January 2, 2017, 4:00pm EST

Happy New Year!  We’re off to what will be a very exciting year for markets and the economy.  And make no mistake, there will be profound differences in the world this year, with the inauguration of a new, pro-growth U.S. President, at a time where the world desperately needs growth.

I’ve talked a lot about the “Trump effect.”  Clearly, when you come in slashing the corporate tax rate, creating incentives for trillions of dollars of capital to come home, and eliminating overhead and hurdles associated with regulation, you’ll get hiring, you’ll get spending, you’ll get investment and you’ll get growth.

But there’s more to it.  Ray Dalio, one of the richest, best and brightest investors in the world has said, there is a clear shift in the environment, “from one that makes profit makers villains with limited power, to one that makes them heroes with significant power.”

The latter has been diminished over the past 10 years.

Clearly, we entered the past decade in an economic and structural mess. But while monetary policy makers were doing everything in their power (and then some) to avert the apocalypse and, later, fuel a recovery, it was being undone by law makers and a lack of fiscal support, swinging the pendulum too far in the direction of punishment and scapegoating.

With that, despite the continued wealth creation of the 1% over the past decade, and the widening of the inequality gap, the power of the wealth creators has been diminished in the crisis period – certainly, the public’s favor toward the rich has diminished.  And most importantly, the incentives for creating value and creating wealth have been diminished.

With all of the nuances of change that are coming, and the many opinions on what it all means, that statement by billionaire Ray Dalio might be the most simple and clear point made.

Another good point that has been made by Dalio, as he’s reflected on the “Trump effect.”  It’s the element that economists and analysts can’t predict, and can’t quantify.  The prospects of the return of “animal spirits.”  This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mis-trust of the system.
All along the way, throughout the recovery period, and throughout a tripling of the stock market off of the bottom, people have continually been waiting for another shoe to drop.  The breaking of this emotional mindset appears to finally be underway.  And that gives way to a return of animal spirits, which haven’t been calibrated in all of the forecasts for 2017 and beyond.

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September 2, 2016, 12:00pm EST

This time last month, the famed oil trader—and oil bull—Andy Hall was dealing with a sub-$40 oil market again. And he was again explaining losses to investors in his multi-billion dollar hedge fund.

A guy that has made a career, and hundreds of millions of dollar in personal wealth, picking tops and bottoms in oil, had entered 2016 coming off his worst year ever. And 2016 started even worse.

I’ve talked about the oil price bust extensively, at the depths of the decline in January and February. While most were glorifying the benefits of a few extra bucks in the pockets of consumers from low gas prices, we walked through the ugly outcome of persistently low oil prices. It would be another global financial crisis, as failing energy companies and defaulting oil producing countries would crush banks, and the dominos would fall from there. Unfortunately, the central banks don’t have the ammunition to pull the world back from the edge of disaster for a second time.

With that, central banks stepped in with more easing in the face of the oil price threat, and oil bounced sharply.

Hall’s fund bounced sharply too, running up nearly 25% for the year, by the end of June. But he gave a lot of it back by the time July ended. And now, again, oil is closer to $40 than $50. Thanks to a report yesterday, that oil supplies were bigger than expected, the price of crude has fallen 10% since Friday of last week.

Hall was the Citigroup C +0.13% oil trader who made billions of dollars for the bank energy trading arm, Phibro, in the early-to mid-2000s. He was one of the first to load up on oil futures in 2002, when oil was sub-$30, on the thesis that a boom in demand was coming from China.

So he’s a guy that has been very right about turning points, and big trends. And he’s been pounding the table for much higher oil prices. He thinks oil prices are in for a “violent reversal” (higher). With an important OPEC meeting scheduled for later this month, Hall, in a past investor letter, reminded people how powerful an OPEC policy shift can be. In 1986, the mere hint of an OPEC policy move sent oil up 50% in just 24 hours.

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May 25, 2016, 3:30pm EST

We charted very closely the risks of the oil price bust.  We thought central banks would step in and remove the risk.  They did.  From there, we thought stocks would track the path of oil.  As long as oil continued higher, stocks would follow and slowly global sentiment would mend.  It’s happened.

