From Economic Collapse Blog

We Just Witnessed The Worst Week For Global Financial Markets In 3 Years

Michael Snyder

Economic Collapse Blog,

14 December, 2014

Is this the start of the next major financial crisis?  

The nightmarish collapse of the price of oil is creating panic in financial markets all over the planet.  

On June 16th, U.S. oil was trading at a price of $107.52.  Since then, it has fallen by almost 50 dollars in less than 6 months.  This has only happened one other time in our history.  

In the summer of 2008, the price of oil utterly collapsed and we all remember what happened after that.  Well, the same patterns that we witnessed back in 2008 are happening again.  As the price of oil crashed in 2008, so did prices for a whole host of other commodities.  

That is happening again.  

Once commodities started crashing, the market for junk bonds started to implode.  That is also happening again.  Finally, toward the end of 2008, we witnessed a horrifying stock market crash.  Could we be on the verge of another major one?  

Last week was the worst week for the Dow in more than three years, and stock markets all over the world are crashing right now.  Bad financial news continues to roll in from the four corners of the globe on an almost hourly basis.  

Have we finally reached the “tipping point” that so many have been warning about?

What we witnessed last week is being described as “a bloodbath” that was truly global in scope.  The following is how Zero Hedge summarized the carnage…

• WTI’s 2nd worst week in over 3 years (down 10 of last 11 weeks)
• Dow’s worst worst week in 3 years
• Financials worst week in 2 months
• Materials worst week since Sept 2011
• VIX’s Biggest week since Sept 2011
• Gold’s best week in 6 months
• Silver’s last 2 weeks are best in 6 months
• HY Credit’s worst 2 weeks since May 2012
• IG Credit’s worst week in 2 months
• 10Y Yield’s best week since June 2012
• US Oil Rig Count worst week in 2 years
• The USDollar’s worst week since July 2013
• USDJPY’s worst week since June 2013
• Portugal Bonds worst week since July 2011
• Greek stocks worst week since 1987

The stock market meltdown in Greece is particularly noteworthy.  After peaking in March, the Greek stock market is down 40 percent since then.  That includes a 20 percent implosion in just the past three trading days.

And it isn’t just Greece.  Financial markets all over Europe are in turmoil right now.  In addition to crashing oil prices, there is also renewed concern about the fundamental stability of the eurozone.  Many believe that it is inevitable that it is headed for a break up.  As a result of all of this fear, European stocks also had their worst week in over three years…

European stock markets closed sharply lower on Friday, posting their biggest weekly loss since August 2011, as commodity prices continued to fall and and shares in oil-related firms came under renewed pressure from the weak price for crude.

The pan-European FTSEurofirst 300 unofficially ended 2.6 percent lower, down 5.9 percent on the week as the energy sector once again weighed heavily on wider benchmarks, falling over 3 percent.

But despite all of the carnage that we witnessed in the U.S. and in Europe last week, things are actually far worse for financial markets in the Middle East.

Just check out what happened on the other side of the planet on Sunday…

Stock markets in the Persian Gulf got drilled Sunday as worries about further price declines grew. The Dubai stock index fell 7.6% Sunday,the equivalent of a 1,313-point plunge in the Dow Jones industrial average. The Saudi Arabian market fell 3.3%.

Overall, Dubai stocks are down a whopping 23 percent over the last two weeks, and full-blown stock market crashes are happening in Qatar and Kuwait too.

Like I said, this is turning out to be a truly global financial panic.

Another region to keep an eye on is South America.  Argentina is a financial basket case, the Brazilian stock market is tanking big time, and the implied probability of default on Venezuelan debt is now up to 93 percent…

Swaps traders are almost certain that Venezuela will default as the rout in oil prices pressures government finances and sends bond prices to a 16-year low.

Benchmark notes due 2027 dropped to 43.75 cents on the dollar as of 11:35 a.m. in New York, the lowest since September 1998, as crude extended a bear market decline. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years is at 59 percent, bringing the implied probability of default to 93 percent, the highest in the world.

So what does all of this mean for the future?

Are we experiencing a repeat of 2008?

Could what is ahead be even worse than that?

Or could this just be a temporary setback?

Recently, Howard Hill shared a few things that he looks for to determine whether a major financial crisis is upon us or not…

The first condition is a serious market sector correction.

According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.

That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.

If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.

The third condition, which we can’t determine directly, would bepressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.

I think that he makes some really good points.

In particular, I think that watching how junk bonds perform over the next few weeks will be extremely telling.

Last week was truly a bloodbath for high yield debt.

But perhaps things will stabilize this week.

