Legend Warns Global Stock Market Rout To End In Full-Blown Panic!

On the heels of the Dow plunging more than 500 at one point in the trading day and global markets continuing to get pummeled, today a legend who warned just 8 days ago that the carnage in global markets would continue told King World News that investors should expect to see an acceleration of the global stock market rout that will end in panic.

Eric King:  “Bill, people are wondering if we could see a rebound next week?”

Bill Fleckenstein:  “Of course there can always be a rebound but I don’t think it will carry very far — in the same way that none of the little rally attempts have carried very far that we’ve had in the past eight or nine sessions…

Global Stock Market Rout To End In Panic

Fleckenstein continues:  “So I don’t think the market can rally very well at all and I think there is a much better chance that we will see an acceleration to the downside.

They managed to pull the market back over the August/September lows in the S&P but some of the other indices have already broken through those lows.  So I think there is a better chance of an acceleration of the selling.  And if there is any kind of a bounce I don’t think it will be very meaningful.  I don’t think that the stock market can have any kind of a meaningful bounce until we either get real panic and/or the Fed rides to the rescue.”

Fleckenstein had warned King World News just 8 days ago that there would be more carnage in global markets (see below).

Eric King:  “The fantasy is coming to an end but this day had to come, right?”

Bill Fleckenstein:  “You’re right, it had to come to an end.  One of the hardest things for people who aren’t investment professionals and even for many investment professionals to understand is how something (an investment strategy) that is so clearly destined to work can sort of lie there and not respond and not do what you think it ought to do for as long as this insanity has gone on.

What I’m particularly referring to there is how well and how long the stock market managed to levitate on the back of not much more than outright monetization.

The Gigantic Suspension Of Disbelief

The first couple of years after 2008 there was a snapback after they stopped the carnage with all the programs and government bailouts and money printing.  But from 2011 on, when QE3 started, that’s when we really had a gigantic suspension of disbelief.  That’s when the vast majority of people really concluded, ‘Gee, these guys really know what they are doing and it’s going to work this time.’  They didn’t stop to think that it was these very same policies that got us into this mess and all we do is keep pursuing the same strategy in a bigger and bolder fashion.

But nonetheless, it’s taken quite some time for the ultimate failure of this fantasy to start to unfold.  Now, it’s not the 25 basis points that is breaking the market.  They stopped QE 14 months ago and the market kind of went sideways.  So the top took about a year to produce on the major averages, but beneath the surface lots of stocks have been weak.

This Has Been A Long Time Coming…
The economic data has been pretty damn poor considering rates have been zero for 7 years and we monetized $3 trillion here in the United States and the same thing is going on in most of the G7 countries.  So the economic recovery has been nothing and this has been a long time coming.

But China Is Being Blamed For The Panic

You couldn’t predict when the market break was going to occur but we kind of got some hints of that last year and the way the market has broken in January.  Now, people here want to blame this market break on the North Korean hydrogen bomb or the Chinese devaluation and their stock market plunge.  But China’s got a misallocated capital and debt problem — that’s we have and that’s what the whole world has.  China has a different variation than we do and in some ways they are better than us — in some ways they are worse than us.

This isn’t about China.  China is getting blamed because it’s the spark, right?  But meanwhile you see that credit spreads are widening, junk bonds have collapsed, the oil patch is a wreck.  What do you think is happening to all these insurance companies and pension plans that reached for yield in different credits?  And what about the poor bastards from the public who felt they had no choice and felt they had to reach for yield and buy stocks?

The bottom line is that this misallocation of capital has gone on for so long that people look at individuals like Jim Grant, Fred Hickey, or even me, and people would laugh at us.  I’ve gotten quite a volume of hate mail where people say, ‘You’re an idiot.  Why do you keep saying this stuff?’  Well, you don’t know how long it will take for the chickens to come home to roost, you just know they are going to have to.

