The Oil Crash Of 2016 Has The Big Banks Running Scared - Michael Snyder THE ECONOMIC COLLAPSE BLOG

The Oil Crash Of 2016 Has The Big Banks Running Scared Posted: 18 Jan 2016 04:44 PM PST  Michael Snyder  THE ECONOMIC COLLAPSE BLOG Last time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis.  Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s.   As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses.  And the longer the price of oil stays this low, the worse the carnage is going to get. Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent.  This is something that has many U.S. consumers very excited.  The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan. But this oil crash is nothing to cheer about as far as the big banks are concerned.  During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world. Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses.  The following examples come from CNN… For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.” JPMorgan Chase (JPM) is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months. Citigroup is another bank that also has a tremendous amount of exposure… Citigroup (C) built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.” If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there. For the moment, these big banks are telling the public that the damage can be contained. But didn’t they tell us the same thing about subprime mortgages in 2008? We are already seeing bank stocks start to slide precipitously.  People are beginning to realize that these banks are dangerously exposed to a lot of really bad deals. If the price of oil were to shoot back up above 50 dollars in very short order, the damage would probably be manageable.  Unfortunately, that does not appear likely to happen.  In fact, now that sanctions have been lifted on Iran, the Iranians are planning to flood the world with massive amounts of oil that they have been storing in tankers at sea… Iran has been carefully planning for its return from the economic penalty box by hoarding tons of oil in tankers at sea. Now that the U.S. and European Union have lifted some sanctions on Iran, the OPEC country can begin selling its massive stockpile of oil. The sale of this seaborne oil will allow Iran to get an immediate financial boost before it ramps up production. The onslaught of Iranian oil is coming at a terrible time for the global oil markets, which are already drowning in an epic supply glut. Just the other day, I explained that some of the biggest banks in the world are now projecting that the price of oil could soon fall much, much lower. Morgan Stanley says that it could go as low as 20 dollars a barrel, the Royal Bank of Scotland says that it could go as low as 16 dollars a barrel, and Standard Chartered says that it could go as low as 10 dollars a barrel. But the truth is that the price of oil does not need to go down one penny more to have a catastrophic impact on global financial markets.  If it just stays right here, we will see an endless parade of layoffs, energy company bankruptcies  and debt defaults.  Without any change, junk bonds will continue to crash and financial institutions will continue to go down like dominoes. We are already experiencing a major disaster.  Things are already so bad that some forms of low quality crude oil are literally selling for next to nothing.  The following comes from Bloomberg… Oil is so plentiful and cheap in the U.S. that at least one buyer says it would pay almost nothing to take a certain type of low-quality crude. Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire,said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50. The crude is down from $13.50 a barrel a year ago and $47.60 in January 2014. While the near-zero price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch. A chart that I saw posted on Zero Hedge earlier today can help put all of this into perspective.  Whenever the price of oil falls really low relative to the price of gold, there is a major global crisis.  Right now an ounce of gold will purchase more oil than ever before, and many believe that this indicates that a new great crisis is upon us… The number of barrels of oil that a single ounce of gold can buy has never, ever been higher. All over the planet, big banks are absolutely teeming with bad loans.  And to be honest, the big banks in the U.S. are probably in better shape than some of the major banks in Europe and Asia.  But once the dominoes start to fall, very few financial institutions are going to escape unscathed. In the coming days I would expect to see more headlines like we just got out of Italy.  Apparently, Italian banks are nearing full meltdown mode, and short selling has been temporarily banned.  To me, it appears that we are just inches away from full-blown financial panic in Europe. However, just like with the last financial crisis, you never quite know where the next “explosion” is going to happen next. But one thing is for sure – the financial crisis that began during the second half of 2015 is raging out of control, and the pain that we have seen so far is just the beginning.

Financial Armageddon Approaches: U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives- Michael Snyder THE ECONOMIC COLLAPSE blog

Financial Armageddon Approaches: U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives

Posted: 29 Dec 2015 Michael Snyder  THE ECONOMIC COLLAPSE blog

Did you know that there are 5 “too big to fail” banks in the United States that each have exposure to derivatives contracts that is in excess of 30 trillion dollars?  Overall, the biggest U.S. banks collectively have more than 247 trillion dollars of exposure to derivatives contracts.  

That is an amount of money that is more than 13 times the size of the U.S. national debt, and it is a ticking time bomb that could set off financial Armageddon at any moment.  Globally, the notional value of all outstanding derivatives contracts is a staggering 552.9 trillion dollars according to the Bank for International Settlements.  The bankers assure us that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down.  But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it.  And when this derivatives bubble finally implodes, there won’t be enough money on the entire planet to fix it.

A lot of readers may be tempted to quit reading right now, because “derivatives” is a term that sounds quite complicated.  And yes, the details of these arrangements can be immensely complicated, but the concept is quite simple.  Here is a good definition of “derivatives” that comes from Investopedia…

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets includestocks, bonds, commodities, currencies, interest rates and market indexes.

