Huge Trouble Is Percolating Just Under The Surface Of The Global Economy

World On Fire - Public DomainDid you know that the number of publicly traded companies declaring bankruptcy has reached a five year high?  And did you know that Chinese exports are absolutely collapsing and that Chinese economic growth in 2014 was the weakest in over 20 years?  Even though things may seem to be okay on the surface for the global economy at the moment, that does not mean that big trouble is not percolating just under the surface. On Wednesday, investors cheered as stocks soared to new highs, but almost all of the economic news coming in from around the planet has been bad. The credit rating on Greek debt has been slashed again, global economic trade is really slowing down, and many of the exact same financial patterns that we saw just before the crash of 2008 are repeating once again. All of this reminds me of the months leading up to the implosion of Lehman Brothers. Most people were feeling really good about things, but huge trouble was brewing just underneath the surface. Finally, one day we learned that Lehman Brothers had “suddenly” collapsed, and then all hell broke loose.

If the economy is actually “getting better” like we are being told by the establishment media, then why are so many big companies declaring bankruptcy? According to CNBC, the number of publicly traded companies declaring bankruptcy has hit a five year high…

The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis of data from research firm

Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies.

It is interesting to note that the price of oil is being named as one of the primary reasons why this is happening.

In an article entitled “Anyone That Believes That Collapsing Oil Prices Are Good For The Economy Is Crazy“, I warned about this. If the price of oil does not bounce back in a huge way, we are going to see a lot more companies go bankrupt, a lot more people are going to lose their jobs, and a lot more corporate debt is going to go bad.

And of course this oil crash has not just hurt the United States. All over the world, economic activity is being curtailed because of what has happened to the price of oil…

In the heady days of the commodity boom, oil-rich nations accumulated billions of dollars in reserves they invested in U.S. debt and other securities. They also occasionally bought trophy assets, such as Manhattan skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.

Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and other commodity-rich nations are fast drawing down those “petrodollar” reserves. Some nations, such as Angola, are burning through their savings at a record pace, removing a source of liquidity from global markets.

If oil and other commodity prices remain depressed, the trend will cut demand for everything from European government debt to U.S. real estate as producing nations seek to fill holes in their domestic budgets.

But it isn’t just oil. We appear to be moving into a time when things are slowing down all over the place.

In a recent article, Zero Hedge summarized some of the bad economic news that has come in just this week…

Mortgage Apps tumble, Empire Fed slumps, and now Industrial Production plunges… Against expectations of a 0.3% drop MoM, US Factory Output was twice as bad at -0.6% – the worst since August 2012 (and lamost worst since June 2009). This is the 4th miss in a row.

If we are indeed heading into another economic downturn, that is really bad news, because at the moment we are in far worse shape than we were just prior to the last recession.

To help illustrate this, I want to share with you a couple of charts.

This first chart comes from the Federal Reserve Bank of St. Louis, and it shows that after you adjust for inflation, median income for the middle class is the lowest that it has been in decades

Median Income St. Louis Fed

This next chart shows that median net worth for the middle class is also the lowest that it has been in decades after you adjust for inflation…

Median Net Worth St. Louis Fed

The middle class is being systematically destroyed. For much more on this, please see this recent article that I published. And now we are on the verge of another major economic slowdown. That is not what the middle class needs at all.

We are also getting some very disturbing economic news out of China.

In 2014, economic growth in China was the weakest in more than 20 years, and Chinese export numbers are absolutely collapsing

China’s monthly trade data shows exports fell in March from a year ago by 14.6% in yuan terms, compared to expectations for a rise of more than 8%.

Imports meanwhile fell 12.3% in yuan terms compared to forecasts for a fall of more than 11%.

This is a clear sign that global economic activity is slowing down in a big way.

In addition, Chinese home prices are now falling at a faster pace then U.S. home prices fell during the subprime mortgage meltdown

It appeared as though things went from bad to worse nearly overnight; China’s National Bureau of Statistics said that contrary to hopes that there would be a modest rebound, the average new home price in China fell at the fastest pace on record in February, from the previous year.

Reuters reported that average new home prices in China’s 70 major cities fell 5.7 percent, year to year, in February – marking the sixth consecutive drop after January’s decline of 5.1 percent.

Things continue to get worse in Europe as well.

This week we learned that the credit rating for Greek government debt has been slashed once again

Standard & Poor’s has just cut Greece’s credit rating to “CCC+” from “B-” with a negative outlook.

S&P said it expected Greece’s debt to be “unsustainable.” It cited the potential for dissolving liquidity in the government, banks and economy.

And according to the Financial Times, we could actually be on the verge of witnessing a Greek debt default…

Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government’s thinking.

The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5bn of payments due to the International Monetary Fund in May and June if no agreement is struck, they said.

So I hope that those that are euphoric about the performance of their stock portfolios are taking their profits while they still can.