When oil sustained above $40, we turned focus to the extremely negative sentiment that was weighing on markets and economies.  But given the extreme views on the world, we thought things were set up for positive surprises.  We said this surprise element creates opportunities for asymmetric outcomes (bad is priced-in, good … not at all). That sets up for the potential of “good times” ahead for both markets and broader sentiment.

Fast forward:  Earnings expectations were ratcheted down and broadly surprised on the positive side.  Global economic data has been ratcheted down and is positively surprising. It’s happening in Germany, which is a very important indicator for a bottoming of the euro zone economy.   If the threat of further spiral in Europe has lifted, that’s a huge catalyst for global sentiment.  When global sentiment has officially moved out of the doom and gloom camp and back to optimism the horse will have already had plenty of steps out of the barn.  And we think we are seeing it reflected in stocks, especially small caps.

With this backdrop, we think everyone could benefit by having a healthy dose of “fear of missing out.”  Stock returns tend to be lumpy over the long run.  When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.

Consider what we said on February 11th (stocks bottomed that day and are up 16% since): “We often hear interviews of money managers during periods like this, and the question is asked “are you getting defensive?”

That’s the exact opposite of what they should be asking. When stocks are up 15–20%, and acknowledging that the long–run average return for stocks is 8%, that’s the time to play Defense. When stocks are down 15–20%, that’s the time to play Offense.

The reality is most investors should see declines in the U.S. stock market as an exciting opportunity. The best investors in the world do. The same can be said for average investors.

Here’s why: Most average investors in stocks are NOT leveraged. And with that, they should have no concern about stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices?” And, “where should I put that cash to work?”

As Warren Buffett says, bad news is an investor’s best friend.  And as his billionaire counterpart says, and head of the biggest hedge fund in the world, ‘stocks go up over time.’  With these two basic, plain-spoken, tenets you should buy dips and look for value.

Broader stocks have just gone positive for the year.  Small caps are still down small.  Remember, when the macro fog cleared in 2010, small caps went on a tear, from down 6% through the first seven months of the year, to finish UP 27%. Don’t miss out!

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We’ve talked a lot about oil, the rebound of which has probably led to the trade of the year.  If you recall back on February 8th, we said policymakers finally got the wake up call on the systemic threat of the oil price bust when Chesapeake Energy, the second largest oil and gas producer, was rumored to be pursuing bankruptcy.

This is what we said:

“The early signal for the 2007-2008 financial crisis was the bankruptcy of New Century Financial, the second largest subprime mortgage originator.  Just a few months prior the company was valued at around $2 billion. 

On an eerily similar note, a news report hit this morning that Chesapeake Energy, the second largest producer of natural gas and the 12^th largest producer of oil and natural gas liquids in the U.S., had hired counsel to advise the company on restructuring its debt (i.e. bankruptcy).  The company denied that they had any plans to pursue bankruptcy and said they continue to aggressively seek to maximize the value for all shareholders.  However, the market is now pricing bankruptcy risk over the next five years at 50% (the CDS market).

Still, while the systemic threat looks similar, the environment is very different than it was in 2008.  Central banks are already all-in.  We know, and they know, where they stand (all-in and willing to do whatever it takes).  With QE well underway in Japan and Europe, they have the tools in place to put a floor under oil prices. 

In recent weeks, both the heads of the BOJ and the ECB have said, unprompted, that there is “no limit” to what they can buy as part of their asset purchase program.  Let’s hope they find buying up dirt-cheap oil and commodities, to neutralize OPEC, an easier solution than trying to respond to a “part two” of the global financial crisis.” 

Chesapeake bounced aggressively, nearly 50% in 10 business days.  

And on February 22nd, we said, “persistently cheap oil (at these prices) has become the new “too big to fail.” It’s hard to imagine central banks will sit back and watch an OPEC rigged price war put the global economy back into an ugly downward spiral.  And time is the worst enemy to those vulnerable first dominos (the energy industry and weak oil producing countries).”

As we’ve discussed, central banks did indeed respond.  The BOJ intervened in the currency markets on February 11, and that (not so) coincidently put the bottom in oil and global stocks.  China followed on February 29, with a cut on bank reserve requirements, then ECB cut rates and ramped up their QE and the Fed joined the effort by taking two projected rate cuts off of the table (we would argue maybe the most aggressive response in the concerted central bank effort).