I like to refer to the derivatives marketplace as a form of “legalized gambling”.  Those that are engaged in derivatives trading are simply betting that something either will or will not happen in the future.  Derivatives played a critical role in the financial crisis of 2008, and I am fully convinced that they will take on a starring role in this new financial crisis.

And I am certainly not the only one that is concerned about the potentially destructive nature of these financial instruments.  In a letter that he once wrote to shareholders of Berkshire Hathaway, Warren Buffett referred to derivatives as “financial weapons of mass destruction”…

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Since the last financial crisis, the big banks in this country have become even more reckless.  And that is a huge problem, because our economy is even more dependent on them than we were the last time around.  At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008.  The five largest banks account for approximately 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system.

So the problem of “too big to fail” is now bigger than ever.

If those banks go under, we are all in for a world of hurt.

Yesterday, I wrote about how the Federal Reserve has implemented new rules that would limit the ability of the Fed to loan money to these big banks during the next crisis.  So if the survival of these big banks is threatened by a derivatives crisis, the money to bail them out would probably have to come from somewhere else.

In such a scenario, could we see European-style “bail-ins” in this country?

Ellen Brown, one of the most fierce critics of our current financial system and the author of Web of Debt, seems to think so…

Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back.

As I mentioned yesterday, the FDIC guarantees the safety of deposits in member banks up to a certain amount.  But as Brown has pointed out, the FDIC only has somewhere around 70 billion dollars sitting around to cover bank failures.

If hundreds of billions or even trillions of dollars are ultimately needed to bail out the banking system, where is that money going to come from?

It would be difficult to overstate the threat that derivatives pose to our “too big to fail” banks.  The following numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is on a level that is difficult to put into words…

Citigroup

Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)

JPMorgan Chase

Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)

Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)

Goldman Sachs

Total Assets: $880,607,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)

Bank Of America

Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)

Morgan Stanley

Total Assets: $834,113,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)

Wells Fargo

Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)

Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)

As the “real economy” crumbles, major hedge funds continue to drop like flies, and we head into a new recession, there seems to very little alarm among the general population about what is happening.

The mainstream media is assuring us that everything is under control, and they are running front page headlines such as this one during the holiday season: “Kylie Jenner shows off her red-hot, new tattoo“.

But underneath the surface, trouble is brewing.

A new financial crisis has already begun, and it is going to intensify as we head into 2016.

And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.

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My heart yearns for the glory of the Lord Jesus to be revealed in the earth, touching the hearts and souls of men, women and children in each and every nation. As we see the days become darker, we believe that the Lord God of Israel will show Himself strong, and prove that He is the Way, the Truth and the Life, as He says He is. 

I wrote this book for you who also long to walk in strong faith, courage and commitment to the end, for whatever the Lord has planned and purposed for you and I. Together, as the Body of Christ, and the glorious Bride that we will become, we will one day see His Kingdom come, His will be done, on earth as it is in heaven. 

The Gospel, the Good News of salvation, will be declared, and that which is just and good will for all eternity overcome the evil one. I sincerely believe we are living in the end of days, as prophetic words have been rapidly fulfilled since the re-birth of Israel in 1948. Jesus Himself had said that when we see the fig tree budding, we know that the time is near. 

This book, my 10th published in the last three years (all between 2013-2015) and before my 61st birthday, is very special to me. I sense it is something the Lord put on my heart to do several months ago, giving it that “urgency of getting it done and out there” feel as I wrote. Originally these chapters were Now Think On This messages. 

It was amazing to me how many were done in September and October of 2015 alone, as the Holy Spirit would speak a word or sentence to me, and I would write soon after. I am truly grateful for His impartation, and acknowledge Jesus (Yeshua), my Lord and Savior, above all. 

The photos I have included in the book are primarily ones I took (exceptions noted), both to document history and to share another way the Lord also speaks to His Body. Capturing moments of the Holy Spirit action, especially in the two “fire” photos, were exciting. In both cases I wasn’t even aware of it until they were “developed”. 

I trust this book will both encourage you and cause you to re-commit yourself - to know the Lord’s will for your life, do all you can to allow Him to direct your steps, and be the light in these dark days we desperately need and have been called upon by the Lord to be. 

I am with you, arm in arm! 

Ahava (love in Hebrew) and shalom (peace), 

Steve Martin

Founder 

Love For His People

Guess What Happened The Last Time The Price Of Oil Plunged Below 38 Dollars A Barrel? - Michael Snyder - THE ECONOMIC COLLAPSE BLOG

Guess What Happened The Last Time The Price Of Oil Plunged Below 38 Dollars A Barrel?

