{"id":1093470,"date":"2019-01-08T22:16:27","date_gmt":"2019-01-08T22:16:27","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=106533"},"modified":"2019-01-08T22:16:27","modified_gmt":"2019-01-08T22:16:27","slug":"heres-where-the-next-crisis-starts","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1093470","title":{"rendered":"Here\u2019s Where the Next Crisis Starts"},"content":{"rendered":"

This post Here\u2019s Where the Next Crisis Starts<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

The case for a pending financial collapse is well grounded. Financial crises occur on a regular basis including 1987, 1994, 1998, 2000, 2007-08. That averages out to about once every five years for the past thirty years. There has not been a financial crisis for ten years so the world is overdue. It\u2019s also the case that each crisis is bigger than the one before and requires more intervention by the central banks.<\/p>\n

The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.<\/p>\n

This means a market panic far larger than the Panic of 2008.<\/p>\n

Today, systemic risk is more dangerous than ever because the entire system is larger than before. Due to central bank intervention, total global debt has increased by about $150 trillion over the past 15 years. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.<\/p>\n

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, \u201cI want my money back!\u201d<\/p>\n

First, one asset class has a surprise drop. The leveraged investors sell the sinking asset, but soon the asset is unwanted by anyone. Margin calls roll in. Investors then sell good assets to raise cash to meet the margin calls. This spreads the panic to banks and dealers who were not originally involved with the weak asset.<\/p>\n

Soon the contagion spreads to all banks and assets, as everyone wants their money back all at once. Banks begin to fail, panic spreads and finally central banks step in to separate winners and losers and re-liquefy the system for the benefit of the winners.<\/p>\n

Typically, small investors (and some bankrupt banks) get hurt the worst while the big banks get bailed out and live to fight another day.<\/p>\n

That much panics have in common. What varies in financial panics is not how they end but how they begin. The 1987 crash started with computerized trading. The 1994 panic began in Mexico. The 1997\u201398 panic started in Asian emerging markets but soon spread to Russia and the big banks. The 2000 crash began with dot-coms. The 2008 panic was triggered by defaults in subprime mortgages.<\/p>\n

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector.<\/p>\n

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not. Risk has simply shifted.<\/p>\n

What will trigger the next panic?<\/p>\n

Prominent economist Carmen Reinhart says the place to watch is U.S. high-yield debt, aka \u201cjunk bonds.\u201d<\/p>\n

I\u2019ve also raised the same argument. We\u2019re facing a devastating wave of junk bond defaults. The next financial collapse will quite possibly come from junk bonds.<\/p>\n

Let\u2019s unpack this\u2026<\/p>\n

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or \u201cjunk bonds,\u201d to rise about 60% \u2014 a record high. Many businesses became extremely leveraged as a result. Estimates put the total amount of junk bonds outstanding at about $3.7 trillion.<\/p>\n

The danger is that when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.<\/p>\n

This is from a report by Mariarosa Verde, Moody\u2019s senior credit officer:<\/p>\n

\n

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default\u2026 A number of very weak issuers are living on borrowed time while benign conditions last\u2026 These companies are poised to default when credit conditions eventually become more difficult\u2026 The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.<\/em><\/p>\n<\/blockquote>\n

If default rates are only 10% \u2014 a conservative assumption \u2014 this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08.<\/em><\/p>\n

Many investors will be caught completely unprepared. Once the tsunami hits, no one will be spared. The stock market is going to collapse in the face of rising credit losses and tightening credit conditions.<\/p>\n

But corporate debt is not the only dagger hanging over the economy. Credit conditions have already begun to affect the real economy. Student loan losses are also skyrocketing. Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.<\/p>\n

Have we already seen the beginning of the next crisis? No one knows for sure, but the time to prepare is now. Once the market falls apart, it\u2019ll be too late to act.<\/p>\n

That\u2019s why the time to buy gold is now, while it\u2019s cheap. When you need it most, once the crisis hits, it\u2019ll cost a fortune.<\/p>\n

Both the panics of 1998 and 2008 began over a year before they reached the level of an acute global liquidity crisis.<\/p>\n

Investors has ample time to reduce risky positions, increase cash and gold allocations and move to the sidelines until the crisis abated. At that point there were bargains galore for those with cash.<\/p>\n

An investor with cash in 2008 could have preserved wealth during the crisis and nearly quadrupled his money since then by buying the Dow Jones index at 6,550 (even with the recent turmoil, today it\u2019s still around 23,600).<\/p>\n

Relatively few investors did this. Instead they suffered from \u201cfear of missing out\u201d as markets rose until the panic began. They persisted in the mistaken belief that they could \u201cget out in time\u201d if markets reversed, not realizing that reversals happen much faster than rallies. They held onto losing positions hoping they would \u201ccome back\u201d (they did after 10 years) and so on.<\/p>\n

Simple behavioral biases stand in the way of doing the right thing almost every time.<\/p>\n

For now, it\u2019s not clear which way things will break next. Volatility is back and markets are still in a precarious position. Fed chairman Jay Powell threw markets a bone last Friday when he basically said all rate hikes are off until further notice and that he\u2019s willing to scale back QT \u201cif needed.\u201d Markets have naturally rallied since Powell\u2019s remarks.<\/p>\n

If you still need proof that today\u2019s rigged markets still require support from the Fed, here it is. But it\u2019s far from clear the next crisis can be avoided at this point.<\/p>\n

You don\u2019t want to be heavily exposed to these markets. It\u2019s far better to get out too early than too late. You should not be the last to be get ready. Start now to decrease equity allocations and increase your allocations to cash and gold so you can weather the coming storm.<\/p>\n

Preparation means 10% percent of your investible assets in gold or silver and another 30% in cash. That allocation will preserve wealth and provide dry powder for bottom-fishing in the crisis to come.<\/p>\n

Regards,<\/p>\n

Jim Rickards
\nfor The Daily Reckoning<\/em><\/p>\n

The post Here\u2019s Where the Next Crisis Starts<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post Here’s Where the Next Crisis Starts<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

“If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08”…<\/p>\n

The post Here’s Where the Next Crisis Starts<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[366,465,463],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1093470"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1093470"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1093470\/revisions"}],"predecessor-version":[{"id":1093471,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1093470\/revisions\/1093471"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1093470"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1093470"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1093470"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}