Is Another Global Financial Crisis Looming?

Is Another Global Financial Crisis Looming?

January 22, 2020 – While on the surface, the United States economy seems to be doing great and even reaching record highs, some cracks are beginning to show. We will look at a variety of sources all of which provide a unique perspective on the global economic outlook, as well as what cyclical and current trends indicate.

IMF “Warning”

The director of the International Monetary Fund (IMF), Kristalina Georgieva issued a “warning” while giving a speech at the Peterson Institute recently.  Blacklisted News has published a report from Technocracy.News:

IMF Director Kristalina Georgieva addressed the Peterson Institute, founded by the late Trilateral Commission member, Peter G. Peterson (1926–2018). The Peterson board of directors is a Who’s Who of other Trilateral members.

Trilateral Commission members (past or present) include Alan Greenspan, Frank Loy, George Shultz, Ernesto Zedillo, Robert Zoellick, Stanley Fischer, Richard N. Cooper, C. Fred Bergsten,  and Larry Summers, among others.

Georgieva lays much of the future blame on global warming. The moral hazard is enormous because the IMF wants to kill Capitalism and Free Enterprise, and moreover, has the power and influence to do it. The mal-investment of trillions of dollars into futile and unproductive green investments breeds a self-fulfilling prophecy. ⁃ TN Editor

The head of the International Monetary Fund has warned that the global economy risks a return of the Great Depression, driven by inequality and financial sector instability.

Speaking at the Peterson Institute of International Economics in Washington, Kristalina Georgieva said new IMF research, which compares the current economy to the ‘roaring 1920s’ that culminated in the great market crash of 1929, revealed that a similar trend was already under way.

While the inequality gap between countries had closed in the last two decades, it had increased within countries, she said, singling out the UK for particular criticism.

‘In the UK, for example, the top 10% now control nearly as much wealth as the bottom 50%. This situation is mirrored across much of the OECD (Organisation for Economic Co-operation and Development), where income and wealth inequality have reached, or are near, record highs.’

She added: ‘In some ways, this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.’

She warned that fresh issues such as the climate emergency and increased trade protectionism meant the next 10 years were likely to be characterized by social unrest and financial market volatility.

‘If I had to identify a theme at the outset of the new decade, it would be increasing uncertainty,’ she said.

With disputes still raging between the US and Europe, she said ‘the global trading system is in need of a significant upgrade’.

Georgieva said uncertainty affects not only businesses but individuals, especially given the rising inequality within many countries.

She said that ‘excessive inequality hinders growth and … can fuel populism and political upheaval’.

Eric LeCompte, the head of debt charity Jubilee USA, said: ‘The IMF delivered a stark message about the potential for another massive financial disaster that we last experienced during the Great Depression.

‘With inequality on the rise and concerns of stability in the markets, we need to take this warning seriously.’ – Blacklisted News

Of course so-called “climate change” was a major theme of this year’s World Economic Forum at Davos. Inexperienced teenager Greta Thunberg was invited to speak about this so-called climate change crisis as the central banks now claim the need to shift focus to include climate change as part of their mandates.

Guggenheim Investments Warn of Central Banks Fueling a “Ponzi Market”

Scott Pinard of Guggenheim Investments recently published an article entitled ‘Global Central Banks Fueling a Ponzi Market‘ that claims:

One of the topics that I am focused on in Davos is the deterioration in the quality of the corporate bond markets. 

The disturbing trend is that despite the rally in risk assets in the prior year, the number of defaults rose by approximately 50 percent, according to data compiled by J.P. Morgan. Additionally, the number of distressed exchanges increased by 400 percent.

This correlates well with our observation that the number of idiosyncratic defaults has been increasing. Ultimately, markets will need to reprice for this rising risk with increased bond spreads relative to Treasury securities. However, that day of reckoning when spreads rise is being held off by the flood of central bank liquidity and international investors fleeing negative yields overseas. 

And let’s not forget downgrade risk of BBBs: today 50 percent of the investment-grade market is rated BBB, and in 2007 it was 35 percent. More specifically, about 8 percent of the investment-grade market was BBB- in 2007 and today it is 15 percent. It has more than quintupled in size outstanding, from $800 billion to $3.3 trillion. We expect 15–20 percent of BBBs to get downgraded to high yield in the next downgrade wave: This would equate to $500–660 billion and be the largest fallen angel volume on record—and would also swamp the high yield market.

Ultimately, we will reach a tipping point when investors will awaken to the rising tide of defaults and downgrades. The timing is hard to predict but this reminds me a lot of the lead-up to the 2001 and 2002 recession. 

The prolonged period of tight credit spreads experienced in the late 1990s lulled investors into unwittingly increasing risk at a time they should have been upgrading their portfolios.