Posted: 07 Dec 2015  Michael Snyder - THE ECONOMIC COLLAPSE BLOG

On Monday, the price of U.S. oil dropped below 38 dollars a barrel for the first time in six years.  The last time the price of oil was this low, the global financial system was melting down and the U.S. economy was experiencing the worst recession that it had seen since the Great Depression of the 1930s.  As I write this article, the price of U.S. oil is sitting at $37.65.  For months, I have been warning that the crash in the price of oil would be extremely deflationary and would have severe consequences for the global economy.  Nations such as Japan, Canada, Brazil and Russia have already plunged into recession, and more than half of all major global stock market indexes are down at least 10 percent year to date.  The first major global financial crisis since 2009 has begun, and things are only going to get worse as we head into 2016.

The global head of oil research at Societe Generale, Mike Wittner, says that his “head is spinning” after the stunning drop in the price of oil on Monday.  Just like during the last financial crisis, we have broken the psychologically important 40 dollar barrier, and there are concerns that we could go much lower from here…



One analyst told CNBC that he believes that we could soon see the price of U.S. oil go all the way down to 32 dollars a barrel…

“We’re in a tug-of-war between a heavily shorted market and a glut of oil in the U.S. and globally, as Saudi Arabia continues to produce oil at elevated levels to maintain market share,” said Chris Jarvis at Caprock Risk Management, an energy markets consultancy in Frederick, Maryland.
“Couple this with a strengthening dollar as the market anticipates a U.S. rate hike this month, oil is heading lower with a near term target of $32 for WTI.”

Analysts at Goldman Sachs are even more pessimistic than that.  According to Business Insider, they are saying that we could eventually see the price of oil go below 20 dollars a barrel…

At OPEC’s meeting on Friday, member countries decided to set its production level at 31.5 million barrels per day, and did not agree on what the new limit should be.
After OPEC’s meeting, commodity strategists at Goldman put out a note saying that oil prices could plunge another 50% in the coming months, as the oil market tries to rebalance the supply and demand situation.

That may sound really good to you, especially if you fill up your gas tank frequently.  But the truth is that plunging oil prices are exceedingly bad for the U.S. economy as a whole.  In recent years, the energy industry has been the primary engine for the creation of good jobs in this country, and now those firms are having to lay off people at a frightening pace.  Not only that, CNBC’s Jim Cramer is warning that many of these firms may actually start going under if the price of oil doesn’t start going back up soon…

“This is not ‘longer and lower;’ this is ‘longer and much lower.’ There’s companies that are not going to be able to fund with futures; there’re companies that are not going to be able to get credit,” Cramer said on “Squawk on the Street.”
Cramer made his remarks after the Organization of the Petroleum Exporting Countries decided not to lower production on Friday.
“This was a devastating blow for the U.S. oil industry,” Cramer said.

On Monday, we witnessed another benchmark that we have not seen since the last financial crisis.
I watch a high yield bond ETF known as JNK very closely.  On Monday, JNK broke below 35 for the first time since the financial crisis of 2008.  Just like 40 dollar oil, this is a key psychological barrier.

So why is this important?

As I discussed last week, junk bonds crashed before stocks did in 2008, and now it is happening again.  If form holds true, we should expect U.S. stocks to start tumbling significantly very shortly.

Meanwhile, another notable expert has come forward with a troubling forecast for the global economy in 2016.  Just like Citigroup, Raoul Pal believes that there is a very significant chance that we will see a recession next year…

Former global macro fund manager Raoul Pal says there’s now a 65% chance of a global recession.
In July, Pal predicted that the Institute of Supply Management’s (ISM) manufacturing index would break the key level of 50 late in 2015.
On December 1, the ISM broke the 50 level for the first time since the 2008 recession, reaching 48.6.
“I use the ISM as a guide to the global business cycle, not just the US cycle,” Pal told Business Insider.

What amazes me is that so many people out there cannot see what is happening even though the next great crisis has already started.  The evidence is all around us, and yet so many choose to be willingly blind.

Instead of fixing our problems after the last crisis, we just papered them over with lots of money printing and lots more debt.  And of course all of this manipulation just made our long-term problems even worse.  I really like how Peter Schiff put it recently…

What’s happening is pretty much what we would anticipate. I don’t see from the data any real economic recovery, certainly not in the United States.
We’re spending more money, but it’s not because we’re generating more wealth. We’re generating more debt. We’re using that borrowed money to consume and so temporarily it feels that we’re wealthier because we get to spend all that money… but we have to come to terms with paying the bill.
The bills are going to come due. Right now interest rates are being kept at zero which makes it possible to service the debt even though it’s impossible to repay it… at least we can service it. But once interest rates go up then we can’t even service it let alone repay it. 
And then the party is going to come to an end.

Indeed – the party is coming to an end, and a new financial crisis is playing out in textbook fashion right in front of our eyes.

Hopefully you are already prepared for what is coming next, because it is going to be extremely painful for the U.S. economy.