Money Morning Members should know two things. First: the 2008 financial crisis was caused by a housing bubble, centered in the U.S., that radiated out through the rest of the world and almost destroyed the global financial system.
Second: The next financial crisis – which is starting to unfold as we speak – was caused by a commodities bubble centered in China that radiated out through the rest of the world and will cause enormous financial damage, threatening the global financial system.
Both crises were aided and abetted by central banks printing massive amounts of debt that can never be repaid. That leaves the world with three choices for how to deal with that debt – currency depreciation (which is why you should buy gold), inflation, and default.
There is one crucial difference between the current Super Crash and the last one – today there is much more global debt (roughly $200 trillion and rising) and the geopolitical landscape is much less stable than it was seven years ago. This means that today’s world is much more fragile than it was seven years ago. It’s crucial to acknowledge this reality and move to protect your investments immediately, if you have not already done so. Much more pain is in store.
High Yield Debt is Returning to Crisis Levels
The low-light of last week’s market was the continuing collapse of the high yield bond market. This market is experiencing a crash that is every bit as bad at 2009, when spreads blew out to 2500 basis points. While the headline numbers are nowhere as bad as that yet, under the surface market internals are moving in that direction and could easily get that bad.
The Fed’s “Catch 22”
The question now is whether the Fed will still go ahead with a 25-basis point hike next week in the face of collapsing financial markets. A Fed hike in the face of plunging commodity and credit markets would be an unprecedented move. But the Fed has painted itself into a corner with its failed policies and endless jibber-jabbering about its intentions.
The current situation is an object lesson in why the Fed should talk less. Actually, it is an object lesson in why the Fed should be closed down (but that’s a discussion for another day). If the Fed were to chicken out now and fail to raise rates by a paltry 25 basis points, it would likely spook markets and send them into an even worse tailspin than they are already in.
That suggests that the Fed will most likely stick to its plan to raise rates for the first time in nearly a decade, but there is no way to predict how markets will react in view of the ongoing sell-off. Either way, markets are in for a rough ride through the next few months because commodity prices and credit market are unlikely to improve.
The “Brave New World” of Activist Investing
Wall Street’s disastrous week was appropriately capped by another megamerger by two companies that were forced into each other’s arms because they can’t generate domestic growth and were too afraid to tell activist investors to go take a hike. Dow Chemical Co. (NYSE: DOW) and DuPont Co. (NYSE: DD) announced a $120 billion merger on Friday that was heralded by The Wall Street Journal in one of the most inane articles ever to appear in the financial press (which is saying something in light of what passes for financial journalism these days).
Full article: The Next Financial Crisis is Unfolding Now (Money Morning)