Ultimately, this leads to what he called a Ponzi Market where the only reason investors keep adding to risk is the fear that prices will be higher tomorrow (or in the case of bonds, yields will be lower tomorrow).

Daniel Kahneman observed this behavior in his own work, when he identified that investors’ fear of missing an opportunity induces them to buy when they should be selling. 

Even though the recession clearly has been put off until 2021 and perhaps 2022, in the lead-up to the 2001 recession, credit deterioration started to be evidenced three years earlier in 1998 as defaults and credit spreads were rising. 

This would sound like good news for yield starved investors and I would agree. – Guggenheim Investments

Another theme at Davos this year is the recognition that some substantive changes need to be made that would be serious for world trade.

David Rosenberg Warns of Potential for Recession

After reviewing some historic trends and data, David Rosenberg is warning of a potential for an economic recession. Rosenberg has a decades-long career as chief economist at top financial institutions before establishing his own, Rosenberg Research. Looking at fixed assets among other indicators, he reports:

According to Zero Hedge:

David Rosenberg explores Recession Arithmetic in today’s Breakfast With Dave. I add a few charts of my own to discuss.

Rosenberg notes ‘Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened twice outside of a recession.’

Since 1980 there have been five recessions in the U.S.and only once, after the dotcom bust in 2001, was there a recession that didn’t feature an outright decline in consumption expenditures in at least one quarter. Importantly, even historical comparisons are complicated. The economy has changed over the last 40 years. As an example, in Q4 of 1979, fixed investment was 20% of GDP, while in 2019 it makes up 17%. Meanwhile, imports have expanded from 10% of GDP to 15% and the consumer’s role has risen from 61% to 68% of the economy. All that to say, as the structure of the economy has evolved so too has its susceptibility to risks. The implication is that historical shocks would have different effects today than they did 40 years ago.

So, what similarities exist across time? Well, every recession features a decline in fixed investment (on average -9.8% from the pre-recession period), and an accompanying decline in imports (coincidentally also about -9.5% from the pre-recession period). Given the persistent trade deficit, it’s not surprising that declines in domestic activity would result in a drawdown in imports (i.e. a boost to GDP).

So, what does all of this mean for where we are in the cycle? Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened two other times outside of a recession. The first was in the year following the burst of the dotcom bubble, as systemic overinvestment unwound itself over the course of eight quarters. The second was in 2006, as the housing market imploded… and we all know how that story ended.Small sample bias notwithstanding, we can comfortably say that this is not something that should be dismissed offhand.

For now, the consumer has stood tall. Real consumption expenditures contributed 3.0% to GDP in Q2, and 2.1% in Q3. Whether the consumer can keep the economy from tipping into recession remains to be seen.

We are very close to a tipping point in which residential and nonresidential fixed investment are near the zero line. The above chart shows recessions can happen with fixed investment still positive year-over-year.

After a manufacturing surge in November due to the end of the GM strike, Manufacturing Sector Jobs Shrank by 12,000 in December. – Zero Hedge

This is not to say this is one hundred percent certain. This is simply a rough estimate based on a review of fixed assets year over year and current manufacturing data. An economic recession is possible based on these statistics but that doesn’t mean it will happen. It’s good to be prepared just in case something does happen. Having about six months worth of food and a supply of some water, etc. is always a good idea.

One Trillion Added to Deficit

Michael Maharrey of the Free Though Project is warning about the Trump administration’s addition of one trillion dollars to the national deficit as a sign of a potential debt crisis. According to the report:

The Trump administration ran an Obamaesque budget deficit of over $1 trillion in the 2019 calendar year.

It was the first budget deficit over $1 trillion in any calendar year since 2012.

The budget shortfall from January through December totaled $1.02 trillion, according to the latest report issued by the Treasury Department. That was a 17.1 percent increase over the 2018 deficit, which was a 28.2 percent increase over 2017.

The budget deficit for fiscal 2019 (October 2018-September 2019) came in just under $1 trillion at $984 billion. That represented 4.7 percent of GDP, the highest percentage since 2012. It was the fourth consecutive year in which the deficit increased as a percentage of GDP. The debt-to-GDP ratio is estimated to have increased a hefty 26 percent over last year.

The CBO estimates the budget deficit for fiscal 2020 will eclipse $1 trillion.

These are the kind of budget deficits one would expect to see during a major economic downturn. The federal government has only run deficits over $1 trillion in four fiscal years, all during the Great Recession. We’re approaching that number today, despite having what Trump keeps calling ‘the greatest economy in the history of America.’

Generally, during economic expansions, government spending on social programs shrinks and tax revenues climb with increased economic activity. Revenues have increased over the last year, but they haven’t kept pace with the increase in government spending.

