by Evie Courtlandt & John Needham

Another financial crisis—predicted to be the worst in U.S. history—is on its way.

“We have $250 trillion worth of global debt, and interest rates are going up. This will be the worst market crash in history—an economic 9/11. It’s going to be worse than the Great Depression. When this thing crashes, it is gone.” –Gerald Celente, Founder & Director of the Trends Research Institute and widely hailed for warning everyone about what he predicted would be the “panic of 2008.”

The volatile U.S. stock market dropped 967 points so far this week at close, and is down again today as I write this. The share price of formerly investment grade General Electric (GE), saddled with unprecedented debt, has tanked by over 50% for 2018. The Dow suffered other massive dives this year, like the 1,375-point combined fall over October 10th to 11th, the 424-point drop on April 24th, and the 1,033-, 1,175- and 666-point plummets on February 8th, 5th and 2nd respectively.

After each drop, many attributed the losses to increased bond yields, or interest rate hikes (short-term interest rates are still less than half of what they were in early 2007). Upon closer inspection, though, top investors and economists offer a list of systemic fissures that are the cause, including the biggest debt bubble in global history, and emerging markets teetering on defaults. Greece’s economy nearly failed in 2011, but now Italy’s is teetering—and it’s the world’s ninth largest economy. Whereas Lehman went bankrupt in 2008, today’s most ailing too-big-to-fail is currently Deutsche Bank—three times the size of Lehman, and with $48 trillion in derivatives.

Legendary investor Jim Rogers, who co-founded the Quantum Fund with George Soros and achieved returns of over 4,200 percent over ten years, said in early 2018 that he expects “a $68 trillion ‘biblical’ collapse poised to wipe out millions of Americans.” On Fox Business last April, he reiterated, “When I said it’s going to be the biggest market downturn in my lifetime, that’s not so strange to me. In 2008, we had a problem because of debt. Debt has skyrocketed since 2008.”

Despite having led the Federal Reserve to inject cheap money into the economy, which resulted in unprecedented loan issuance, former Federal Reserve head Janet Yellen said a month ago that “regulators should sound the alarm” about the loan bubble run amok, and Claudio Borio at Bank of International Settlements said the “world economy is about to get very sick.”

The debt bubble ($250 trillion globally, up from $170 trillion in 2008) this time is not just in real estate, but also skyrocketed student loan debt (up 157% since 2008), corporate debt (now 70% of the GDP, and up 60% in risky leveraged loans since 2008), auto loan debt (up 52% since 2008), credit card debt (up 49% since 2008), and government debt (U.S. fiscal debt is up 122% since 2008).

Prices have risen, but wages have not, and because interest rates have been so low, the Baby Boomers retiring have 70% of their retirement funds in equities—another bubble that is bursting already. Defaults have increased markedly this year on all of these debts.

Even more disconcerting is that, just as in 2008 with mortgage-backed securities and credit default swaps, the same instruments today (asset backed securities, collateralized debt obligations, collateralized loan obligations, credit default swaps and naked credit default swaps) hold this new unsound debt. CLOs in particular are being pushed, including subprime, to meet the demand for pooled CLOs, just like mortgages were pushed to pool them for mortgage backed securities before 2008. The Federal Reserve had to purchase $4 trillion worth of these assets and Treasuries, and is now beginning to unload them, which is already tightening credit.

There has been mostly euphoria over the state of the economy until October, which Bridgewater Associates founder Ray Dalio said recently “is what bubbles are made of.” But economists and investors point out that not only has every bubble grown, but the U.S.’s stated economic figures, such as low unemployment, are artificial and misleading. Since 2008, the Federal Reserve’s policies of “quantitative easing” (i.e. buying assets and printing money to inject into the economy) led us to this crisis. The low interest rates and liquidity led to far more borrowing, and to share price spikes resulting not from growth, but mostly from stock buybacks.

The last bailout in 2008 to the tune of trillions of dollars kept the failing business cycle going, but did not succeed in improving the fundamentals of the economy. Now the fiscal debt, if unfunded liabilities are included, exceeds the GDP. As interest rates rise, interest payments on all of this debt will be unsustainable for the government, corporations, homeowners—for everyone.