Huge trouble is percolating just under the surface of the global economy, and it won’t be too long before the financial markets start feeling the pain.

Disclosure: None.

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V M Jacob 7 years ago Member's comment

Change is always necessary. We learn many things only after a change. We should not worry about change as it is normal and natural.

Jai Guru 7 years ago Member's comment

Tell that to the people who once lived in what we call the runs of Rome.

Jai Guru 7 years ago Member's comment

"If the price of oil does not bounce back in a huge way, we are going to see a lot more companies go bankrupt, a lot more people are going to lose their jobs, and a lot more corporate debt is going to go bad."

As if allowing these predatory companies with toxic debts to die and fall off is a bad thing. It will be very hard to absorb in the beginning, but the market will correct itself. Event he great depression was no exception to that rule. We have to cut the globalization cancer out of the body before it can heal. What you propose isn't a healing, it's a resignment to the diseased way we've been handling finances since the repeal of Glass Steagall.

It is tragic that so many will pay for the behaviors of these vulture capitalists, but that is not my doing. It's theirs. And we cannot let them lord the consequences of their own terrible behavior over us if we're ever to have a healthy economy in this nation, and in this world, again. The hyper globalized economy is a failed experiment. We must return to domestic manufacturing and regulate corporate entities as such that INDIVIDUAL PEOPLE can be held accountable for the horrible behaviors of their companies.

I say collapse. Let us get it over with so we can rebuild the world they destroyed, already. And this time, maybe there should be some people arrested.

Art Hernandez 7 years ago Member's comment

Get rid of all Sick minds all over the World, and start helping Humanity

Kathleen Knights 7 years ago Member's comment

Low oil prices are not reflected at prices at the pump in Europe, so the consumer does not have more disposable income. Unfortunately some people are hit very badly by change, losing jobs and homes, so are not as sanguine as some of your commenters.

Dave Hargraves 7 years ago Member's comment

IF the whole world was at peace and was willing to share it, all would be good

David Sudekum 7 years ago Member's comment

It's going to take a world war the likes we have not seen and China, the Middle East, Russia, Europe and the US will all be in a free for all for resources. The world needs to remove its dependency on fossil fuels and this just might be the push that is needed.

Dave Hargraves 7 years ago Member's comment

Or it could take everyone setting down their arms and refuse to kill again. War is way more expensive than peace. Peace is a money making venture whereas war does the opposite.

David Sudekum 7 years ago Member's comment

That unfortunately is something that, while desirable, is currently beyond the human psyche. Human kind is not yet ready for peace. Look at all the inventions that have been made in times past, the greater majority of them have been war related. Most of the economic strength of the last 75 years has been from the constant rebuilding and rearming of our enemies and supplying arms to the emerging nations. The US is one of the biggest arms dealers in the world so is Russia, China, England, France, Germany. So no the human race is not ready for peace.

Dave Hargraves 7 years ago Member's comment

innovation has become a stalemate. Did you know for a common person to apply for a utility patent the cost is $20,000.00? That is the starting price as citing other familiar ideas and arguing back and forth with patent office can possibly double that price. Applying for a patent should not exceed the sum of $500.00 as it takes less then a day to prepare. Its because this world is full of greed and is the reason for a collapsing economy.

Jayeshkumar 7 years ago Member's comment

While Some Punishment for the Ignorance of Basic Science was inevitable, the world should have its focus now firmly fixed on the long term rewards from this transition of Oil as Energy to Oil as Raw materials...for one and all, or a Sustainable Economy and not just a few traditional Hot Sectors. The Real Problem according to me is that media is only good at emphasizing the problem, pain or all the Bad News; but bad at or shy away from emphasizing any good news. Has any media anywhere in the world, ever said that whatever oil that is saved from burning in automobiles (also causing this Pollution, Climate Change and Global Warming as well as the Natural Disasters), is also useful for the mankind as important raw material, now and in the future...or boldly saying that we have been wrongly using up this Oil as Energy for driving our Automobiles, when according to one of the most important science that govern the existence of this universe - The Newton's Laws of Motion; the Transportation is Free!, rest is all about the Engineering efforts. So Why Talk only Oil and Oil prices, and Not Ideas, Engineering and innovations that can Change this world forever for the Better. The Present Oil price is our Anxiety and inability to take action for this Big Change.

Toy Canon 7 years ago Member's comment

Economics is never a one-way street. No matter what happens to a price or a supply or a quantity, someone loses and someone wins and everything changes in due time. Lower oil prices mean consumers have more money to spend and many businesses enjoy better margins.

Supply will drop gradually and prices will move to a new equilibrium. If more companies go broke, more resources are freed up to be better utilized. There are always short term problems but in the long run, the system corrects. That is why the endless doomsday prophets are always right eventually and wrong most of the time. It is why being a long term diversified investor works as nothing else does.