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Are We in Another Credit Bubble? And Is It Different than Before?

Are We in Another Credit Bubble? And Is It Different than Before?

Part 1 of our FREE report on the recent build-up in credit includes a chart of U.S. corporate debt issuance since 1998 you don't want to miss

By Elliott Wave International

May 22, 2015

Whatever your politics, creed or nationality -- we can all agree that a huge catalyst for the 2008-9 global financial meltdown was the universal binge of bad credit.

A huge part of that bad-debt pile were the "don't-ask-don't-tell" high-yield bonds -- a.k.a. junk bonds -- which were used to fund a lot of things, including corporate takeovers.

You might still remember how, at the time, few saw any reason to question the upside potential of these lower-grade yet higher-yielding loan instruments. Here, the following articles from 2007 recapture the scene:

"We're in the thick of a period when debt is a good thing rather than a bad thing, at least in the corporate world. And the riskier the debt, the more investors want it. There is a self-sustaining cycle at work here. The global economy has been so strong in recent years that few companies, even those loaded with debt, have had trouble paying their obligations." (LA TIMES)

"We say it isn't politically correct to call them junk bonds anymore. There's not a lot of downside risk because money managers burned in the dotcom era learned their less and portfolios aren't as risky as 10 years ago." (Associated Press)

The ensuing credit implosion systematically restored the political correctness of the word "junk," as high-yielding bonds plummeted in the worst debt crisis since the Great Depression.

Which brings us to the trillion-dollar question: What about now? Or, expanded in a handy bullet-point format, the same question may be phrased like this:

  • Has the world's leading economy learned its lesson?
  • Is the thirst for yield less than the need for caution?
  • Is the credit health of the United States different than before?
  • Is it different this time?

Well, the following chart from Elliott Wave International's May 2015 Elliott Wave Financial Forecast shows you that -- yes! The credit bubble underway in the United States today is different than the one that triggered the 2008-9 crisis.

It's bigger.

"While the total value of investment-grade bond issuance surpassed $1 trillion in each of the last three years, the junk bond total more than doubled from the prior high in 2006 to more than $300 billion.

"'Back in 2006/2007, 28% of debt being issued was B-rated,' says hedge-fund manager Stanley Druckenmiller. Today 71% of the debt that's been issued in the last two years is B-rated. So, not only have we issued a lot more debt, we're doing so with much [lower standards].

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"The quantity and quality of bond issuance over the last three years signals the potential for a credit washout that is even more severe than that of 2008/2009." Our new, May Financial Forecast goes on to explain why it is so with an equally shocking chart of U.S. consumer credit since 1980.

You can see that second chart in part 1 of our brand-new, 3-part report titled

What You Need to Know About Deflation

Credit Insanity: The Biggest Debt Bomb in History and the Fuse is Lit

Created for paying subscribers and now accessible to the public for the first time, this eye-opening new report reveals the precarious consumer, corporate and government debt situation around the world. Read this three-part report now and hear directly from the top analyst at the world's largest financial forecasting firm about key research, statistics and concerns about U.S. and global debt, as well as its imminent threats to investors.

Get your free report now »

 

This article was syndicated by Elliott Wave International and was originally published under the headline Are We in Another Credit Bubble? And Is It Different than Before?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter

Founder, Elliot Wave International

 

 

 

 

 

 

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One of Europe's Latest Debt Nightmares

 

One of Europe's Latest Debt Nightmares

 

By Elliott Wave International

May 21, 2015

Elliott Wave International's European markets expert Brian Whitmer often cautions his subscribers to beware of the pitfalls that will accompany the developing deflation in Europe.

On May 20-27, Brian is hosting a free 5-video event at elliottwave.com: Investing in Europe: 5 Critical Insights.

"Europe seems to be leading the way on important global trends, so even if you don't invest in Europe, knowing about these trends in advance can help you determine your investment strategy." -- Brian Whitmer

Read some of Brian's recent analysis of Europe's latest debt nightmares from the April issue of his European Financial Forecast, and then register here to join his free 5-video event.


Excerpted from the April 2015 European Financial Forecast (pub date: March 27.)

