The next crisis is coming

After what happened since October 2008, I mean, elementally, you would think what? That now they’re going to change. I mean, they see that the model is not working. The model is even poisonous, you know? Dramatically poisonous. And what is the result, and what happened in the last meeting of the European Union? They are more fundamentalist now than before. So, the only thing you know that you can be sure of, that the next crisis is coming, and it will be twice as much as this one. And for that one, there won’t be enough money anymore. So that will be it. And that is the consequence of systematical human stupidity.
--Manfield Max-Neef at http://www.democracynow.org/2010/9/22/chilean_economist_manfred_max_neef_us

Stock Market mini-crash about October 20?

I have a theory that the dates October 20 and April 20 (six months later) are very unlucky. I don't mean on the precise date, I mean about that date, plus or minus a couple of weeks. Financial collapses usually happen in October and physical disasters happen in April. Here are some bearish events that took place in September or October:

October 29, 1929 great stock market crash
October 19, 1987 The stock market crashed for no apparent reason, and the Dow was down 22%.
October 13, 1989 ("Friday the 13th mini-crash") - The stock market drops 12% over 2 days, blaming a failed buyout. "Many investors were left stunned".
October 11, 1990 Dow Jones at 2365
September 10, 1998 - Dow hits a short term low of 7,615
September 23, 1998 - LTCM crash. LTCM was providing returns of 40% annually when suddenly their economic theories quit working. The Fed bailed them out, fearing a systemic collapse.
September 11, 2001 - The stock market closed for a week and when it opens, drops 14%.
September 21, 2001 - dow closes at 8,235
October 9, 2002, dow closed at 7,286, a 37.8% decline.
September 15, 2008 - Lehman Bros collapsed, the stock market quickly drops 5%, the Fed takes over AIG, and Congress rushes through a $700 billion bailout.
October 27, 2008 - Dow Jones hits a short-term low of 8,175. (It jumped by 900 points the next day, but dropped even further in Nov. 2008 and March 2009).

Update:
The Panic of 1873 started on September 18, 1873 with the failure of Jay Cook & Company.  This started a chain reaction of bank failures and the NYSE closed for ten days starting Sept. 20, 1873.
The Panic of 1907 started on October 22, 1907 with a bank run on the Knickerbocker Trust Company.

Update 2:
Montgomery recalls living through the October "massacres" of 1978 and 1979, the crash of 1987, the mini-crash of 1989, the 1997 Asian collapse and the Long-Term Capital Markets plunges [in 1998], which started to cascade downward in late September. And while gold bullion topped in January 1980, gold stocks made their highs on Sept. 22 of that year, he adds. That date also saw the peak in many oil stocks.
Looking back farther, on Sept. 22, 1929, the Dow Jones Utility Index became the final major average to make its high before the Great Crash. And in 1873, a panic forced the New York Stock Exchange to shut down, Montgomery further details.
And who can forget 2008, when markets went into free fall in the days following the collapse of Lehman Brothers? What's remembered less well now is the market chaos in the subsequent days after the House of Representatives initially rejected legislation that created the Trouble Asset Relief Program
Currencies have seen historic changes around this date as well, he adds. The British pound was taken off the gold standard and was devalued a huge 28% on September 21, 1931. Exactly 54 years later, the Group of Five produced the Plaza Accord, which brought a sharp decline in the dollar and expansion of global liquidity. Black Wednesday, when Britain was forced to withdraw from the European Exchange Rate Mechanism, came a few days early on Sept. 16, 1992.
I also recollect that Treasury note and bond yields made their historic highs in late September, 1981, with shorter maturities hitting 17% and long bonds reaching 15%. That marked the end of a 35-year bear bond market from the end of World War II.
"If that's not enough, several of the astrological types claim their charts show [this] week is fertile ground for surprises – geo-political and otherwise."
http://www.zerohedge.com/news/2014-09-22/bofaml-repeats-art-cashins-concerns-september-seasonal-slump

Update 3: The Black Friday gold panic of September 24, 1869 was caused when two speculators attempted to corner the gold market. The price of gold briefly went as high as $162.50 per ounce before dropping to $133 after the Treasury sold some gold.

Hurrah the recession is over!

The "great recession" officially ended in June 2009, according to the NBER.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007.--http://www.nber.org/cycles/sept2010.html

CBO: Don't worry, be happy!

Did you know that our current recession is scheduled to be completely over by October 1, 2011? The mighty Obama has commanded it and thus it will be so. Revenues will increase from 2143B in 2010 to 2953B in 2012, an increase of 810B/year or 37%, spending will increase only by 133B/year or 4%, and the deficits will drop from the trillion dollar range to a "sustainable" 500-600B/year amount.

Don't worry, be happy!

Year 2038 bug

Many of the older computer systems will crash on January 19, 2038. Is it time to panic yet?

