Monday, December 21, 2015

The Rate Hike Stock Market Crash Has Thrown Gasoline Onto An Already Raging Global Financial Inferno

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If the stock market crash of last Thursday and Friday had all happened on one day, it would have been the 7th largest single day decline in U.S. history.  On Friday, the Dow Jones Industrial Average was down 367 points after finishing down 253 points on Thursday.  The overall decline of 620 points between the two days would have been the 7th largest single day stock market crash ever experienced in the United States if it had happened within just one trading day.  If you will remember, this is precisely what I warned would happen if the Federal Reserve raised interest rates.  But when news of the rate hike first came out on Wednesday, stocks initially jumped.  This didn’t make any sense at all, and personally I was absolutely stunned that the markets had behaved so irrationally.  But then we saw that on Thursday and Friday the markets did exactly what we thought they would do.  The chief economist at Gluskin Sheff, David Rosenberg, is calling the brief rally on Wednesday “a head-fake of enormous proportions“, and analysts all over Wall Street are bracing for what could be another very challenging week ahead.
When the Federal Reserve decided to lift interest rates, they made a colossal error.  You don’t raise interest rates when a global financial crisis has already started.  That is absolutely suicidal.  It is the kind of thing that you would do if you were trying to bring down the global financial system on purpose.
Surely the “experts” at the Federal Reserve can see what is happening.  Junk bondshave already crashed, just like they did in 2008.  The price of oil has crashed, just like it did in 2008.  Commodity prices have crashed, just like they did in 2008.  And more than half of all major global stock market indexes are already down at least 10 percent for the year so far.
You don’t raise interest rates in that kind of an environment.
You would have to be utterly insane to do so.
The Federal Reserve has thrown fuel onto a global financial inferno that is already raging, and things could spiral out of control very rapidly.
As far as this upcoming week is concerned, we have now entered “liquidation season”.  Investors are going to be pulling their money out of poorly performing hedge funds before the end of the calendar year, and as CNBC has pointed out, more hedge funds have already failed in 2015 than at any point since the last financial crisis…
Liquidation season occurs when clients of poorly performing hedge funds ask for their money back. It tends to occur at the end of a quarter or year. In response, hedge funds must sell stocks in the open market to raise the money that needs to be returned to investors.
That means if a hedge fund performed poorly this year; it is probably flooded with liquidation requests right now. In fact,there have been more failed hedge funds this year than any time since 2008.
The dominoes are starting to fall.  We have already seen funds run by Third Avenue Management, Stone Lion Capital Partners and Lucidus Capital Partners collapse.  Amazingly, there are some people out there that are still attempting to claim that “nothing is happening” even in the midst of all of this chaos.
As they say, “denial” is not just a river in Egypt.
And this crisis is going to get even worse as we head into 2016.  Egon von Greyerz, the founder of Matterhorn Asset Management, is convinced that we will soon see “one disaster after another”
Greyerz predicts, “I think we will have one disaster after another, first in the junk bond market, then in emerging markets and, after that, the subprime markets. Subprime car loans and student loans I see as another massive problem area. It is going to be one thing after another that will unravel. Since 2008, when the world almost went under, we have printed or increased credit by 50% or by $70 trillion, and the world economy is still struggling to survive. I think the real change in confidence will come down when markets come down. . . . I think things will come down very quickly.”
And I think that he is right on target.  The global financial system is more interconnected today than ever before, and when one financial institution fails, it inevitably affects dozens of others.  And the failures that we have already seen are already spreading a wave of fear and panic that may be difficult to stop.  The following comes from Business Insider, and I think that it is a pretty good explanation of what we could see next…
  • Funds such as Third Avenue and Lucidus close, liquidating their portfolios.
  • Investors, spooked by the closures and the risk that they might not be able to get their money out of these funds, make a rush for the exits while they still can.
  • That creates even more selling pressure.
  • Funds sell the assets that are easiest to sell as they look to reduce risk, which pushes the selling pressure from the risky parts of the market to the higher-quality part of the market.
  • Things evolve from there.
If you have been waiting for the next financial crisis to arrive, you can stop, because it is already unfolding right in front of our eyes.
The only question is how bad it is going to become.
In the final analysis, I find myself agreeing quite a bit with Charles Hugh Smith, the author of “A Radically Beneficial World: Automation, Technology and Creating Jobs for All“.  He believes that the ridiculous monetary policies of the Federal Reserve have played a primary role in setting the stage for this new crisis, and that now this giant financial “Death Star” that they have created “is about to blow up”
By slashing rates to zero, the Fed ruthlessly eliminating safe returns for savers, pension funds, insurers and the millions of people with 401K retirement nesteggs. In effect, the Fed-Farce has pushed everyone into risk assets–and then played another Dark Side mind-trick by masking the true dangers of these risky assets.
As oil-sector debt blows up, as junk bonds blow up, and emerging markets blow up, we are finally starting to see the real costs of going over to the Dark Side of endless credit expansion and throwing the gasoline of near-zero interest rates on the speculative fires of financialization.
The Fed’s hubris has led it to the Dark Side, and now its Death Star of impaired debt, phantom collateral, speculative frenzy and bogus mind-tricks is about to blow up.
Personally, instead of saying that it “is about to blow up”, I would have said that it is already blowing up.
We have already seen trillions upon trillions of dollars of wealth wiped out around the world.
Energy companies are failing, giant hedge funds are going under, and the 7th largest economy on the entire planet has already plunged into “an outright depression“.
Everyone that warned of financial disaster in the second half of 2015 has been proven right, but this is just the beginning.  Now that the Federal Reserve has thrown gasoline onto the fire, our problems are only going to accelerate as we head into 2016.
So for the upcoming year, let us hope for the best, but let us also prepare for the worst.

