The Bank for International Settlements is nothing if not obscure. As the central bankers’ bank, it seems little-more than a back-door, private club for monetary elites to rub shoulders. And it’s located in Switzerland which has always carried a reputation for financial secrecy.
Then it has this going for it – John Keynes of “Keynesian economic theory” opposed its dissolution back in the 1940s. His was the kind of thinking that has largely influenced central banks to hijack our economies with manipulative monetary policies! So you’d probably think I hate these guys.
But you’ve got to give credit where credit is due. The Bank for International Settlements is one of the few financial institutions that warned of dangers to the global financial system as early as 2003.
So by time the financial crisis struck, they’d been warning about it for years. Its former chief economist, William White, even dared to challenge former Fed Chair Alan Greenspan about cheap money policies that helped start the crisis!
Once again, this group is on the right side of history.
It just warned about a “gathering storm” in the global economy as central banks seem to be running out of options. They’ve seen right through this “recovery” and warned that unprecedented debt levels would put the world economy in worse shape than before the 2008 crash.
Because like with any addiction, there is a point where increased stimulus just doesn’t work anymore.
Just this week, China reported a 25.4% year-over-year decline in exports, despite continued strong economic stimulus from the government. Now, they simply pledge more stimulus like every central bank in the world.
Then there’s Japan, whose economy remains in a coma after the most aggressive QE of all developed nations. Four of the last seven quarters have been negative, including the fourth quarter of 2015.
Now, Japan has joined a group of European nations in announcing negative interest rates in January. And what do they have to show for it? Japan’s stocks went down after the announcement, and it’s hurting bank margins and profits that are already suffering.
But the failure of global stimulus clearly isn’t confined to these two countries.
Italy’s non-performing loans are rising and the country looks increasingly like the next Greece. Of course, Greece hasn’t exactly recovered from its debt defaults. Nor has Cyprus. Kicking the can down the road, hoping for better economies despite crushing debt and refusing to restructure it, just doesn’t work.
I predict Southern Europe is going to be in deep trouble again by the end of this year. In Italy, they’ll probably have to a resort to a Cyprus-style “bail in” where large depositors have to bail out the banks. That won’t be pretty.
Speaking of bad loans, it now looks like Deutsche Bank (DE:DBKGn) could wind up like the next Lehman Brothers. Last year, they suffered a $7 billion loss from bad loans – worse than in the Great Recession! Make money free, and banks will make bad loans. And investors will increasingly speculate.
Worse than that, Deutsche Bank has derivatives exposure up to $54.5 trillion (that’s not a typo). That’s higher than JPMorgan (NYSE:JPM) at $51.7 trillion. Overall, there are $550 trillion in highly leveraged derivatives globally.
That isn’t good for the major global banks. Most of them are trading well below book value – meaning, they’ve already been crushed!
And if you think the U.S. economy and stock market will continue to be the last man standing in a sea of sinking ships, think twice! S&P 500 earnings are down 18% from their September 2014 peak, and that makes real P/E (price/earnings) ratios over 23%, which can’t last.
I’ve also discussed how the Global Luxury Index has dropped 26% since its peak in January of 2014. Luxury brands are dropping like a rock, from Nordstrom (NYSE:JWN) to Tiffany & Co (NYSE:TIF). to Ferrari (NYSE:RACE). That’s because the affluent sector is finally beginning to slow in spending as my demographic indicators have predicted.
Then there’s also clear speculation in the housing market, as the dumb money – which always piles in at the last minute – has taken up flipping real estate. 180,000 houses were flipped in 2015, or 5.5% of sales, compared to 4.6% in 2014. That’s a big jump! And it’s a clear sign that housing is about to peak again.
This is just the tip of the iceberg. Signs of trouble are popping up all over as central banks are desperate to reverse the course.
The UK is threatening a “Brexit.” Mass migration from Syria into Europe is still a problem without a solution. Despite a brief reprieve, oil will continue to crash. And developed countries all over the world are marching over a demographic cliff.
This is not the time to be complacent. Now is the time to hunker down and protect yourself from the worst financial devastation of your lifetime. And even the central banks’ bankers see it.