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From the bottom on February 8th, Chesapeake shares have gone up five-fold, from $1.50 to over $7.  Oil bottomed February 11 and is up 77%.  This is the trade of the year that everyone should have loved.  If you’re wrong, the world gets very ugly and you and everyone have much bigger things to worry about that a bet on oil and/or Chesapeake.  If you’re right, and central banks step in to divert another big disaster (a disaster that could kill the patient) you make many multiples of your risk.

We think it was the trade of the year.  The trade of the decade, we think is buying Japanese stocks.

Overnight the BOJ made no changes to policy.  And the dollar-denominated Nikkei fell over 1,200 points (more than 7%).

As we said yesterday, two explicit tools in the Bank of Japan’s tool box are: 1) a weaker yen, and 2) higher stocks.  I say “explicit” because they routinely have said in their minutes that they expect both to contribute heavily to their efforts. So now Japanese stocks and the yen have returned near the levels we saw before the Bank of Japan surprised the world with a second dose of QE back in October of 2014.  So their efforts have been undone. And they’ve barely moved the needle on their objective of 2% inflation during the period.  In fact, the head of the BOJ, Kuroda, has recently said they are still only “halfway there” on reaching their goals.

So they have a lot of work left.  And if we take them at their word, a weak yen and higher stocks will play a big role in that work.  That makes today’s knee-jerk retreat in yen-hedged Japanese stocks a gift to buy.

U.S. stocks have well surpassed pre-crisis, record highs.  German stocks have well surpassed pre-crisis, record highs.  Japanese stocks have a long way to go.  In fact, they are less than “halfway there.”

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We talked this week about the way markets are set up for a significant positive perception shift.  It’s been led by oil, which had its third consecutive close above $40 today.  Yields are another key brick in the foundation that may be laid tomorrow.

As oil prices have been a threat to the global economic and stability outlook over the past few months, yields have also been sending a negative signal to markets.  The yield on the German 10-year got very close to the all-time lows this week, inching closer to the zero line (and negative territory).  And U.S. 10-year yields, following the Fed’s last meeting, have fallen back from 2% down to as low as 1.68%  — just 30 basis points above the all-time low of July 2012, when Europe was on the edge of a sovereign debt blow-up.  And remember, this is AFTER the Fed has raised rates for the first time in nine years.

So yields have been signaling an uglier path forward, if not deflation forever in places like Japan and Europe.  Of course, the move by Japan to negative interest rates in January was a strong contributor to the perception swoon about the global economy.  But a key component in Japan’s move, and in the coordinated actions by central banks over the past two months, has been the threat from the oil price bust.  And that is now on the mend. Oil is up 58% from its February low.

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Still, global yields are hanging around at the lows.

Tomorrow we get euro zone and U.S. inflation data.  As we’ve said, when expectations and perception has been ratcheted down so dramatically, we can get an asymmetric outcome.  Earnings expectations are in the gutter.  Economic growth expectations are in the gutter.  Same can be said for expectations on the outlook for inflation data.  In a normal world, hotter than expected inflation is a bad signal for the risk-taking environment.  In our current world, hotter than expected inflation would not be a good signal, it would be a very good signal. It would show the economy has a pulse.

Yields in the two key government bond markets are set up nicely for a bottom on some hotter inflation data.

Here’s a look at German yields…

Source: Billionaire’s Portfolio, Reuters

Tuesday, German yields touched 7.5 basis points.  Remember, earlier in the month we talked about what happened the last time German yields were this low.

Bond kings Bill Gross and Jeffrey Gundlach said it was crazy. Bill Gross called the German bund the “short of a lifetime” (short bonds, which equates to a bet that yields go higher). He compared it to the opportunity when George Soros broke the Bank of England and made billions shorting the British pound. Gundlach said it was a trade with almost no upside and unlimited downside.

They were both right. In the chart below you can see the explosive move in German rates (in blue) away from the zero line.  In the chart below, you can see the 10-year German bond yields moved from 5 basis points to 106 basis points in less than two months — a 20x move.  U.S. 10 year yields (the purple line) moved from 1.72% to 2.49% almost in lock-step.

On the move down on Tuesday, the yield on the German bund reversed sharply and put in a bullish outside day (a key reversal signal).  Could it have been the bottom into tomorrow’s inflation data?

Coincidentally, the U.S. 10-year looks like a bottom may be in as well.