Starting at GMT 03:14:07, Tuesday, January 19, 2038, I fully expect to see lots of systems around the world breaking magnificently: satellites falling out of orbit, massive power outages (like the 2003 North American blackout), hospital life support system failures, phone system interruptions (including 911 emergency services), banking system crashes, etc. One second after this critical second, many of these systems will have wildly inaccurate date settings, producing all kinds of unpredictable consequences. In short, many of the dire predictions for the year 2000 are much more likely to actually occur in the year 2038!
--http://maul.deepsky.com/~merovech/2038.html

Is ten times revenue the debt limit?

I just had a thought, which is that GDP is irrelevant when measuring the debt. The appropriate measurement is instead cash flow or tax revenue. And I think that 10 times that amount of revenue is some kind of limit or would signal an imminent debt crisis. If that point is reached and interest rates rise to only 5%, then half of all revenue will go towards paying interest. I also like measuring it on a scale of 1 to 10.

The last hard numbers I have are for 9/30/09 when revenue was at 2105 and total debt was 11,910 for a Debt Crisis Number or "Crip" of 5.7. The number at 9/30/10 should be about 6.4, with revenue of 2,100 and debt of 13,500.

So the question is, when will this reach the max of 10? Well there are lots of assumptions, but my best guesstimate is in 2025, when tax revenues will be $5,346B and debt will be $58,332B.

Update 6/19/2012:
This is model C-1.

Counterpoint: why hyperinflation in the US is impossible

See this article: http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-society-about.html

In essence, what he is saying is that hyperinflation is always a political event, not a financial event." The commonality between Zimbabwe and Weimar is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, triggering hyperinflation."

He says that it is impossible for the Federal Reserve on its own to cause hyperinflation. Congress can cause hyperinflation through massive spending; however, they won't.

I disagree with his conclusion. I believe that at some point people will lose faith in the ability of the government to pay back the massive debt and that lack of faith and the reaction to it will cause hyperinflation.

Doomsday warnings of US apocalypse gain ground

Economists peddling dire warnings that the world's number one economy is on the brink of collapse, amid high rates of unemployment and a spiraling public deficit, are flourishing here.

The guru of this doomsday line of thinking may be economist Nouriel Roubini, thrust into the forefront after predicting the chaos wrought by the subprime mortgage crisis and the collapse of the housing bubble.

"The US has run out of bullets," Roubini told an economic forum in Italy earlier this month. "Any shock at this point can tip you back into recession."

But other economists, who have so far stayed out of the media limelight, are also proselytizing nightmarish visions of the future.

Boston University professor Laurence Kotlikoff, who warned as far back as the 1980s of the dangers of a public deficit, lent credence to such dark predictions in an International Monetary Fund publication last week.
...
"In a short period of time, the Federal Reserve would have to print trillions of dollars to cover its explicit and implicit guarantees. All that new money could produce strong inflation, perhaps hyperinflation," he said.

"There are other less apocalyptic, perhaps more plausible, but still quite unpleasant, scenarios that could result from multiple equilibria."
--http://www.breitbart.com/article.php?id=CNG.a64b6fa820c23d9ef2058a22276ce3a1.2c1&show_article=1

I haven't heard of Mr. Kotlikoff before, but I will start following his blog: http://www.esplanner.com/view/blog

The future collapse of the EU

But no current issue better illustrates the bizarre nature of the system to which we have surrendered the power to run our country than the chaos inflicted on our hospitals by the enforced application of the EU’s working time directive. Led by John Black, head of the Royal College of Surgeons, medical professionals protest that this is threatening many patients’ lives.

Even the European Commission freely admits, in a recent “communication” to the European Parliament and sundry others, that its rules are, in practice, highly “unsatisfactory” and in need of urgent reform. But it adds that attempts to amend the directives have been going on since 2004 and that any chance of getting the reforms needed will involve so many consultations and negotiations that little is likely to happen for years.

Of course, if we still had the power to run our own country, this crisis in the NHS and much else besides could be sorted out within months, But since our Government seems quite happy to continue handing over even more powers to this crazy system, there is nothing we can do about it – until eventually the whole lumbering, labyrinthine, unaccountable, undemocratic mess implodes under the weight of its own contradictions.

--http://www.telegraph.co.uk/comment/columnists/christopherbooker/7996747/Brussels-has-broken-our-power-to-rule.html

The Keynesian Endpoint

On the whole, I expect the federal government to maintain deficit spending at roughly its current level, until market forces intervene and force it to make cuts in a hurried, unplanned manner.

That is the Keynesian endpoint, but it can come in different ways. One way, which I think is less likely, is through a substantial drop in the value of Treasuries, meaning a rise in their yields. ... A substantial rise in Treasury yields would force the government to cut spending, exacerbating the recession and spurring further yield rises, until the market was satisfied that public borrowing had been reduced to sustainable levels. But the government shouldn’t have to default, so I see this as the rosy scenario.