There Is No Saving This Market – QE4 Is Coming

So we’re at that moment now, and it’s liable to get quite a bit worse because there is no saving the market.  The numbers have been bad, the speculation has been high, and the world economy is getting worse, but the Fed can’t come to the rescue until global stock markets break and break hard.  Then we’ll have QE4 and in that phase we will have to see how well the Fed is believed, what they do, and what we think the ramifications will have to be at that time.

The Carnage Will Play Out Faster Than People Think

There’s no guarantee that people are going to believe the central banks because in 2008 they didn’t believe them all year, and in 2001 – 2002 they didn’t believe them.  Right now they still seem to have total confidence.  So the stock market has been an accident waiting to happen and now the accident is happening, and the carnage is going to play out much quicker than people think.

Having said that, this is going to be a two-step trade, right?  The first is going to be the big break in the stock market.  Then the Fed is going to do what it’s going to do, and then you’ve got to see what you want to do next.

As It Pertains To Gold And Silver…

As it pertains to the precious metals (phase two of the trade), they have been hated and avoided because nobody thinks they need them when the central banks are in control.  So they are basically the flip-side of the confidence trade that’s driven stocks to the moon.

It’s no coincidence that as the market has broken badly at a time of the year when it’s not supposed to, suddenly gold has started to move higher.  And what will happen is gold will start to go up and it will finally catch a bid and start behaving better.

Gold will start to trade higher once again on news that used to make it surge and people will come out of the woodwork and try to own it and there will be a gigantic scramble.  Has that process started?  Most likely it has.  It’s also worth noting that some of the miners are finally acting better.

So we are going to see both sides of the trade start to play out at the same time, but they are all different expressions of the same thing.  Gold is a way for people to say, ‘These policies are crazy.  I know what central banks are going to do and I can own this  in order to protect my capital and make money.  The stock market only went up because people believed in these idiots and that trade and that belief are now coming to an end.’

So people can express their doubt in what central banks can do by being short stocks or being long gold.  I’ve currently got both sides of that trade on.  Anyway, I think that’s the longest answer I’ve given to a short question in my career.”

THE G-30 GROUP OF CENTRAL BANKERS WARN THEY CAN “NO LONGER SAVE THE WORLD”

“Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on"

by ZERO HEDGE

In a detailed report by the Group of Thirty, central bankers warned that ZIRP and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. As Reuters reports, the flow of easy money has inflated asset prices like stocks and housing in many countries but have failed to stimulate economic growth; and with growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies. “Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on,” sending a message of “you’re on your own” to governments around the world.

The G30 begins their report rather pointedly…

Central banks worked alongside governments to address the unfolding crises during 2007–09, and their actions were a necessary and appropriate crisis management response. But central bank policies alone should not be expected to deliver sustainable economic growth. Such policies must be complemented by other policy measures implemented by governments.
At present, much remains to be done by governments, parliaments, public authorities, and the private sector to tackle policy, economic, and structural weaknesses that originate outside the control or influence of central banks. In order to contribute to sustainable economic growth, the report presumes that all other actors fulfill their responsibilities.

Roughly translated… central bankers are saying “you are now on your own.”

Central banks alone cannot be relied upon to deliver all the policies necessary to achieve macroeconomic goals. Governments must also act and use the policy-making space provided by conventional and unconventional monetary policy measures. Failure to do so would be a serious error and would risk setting the stage for further economic disturbances and imbalances in the future.

And the “need to exit” appears to be front and center for The G30 bankers…

There seems to be an almost unanimous view that monetary policy in the major AMEs will have to be normalized at some point. However, even if views differ about what precisely normal might mean, presumed dates for exit also differ due to different countries being at different points in the business cycle. There is also agreement that a danger exists of exiting too soon, thus aborting a nascent recovery, and also of exiting too late, thus encouraging some combination of higher inflation and other imbalances that could also weigh on recovery.

However, where serious disagreement arises is when it comes to discussing which danger is the greater. Those worried about too early an exit point to the example of the Federal Reserve in 1937. In contrast, those worried about too late an exit point to the inflation that followed the Fed-Treasury Accord in the late 1940s and to the inflationary surge in the early part of the 1970s.

In recent years, distortions in financial markets and the effects on EMEs have also moved much higher up the list of concerns of this latter group.