Since 2008, asset prices rose, but it’s the top 1% who own most assets, so this ended up widening the wealth gap markedly.

Worse, according to Bloomberg Finance and Deutsche Bank, as of October 31, 2018, a record number of assets—89% of assets—had a negative total return. That means that only a fraction of the assets held by an already tiny portion of the population have seen return on assets this year.

As increased defaults lead to corporate failures, then layoffs, and then more defaults, this time interest rates will not have downward leeway. The Ponzi scheme of borrowing to pay debt to infinity will, many investors expect, be revealed.

Since the last crisis in 2008, the Federal Reserve’s loosened monetary policy left tens of millions behind. Those without assets could not buy any due to their (artificially) rising prices with their stagnant wages, and everyone used debt as money: credit cards, corporate bonds, municipal and Treasury bonds, auto loans, mortgages, home equity loans. Debt, debt and more debt.

Main Street (a.k.a. “the 99%”) also suffered from rising consumer prices since 2009, including in health care, insurance and tuition. Student loan debt rose 157% since 2008, and counts as the fastest-growing segment of consumer debt since 2007.

In the years since the 2008 recession, student loan debt has been linked to a slowdown in home ownership, marriage and starting families. Just as Baby Boomers are retiring, Millennials fail to make up for the retirees’ declining consumption levels and wages, and 34% live with their parents after college.

A wave of populism rose out of all of this pain and put Trump in office. Unfortunately, Trump’s tax cuts only prolonged the rising debt, and the artificial share price increases that came from stock buybacks (not growth). Trump’s trade war has led us further toward recession, and now rising interest rates threaten to bring the whole system crashing down harder than before.

Experts predict a stock market sell-off ranging from between 40%-70%; a debt crisis due to household, corporate, and government debt; and a potential dollar crisis that could dethrone the dollar from its status as the world’s reserve currency, and start a global economic reset that will lead to massive civil unrest.

Economist David Stockman and Global Chief Investment Officer for Guggeinheim Partners Scott Minerd point out that Trump’s tax cuts injected even more cash into an already debt-ballooned economy, increasing the federal budget deficit by one trillion next year at a time when the Federal Reserve has begun unwinding its enormous bond portfolio amassed since 2008. In order to raise money to cover the deficit, the Treasury will have to sell bonds at the same time that the Fed is also selling mountains of them. Minerd told clients that when interest rises on corporate debt, without enough actual earnings growth, companies will not have the cash on the balance sheet to pay it–leading to waves of corporate debt defaults.

“As soon as short-term rates hit 3%, we’ll see a wave of corporate defaults by late 2019, and a 40% plunge in the stock market. In the last downturn, the defaults were on the consumer side, but this time it will also be on the corporate side,” Minerd said. He expects the Fed to intervene by lowering interest rates again, but this will only defer an even bigger problem into the future once again.

“The market crash is just around the bend, and will be a doozy.” – Economist David Stockman, former budget director for the Reagan White House, Solomon Brothers investment banker, to CNBC (March 2018)

“I expect a crash by early 2019. We’re in the throes of a burgeoning financial bubble. The stock market capitalization of the G7 is at a record 127.6% of their collective GDP, the highest since the tech bubble of 2000, and much like Japan’s in 1989–and Japan never recovered.” -Paul Tudor Jones, hedge fund manager and founder of the Tudor Group, credited with calling the 1987 market crash (May 2018)

John Hussman, president of Hussman Investment Trust and a well-known contrarian investor, has been warning of a correction on the highly overvalued market that will be something not seen since the dot-com bubble.

“Take your money and run. I was bullish in 2017, but the last couple of 10 percent declines, plus the volatility index and trade tensions, are a sign that the band is about ready to go home.” -Investor David Tice, former Prudent Bear Fund Manager

While any event could be the trigger for a market that has risen 289% since March 2009, Mark Mobius, founding partner at Mobius Capital Partners, believes the catalyst will come from “continuing increases in interest rates.”

