The signs of something really, really nasty building up in the national and global economy are getting clearer all the time. I strongly urge you to read the following reports in full - follow the links to reach them.
- Central banks - which until recently created a massive liquidity bubble through quantitative easing - are now investing in stocks and shares. Want to know why the S&P 500 keeps on soaring? Look no further.
- The Japanese bond market is effectively dead. On one day last week there were no purchases whatsoever of Japanese government securities. That leaves the Bank of Japan (that nation's equivalent of the Federal Reserve) as the only possible buyer for such securities, just as the Fed has the Treasury issue bonds, then buys them with currency it conjures up out of thin air. If Japan's reached this point already, how long will it take before the USA hits the same brick wall?
- All over the world, as the liquidity bubble (see the first point above) dries up, investors are finding it more and more difficult to sell their assets - because fewer and fewer buyers have cash on hand to buy them. Zero Hedge points out: "And with that not only have the central planners broken the largest and historically most liquid markets in the world but have forced investors into leveraged derivatives positions (in order to find liquidity for their exposure-seeking) which themselves are entirely over-promise (relative to the underlyings) and under-collateralized with any quality collateral."
- The immense national debt accumulated by the USA pales into insignificance when compared to China's exposure. As Seeking Alpha quotes Jim Grant in pointing out: "China's banking assets represent one-third of world GDP, whereas China's economic output represents only 12% of world GDP. Never before has the world seen the likes of China's credit bubble. It's a clear and present danger for us all." Click the graphic below for a larger, more readable view.
- Charles Hugh Smith points out that 'Banks, Wall Street, Housing and Luxury Retail Are Doomed' in the medium to long term. Money quote: "... if Gen-Y cannot afford to buy Boomers' houses at bubble-level prices, then what will keep housing prices at these elevated levels? Answer: nothing. Without strong demand for housing at sky-high prices, valuations will drop to whatever level demand can support. That level can be far lower than conventional housing analysts believe possible because they are still extrapolating Baby Boomer preferences and earnings into a future which will be quite different from the housing bubble decades. The second issue is a question: how much of the Boomers' housing wealth will trickle down to Gen-Y when they actually need housing, i.e. when they're starting families? The answer may well be: very little."
- Mish Shedlock notes that the current average cost of a new home in the USA is six times the median national income, where historically it was half that. Furthermore, while the sales of the most expensive one per cent of homes are soaring, the bottom 99% of houses are struggling to find buyers. Many of those who do buy them are paying cash - in other words, they're investors seeking to generate rental income from them, rather than families wanting to live in them. This indicates a serious housing bubble has once again formed, just as it did prior to the 2007/08 correction in the market.
- In his take on the US housing market, Karl Denninger puts it in a nutshell. "Right now The Fed is running emergency level interest rates. Either there is about to be another emergency, in which case employment (and wages) are about to go down the toilet or they are not. If there is no emergency then the value of the house is going to fall -- strongly. If there is an emergency who is going to buy -- at any price?"
- The Rockefeller Institute is sounding a warning about state tax collections. Money quote: "Personal income tax collections declined in nominal terms by 0.4 percent. This is the first time since the first quarter of 2010 that states reported declines in income tax collections ... While the declines in income tax collections are not surprising, the softening in sales tax collections is less expected and more worrisome. Among 41 early reporting states, sales tax collections showed declines in 11 states, with Arizona and California reporting the largest declines at 16.7 and 9.9 percent, respectively." This is happening because taxpayers are making and spending less money - so governments reliant on taxes to fund their operations will have to trim them, perhaps drastically.
- Subprime auto loans are also showing signs of stress. Zero Hedge remarks: "... what interests us about this development is mainly this: it shows that the credit bubble is beginning to fray at the edges. Every downturn starts with a seemingly innocuous report about things 'suddenly' and 'unexpectedly' going wrong in a relatively obscure corner of the market. We find ourselves reminded of how sub-prime real estate credit troubles began to show up for the first time in February of 2007, leading to the often repeated mantra that this particular disturbance in the force was 'well contained'. That is however never how it works – in the end, it is all one big interconnected market. When troubles begin to show up at one end of it, they soon tend to begin to spread ... One should certainly keep both eyes open henceforth; more anecdotal evidence of this type is likely to emerge in coming months, especially if the Fed continues with its 'QE tapering' course. Once problems become visible in one obscure corner of the low grade credit markets, it is often a warning sign for the entire market and economy."
Folks, if you put all of these pieces of the puzzle together, and add to them the impact of the crisis in the Middle East (as we discussed yesterday), the picture that emerges is bleak and grim. I don't think it can be long now before some sort of major economic crisis erupts, as all these influences combine to create havoc.
You need to have as much cash on hand as possible, at least a few weeks' reserve supplies of food, medication and essentials, and be prepared to hunker down and endure hard times. We've spoken before about practical steps that can be taken to that end, so I won't repeat them here except to say that the best possible thing you can do is get yourself out of debt as far as possible. Debts tie you down. If you're debt-free, you can respond to changing trends and reposition yourself financially and/or geographically as circumstances dictate. If you aren't, you're stuck.
Don't allow yourself to get stuck.
EDITED TO ADD: I've written a brief follow-up post to this one with more evidence of our decline. You'll find it here. It has some useful additional information.