Here’s Where the Next Crisis Starts

//Here’s Where the Next Crisis Starts

Here’s Where the Next Crisis Starts

By Jim Rickards courtesy of the Daily Reckoning

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.Here’s Where the Next Crisis Starts china 3d flag

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this…

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% – a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And 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.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… 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.

Many investors will be caught completely unprepared.

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, “I want my money back!”

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.

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.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

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.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.

Regards,

Jim Rickards

for The Daily Reckoning

News and Commentary

PRECIOUS-Gold steady ahead of Fed statement (Reuters.com)

Gold Posts Longest Losing Streak Since 2013 as Bears Crush Bulls (Bloomberg.com)

U.S. consumer spending rises; wage growth slows in second-quarter (Reuters.com)

Futures, Yuan Slammed As US Plans Higher Tariffs On $200 Billion In Chinese Imports (ZeroHedge.com)

Here’s Where the Next Crisis Starts doldrums gold falls fourth straight month

Source: Bloomberg

How High Will The Market Rally Before The Economic Collapse Begins? (GoldSeek.com)

What Happens When a Central Bank Loses Control? (ZeroHedge.com)

Treasury, Fed evade congressman’s gold questions so he presses them again, and more (Gata.org)

Ira Epstein’s Metals Video 7 31 2018 (GoldSeek.com)

Listen on SoundCloud , Blubrry & iTunesWatch on YouTube below

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Gold Prices (LBMA AM)

31 Jul: USD 1,219.20, GBP 926.71 & EUR 1,039.86 per ounce

30 Jul: USD 1,222.05, GBP 931.20 & EUR 1,045.95 per ounce

27 Jul: USD 1,219.15, GBP 931.06 & EUR 1,048.10 per ounce

26 Jul: USD 1,228.35, GBP 931.46 & EUR 1,049.13 per ounce

25 Jul: USD 1,230.55, GBP 935.09 & EUR 1,051.75 per ounce

24 Jul: USD 1,224.30, GBP 933.77 & EUR 1,047.63 per ounce

Silver Prices (LBMA)

31 Jul: USD 15.43, GBP 11.72 & EUR 13.15 per ounce

30 Jul: USD 15.49, GBP 11.81 & EUR 13.25 per ounce

27 Jul: USD 15.36, GBP 11.72 & EUR 13.20 per ounce

26 Jul: USD 15.54, GBP 11.79 & EUR 13.27 per ounce

25 Jul: USD 15.57, GBP 11.83 & EUR 13.31 per ounce

24 Jul: USD 15.51, GBP 11.81 & EUR 13.24 per ounce

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By |2018-08-02T04:14:56+00:00August 2nd, 2018|Blog|Comments Off on Here’s Where the Next Crisis Starts

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