The spending didn’t slow in the first quarter of fiscal 2020. Through the first three months of the current fiscal year, the deficit ballooned to $356.6 billion. That’s an 11.8 percent increase from a year ago. In just three months, Uncle Sam blew through $1.16 trillion. Spending through the first three months of FY2020 is up 6.5 percent over the spending through the first three months of fiscal 2019.

Meanwhile, the national debt has climbed to $23.2 trillion.

To put that into perspective, last February, the national debt topped $22 trillion. When President Trump took office in January 2017, the debt was at $19.95 trillion. That represented a $2.06 trillion increase in the debt in just over two years. The borrowing pace continues to accelerate. The Treasury borrowed $800 billion in just two months late last summer. – Free Thought Project

The continually climbing national debt is a major problem. It is not new nor unique to the Trump administration. Unfortunately, the Obama administration was not just weakening the economy and sending jobs overseas. They gutted the space programs and the U.S. military. President Trump immediately addressed that issue, reinvesting to restore the military to a robust status. In terms of the debt, however, there is a saying that what goes up, must eventually come back down.

The Repo Market

Typically governments engage in short-term borrowing,  repurchase agreements, commonly called the Repo Market. Many sources are warning that the Federal Reserve is keeping interest rates so low, no one wants to buy U.S. Treasury notes. Instead, they are quietly using the repo market to buy the debt.

According to an article entitled The Federal Reserve Considers Making Billions in Repo Loans Available to Hedge Funds, Essentially Bailing Out the ‘Fat Cats’‘ from Dr. G. Edward Griffen’s Need to Know. (Dr. Griffen has made several appearances on Patriots’ Soapbox Channel discussing financial market matters.)

Hedge funds, globally, are in a financial tail spin, and many have already blocked investors from withdrawing their money. True to form, the Federal Reserve is preparing to infuse these firms with super low-cost loans that will help to bail them out – at taxpayer expense, of course. [When the repos prove to be insufficient, then what?] -GEG

One hurdle to a possible fix for recent volatility in the short-term cash markets: hedge funds.

Federal Reserve officials are considering a new tool to ease stresses in the market for Treasury repurchase agreements, or repos. Through the repo market, banks and hedge funds borrow cash overnight, while pledging safe securities such as government bonds as collateral. In September, an unexpected shortage of available cash to lend sparked a surge in the cost of repo-market borrowing, prompting the Fed to intervene for the first time since the financial crisis.

One potential solution is to lend cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC.

Hedge funds currently borrow through a process called sponsored repo, in which they ask a large bank to act as a middleman, pairing their government bonds with money-market funds willing to lend cash. The bank then guarantees that the parties will fulfill their obligations—repaying the cash or returning the securities. Firms trading through the FICC contribute to a fund that would cover a borrower’s default. Critics of the new plan say if the Fed lends cash directly through the clearinghouse, it could end up contributing to a hedge-fund bailout.

The Fed’s aim, according to analysts, is to step back from temporary efforts to quell repo-market volatility and increase financial reserves. After September’s volatility, officials succeeded in suppressing year-end swings with temporary measures, such as offering short-term repo loans and buying Treasury bills.

Yet the new approach could also create political problems for policy makers, analysts said. The problem centers on the central bank lending directly to hedge funds, the little-regulated investment vehicles that tend to serve wealthy or institutional investors.

The political backlash that followed crisis-era bank rescues hangs over policy makers’ approach to the current problem, analysts said, even as officials work to ensure the smooth functioning of a key piece of the infrastructure underpinning financial markets. Some fear that lending directly to hedge funds could lead to the perception the Fed is fueling risky bets. – Need to Know

Indeed it appears as though we could be seeing another setup similar to what happened in 2008. A financial crisis, either manufactured or being ‘allowed’ to happen, could create another massive transfer of wealth from the lower class to the elite ruling class, as happened in 2008. The vulture capitalists will be waiting to seize on those businesses vulnerable enough to be squeezed by the crisis and will be able to acquire them for pennies on the dollar.

Climate Change Hysteria

We already see the framing of this pseudo-issue being used to usher in austerity, blame ‘climate change’ and then use this manufactured crisis to wipe out whole industries. In fact, according to Market Watch that is exactly what appears to be happening. In this article entitled Some Big Coal Players May Escape Blackrock’s Planned Divestment‘ the author claims:

BlackRock has set out a plan to rid its portfolio of coal companies. But among the diversified miners that dig up an array of products, it’s not obvious which companies will be axed from the fund-management giant’s active funds and which will stay.

BlackRock’s plan is to remove from both its actively managed equity and bond portfolios shares of all companies that generate more than 25% of their revenue from thermal coal production. BlackRock expects the cull to be completed by the middle of this year.

Bank of America has looked at coal companies to see which will be excluded by BlackRock.

Pure coal plays including Whitehaven WHC, -0.40%  , Exxaro Resources EXXAY, -2.20%  , Shenhua CSUAY, -0.10%  , China Coal Energy CCOZY, +0.00% and Yanzhou Coal Mining YZCAY, +0.83% are expected to be easy decisions for BlackRock.