Source: Billionaire’s Portfolio, Reuters

U.S. yields have a chance to break this downtrend tomorrow on a hotter inflation number.

As we said yesterday, in addition to oil, these are very important charts for financial markets and for the global economic outlook.  A bottom in these yields, as well as the continued recovery in oil will be important for restoring confidence in the global economic outlook.

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People continue to blame softness in global markets on China. For years, there has been fear and speculation of “hard landing” for the Chinese economy.

When we talk about China, it’s all relative. China was growing at double digit pace for the better part of the past 25 years. Now Chinese growth has dropped to below 7%. That’s recession-like territory for the Chinese economy.

But the Chinese have powerful tools to promote growth. And we expect them to use those tools, sooner rather than later.

As we know their biggest and most effective tool is their currency. They ascended to the second largest economy in the world over the past two decades by massively devaluing their currency, and then pegging it at ultra-cheap levels. It allowed them to corner the world’s export market, sucking jobs and valuable foreign currency out of the developed world. This is precisely what Donald Trump is alluding to when he says “China is stealing from us.”

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Interestingly though, it’s China, most recently, that has been getting hurt by currency. Over the past four years, the Bank of Japan has devalued their currency against the dollar by nearly 40%. And other export-driven emerging market economies have had massive declines in their currencies (Brazil, Mexico, Argentina, Russia). Given that China has actually been appreciating its currency against the dollar for the past 10 years (albeit gradually), they’ve given back a lot of ground on their export advantage.

Source: Reuters, Billionaire’s Portfolio

In the chart above, you can see the yen weakening dramatically against the dollar (the purple line moving higher = stronger dollar, weaker yen). The orange line is the dollar vs. the Chinese yuan. You can see the relative advantage that the BOJ’s QE program has created (the gap between the purple and orange lines). With that, the orange line rising, since 2014, represents China backing off of its pledge to appreciate its currency. They are fighting to preserve their export advantage by weakening the yuan again.

In August, they devalued by less than 2% in a day and global markets went haywire. That move is nothing extreme in currencies, especially an emerging market currency. But given China’s currency history and their policy stance, since 2005, to allow their currency to appreciate under a “managed float” (managing a daily range for the currency), it has markets confused. When people are confused, they “de-risk” or sell.

Now, China will likely continue this path. Our bet is that markets will finally realize that, in the shorter term, this will be good for global growth and good for the health and stability of global financial markets. Better growth in China, at this stage, is good.

Among their other tools to stimulate growth, China has interest rates. While most of the world is pegged at zero rates (or close to it, if not negative) China’s benchmark interest rate is still 4.35%. And their inflation rate is running 1.5%, well below their target of 3%. That’s a recipe for aggressive rate cuts, which would be a boon for the Chinese economy and for the global economy.

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Stocks have roared back in the past several days. It’s been led by commodity stocks, the area that has been beaten up and left for dead. Not surprisingly, the bounce in that area has been multiples of the broader stock market bounce (which is 7% in less than a week).

As we’ve discussed in recent weeks, in the world we live in, global economic stability continues to rely on central bank influence. And, indeed, after one of the worst starts for stocks in a New Year ever, it was central bank verbal posturing to open the week that has turned the tide for global markets. On Sunday, the head of the BOJ spoke, warning that they were watching markets closely and stood ready to act, and then on Monday, the head of the European Central Bank said, effectively, the same. The result: the BOJ comments sparked a 10% rally in Japanese stocks in a matter of hours. With that lead, the S&P 500 has now rallied 7% in three days, crude oil has bounced 20%, and global interest rates are bouncing back (which, last week, were pricing in recession).

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Like it or not, in a world where the economy remains structurally fragile after the global financial and economic crisis, the central banks remain in the driver’s seat and they know that promoting stability is the key to recovery and ultimately returning to sustainable economic growth. As we approach the March ECB and BOJ meetings, with weak oil prices persisting, we continue to think the central banks may outright buy oil and commodities to remove the risk of oil industry bankruptcies and the domino effect that it would spark. As an additional benefit, it would likely turn out to be a very profitable investment.

