Financial Crisis Dynamics are Building (Again) and are Engulfing the World

Interestingly, in my post with David Hunter from yesterday, he talks about seeing a bubble peak in the US stock markets in Q1 (2022) prior to, a global financial/economic crisis to begin in Q2 (2022). He's expecting the worse financial and economic crisis since the Great Depression. There have been many, many warning signs for a long time.

This morning, Doug Nolan, at Credit Bubble Bulletin, documented renewed financial distress and contagion in peripheral (emerging market) countries. The concern is that this distress is working into the core developed country markets and economies. The Nu Covid scare is just another accelerant. 

We've seen "false starts" before. Everyone has been unable to correctly call the timing of the next crisis. I'll paste his latest post below, but here are some of my comments:

I've long wondered where the critical "leg" of the next worldwide financial crisis begins. For me, it's long been the EU or China. I think I know the answer now: China. The extraordinarily leveraged bubble in it's property sector is bursting. And it's in a country/region where the majority of the population (62% in China) stores ALL their wealth, ie., in property. They pay 10 to 20% down (with borrowed money?), and finance the remainder betting the farm (literally) on ever rising prices. Now China has 90 million empty and unfinished apartment "shells" where 100s of million of people have stored their wealth and taken on huge amounts of debt and paid VERY HIGH prices. This bubble has popped and it's (probably) just a matter of time before 100s of millions of investors speculators see their money melt away as property prices drop. The Chinese will try to stop the inevitable with yet more deficit spending.

Predicting crises and collapse are so difficult because these things take a very long time, ie., years and even decades, to play out. And yes, if you get the timing wrong even though you successfully describe what's coming, you're still wrong. 

It takes decades for goverments to destroy everything. For instance, Nixon abandoned Bretton Woods gold standard for the USD in 1971. This led to a collapsing dollar, unending budget and trade deficits, an OPEC oil embargo, oil price rises and extremely high inflation until about 1982. There was a repreive in the 1980s with the Reagan tax cuts but still huge govt budget deficits. Then the elimination of Glass Steagal in 1991 was pivotal in allowing 'banksters' unlimited leverage of depositor and Fed money. The rise of the Euro-Dollar liquidity in Europe, done in a clever way "off the books" was completely missed by bank regulators. This lugubrious Eurodollar funding allowed the rise of China and permitted "globalization" until the financial accident and near-death experience in 2008/09.  At that point, China embarked on the biggest debt-funded investment program the world has ever seen and saved the world from financial, then economic, death. This lasted until 2014/2015 or so. The Euro-dollar funding mechanism was also back with a vengeance by then to aid and abet China and the emerging markets. 

China has finally "hit the wall" this year in my opinion. They installed Chairman Xi, now emperor-for-life who rules with an Mao-like iron fist, to now tackle their massive misallocations of capital and it's massive bubbles. They have been "hunkering down" for several years now. The Party has warned the people of hardship that is coming.

I started warning that China had reached debt levels that are assciated with financial crises in 2015 and here it is almost 2022.  So, I was wrong with timing.  Hell, I wrote a post Euro Bank Leverage STILL a Systemic Risk in 2013! That post is still accurate, but it's amazing how long governments can "kick the can" down the road with easy (unsound) money. 

I posted America's March to 3rd World Status, Then Collapse in 2016 by noticing the extreme corruption of our politics, government and politicians.  I said, among other things, that:

Obama and the Left have started a class war, a war on business, a war on police and a race war. They want to promote dissent & conflict to justify "emergency" measures then "emergency powers." We're already very close to financial and social collapse. Sounds like Chavez and Maduro to me.  You watch.

Crisis is coming to our country and world and it's being brought to you by failed politicians and horrible central bankers. It's "baked-in." Crises have already enveloped many countries in Latin America, Africa, and the Middle East. Crisis always starts at the periphery and works toward the core. Next will be Europe and Russia. The Brexit vote is signaling EU political and financial collapse there in the months ahead. China is drowning in bad debts--- debts taken out to literally "save the world" in 2009 until 2014. Massive devaluations in China will reverberate around the world. Banking crises in Europe and China will bring back financial crisis conditions soon to the entire world. I don't see a way out as everything is so broken.

Again, I consider myself wrong because I got the timing wrong. Mea Culpa.

The US Repo crisis erupted in 2019 signaling dangerous monetary disorder.  I started to get more strident by posting Rising Risk of Financial and Economic Collapse in Dec. 2019.  Then I posted Rising Risk of Financial & Economic Chaos, Part 2 in Dec. 2019. Then  Extreme Bubble Phase: The Fed Trapped in Repo, then QE. Either Inflate Bubbles or World Economy Blows Up in Jan. 2020.  See my post The Economy is Nearing Collapse, Part 1: Exploding Government Desperation in February 2021.  We've been blowing bubbles ever since: QE by the $Trillions, EXPLODING Government spending, stolen elections and total breakdown of law, order, civility and any semblance of financial prudence. We are on "Plan Zimbabwe" in monetary policy and "Plan South Africa" in government now.  See my Essential Gulfcoastcommentary Index for more (subsection "Our LONG Road to Crisis and Collapse").