Let’s hope so, because this is the closest that we have been to another major financial crisis since 2008.

A Full-Blown Economic Crisis Has Erupted In Russia

Michael Snyder

Economic Collapse Blog,

16 December, 2014

The 8th largest economy on the entire planet is in a state of turmoil right now.  

The shocking collapse of the price of oil has hit a lot of countries really hard, but very few nations are as dependent on energy production as Russia is.  

Sales of oil and natural gas account for approximately two-thirds of all Russian exports and approximately 50 percent of all government revenue. So it should be no surprise that the fact that the price of oil has declined by almost 50 percent since June is absolutely catastrophic for the Russian economy.  

And when you throw in international sanctions, wild money printing by the Central Bank of Russia and unprecedented capital flight, you get the ingredients for an almost perfect storm.  But those of us living in the western world should not be too smug about what is happening in Russia, because the nightmare that is unfolding over there is just a preview of the economic chaos that will soon envelop the whole world.

So far this year, the Russian ruble has fallen nearly 50 percent against the U.S. dollar.  That is a monumental shift.  And as the collapse of the ruble has accelerated in recent days, we are seeing scenes in Russia that are reminiscent of the Weimar Republic.  For example, just consider the following excerpt from an article that just appeared in the New York Times…

Scenes that Russians hoped had receded into the past reappeared on the streets: Currency exchange signs blinked ever-changing digits, and Russians rushed to appliance stores to buy washing machines or televisions to unload rubles.

“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”

In a desperate attempt to stop the bleeding, the Central Bank of Russia made an astounding move.  Last night it raised its key interest rate from 10.5 percent all the way up to 17 percent.

It was hoped that this desperate move would keep the ruble from plummeting any further.

And it did work for a few minutes, but then the collapse of the ruble resumed.  This is how Zero Hedge described the carnage…

For those wondering if the CBR’s intervention in the Russian FX market with its shocking emergency rate hike to 17% overnight calmed things, the answer is yes… for about two minutes. The USDRUB indeed tumbled nearly 10% to 59 and then promptly blew right back out, the Ruble crashing in panic selling and seemingly without any CBR market interventions, and at last check was freefalling through 72 74, and sending the Russian stock market plummeting by over 15%.

So why is this happening now?

Well, the biggest reason for the freefall of the ruble is the fact that the Central Bank of Russia just printed up about 625 billion rubles and gave it to their friends at Rosneft.

Rosneft is an absolutely massive oil company that is controlled by the Russian government.  For months, Rosneft has been asking for a bailout (sound familiar?) to refinance loans that can no longer be rolled over with western banks because of economic sanctions.

And on Friday they got one.

In an attempt to quietly slip this massive injection of new money past everyone, Rosneft issued 625 billion rubles worth of new bonds just before the weekend and the Central Bank of Russia gobbled most of those new bonds up with freshly created money.  Unfortunately for Rosneft and the Central Bank of Russia, the rest of the world took notice…

With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.

Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.

When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.

So that is what led to the panic selling that we witnessed on Monday.

Meanwhile, money is being pulled out of Russia at an absolutely staggering pace.  As confidence in the ruble and in the Russian financial system disappears, wealthy people are feverishly trying to protect their wealth by moving it somewhere else.  The following is an excerpt from an editorial that Mohamed A. El-Erian recently penned for Business Insider…

Rather than bring in buyers at these substantially cheaper levels, Russian currency weakness is inducing more selling, including by a growing number of worried bank depositors who, instead of holding their savings in ruble, are opting for safer dollars. The larger the extent of this “currency substitution,” the bigger the scope for capital flight out of Russia. This puts even greater pressure on the currency, aggravating the output contraction, imported inflation, and the general sense economic and financial instability.

It has been estimated that total capital outflows for 2015 will reach an astounding $128 billion.

And this could just be the beginning of the economic troubles for Russia.

If the price of oil stays this low or goes even lower, the Russian economy will shrink.  The only question is how much it will contract…

The Bank of Russia said Monday that the country could sink into a deep recession next year if oil prices remain at $60 a barrel. GDP could contract by as much as 4.7% in 2015, and then by a further 1.1% in 2016 unless oil prices pick up.

Sadly, it isn’t just oil producing nations such as Russia that are going to be devastated by the coming crisis.

Eventually, the entire globe is going to feel the pin.

Last week was the worst week for global financial markets in three years, and so many of the exact same patterns that we witnessed just prior to the great financial crisis of 2008 are happening once again.  We have been living in a false bubble of relative stability for the past couple of years, but now time is running out.  The next great financial crisis is rapidly approaching, and 2015 promises to be the most “interesting” year that we have seen in ages.