Today we want to talk about the quarterly SEC filings that came in this week. All big investors that are managing over $100 million are required to publicly disclose their holdings every quarter. They have 45 days from the end of the quarter to file that disclosure with the SEC. It’s called a form 13F. While these filings have become very popular fodder for the media, what we care more about is 13D filings. Those are disclosures these big investors have to make within 10 days of taking a controlling stake in a company. When you own 5% or more of a company’s stock, it’s considered a controlling stake. In a publicly traded company, with that sized position, you typically become the largest shareholder and, as we know, with that comes influence. Another key attribute of this 13D filing, for us, is that these investors also have to file amendments to the 13D within 10 days of making any change to their position.

By comparison, the 13F filings only offer value to the extent that there is some skilled analysis applied. Thousands of managers file 13Fs every quarter. And the difference in manager talent, strategies and portfolio sizes run the gamut.

With that caveat, there are nuggets to be found in 13Fs. Let’s talk about how to find them, and the take aways from the recent filings.

First, it’s important to understand that some of the positions in 13F filings can be as old as 135 days. Filings must be made 45 days after the previous quarter ends, which is 90 days. We only look at a tiny percentage of filings—just the investors that we know have long and proven track records, distinct approaches, and who have concentrated portfolios.

Through our research over 15 years, here’s what we’ve found to be most predictive:

Clustering in stocks and sectors by good hedge funds is bullish. Situations where good funds are doubling down on stocks is bullish. This all can provide good insight into the mindset of the biggest and best investors in the world, and can be a predictor of trends that have yet to materialize in the market’s eye.
For specialist investors (such as a technology focused hedge fund) we take note when they buy a new technology stock or double down on a technology stock. This is much more predictive than when a generalist investor, as an example, buys a technology stock.

The bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success. Again, in most cases, we will see these first in the 13D filings.

New positions that are of large, but under 5%, are worthy of putting on the watch list. These positions can be an indicator that the investor is building a position that will soon be a “controlling stake.”

Trimming of positions is generally not predictive unless a hedge fund or billionaire cuts a position by 75% or more, or cuts below 5% (which we will see first in 13D filings). Funds also tend to trim losers into the fourth quarter for tax loss benefits, and then they buy them back early the following year.

With that in mind, we want to talk about a few things we did glean from these recent filings.

First, the old adage “buy when there is blood in the streets” was evident last quarter, as many of the top billionaire investors loaded up on stocks in the fourth quarter. That was BEFORE the further declines this year.

Top billionaire investors Paul Singer, David Tepper and Chase Coleman of Tiger Global all increased their equity exposure (buying more stocks) over the last quarter. And billionaire investors still love health care stocks. John Paulson, Bill Ackman, Dan Loeb and Larry Robbins loaded up, with Paulson putting 56% of his portfolio in health care.

Billionaires are starting to bottom fish in energy. Seth Klarman, David Tepper, Carl Icahn and Warren Buffett all either added to, or initiated new stakes in energy stocks. Tepper now has 12% of his entire equity portfolio in energy stocks! This obviously coincides well with the theme that energy and commodity stocks are starting to bottom.

Also notable, in recent weeks, the 13D filings have been coming in fast and furious as investors are taking advantage of the decline this year.

Analyzing these filings is part of our process in our Billionaire’s Portfolio. With that in mind, this week we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).

The Fed has manufactured a recovery by promoting stability. And they’ve relied on two key asset prices to do it: stocks and housing. Today we want to look at a few charts that show how important the stock and housing market recoveries have been.

While QE and the Fed’s ultra easy policy stance couldn’t directly create demand in a world of deleveraging, it did (and has) indirectly created demand by promoting stability, which restored confidence. Without the confidence that the world will be stable, people don’t spend, borrow, lend or hire, and the economy goes into a deflationary vortex.

But by promising that they stand ready to act against any futures shocks to the economy (and financial markets), investors feel comfortable investing again (stocks go higher). When stocks go higher and the environment proves stable, employers feel more confident to hire. This all fuels demand and recovery. And, of course, the Fed has pinned down mortgage rates at record lows, which promotes a housing recovery, and gives underwater homeowners (at one point, more than a quarter of all homeowners with mortgages) a since that paper losses will at some point be overcome, and that gives them the confidence to spend money again, rather sit on it.

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Along the path of the economic recovery, the Fed (and other key central banks) has been very sensitive to declines in stocks. Why? Because declining stocks has the ability to undo what they’ve done. And if confidence breaks again, it will be far harder to restore it.