But some big coal players may escape the BlackRock ban. Glencore GLEN, -1.22%  , the world’s largest exporter of seaborne thermal coal, has 25% of its industrial revenue coming from coal, and another 6% of trading revenue, according to Bank of America. – Market Watch

This is an indication of where the global markets and the biggest firms see the future going. They are planning on transitioning into the so-called new energy economy or the green economy that focuses on so-called sustainable development. This is how China is structuring their own markets and economy. An article by Market Watch entitled ‘World’s Largest Asset Manager BlackRock Joins $41 Trillion Climate-Change Investment Pact,‘ shows the transition to the latest scheme of the bankers, the climate change boondoggle:

BlackRock, the world’s largest asset manager with more than $6.8 trillion under its control, becomes the latest signatory to Climate Action 100+, an influential big-money pact that’s pushing — although with spotty results so far — many of the world’s largest greenhouse-gas emitters to take action on man-made climate change.

BlackRock joins more than 370 global investors, including pension giant CalPERS and HSBC Global Asset Management, already participating in the initiative, which aims to sway companies ranging from fossil-fuel producers to consumer-product conglomerates to be carbon neutral by 2050. With BlackRock on board, total assets under management represented by Climate Action 100+ now top $41 trillion.

‘Given BlackRock’s size and influence, their commitment to accelerating engagements with the largest corporate greenhouse gas emitters on climate change sends a powerful signal to companies to reduce emissions, improve corporate governance and strengthen their disclosure,’ said Mindy Lubber, a member of the Climate Action 100+ steering committee and CEO and President at Ceres, which advocates for sustainability-minded investors, in a release.

As for BlackRock, ‘this is a natural progression of the work our Investment Stewardship team has done to date. We believe evidence of the impact of climate risk on investment portfolios is building rapidly and we are accelerating our engagement with companies on this critical issue,’ said spokesman Farrell Denby, in an e-mail response to a question asking why the firm has joined now.

BlackRock Chairman and CEO Larry Fink in an annual letter released more than a year ago first shook up the sustainable investment world with an explicit declaration that asset managers could and should enjoin conscientious market choices and a focus on returns, and no longer consider one exclusive of the other. But BlackRock remains a target of climate activists, while most index funds retain fossil-fuel exposure. Fink’s latest letter, issued Jan. 14, doubled down on calling out climate risks to the investment landscape. – Market Watch

Again, clearly we can see the Globalist agenda at work here. At its base, it is always about control and centralization of power.

Conclusion

After a critical analysis of historic trends and current data, it appears that there is reasonable cause for concern about the markets. We saw similar market activity in the lead up to the financial crisis of 2008. We know from our own research that the powers that be have a plan for a one-world government that would be a technocracy with an elite academic scientific establishment ruling over the masses under a form of socialist or feudalistic society. We know that crashing the dollar would be one way to help usher in that society. Therefore it is important that we be aware and informed so that we may plan ahead for our families.

Suggested Additional Reading

There are many more great resources out there that follow market trends far better than I do and here are some articles that also helped inform my perspective for this report:

World’s 2,153 billionaires hold more wealth than 4.6 billion people combined: Report” by Market Watch.

The Year Wall Street Got Sustainable Investing” by Green Money.

“‘Even two paychecks can only go so far.’ Skyrocketing child-care costs put aspiring home buyers in a bind” by Market Watch.

The federal reserve just admitted to fueling the asset bubble!” by Intelihub.

FEDERAL RESERVE’S CORE MISSION NOW INCLUDES CLIMATE CHANGE” by Blacklisted News.

Trump cautions Davos against heeding ‘prophets of doom’ on climate change” by Politico.

Trump says Middle Class Tax Cuts to be Announced in Next Three Months” by Zero Hedge.

Fed Presses Forward With Repos, Wednesday’s Operation Just Under $50 Billion” by the Wall Street Journal.

Notes on Banking & Interest-Bearing Capital” by MDL.

Can the Fed conduct monetary policy through the purchase and sale of stocks on the New York Stock Exchange?” by the Federal Reserve Bank of San Francisco.

Opinion: What’s propelling stocks higher? Not the Fed’s balance-sheet expansion” by Market Watch.

The Fed’s monetary juice has tied directly to the rise in stocks: ‘Here we go again’” by CNBC.

Perkins, John “Confessions of an Economic Hitman

Wheelan, Charles “Naked Economics

For the relative novice, our editor highly recommends Henry Hazlit’s “Economics in One Lesson” for a basic grounding in how economy works. ~~ed.

See a spelling or grammar error? Let us know! Highlight the text and press Ctrl+Enter.

Leave a Reply

avatar
  Subscribe  
Notify of