One big clue to the size of the oncoming debt deflation is the central bank's ongoing policy shift away from bail-outs -- where taxpayers shoulder the losses at a failed bank -- and toward so-called bail-ins, where the losses are dumped onto bondholders. In February 2015, we commented that "the days of unconditional financial rescues are clearly over," and it took almost no time for this forecast to become another hard-hitting reality. Indeed, "Europe's latest debt nightmare" (UK Telegraph, 3/7/15) quickly thumped bondholders in Austria, as its Financial Market Authority refused to cover €10.2 billion in bond guarantees at Heta Asset Resolution (Heta). Heta, itself, was the so-called bad bank created in 2009 to absorb the soured assets of another failed lender, Hypo Alpe Adria. It's the first major banking failure under Europe's new Bank Recovery and Resolution Directive, and it displays nearly every pitfall that we've spent months cautioning subscribers to avoid. Here, for instance, was our September 2014 admonition to senior debtholders at Banco Espirito Santo, who only narrowly avoided losses when the Portuguese conglomerate went belly up (emphasis added):

The terms of the rescue call for BES's junior bondholders to share in the losses with stockholders.... For now, the rescue won't affect senior bondholders or bank depositors, but, like before, this arrangement should change at some point in the near future.

--European Financial Forecast, September 2014

In Austria's case, the near future proved to be closer than we thought, as sources in Vienna tell the Telegraph that "even senior bondholders are likely to face a 50% write-down." The top panel on the chart depicts a 50% nosedive in Heta's 4-3/8% note, expiring in January 2017. These bondholders have become the "first victims of the eurozone's tough new 'bail-in' rules," according to the Telegraph, but they won't be the last. The bottom panel on the chart depicts the long-term decline in Austria's ATX index, and Bloomberg reports that Europe is "awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off."

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In fact, financial ripples from the Heta debacle started spreading immediately. On March 16, Germany's association of private banks stepped in to rescue Duesseldorfer Hypothekenbank AG, a real estate lender with €348 million in exposure to Heta. Property lender NordLB reported €380 million in exposure, while BayernLB, the German bank with the largest known exposure, reported €2.35 billion in unsecured credit lines to Heta. Germany's Commerzbank (€400 million in Heta bonds) is considering legal action against Austria's decision, but the potential lawsuit provides little comfort for investors sitting on major losses now.

A Simple Fight Over Money
Austria's debt write-down uncovered more than the weak assets that pervade the books of European banks; it exposed the political rifts that divide the country itself. Indeed, most of Hypo's original bonds were underwritten by the southern Austrian region of Carinthia. When Fitch ratings stripped Austria of its AAA credit rating in early March, finance minister Jorg Schelling took to public radio demanding that Carinthia pay its full share. The following day, Carinthia's premier Peter Kaiser shot back. "Carinthia cannot pay," said Kaiser, observing that the €10.2 billion in debt guarantees amounted to more than five times the region's annual budget. (Deutsche Welle, 3/4/15)

It's true. And with nearly €1 billion in Heta bonds coming due, Austria's Der Standard anticipates that a "flood of lawsuits" will inundate the Austrian courts. The problem is that these floodwaters will keep rising in an environment of sustained deflation. In February 2015, the EU commission revealed that national governments are backstopping more than €1.2 trillion of various forms of debt. At €113 billion (35% of GDP), Austria is one of the biggest users of state guarantees. But Ireland, too, has contingent liabilities that amount to 32% of its economy, and Germany is backstopping debt that equals 18% of national output. Last month, GMP warned about the dangerous interdependence between European banks and their respective sovereign governments. The hazard is fast getting real now.


Investing in Europe Free Event

FREE Event, May 20-27 at elliottwave.com:
"Investing in Europe: 5 Critical Insights to Boost Your Portfolio Now"

Europe is flashing signals which point to significant changes ahead. If you know how to read these signals, then you can get out of the way of big threats -- and also, capitalize on new opportunities!

Join host Brian Whitmer for his free event (now in progress) and see five critical pieces of evidence which tell you what to expect from European markets, economies and politics.

Register now -- it's free!

This article was syndicated by Elliott Wave International and was originally published under the headline One of Europe's Latest Debt Nightmares. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter
Founder, Elliot Wave International

 

 

 

 

 

 

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Why the IRS Seized All the Money from a Country Store

 

Why the IRS Seized All the Money from a Country Store

Another shot fired in the "War on Cash"

By Elliott Wave International

May 15, 2015

Editor's note: You'll find the text version of the story below the video.

Learn how your hard-earned money may be in jeopardy. Read War on Cash
Follow this link to download your free report »

Lyndon McLellan owns the L&M Convenience Mart in rural North Carolina. A few months ago, the Internal Revenue Service went to McLellan's bank and seized all the cash in his store's account.

Why?

McLellan had violated a "structuring" law by making cash deposits of under $10,000. Structuring laws are supposed to catch drug traffickers and money launderers. But small business owners can also unknowingly run afoul of these laws.

Last July, a swarm of officers from North Carolina's Alcohol and Law Enforcement, the local police and the FBI descended on McLellan's place of business.