A second way to reach the Keynesian endpoint, and I think the more likely way, is through a rise in inflation. If the government continues its high deficit spending while the Fed tries to combat renewed recession with large-scale quantitative easing, the increasing volumes of dollars in the economy would eventually spur inflation, either through excess spending or through a loss of confidence in the dollar. An increase in inflation would send rates on private debt upward and bring the latent private debt burden down on the economy’s weak shoulders. Also, yields on Treasuries, suppressed by the Fed’s monetization of the deficit via QE, would turn substantially negative in real terms, prompting a sell-off by private holders. At that point, the Fed could choose to increase QE and also monetize the rolling-over of maturing federal debt, which would spur hyperinflation and fiscal collapse. Or, the Fed could call off QE, forcing the government to default and sharply cut spending.

Weighing those two options, I think a default would lead to a severe global depression, by shattering the global economy’s confidence in and dependence on the US government, US consumers and the US dollar. On the other hand, hyperinflation would grind all confidence and dependence on the US economy into dust, and lead to an even more severe global depression. When the time comes, I think it will be obvious to everybody that default is the lesser of the two evils.
--http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/

Comment: We have 2 options in front of us, option 1: to default on the US debt, which would lead to a severe global depression, and option 2: hyperinflation, which will destroy the value of the dollar and lead to an even more severe global depression.

With option 1, at least the dollar will still exist as a global reserve currency, and the global financial system will be intact and the depression, although severe, would be over in a few years and would be mostly limited to the US. Although the US government would lose much of its power because investors would not be willing to buy its bonds except for at a high interest rate.

Option 2 would be a disaster. The dollar would disappear, there would be a global depression from which the world might never recover, and the US would lose any influence on the world stage leaving a power vacuum to be filled by a totalitarian Chinese government and Islamic militants. It would lead to a new Dark Age.

We might be able to delay making a choice for as many as 20 years, but not forever.

The US will hit the debt wall by 2015

Here is an interesting video by Mike Pento. Some quotes:
"The maximum duration of having a quiescent market is around four years, but it could be much sooner than that when we hit the debt wall. ... The publicly traded debt just reached 8.5 trillion dollars. It was 7.5 trillion last year. By 2015, it's gonna reach 14 trillion dollars. It's basically going to almost double in 6 years. ... The interest payment on the debt by 2015 will be about 1 trillion dollars. Even if you grow revenue by 50%, 30% of all government revenue is going to pay interest on the debt. .. It leads to unfortunately a dollar crisis and a bond market crisis. ... We need to drastically cut spending and we are doing the exact opposite.

Won't cutting back on spending now lead us into a worse recession? It will on the short run, but what is your alternative? ... We've kicked the can down the road but the can has gotten much much bigger. So when we do have to address this situation, who is going to bail out the United States? It's not going to be the IMF we just have too much debt. It's going to be the Federal Reserve with their printing press."

The treasury bond bubble will burst

This excessive debt level of the U.S. Federal government insures that Treasury bonds will never be repaid in real terms. The market is aware of this situation—the bond market is aware that Treasuries are in a bubble, floating on nothing but air. Therefore, when—not if—the bubble in Treasury bonds finally bursts, there will be a run on comodities, most likely, which will start the hyperinflationary phase of the current Global Depression. From here, the endgame of the U.S. economy.
--http://www.zerohedge.com/article/guest-post-prosecution%E2%80%99s-case-against-alan-greenspan

Most people see US Treasury bonds as the ultimate safe haven, so this is kind of hard to imagine, but I will try to explain. There is an inverse relationship between bond prices and interest rates - when interest rates go down, bond prices go up and when interest rates go up, bond prices will go down. Guess what - interest rates will go up at some point, which may be years away. When this happens, investors will flee bonds. US bonds are a stupid investment.

National debt increased by $200 billion in August

On July 30, 2010 the numbers looked like this:
Debt held by Public $8.702T
Intragovernmental $4.535T
Total Public Debt $13.238T

On August 31, 2010 the numbers look like this
Debt held by Public $8.927T
Intragovernmental $4.523T
Total Public Debt $13.450T

That's an increase of $225B in the debt held by the public, and $212B increase in the total debt in just 31 days. I don't think the debt has ever increased more in a month, although Sept 2008 may be an exception. Despite the huge increase, this still can't be considered an emergency yet, since interest rates are so low. But the bridge is out ahead, so picking up speed is not a good thing.

A Moment of Clarity will occur

Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?

In two previous posts, I essentially said “yes”: “Yes” to a collective Moment of Clarity, “yes” to a panic in Treasuries. I further argued that such a panic would lead—inexorably—to a flight to safety in actual, physical commodities, which would then result in a massive hyperinflation that would kill the dollar dead.

What is most important is, I do not know when such a Moment of Clarity will occur—but I have no doubt that it will occur. Inevitably, unavoidably: Treasury bonds are bound to collapse, triggering the sequence of events that I have described.

-- http://www.zerohedge.com/article/guest-post-termite-riddled-house-treasury-bonds

Update: Here is another article by the same author, Gonzalo Lira, explaining how the crash will occur - http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html .

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon.

I think he has nailed it. The only thing I differ with him is on the timing. He thinks it will happen very soon: "I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011." Whereas I think we have about 15 more years before it will happen.