Low oil prices are finally starting to take their toll. Over the last few weeks many of the major banks announced that losses due to bad loans in the energy sector were affecting their profits. Bank of America allowed $264 million for losses from energy debt and Wells Fargo, one of the safer more conservative banks with less trading exposure, has allocated over 7% or $1.2 billion of its loss reserve towards energy. (This might be the highest ever on Wall Street)
Junk bond yields have started to spike to levels that have not been seen since 2008.
Ray Dalio, one of the smartest investors of all time, went on record saying there is “asymmetric risk on the downside.” And that the normal relationship in his all-weather portfolio has broken down. This means the advice that most financial advisors normally give is no longer true (i.e. have a properly diversified portfolio and you will weather a storm). What do you do when everything goes down?
The real truth is right now the storm hasn’t really hit. Major defaults have to happen or a big company has to go bust in an unexpected way to cause the storm. The thing that is different this time vs. 2008 is that it’s more visible if you know where to look because of the way bonds & commodities are traded on a global open market. The current drops are caused by the smart money taking their money off the table.
6 months ago at a financial conference I presented at in Los Angeles, I talked about the fact that the amount of debt that has been lent to many companies could be the trigger for the next market collapse. At the time, I thought that Glencore, a global commodities company, could be the next Lehman Brothers due to the drop in global commodities. This drop in global demand for commodities is primarily due to a slowing down of the Chinese economy. Which until recently was using enormous amounts of commodities.
Whilst that could still happen, the real risk now is from large numbers of energy loans whether via bonds or from major banks defaulting. The Dallas Fed is so worried about that according to Zero Hedge it told the banks to suspend market-to-market accounting on energy debts effectively asking all the major banks to hide losses from their books; which is what they did after the 2008 crash in real-estate. Inferring that they think this is another subprime type blow up.
This is in effect like going to a casino and doubling down when you have just lost all your money because you have a chance you could win in back. That strategy rarely ends well.
The reason why debt defaulting will cause pain is it reduces the amount of money in the world. When the world money supply shrinks the value of the remaining money goes up and prices across the board fall. This is something that very few people alive today have ever experienced. The last time it happened was in the early days of the great depression. Click here for the blog post I wrote on this topic. It is a time of great risk and also great opportunity.
Now is not the time to follow the 90% – it is a time to be one of the 10%.
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Other news articles
Ray Dalio “If Assets Remain Correlated, There’ll Be A Depression”
World Bank issues ‘perfect storm’ warning for 2016
After living in 3 countries and experiencing different financial systems, I found myself questioning things that a lot of people took for granted. My uncle, who was an international currency trader in London, reinforced this by sharing stories of how a few individuals where able to change the forces of governments-take them on and win. In the process I became an unintentional economist. Thus, I have an alternative view of financial forces and headwinds that affect people’s lives such as the power of debt for good and bad, the true risks associated with different types of investing, and how different people hack the system. To do well today most people need to overcome the financial headwinds they are burdened with. By applying this knowledge it has allowed me to gain time back in my life to spend it on things that create meaning not just the daily grind of trading time for money. I have a great desire to share what I have learned along the way, mentoring others and helping them find their path and devising creative ways to capitalize on various market and economic events. Nowadays, having fun, presenting at conferences on economics and other financial topics, and building a coalition of the willing to take on the world, is my passion; I hope you can join me on this journey.
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