Now with excepts From this morning's Doug Nolan at Credit Bubble Bulletin:

[Speaking about the new Covid virus strain and market turbulence on Friday:] Once again, the wily Covid virus boasts ghostly timing. Omicron barges in with de-risking/deleveraging and global Crisis Dynamics attaining pivotal momentum. And with contagion rapidly enveloping the emerging markets (EM), disaster strikes for the vulnerable South African domino already in line for trouble.

The South African rand this week sank 3.4%, increasing 2021 losses to 9.8%. South African 10-year yields jumped 19 bps Friday (high since April 2020), boosting the week’s yield spike to 43 bps. South African CDS Friday surged 25 (43 for the week) to 252 bps – the high since March.

An index of EM CDS surged 19 Friday - the largest one-day rise since September 2020 - to 221 bps, the high back to October 2020. EM CDS surged 34 for the week, the biggest weekly gain since September 2020. Friday saw sovereign CDS surge 17.5 in Brazil to 268 bps (high since June 2020), 17.5 in Colombia to 218 bps (May 2020), and nine in Chile to 99 bps (May 2020). For the week, CDS jumped 26 bps in Brazil, 32 bps in Colombia, 27 bps in Mexico, and 11 bps in Indonesia.  

he last thing Turkey needed was a stiff forearm shove toward a full-fledged financial and economic crisis. The Turkish lira sank another 2.8% Friday, pushing losses for the week to 8.9% - for the month to 22.1% and for 2021 to about 40%. Turkey’s 10-year (lira) yields spiked 80 bps this week, trading above 20% for the first time since May 2019. Turkey CDS surged 28 Friday (58 for the week) to a one-year high 504 bps. For a country with a population of 84 million – that saw living standards and expectations inflate right along with its Credit Bubble – the collapse is turning increasingly desperate.

Mexico is another key EM domino – with self-inflicted wounds placing it directly in the line of fire. 

The Mexican peso sank 5.0% this week, boosting y-t-d losses to 9.2%. Mexico’s local currency yields jumped 21 bps to 7.68%, the high since the March 2020 market crisis. Mexico’s dollar bond yields rose 16 bps to 3.16% (high since March). Mexico CDS jumped 14 Friday to 125 bps (October 2020), with the week’s 27 bps jump the largest gain since June 2020. Mexican stocks dropped 2.6% this week.

Fragile Brazil’s dollar bond yields surged another 34 bps this week to 4.99%, the high since June 2020. Brazil’s mid-November annual inflation jumped to 10.73%. From Goldman Sachs chief Latin America economist Alberto Ramos (from Bloomberg): “Overall, inflation is now very generalized with overwhelming evidence of significant second-round effects.”

So-called “strongmen” leaders from Ankara to Mexico City and beyond have not taken inflationary surges seriously. They act as if the world hasn’t changed from earlier halcyon days of seemingly endless global liquidity and yield-chasing EM “hot money” inflows. Especially these days, there is no overstating the critical role played by disciplined, principled, and independent central banking. Enormous speculative leverage throughout the emerging markets left no room for error. Tons of erroneous policies and market misperceptions created currency and bond market fragilities, with Crisis Dynamics having now been unleashed.

Bubbles at their core are pernicious mechanisms for wealth redistribution and destruction. Geopolitical risk is a key Bubble manifestation, with the current most protracted global Bubble unmatched in this regard. Competing head-to-head with Covid in terms of stubborn persistency, there was similarly no relief this week from mounting geopolitical risks.

With Crisis Dynamics now in full swing within the global “Periphery,” the “Core” is in heightened jeopardy. European stocks were hammered this week. France’s CAC40 sank 4.8% in Friday trading (down 5.2% for the week), with major indices falling 4.2% in Germany (down 5.6%), 5.0% in Spain (down 4.0%), 4.6% in Italy (down 5.4%), and 3.6% in the U.K. (down 2.5%). Ominously, Italian bank stocks were slammed 7.8%, with European banks sinking 5.9%. An index of bank (subordinate) debt CDS surged 19 this week to 131 bps, the largest increase in over a year. ....

It is a fundamental tenet that contemporary finance works wonderfully, so long as leverage and speculation are expanding. It does not function well in reverse. Global “risk off” de-risking/deleveraging took a meaningful leap forward this week. China’s historic Bubble continues to deflate, while virulent contagion ruthlessly targets the weak and vulnerable throughout the emerging markets. And, importantly, a bout of risk aversion Friday slammed the “Core.” At this point, a lot has to go right to restrain energized Crisis Dynamics hellbent on engulfing an unprepared world.