After Fed rate hike, global economic fault lines deepen

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After an initial rise following the decision by the US Federal Reserve to lift interest rates by 0.25 percentage points on Wednesday, stock markets around the world have experienced significant declines over the past two days.
The biggest falls were in the United States, where the Dow was down by 368 points at the close of trade on Friday, a drop of more than 2 percent, while the more broadly based S&P 500 fell by 1.8 percent. The CBOE VIX index, which measures market volatility and is often referred to as the “fear gauge,” went over 20, a level regarded as indicating a high degree of market stress.
Markets also fell around the world after rising in the immediate aftermath of the Fed decision. The Euro Stoxx index dropped by 1.4 percent on Friday after rising earlier in the week. In Japan, the Nikkei index closed 1.9 percent lower.
Underlying the volatility on share markets are a series of widening fault lines in the global economy produced by the deepening trend toward stagnation and slump. The increased turbulence in financial markets is an expression of the fact that massive financial speculation, fuelled by the Fed and other central banks’ pumping of trillions of dollars into the banking system since the 2008 Wall Street crash, is being overwhelmed by developments in the real economy, particularly the decline in industrial production.
So far, this interaction has found its sharpest expression in the market for high-yield, or “junk,” corporate bonds, particularly in the energy sector, because of the sharp fall in oil and other energy prices, coupled with the decline in basic industrial commodity prices to their lowest levels since the global financial crisis.
This week, the price of Brent crude oil hit a seven-year low of $36.33 per barrel, further heightening problems in the energy junk bond market, where money poured in to finance risky ventures when the price of oil was trading at around $100 per barrel less than two years ago.
But the turbulence is not confined to energy-related finance. According Lipper, a Thomson Reuters company that supplies information to financial markets, investors withdrew $5.1 billion from US mutual funds that purchase bonds rated as investment grade by credit-rating agencies—the largest such withdrawal since 1992. This was accompanied by a further withdrawal of $3 billion from junk bond funds. In the week to December 16, it is estimated that $15.4 billion was withdrawn from taxable bond funds.
In a report on the state of financial markets issued this week, the Office of Financial Research (OFR), set up by the US Treasury after the 2008 crisis, painted a picture of, in the words of Financial Times economic commentator Gill Tett, a “distinctly distorted American financial system” resulting from seven years of ultra-low interest rates.
The OFR said that “credit risk in the US non-financial business sector is elevated and rising.” It went on to warn that “higher base rates may create refinancing risks… and potentially precipitate a broader default cycle.”
In other words, a situation has been created where a default or a series of defaults in high risk areas could set off a chain reaction in the system as a whole, recalling the effects of the sub-prime mortgage collapse. When that crisis emerged in 2006 and 2007, then-Fed Chairman Ben Bernanke brushed it off as a relatively small problem that could be easily contained.
The worsening financial situation is compounded by the divergence in the policies of the world’s major central banks. While the Fed has moved towards tightening, although at a very gradual pace, the European Central Bank and the Bank of Japan are continuing with various forms of “quantitative easing” aimed at pumping more money into the financial system.
In the midst of growing financial turbulence, however, the official mantra is that the US is in the midst of an expanding economic recovery and is considered to be a “bright spot” in the world economy.
This soothing scenario is belied by both longer-term developments and the immediate situation. Since the US economy started growing in the June quarter of 2009, its gross domestic product has increased by only 2.2 percent per year, the lowest pace for any post-recession phase in post-World War II history. As a result, it took five years for the US economy just to make up for the loss of employment and economic output sustained as a result of the financial crisis.
Now figures from the industrial sector point to another downturn. US industrial production last month was down by a seasonally adjusted 0.6 percent from October, the biggest drop since March 2012 and the third straight month it has fallen. Manufacturing output, which comprises three quarters of industrial production, was flat. Mining output was down 1.1 percent for the month and is now 8.2 percent below the level of a year ago.
According to a report published in the Financial Times on Tuesday, a common theme of major companies supplying industry, such as Caterpillar and Deer & Co, is that “tough times are back,” with some even pointing to “the arrival of an industrial recession.”
The stagnation in US industry is part of an emerging global trend. Data on industrial employment in China—the world’s major manufacturing centre—shows that aggregate employment in manufacturing fell by 1.9 percent in the year ending in October. In the third quarter, employment growth in the sector was at its lowest rate on a quarterly basis since 2000. The biggest declines are in heavy industry, with iron ore mining and processing employment down by 12 percent, coal mining down 7 percent, and steel employment down 6 percent.
The slowdown in China is impacting on so-called emerging markets more generally. Of 22 big emerging markets tracked by JPMorgan Chase, 21 have had their growth forecasts for 2016 downgraded. Brazil, which is highly dependent on the Chinese economy, is the sharpest expression of this trend. Its economy is contracting by 4.5 percent according to the latest data. Brazil’s worsening situation was highlighted this week when Fitch became the second of the major credit rating agencies to downgrade the country’s debt to junk status.
The World Bank has warned of “the beginning of an era of weak growth for emerging markets.” This will have a significant impact, as these economies account for almost 40 percent of global output. They could also be hit by significant financial turbulence, with the International Monetary Fund warning that they have incurred $3 trillion more in debt than is warranted by commodity prices and global demand.
Two inescapable conclusions flow from the latest economic data and the growing turbulence in financial markets.
First, the supply of trillions of dollars of ultra-cheap money by the Fed and other central banks has done nothing either to resolve the crisis which erupted in 2008 or bring about a genuine economic recovery.
It has, however, subsidized a vast transfer of wealth from the bottom to the top, fuelling a tripling of stock prices, record corporate profits and CEO bonuses, and ever greater levels of social inequality. The vast sums handed to the banks and hedge funds have not, for the most part, been invested in production, but used instead to fund parasitic activities such as job-slashing corporate mergers, stock buybacks and dividend increases. To pay for the resulting bankrupting of state treasuries, governments around the world have imposed brutal austerity measures against the working class.
Second, these policies have only created the conditions for another financial crisis, whose consequences are potentially even more devastating than those triggered by the sub-prime mortgage collapse. The deepening decline in the real economy and the mounting signs of financial distress demonstrate that the source of the global economic crisis is the capitalist system itself, which cannot be reformed, but must be overthrown and replaced by the international working class in the fight for socialism.