The agents told the small business owner something that shook him to his core: The Internal Revenue Service had seized all of the money in L&M's bank account: $107,702.66.

"'Are you telling me you took my money?'" McLellan recalled asking the agents. "I didn't understand what was going on. They dropped a bomb on me. I was lost for five to 10 minutes. I can't believe that y'all guys can walk in here and tell me y'all took every bit of my money out of the bank."

The Daily Signal, May 11

McLellan is still fighting to get his money back.

"In 2005, the Internal Revenue Service made just 114 structuring seizures. By 2012, that number had risen to 639."

This story shows how the government can financially upend the lives of citizens.

Consider this excerpt from the March Elliott Wave Theorist:

The most vulnerable money is sitting in bank accounts. Depositors in Cyprus banks found that out in 2013, when the government seized a large portion of uninsured deposits to pay its debts to the EU. ...

... I have long advocated holding outright cash notes, which are already preserving value better than commodities and negative-interest-rate bonds. But we cannot depend upon government to act fairly. If in a future panic central banks opt to recall cash, even cash-holders will be doomed. All authorities need do is demand that people turn in their cash for new notes worth 1/10 as much. In 1933, the U.S. government confiscated gold because that was the money of the day. Now, dollar deposits and cash notes are the money of the day, and they are even easier to seize.

We've been updating subscribers on the "War on Cash."

  • JPMorgan Chase Bans Storage of Cash in its Safety Deposit Boxes (InfoWars)
  • Citi Economist Says It Might Be Time to Abolish Cash (Bloomberg)
  • Sweden moving towards cashless economy (CBSNews)
  • Large U.S. bank bans wire transfers, limits cash withdrawals (TheCrux)

Giant financial institutions and the government are now waging a large-scale war on cash.

This is the time to get the financial insights you need to protect your hard-earned savings.


War on Cash

Read our Free Report: War on Cash

Big government is conspiring with big banks to wage a secret war on cash by limiting and even outlawing the use of physical currency. This development may have a devastating impact on your hard-earned savings unless you prepare right now.

Get your free report now »

This article was syndicated by Elliott Wave International and was originally published under the headline Why the IRS Seized All the Money from a Country Store. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter
Founder, Elliot Wave International

 

 

 

 

 

 

Continue reading
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Big Volatility Shakes Bond Investors

 

Big Volatility Shakes Bond Investors

Is the debt bomb about to go off?

By Elliott Wave International

May 12, 2015

Editor's note: You'll find the text version of the story below the video.

 

The yields on U.S. Treasuries and European sovereign debt have risen sharply in a relative short time.

Bond prices trend inversely to yields -- which means debt portfolios have suffered substantial losses.

From mid-April through May 6, yield on German 10-year bunds spiked 47 basis points. Yields on 10-year U.S. Treasuries jumped 29 basis points in just the past week.

Volatility in the bond market continued on May 7. In just a few hours, the yield on the 10-year bund jumped 21 basis points before pulling back. Bear in mind that sovereign bond yields rarely move more than a fraction of one percent in a day.

Long-term bonds have been hit particularly hard. The yield on 30-year U.S. Treasuries topped 3% for the first time this year.

"We've been hurt," said [an] investment manager at Aberdeen Asset Management. "The movements of recent days have been extremely unusual ... ." (Financial Times, May 7)

German government debt is regarded as a benchmark for European assets.

Take a look at this chart of Euro-Bund futures from our May 6 Financial Forecast Short Term Update:

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Similar to the credit crisis in 2007-2009, the rout is starting in the bond market, where the pace of evaporating liquidity is quickening. Bids are pulled, prices crack, yields rise and it leaks out toward other asset classes. The turn in bonds in the U.S. and Europe is a sign that the "debt bomb" ... is about to go boom.

The April Elliott Wave Financial Forecast warned subscribers about the insanity that pervades the world's bond markets. Take a look at this chart and commentary:

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Many bonds that are perceived to be the safest credit risks guarantee investors a loss. To our knowledge this has never occurred on such a widespread basis in the history of finance. Yields on nearly a third of the euro area's $6 trillion of government bonds are below zero, which means that bond buyers are guaranteed to lose money if they buy these bonds and hold them to maturity.

The risk of widespread defaults also lurks in the world's credit markets.

Here's what well-known hedge fund manager Stanley Drunkenmiller recently said:

Back in 2006/2007, 28% of debt being issued was B-rated. Today 71% of the debt that's been issued in the last two years is B-rated. So, not only have we issued a lot more debt, we're doing so with much [lower standards].

All told, the world's credit markets are on very unstable ground. Expect that ground to get even shakier in the months ahead.


