Financial Crash Clock at One Minute to Midnight

The London Telegraph headlines, “Doomsday Clock for Global Crash Strikes One Minute to Midnight, as Central Banks Lose Control” on Aug. 17.

The analysis under this headline, like the companion article by Daily Telegraph International Business Editor Ambrose Evans-Pritchard, scans the combined collapses which are signalling another 2008-type financial blowout and/or another “Great Recession.”

The continuing plunge in prices of oil and virtually all other important commodities, particularly metals — a copy of the commodity collapse preceding the 2008 crash — has driven the Bloomberg Commodity Index below its lowest levels of this century to date.

Along with this has gone a drop in world trade of now more than 4% year-over-year, emphasized by Pritchard as meaning a contraction of world economic activity. There is a series of currency crises occurring in newly industrialized countries — Indonesia, Malaysia, Thailand, Brazil — and stock market collapses in more than 20 nations.

The New York Federal Reserve report on industrial and manufacturing released Aug. 17 showed a shocking contraction.

“The New York state manufacturing index for July,” writes Pritchard, “plummeted to a recessionary low of minus 14.9, the lowest since the Great Recession and one of the steepest one-month drops ever recorded. The new shipments component fell to -13.8, and new orders to -15.7. [this] comes at a delicate moment for the world economy. There is now a full-blown August storm sweeping through global markets.”

The financial blog of economists Pam and Russ Martens Aug. 17 also reports the startling plunge in real economic activity reported by the New York Fed, but is called, “Keep Your Eye on Junk Bonds: They’re Starting To Behave Like ’08.” “The biggest cautionary warnings — rising junk bond yields and the rising spread in yields between junk and U.S. Treasuries—are commanding far less attention than they should be. Widening credit spreads served as an early red flag to the 2008 financial crash and implosion of iconic Wall Street firms.”

Oil and gas junk debt in the U.S. economy is now being issued for average interest rates of 11-12%, but ranging up to 20-30% as defaults and bankruptcies appear in the oil/gas sector. But worse, as the Telegraph‘s “doomsday clock” analysis notes, this debt continues to issue, and be bought, at tremendous rates, running at $325-350 billion of junk from the U.S. oil patch in 2015, for the fifth straight year.

The common denominator of all these crash elements — massive Wall Street/London exposure to derivatives losses — has triggered an intense campaign by big banks to get Basel and Washington to remove “cleared derivatives” — only about $150 trillion worth! — from their allowed leverage ratios. FDIC vice chairman Thomas Hoenig takes this on in a Wall Street Journal column Aug. 17, as a warning of the next crash.