The financial system is lurching towards the next round of the Great Crisis that began in 2007.
The 2007-2008 phase occurred when investment banks flooded the financial system with toxic derivatives. All told the derivatives market was over $1 QUADRILLION (that’s 1,000 TRILLIONS) in notional value when the crisis hit.
The Central Banks, knowing that the very banks they are meant to govern, were insolvent, began a series of emergency measures to deal with this. In the simplest form, they moved the banks’ garbage debts onto the public’s (read sovereign nations’) balance sheets.
The banks, knowing that they were given a green light, have since begun leveraging up again. Today, the financial system’s leverage is in fact even greater than it was in 2007.
Moreover, this time around, entire countries are on the verge of being bankrupt.
Consider Japan.
Japan is the third largest economy in the world. And the Bank of Japan is buying ALL of its debt issuance. This is precisely what triggered Germany’s Weimar Hyperinflation. The Japanese Bond market has become in the words of a financial insider “a giant Ponzi scheme”
We all know how Ponzi schemes end. They implode. Japan is on the verge of this.
In Europe, we already know the economy is in tatters. Italy is back in recession for the third time since 2008. Germany’s economy contracted in the second quarter of 2014 and will likely be in recession before the first quarter of 2015. France has registered zero growth for six months now.
Things are heating up on the political front as well. Separatist movements are rapidly growing in Spain, Italy, Belgium, and even France. Small wonder when even the individual Central Banks for the EU are fed up with the European Central Bank and its policies.
Then there is the US.
While the US in no better shape than Japan or Europe, the fact remains that our economy is almost flat-lining. The “official” data claims we’re in good shape as far as unemployment, but we all know that the “official” data is a work of fiction.
Moreover, we’re now sitting on the biggest stock market bubble of all time. By some measures, stocks are MORE overvalued today than they were in 2000. Small wonder than corporate insiders (the folks who know more about their companies’ growth prospects than anyone) are dumping shares at a pace not seen since the peak of the Tech Bubble.
On top of this:
1. Corporate debt is back to 2007 PEAK levels.
2. Stock buybacks are back to 2007 PEAK levels.
3. Investor bullishness is back to 2007 PEAK levels.
4. Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.
5. Numerous investment legends have warned of a coming crash.
6. Investor complacency is at a record LOW.
Between the US, Europe, and Japan, you’ve got over 50% of the world’s GDP in recession or approaching it. And this is happening at a time when the financial system is in an epic bubble.
Buckle up, it’s coming.
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