What You Need to Know About Deflation

Credit Insanity: The Biggest Debt Bomb in History and the Fuse is Lit

Created for paying subscribers and now accessible to the public for the first time, this eye-opening new report reveals the precarious consumer, corporate and government debt situation around the world. Read this three-part report now and hear directly from the top analyst at the world's largest financial forecasting firm about key research, statistics and concerns about U.S. and global debt, as well as its imminent threats to investors. 

Get your free report now »

This article was syndicated by Elliott Wave International and was originally published under the headline Big Volatility Shakes Bond Investors. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

Robert Prechter
Founder, Elliot Wave International

 

 

 

 

 

 

Continue reading
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Glinda the Good" Deflation Isn't Looking So... Good

 

Glinda the Good" Deflation Isn't Looking So... Good

Cold weather, falling wages, bizarre fluke? The real reason consumers aren't spending is... defensive, deflationary psychology

By Elliott Wave International

May 07, 2015

Editor's note: You'll find the text version of the story below the video.

Learn What You Need to Know NOW About Deflation
 Get Your Free Report Now »

When 2015 began, the mainstream financial experts were certain of one thing: Even if the United States economy were sliding into deflation (which, they said, was open to discussion) that particular kind of Glinda the Good deflation, characterized by plunging energy and food prices, was going to be a boon for consumer spending:

"Good deflation a tax cut for working families," affirmed a February 2 Huffington Post. "Cheaper gas means more flying, more driving, more hotel occupancy, more use of restaurants and leisure facilities. In short, deflation driven by the rapid decline in oil prices is good news for America."

So, what's happened since?

Well, according to an April 16 article in the Chicago Tribune, the sharpest annual decline in oil prices since 2008 somehow translated into not more, but less non-essential consumer spending. In March, U.S. retail sales clocked their third straight monthly decline -- which doesn't make sense, said the Tribune:

"This is puzzling. Why would consumers spend less when the economy picks up steam, and why haven't consumers gone shopping with the 1% extra income that collapsing oil prices have handed them?"

The piece then offers a few possible reasons -- such as cold weather, stagnant wages, business cuts, and so on. But none of them feel adequate, leading back to the initial shock:

"Consumers have defied expectations. Investors who anticipated purchasing-power gains would lead to greater consumer spending must be sadly disappointed."

We absolutely agree. Consumers have defied expectations -- those of the mainstream experts, that is. But they have completely complied with our long-standing expectations of a shift toward thrift, as laid out in chapter 9 of Bob Prechter's business best-seller Conquer the Crash.

There, Prechter explained how, in times of deflation, the trend toward non-spending is not a rational decision; it's an emotional one:

"The psychological aspect of deflation cannot be overstated. When the social mood trend changes from optimism to pessimism... consumers change their primary orientation from expansion to conservation. As consumers become more conservative, they save more and spend less. These behaviors reduce the 'velocity' of money, i.e. the speed with which it circulates to make purchases, thus putting downside pressure on prices."

Then, in November 2014 Elliott Wave Financial Forecast, we showed definitive proof that deflation -- not the "good" kind -- was set to arrive in the United States:

In other words, the conservatism called for in Conquer the Crash arrived in 2006-2008, and it continues to restrain consumers and corporations.

For years now, the Fed along with most economists have anticipated the imminent return of inflation, but it continues stubbornly subdued. This long-term chart of the CPI shows a succession of lower highs since the early 1980s, as inflation turned into disinflation, which is on the cusp of leading to outright deflation. Some argue that the CPI is rigged to show milder levels of inflation, but the bottom graph shows the same steady move toward the zero line in the Personal Consumption Expenditures Index, an alternate inflation measure favored by the U.S. Fed.

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As it approaches, deflation will introduce itself to people in subtle and not-so-subtle ways.

The first way was consumer spending. Now, our brand-new May 2015 Elliott Wave Financial Forecast shows you an equally compelling chart of U.S. consumer credit since 1980 that confirms: deflation is now "playing catch up" to debt.


What You Need to Know About Deflation

What You Need to Know NOW About Protecting Yourself From Deflation

Get this free report about the unexpected but imminent and grave risk to your portfolio. You can read this special 10-page report -- with highlights from Robert Prechter's New York Times bestseller Conquer the Crash -- You Can Survive and Prosper in a Deflationary Depression. You'll get 29 specific forecasts for stocks, real estate, gold, cultural trends and more.

Complete your Club EWI profile to get immediate access >>

This article was syndicated by Elliott Wave International and was originally published under the headline "Glinda the Good" Deflation Isn't Looking So... Good. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

Robert Prechter
Founder, Elliot Wave International

 

 

 

 

 

 

Continue reading
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