“This is the calm before the storm. The next recession is imminent and will be far bigger than the 2008 crash, because the bubble is far bigger this time.” -Peter Schiff, Chief Economist & Global Strategist of Euro Pacific Capital, and famed author of the book “Crash Proof” (February 2007) predicting the housing bubble and debt crisis

“Since the last financial crisis, our long-term debt problems have continued to grow, and there are many that believe that the next crisis will actually be far worse than the one that we experienced ten years ago. Analysts are sounding the alarm about junk bond defaults, the smart money is getting out of stocks at an astounding rate, mortgage rates are absolutely skyrocketing, and Europe is already facing a full blown financial meltdown.” –Jeff Cox @ CNBC (May 2018)

“Bear markets followed 11 out of 12 times that the Fed reduced its balance sheet and raised interest rates. Also, emerging markets having huge debts—$8 trillion, which are U.S.-dollar denominated. The problems of Argentina (with interest rates at 60%), Venezuela (which is barely functioning), and Turkey (loaded with debt), could spread like the late 1990s collapse that began in Asia and spread to Latin America, Russia, and eventually the U.S. Wages have not gone up and will not anytime soon. I do not have faith in Trump’s methods of tariff warring and villainizing immigration.” -Gary Shilling, legendary economist and president of A. Gary Shilling & Co., who famously led John Paulson to bet against the housing market and make $4 billion, to Business Insider (October 2018)

Signs of a lack of faith in the market began last January. First, Smart Money (i.e. institutional investors) sold off stock, along with a record number of corporate insiders. Second, a dozen companies that were ready to go public decided to get bought privately instead. The volatility index went from extremely low to very high, mirroring what it did in 2007 and 2008 respectively. Our stock market’s P/E ratio is the highest it’s ever been, other than at the end of the dot-com bubble, and market capitalization is higher than it was even in 1929, after which we saw an 89% stock market crash (we had a 50% crash in 1999). Between this month and last, the Dow lost ALL of its gains for the year.

“U.S. stocks are now about 80% overvalued,” says Andrew Smithers, the chairman of Smithers & Co. Smithers backs up his prediction using a ratio which proves that the only times in history stocks were this risky was 1929 and 1999. “And we all know what happened next. Stocks fell by 89% and 50%, respectively.”

“The economic indicators screaming ‘sell’ don’t imply that a 50% collapse is looming—it’s already at our doorstep.” -Economist James Dale Davidson, founder of Strategic Investment, who correctly predicted every major economic shift over the last three decades. Davidson uses over 20 unquestionable charts to prove his point, and has a remarkable track record of having called, for example, the collapses of 1999 and 2007, the fall of the Soviet Union, and Japan’s economic downfall, to name a few. Davidson goes on to say, “I know that everywhere you turn things look pretty good. The market is near all-time highs, the dollar is strong, and real estate is booming again. But remember, the exact same scenario played out in 1999 and 2007. The economy is unraveling right now, and fast. Very fast.”

Foreign stock markets have seen significant declines already as the European, Asian and Latin American economies contract (ex. China’s Shanghai index is down 22% for 2018), and emerging markets’ currencies are collapsing under the weight of debt owed in American dollars. That said, many economists and investors foresee a dollar crisis after this next debt crisis, because interest rates have almost nowhere to go down from this low height.

Four more interest rate hikes are already planned, beginning next month. Not only can the economy not bear them, the economy was never reset after the 2008 crash because of the Fed’s intervention, and we’re in much worse shape than in 2008: many investment grade companies have been downgraded to junk, prices are up, assets are inflated, wages have been flat, and debt has increased in every sector. Retail has suffered high losses and closings based in part on unmanageable rents from inflated asset prices, the real estate market began to fall once the Fed stopped buying commercial mortgages, what the FDIC calls “asset problem banks” has tripled in the first three quarters of 2018, and of course black swans like Deutsche Bank, Italy and others are teetering on too-big-to-fail collapse.

Mortgage and retail defaults are now at their highest in 10 years. James Dale Davidson warns that “real estate will plummet by 40%, savings accounts will lose 30%, and unemployment will triple.”

Check back here soon (subscribe to be notified) for a detailed breakdown of all of the many red flags in this economy, including the above as well as the widening wealth gap, the trade war, the retirement crisis, the potential collapse of the dollar, the likelihood of a global reset, and more.

Get ready.