 2015) I discuss several metrics that help judge what's going on in the market. These include my stock market confidence indices. One of the indicators in that series is based on a single question that I have asked individual and institutional investors over the years along the lines of, "Do you think the stock market is overvalued, undervalued, or about right?" Lately, what I call "valuation confidence" captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000.

Other valuation indicators produce similar results.  This next chart is another one from Doug Short, and it shows the average of four of his favorite valuation indicators.  As you can see, there is only one other time when stocks have been more overvalued than they are today according to the average of his four favorite indicators, and that was just before the stock market crashed when the dotcom bubble burst...

Four Valuation Indicators - Doug Short

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[Michael K.]

http://www.wsws.org/en/articles/2015/08/21/econ-a21.html

Global markets plunge amid signs of deepening slump

By Andre Damon
21 August 2015

Global stocks plunged Thursday as fears of a world economic slowdown mixed with concerns over a destabilization of global exchange rates and mounting geopolitical tensions.

US stocks staged their sharpest one-day selloff since February 2014, hitting six-month lows and wiping out all their gains over the past year. Shares in emerging markets, meanwhile, fell for the fifth day in a row, hitting the lowest levels since 2011.

Markets in China led Thursday's selloff, falling 3.18 percent. This brings total declines since June to 29 percent, despite an extraordinary series of cash injections by the Chinese central bank, which intensified following the country's currency devaluation last week. The stock market drop has been accompanied by a sharp decline in economic growth.

The most immediate trigger for Thursday's selloff appeared to be a gloomy assessment of the global economy by the US Federal Reserve in the minutes just released for its July 28-29 policy meeting.

In recent years, the ruling class had treated reduced growth predictions by the Fed as a positive sign, signaling further infusions of cash to prop up financial markets.

But Thursday's negative response to the figures may point to fears that, after nine years without a rate increase by the US central bank, global central banks may be running out of ammunition to combat a crisis that is increasingly affecting every corner of the globe.

Markets in the rest of Asia, Europe and North America followed the Chinese markets downward. In the US, the Dow Jones Industrial Average fell more than 350 points, closing down by 2 percent. The S&P 500 fell by 2.1 percent, and the tech-heavy Nasdaq plunged by 2.8 percent after the release of negative technology sales figures on both sides of the Pacific.

A number of industries have now officially entered stock corrections. Bloomberg reported, "The Nasdaq Biotechnology Index...entered a correction, falling more than 10 percent from a record set a month ago. The Philadelphia Semiconductor Index slid into a bear market, plunging more than 20 percent from a June peak."

The selloff was concentrated in the stocks that have risen most sharply this year, with Netflix Inc. falling 7.8 percent in a single day. One analyst told Bloomberg, "You're finally starting to see the untouchable stocks—some of the biggest weighting of the market—get touched."

In addition to the negative prognosis by the Federal Reserve, markets were responding to the persistent slump in commodities prices amid a continuing fall in global demand due to the world economic slowdown.

The underlying significance of the commodities selloff was noted by the Financial Times, which pointed out, paraphrasing a securities analyst, that "at face value, the slide in commodity prices over the past year was consistent with a global recession as severe as that in 2008-09."

The fall in commodities prices is transmitting the recessionary tendencies of the real global economy into financial markets. Reuters noted that the two-week correlation between the US stock market and oil prices is at the highest level in five months.

Prices for Brent Crude oil, a benchmark for international oil prices, fell 1.2 percent Thursday, hitting a 7-month low of $46.62. Despite staging a small recovery earlier in the day, US crude prices hit six-year lows. This puts them on track to fall as low as $30 per barrel by the fall, which would be the lowest price since the 2008-2009 financial crisis.

The global selloff in markets has been compounded by increasing turbulence in global exchange rates following last week's surprise devaluation of the Chinese yuan. Kazakhstan's tenge fell by more than 20 percent after the country announced that it would stop defending its currency peg and allow the currency to float freely, following a similar move by Vietnam. The national currencies of Turkey, Russia and Colombia also saw sharp declines.

Worries over these currency devaluations were accompanied by growing fears over the destabilizing effects of a series of intensifying geopolitical conflicts, including recent military flare-ups between Russia and Ukraine, Turkey and Kurdish militias, North and South Korea, as well as India and Pakistan.

In the eight years since the US Fed began cutting its federal funds rate, the global economy has been characterized by a tug-of-war between extraordinarily accommodative monetary policies by US, Asian, and European central banks on one hand, and the persistently moribund state of the real economy.

Since the eruption of the 2008 crisis, every indicator of a global downturn was met by an overwhelming infusion of cash from global central banks. This process has succeeded in producing an enormous increase in social inequality, along with a massive speculative financial bubble that has grown increasingly divorced from real economic activity.

The measures taken by the central banks have been dictated by the interests of the financial aristocracy, and have been accompanied by unrelenting austerity and attacks on wages and working conditions.

But there are increasing indicators that the ability of world central banks to contain the swelling economic crisis has broken down. As one analyst at Société Générale told the Financial Times, "The threat of Fed tightening may be perceived to have diminished but the threat from weaker Chinese growth and falling global commodity prices isn't going away any time soon." The latter tendencies certainly predominated in Thursday's selloff.

At the beginning of the year, the WSWS noted that "the contradictions of the capitalist system" are increasingly "acquiring an acute character. The 'peaceful' intervals between the eruption of major crises—geopolitical, economic and social—have become so short that they can hardly be described as intervals. Crises, on the other hand, appear not as isolated 'episodes,' but as more or less permanent features of contemporary reality."

This prognosis is increasingly being borne out as the global economic slump, the destabilization of international currency markets, and growing geopolitical conflicts are combining into a generalized crisis to which the world's ruling classes can offer no solution.