While reasonable people can disagree on such objective issues, a number of political economy factors seem to make exiting too late the more likely outcome.

First, there is great uncertainty concerning the consequences of tightening.

Second, in some cases it will in fact be clear that tightening will reveal some debts as being unserviceable, and some financial institutions as undercapitalized. Central banks will then be asked to wait until these other sectors have become more robust, which could well take a long time. The danger is that debt levels will rise with the passage of time, strengthening the arguments for still more forbearance—the debt trap discussed above.

Third, debtors will obviously resist the tightening of policy.Since governments are struggling to manage record-high sovereign debt levels, they too will be tempted to put pressure on their central banks to push back tightening as far as possible.

But delaying an ‘exit’ has costs…

Wicksell, Hayek, Koo, Minsky, and others have, over many decades, identified a variety of theoretical concerns arising from the excessive expansion of money and credit during booms. Rising inflation, investment misallocations, balance sheet overhangs, banking sector instability, and volatile international capital flows were all highlighted as threats to future economic stability. Moreover, by 2007 it was evident that these were matters of practical concern as well.

The policies followed by the major central banks since 2008, while contributing to stability in the short run and conceivably avoiding a second great depression, might also have aggravated threats to future stability. These policies have had undesirable macroeconomic side effects both in the AMEs themselves and in EMEs. Admittedly, in the latter case, the policy responses of the EMEs themselves to inflows of foreign capital have also played a contributing role.

“Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop,” the G30 report said.

With the consequences of an exit from easy money so unpredictable, the G30 said the risk was of exiting too late for fear of sparking another crisis.

And so, while ‘exit’ is seen as urgent, it is unlikely…

“Faced with uncertainty, the natural default position is the status quo,” the G30 said.
In other words more of the same… and while  The G30 are careful to note the glass-half-full persepctive of the future, their “endgame” scenario of continuing weak (or even weaker) growth  is troubling…

Should the global economy stay weak, or indeed should it weaken again as financial markets overshoot, we could face the possibility of debt deflation. The almost 40 percent decline in commodity prices since mid-2014 could be a precursor of such a slowdown. In this environment, risk-free rates would stay very low and there would be no exit for monetary policy.
Nevertheless, the current prices of many other financial assets would be revealed as excessive. Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop. In this scenario, for all the political economy arguments presented above, attempts might nevertheless be made to rely on monetary policy to restore demand. However, just as past efforts have failed to gain traction, renewed efforts would likely have a similar outcome. This would be particularly likely if the overhang of debt had worsened in the interval as has indeed happened over the last few years.

In such circumstances, governments would also be faced with chronic revenue shortfalls. This could lead to a worst-case situation where deflation would actually sow the seeds for an uncontrolled inflationary outcome. Governments with both large deficits and large debts must borrow to survive, but worries about debt accumulation might imply an increasing reluctance on the part of the private sector to lend to them at sustainable rates. In that case, recourse to the central bank is inevitable, and hyperinflation often the final result.

And the side effects of central bank policies during the crisis is still more worrying…

Central banks see their actions as buying time for governments to address problems that are essentially real, not monetary. However, governments have thus far not reacted as necessary. Recognizing the political difficulties of addressing these underlying problems, they prefer to believe that central bank actions will be sufficient to restore strong, stable, and balanced growth. Thus, they are strongly tempted to forebear in the pursuit of policies that might be more effective. The longer this standoff persists, the more dangerous it becomes as the undesirable side effects of current central bank policies continue to cumulate.

Which is exactly what Macquarie hinted at… the academics will be the first to note that policy escalation may be required (helicopter money).. and then policy-makers have the ivory tower to lean on when they unleash it.

Finally, The G30 admits – it’s all an illusion…

Central bank policies since the outbreak of the crisis have made a crucial contribution to restoring the appearance of financial stability.

Nevertheless, for this appearance to become a reality, underlying problems rooted in very high debt levels must be resolved if global growth is to be more sustainably restored.

So, the bottom line, reading between the lines of this 80-page report, is that

Central Bankers know their policies have done (and will do) nothing to promote real economic improvements, are putting pressure on governments to do something (anything), admit that is unlikely (because the central bankers have always saved them before), expect extreme policy measures to become the status quo (despite admitting their failure) for fear of any asset weakness, and suggest more measures might be needed (which have led to hyperinflation in the past).

But apart from that – everything is awesome!!

Turk - Frightening Situation, The World Is On A Knife’s Edge

With continued volatility in global markets, today King World News interviewed James Turk out of Europe. Turk told KWN, “The world is on a knife’s edge.”  He also stated, “Monetary history shows that currencies under political control are always destroyed -- always.  And the dire result is economic chaos.”  Here is what Turk had to say about what he termed the, “frightening situation”:  “Europe had its big meeting last week, and one conclusion is clear, Eric, Europe still has to learn that bailouts are not a solution.  When a government or a bank, or any borrower for that matter, has too much debt -- more debt than they can handle -- adding more debt just worsens the problem.  This ultimately has the effect of making the inevitable bust that much more difficult when it eventually arrives.”

“There are other serious problems here as well.  For example, there are several countries in Europe, of which Germany is the largest, that want to pursue a monetary policy in which the euro maintains its purchasing power.  They want to make sure the currency is not debased by inflation or other bad monetary steps, such as the ECB purchasing debt/bonds of countries, to enable those countries to fund their operating expenses.

In other words, this group of countries wants the euro to be managed like the deutsche mark was managed, which, after all, is what the rules of the eurozone provide.  But these rules are being broken left and right, with the result being that the euro is just like all of the other fiat currencies around the world -- completely at the mercy of politicians, and that is a frightening situation....

“Monetary history shows that currencies under political control are always destroyed -- always.  And the dire result is economic chaos, which is then followed by political chaos and the opportunity for a demagogue to rise to power by promising order.  Given its history, is it any wonder that thinking Europeans do not want to go down that path?

But it is clear that the central planners are now in charge in Europe, Eric. It is a dangerous road for Europe to take.  I keep going back to one of my favorite Margaret Thatcher quotes:  ‘The problem with socialism is that you eventually run out of other people's money.’  Europe ran out of money long ago.  Sadly, this reality is still being ignored in Europe, and for that matter, in every socialist country, which today is just about everywhere in the world.”

Turk also added: “The precious metal markets feel just like the summer of 2010.  In fact, this weekend I spent some time going through the KWN archives and listening to my interviews from that time period (2010).  It was eery, because just about everything I was saying back then also applies to our present situation, particularly sentiment being at rock bottom.

We had big rallies in both gold and silver starting in the summer of 2010.  These are the rallies that took gold over $1900 and silver to $50.  Last week's big move should mean that massive rallies are starting again, and because the banking and economic situation is so much worse today, on this new rally, gold and silver are going to break their old highs.

The world is on a knife’s edge, Eric.  The geopolitical situation is worrying.  Economic activity around the world is rapidly deteriorating, and this is having the effect of putting more and more people out of work.  It is noteworthy that the eurozone jobless rate, in May, hit a record-high of 11.1%.  If we then factor bank runs into this toxic brew, the opportunity for the fear event I have been worrying about seems all the more likely.

As that fear event begins to manifest itself, physical gold and silver will be your best safe-haven.  It is extremely important that KWN readers, around the world, position themselves into the metals ahead of the coming chaos.”

World Bank Urges Developing Countries to Brace for Long Term Volatility

The World Bank is urging developing countries to brace for the possibility of more economic turmoil in Europe. In its Global Economic Prospects Report, the bank advises emerging market economies to strengthen fiscal positions and develop medium-term strategies to protect their economies.

Emerging market economies may have weathered the 2008 financial crisis better than more advanced countries, but the World Bank warns -- it could happen again.

Senior bank economist Andrew Burns says anything is possible right now in Europe.

"Although we don't see it as a baseline scenario, it certainly is possible that the situation in high-income Europe deteriorates significantly. And if it did, that would have very serious impacts for developing countries," Burns said.

With borrowing costs still rising in Spain and Italy, and an upcoming Greek referendum that could forever alter the Eurozone -- Burns predicts a bumpy ride.

But even with the most recent bailout in Spain - economist Peter Morici says the problems facing Greece and Spain are very different.

"Spain's problem is one of a banking crisis. Greece's problem is one of a government crisis," Morici said.

Either way, Morici says the crisis has the potential to plunge the world into another recession, reducing global trade and exports dramatically.

The World Bank says developing nations need to focus on enhancing domestic productivity and boosting infrastructure development -- while reducing debt.

"What we suggest is that countries take the time now to try and replenish some of those cushions, some of those buffers they used in 2008 - 2009 so successfully to recover from that crisis. Try and rebuild those now by bringing policy to a more neutral stance, reducing fiscal deficits so that they have the ammunition to respond if a crisis, a second crisis, announces itself," Burns said.

Despite an over-abundance of caution, Burns is optimistic about a full-fledged global recovery - one led by emerging economies in Central Asia, the Middle East and Sub-Saharan Africa.

Americans’ wealth plummeted 40 percent from 2007 to 2010, Federal Reserve says

By Ylan Q. Mui

The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with middle-class families bearing the brunt of the decline.

The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were back in 1992.

The data represent one of the most detailed looks to date of how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross.

Those findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. If the recession set Americans back 20 years, economists say, the road forward is sure to be a long one. And so far, the country has only seen a halting recovery.

“It’s hard to overstate how serious the collapse in the economy was,” said Mark Zandi, chief economist for Moody’s Analytics. “We were in free fall.”

The recession caused the greatest upheaval among the middle class. Only roughly half of middle-class Americans remained on the same economic rung during the downturn, the Fed found. Their median net worth — the value of assets such as homes, automobiles and stocks minus any debt — suffered the biggest drops. By contrast, the wealthiest families’ median net worth rose slightly.

Americans have tried to rebalance the family budget but have found it difficult to reverse the damage.
The survey showed that fewer families are carrying credit card balances, and those who do have less debt. The median balance dropped 16 percent, from $3,100 in 2007 to $2,600 in 2010. The Fed also found that the percentage of Americans who have no debt rose to a quarter of families.

But that progress was undermined by other factors, leaving the median level of family debt unchanged. The report said more families reported taking out education loans. Nearly 11 percent said they were at least 60 days late paying a bill, up from 7 percent in 2007. And the percentage of families saddled with debts greater than 40 percent of their income stayed the same.

Not only were Americans still facing significant debts, but they were making less money. Median income fell nearly 8 percent to $45,800 in 2010. The median value of stock-market-based retirement accounts declined 7 percent to $44,000.

But it was the implosion of the housing market that inflicted much of the pain. The value of Americans’ stake in their homes fell by 42 percent between 2007 and 2010 to $55,000, according to the Fed.

The poorest families suffered the biggest loss of wealth from the drop in real estate prices. But middle-class Americans rely on housing for a larger part of their net worth. For some, it accounts for just more than half of their assets. That means every step downward is felt more acutely.

Rakesh Kochhar, associate director of research at the Pew Hispanic Center, calls this phenomenon the “reverse wealth effect.” As consumers watched the value of their homes rise during the boom, they felt more confident spending money, even if they did not actually cash in on the gains. Now, the moribund housing market has made many Americans wary of spending, even if their losses are just on paper.

According to the Fed survey, that paper wealth — or what is officially called unrealized capital gains — shrunk 11 percentage points to about a quarter of American’s assets.

The findings track research Kochhar released last year that showed a dramatic drop in household wealth during the recession, particularly among minorities. That study found record-high disparities between whites’ wealth and that of blacks and Hispanics.

“It was turning the clock back quite a bit,” Kochhar said.

The Fed’s survey is conducted every three years. Although there have been some signs that the recovery has picked up — housing prices have begun to stabilize and unemployment has fallen — Fed economists said those improvements largely do not change the survey results.

“Recovery from the so-called Great Recession has also been particularly slow,” the report said.