Fukushima Radiation Cover-Up: Government-Funded Scientists Now Claim Radiation Won’t Hurt You

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The alarming findings that levels of Fukushima radiation off the North American coast are higher now than they have ever been, is being spun by the press as an issue of no concern.
In March 2011, Japan’s Fukushima Daiichi nuclear power plant suffered multiple meltdowns following a massive earthquake and tsunami. The exploding reactors sprayed massive amounts of radioactive material into the air, most of which settled into the Pacific Ocean. Since then, more radioactive material has continued to pour from the coastal plant into the ocean.
In a study presented at the conference of the American Geophysical Union in San Francisco on Dec. 14, researchers found that radiation levels from Alaska to California have increased since samples were last taken. The highest levels yet of radiation from the disaster were found in a sample taken 2,500 kilometers (approx. 1,550 miles) west of San Francisco.
“Safe” according to whom?
Lead researcher Ken Buesseler of Woods Hole Oceanographic Institution was one of the first people to begin monitoring Fukushima radiation in the Pacific Ocean, with his first samples taken three months after the disaster started. In 2014, he launched a citizen monitoring effort – Our Radioactive Ocean – to help collect more data on ocean-borne radioactivity.
The researchers track Fukushima radiation by focusing on the isotope Cesium-134, which has a half-life of only two years. All Cesium-134 in the ocean likely comes from the Fukushima disaster. In contrast, Cesium-137 – also released in huge quantities from Fukushima – has a half-life of 30 years, and persists in the ocean, not just from Fukushima, but also from nuclear tests conducted as far back as the 1950s.
The most recent study added 110 new Cesium-134 samples to the ongoing studies. These samples were an average of 11 Becquerels per cubic meter of sea water, a level 50 percent higher than other samples taken so far.
Instead of presenting the findings as an alarming sign of growing radiation, however, Buesseler emphasizes that the Cesium-134 levels detected are still 500 times lower than the drinking water limits set by the U.S. government. The news site The Big Wobble questions whether Buesseler and Woods Hole’s heavy financial reliance on the U.S. government – Woods Hole has received nearly $8 million in research funding from several government agencies – plays any role in this emphasis.
Situation still worsening
The reality, however, is that radiation along the West Coast is expected to keep getting worse. According to a 2013 study by theNansen Environmental and Remote Sensing Center in Norway, the oceanic radiation plume released by Fukushima is likely to hit the North American West Coast in force in 2017, with levels peaking in 2018. Most of the radioactive material from the disaster is likely to stay concentrated on the western coast through at least 2026.
According to professor Michio Aoyama of Japan’s Fukushima University Institute of Environmental Radioactivity, the amount of radiation from Fukushima that has now reached North America is probably nearly as much as was spread over Japan during the initial disaster.
The recent Woods Hole study also confirmed that radioactive material is still leaking into the Pacific Ocean from the crippled Fukushima plant. Cesium-134 levels off the Japanese coast are between 10 and 100 times higher than those detected off the coast of California.
Without directly challenging the U.S. government’s “safe” radiation limits, Buesseler obliquely references the fact that any radioactive contamination of the ocean is cause for concern.
“Despite the fact that the levels of contamination off our shores remain well below government-established safety limits for human health or to marine life,” he said, “the changing values underscore the need to more closely monitor contamination levels across the Pacific.”
Sources for this article include: