Bad Economic Signs 2012
July 17, 2012 by Brandon Smith
In January, I wrote “Baltic Dry Index Signals Renewed Market Collapse,” an analysis of the record-breaking low hit by the Baltic Dry Index and its implications for the global economy; namely, that it signaled a steep decline in true demand around the world and that similar declines in the index’s past have almost always prophesied a crisis event in financial markets.
The mainstream media attempted to write off the implosion of the index as a fluke tied to the “overproductions of cargo ships” instead of a warning sign of deteriorating demand. The past six months have proven that assertion to be entirely false.
Manufacturing has tumbled in the United States, the EU and Asia simultaneously as orders drop back to the dismal levels last seen in 2008-2009 after the credit crisis first took hold, as reports Reuters, the Los Angeles Times, The Manufacturer and The Tokyo Times.
Despite the astonishing amount of manipulation that goes into our fiscal system by major banks, there are still a few fundamental rules to economics that never change. The bottom line is that demand around the world is derailing. Where demand goes, so goes the economy.
Economies of multiple nations move into a widely felt crisis event about eight to 12 months after the index crashes.
There is a strange delayed reaction between the initial exposure of weakness in the financial system and the public’s realization of the truth, much like Wile E. Coyote dashing off a cliff only to continue running in mid-air above the abyss below. It is a testament to the fact that, beyond the math, there is an undeniable power of psychology in our economy. The investment world naively believes it can fly, even with the weight of endless debt around its ankles; and for a very short time, that pure, delirious, oblivious belief sustains the markets. Eventually, though, gravity always triumphs over fantasy.
In May, I also discussed the impending disaster in the EU in light of elections that would obviously lead to a clash between proponents of austerity and proponents of endless stimulus spending. I suggested that this clash would trigger a possible remodeling or breakdown of the EU in the near future.
Today, I do not think that it would be outlandish to suggest (even to the casual market observer) that the EU has indeed been fractured, though the establishment still strives to maintain the façade.
Spain and Italy have both requested bailouts from the European Central Bank, finally exposing a problem that alternative analysts have warned about for years. While the mainstream media have bicycle-kicked the thoroughly dead horse of Greece, the much more detrimental problems of the rest of the EU have been ignored completely. Only now are investors beginning to understand that there is no such thing as a “Greek contagion,” and that the whole of Europe has been quietly suffering through a debt malaise that surpasses the Greek issue.
Central banks pushed the idea that Greece was the gangrenous toe of the EU; it had to be cured or amputated, or the infection would invade the entire body. But the truth is Europe has been host to a systemic disease from the very beginning. Greece is just a side note.
The U.K. has openly admitted that it has “returned” to recession. Mass credit downgrades have been issued by Standard & Poor’s and Moody’s Investors Service in primary EU economies, including France and Spain. Italy’s credit rating has been cut only two notches above junk status, and its bond sales have turned to Jell-O. Spain has declared austerity cuts that include the confiscation of employee pension funds. Does this sound like an economic body near “recovery,” as was the rhetoric spouted by the MSM a year ago, or does it sound like the EU has gone off the deep end?
In the meantime, China continues to court its global trading partners with bilateral trade agreements designed to remove the dollar as the world reserve currency, and recent events appear to be hastening this process. With American and European demand faltering, Chinese manufacturers are threatened with the same export breakdown they saw in 2008. It is only a matter of time before the BRIC nations — Brazil, Russia, India and China — and the Association of Southeast Asian Nations fully solidify their trade partnerships outside of the West and away from the dollar.
This year has been the most startling as far as financial news has been concerned. It has been vastly more startling to me than 2008. This time around, the corruption has been utterly blatant and disturbingly nonchalant. The central and corporate banking interests are no longer trying to hide the fact that the entire edifice is a cheap magic trick. When criminals are no longer concerned with hiding their crimes, it is time for the rest of us to start worrying. The current behavior of the establishment leads me to believe that a new phase in the crisis is about to arise.
Three recent events in particular should be noted by those who wish to gauge the acceleration of financial hazard around the world.
Multiple Central Banks Issuing Policy Changes Simultaneously
Only a week ago, the supposedly independent and sovereign central banks of China, the U.K. and the EU made multilateral policy changes including cutting interest rates to zero and reinstituting stimulus measures within the same hour of each other.
This is a disturbing and open admission by central banks that they not only dominate the economic structure of their host countries, but they do so in a coordinated fashion. In the past, central bankers have made a point to at least pretend that they do not work in tandem with each other and are not centralized around a global methodology or hierarchy. Today, they do not seem to mind if the public is aware of how they really operate. I feel that this is the start of an expedited trend toward full centralization of sovereign economies and that central banks will act soon as if single broad-spectrum global monetary policy measures and global economic governance are “commonplace.”
Trade Volume Collapsing
Standard & Poor’s 500 Index has generated the worst market volume in more than a decade. Small-market investors are fleeing away from stocks in droves, leaving only the big players to dominate the field.
This extreme lack of volume will facilitate a return to volatility, and we are about to see the same kind of massive stock spikes and drops we saw three years ago.
The Libor Scandal
Like the bankruptcy of Lehman Brothers that heralded the credit crisis, the London interbank offered rate (LIBOR) scandal has the potential to rock the pillars of the banking world. The average person needs to understand three things about LIBOR:
- The manipulation loans and credit swaps through the LIBOR interest rate mechanism allowed big banks to hide the true extent of their incredible debts. Some mainstream economists are actually calling this a “good thing.” According to them, the lie of LIBOR fooled investors into supporting the markets where they may not have otherwise if they had known the truth, thus the lie “averted Armageddon.” Frankly, this is idiotic. LIBOR has saved nothing, and the lack of transparency and honesty from corporate banks has only postponed an inevitable calamity that will be even worse now because it was allowed to continue on for years longer than it should have.
- Barclays and other institutions have claimed they had to use LIBOR fraud. Why? Because every other major bank used it. They had to lie in order to remain competitive. Even if you buy this rationalization, you have to acknowledge the deeper problem: Barclays essentially is pointing out that every major bank uses Libor to hide the fact that they are in dire straits. The system has openly confessed its own insolvency.
- Finally, regulators and central banks on both sides of the ocean, from the United States to the U.K., from the Federal Reserve to the Bank of England, knew about the LIBOR fraud being conducted by numerous banks as early as 2008 but kept their mouths shut. This shows not only that central banks have been complicit in financial criminal activities, but governments have played along as well. This fits right in with what I have stated for years: The economic collapse could not possibly be a “random” event. Its culmination requires the collusion of so many corporate and government entities that it would be foolish to call it anything other than conspiracy.
What comes next? According to the path I predicted back in January, the economy is near a climax event. Perhaps an announcement of a third round of quantitative easing, perhaps another bankruptcy by a “too big to fail” conglomerate or perhaps even the exit of certain countries from the EU will occur. Perhaps all of this and more will happen. The point is: Keep your eyes fixed on the financial sector as we move into fall and winter. There is a bleak harvest on the horizon.