The first chart here is the S&P 500. Stocks bottomed in March of 2009, when the Fed announced a $1 trillion QE program.

Source: Billionaire’s Portfolio

Stocks surpassed the pre-crisis highs in 2013 after six years in the hole. But even after the dramatic rise you can see in the chart the damage from the crisis is far from restored. If we applied the long term annual rate of growth of the S&P 500 (8%) to the pre-crisis highs, the S&P 500 should be closer to 3,150 (over 60% higher).

How does housing look? Of course, bursting of the housing bubble was the pin that pricked the global credit bubble. Housing prices in the U.S. have been in recovery mode since 2012. Still, housing has a ways to go. This is a very important component for the Fed, for sustainable recovery.

Source: Billionaire’s Portfolio

Housing prices have bounced more than 30% off of the lows (for 20 major cities in the index) – but remains about 13% off of the pre-crisis highs.

How has the recovery in stocks and housing reflected in the broader economy?

As stocks surpassed pre-crisis highs in 2013, so did U.S. per capita GDP.

Source: Billionaire’s Portfolio

While bloated government debt continues to be a big structural problem for the U.S and the rest of the world, growth goes a long way toward fixing that problem.

And growth, low interest rates, higher stocks and higher housing prices goes a long way toward restoring household net worth. As you can see in the chart below, we have well recovered and surpassed pre-crisis levels in household net worth…

Source: Billionaire’s Portfolio

What is the key long-term driver of economic growth overtime? Credit creation. In the next chart, you can see the sharp recovery in consumer credit since the depths of the economic crisis (in orange). This excludes mortgages. And you can see how closely GDP (economic output) tracks credit growth (the purple line).

Source: Reuters, Forbes Billionaire’s Portfolio

What about deleveraging? It took 10 years to build the global credit bubble that erupted in 2007. Based on historical credit bubbles, it typically takes about as long to de-lever. So 10-years of deleveraging would put us at year 2017. With that, it’s fair to think we could be very near the end of that period, where paying down debt has weighed on economic growth.

You can see in the chart below, the average annual growth rate of consumer credit over the past 55 years is 7.9%. And over the past five years, despite the deleveraging, consumer credit growth has been solid, just under the long term average. And importantly, FICO scores in the U.S. have reached an all-time high.

Source: Billionaire’s Portfolio

With the recent correction in stocks, there has been increased scrutiny on the economy. Some are predicting another recession ahead. Others are waving the red flag anywhere they find soft economic data. Consumption makes up more than 2/3 of the U.S. economy. And you can see from the charts above, the consumer is in a solid position. But stocks and housing remain key drivers of the recovery. The Fed is well aware of that. With that, don’t expect the Fed, in the current economic environment, to do anything to alter the health of the housing and stock markets.

This week, in our BillionairesPortfolio.com, we followed one of the best billion dollar (plus) activist hedge funds into a stock where they own 12.5%, have three board seats, and are in the process of replacing the CEO. These are are three key ingredients in the success of activist campaigns: 1) a big concentrated position (12.5% stake), 2) control (board seats), and 3) change (a new CEO). This activist fund has won on 82% of its campaigns since 2002 and has a price target on this stock that’s more than 150% higher than the current share price. To join us you can subscribe to our Billionaire’s Portfolio (here).

To follow the stock picks of the world’s best billionaire investors, subscribe at Billionaire’s Portfolio.

2/8/16

When housing prices stalled in 2006 and then collapsed over the next three years, the subprime lending schemes quickly became exposed.

Mortgage defaults led to a banking crisis. Due to the highly interconnectedness of banks globally, the problems quickly spread to banks around the world. A banking crisis led to a global credit freeze. When people can’t access credit, that’s when it all hits the fan. Companies can’t meet payroll, don’t have the liquidity to make new orders. Jobs get cut. Companies go bust. Finally, the microscope on overindebtedness of consumers and corporates, turns to countries. Deficits leads to debt. Debt leads to downgrades. Downgrades leads to defaults.

For the most part, defaults were averted because central banks and governments stepped in, in a coordinated way, to backstop failing banks, failing companies and failing countries. From that point, continued central bank stimulus has 1) enabled banks to recapitalize, 2) foiled additional shock events, and 3) restored confidence to employers (to hire), to investors (to invest) and to consumers (to spend again).

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As we’ve discussed in the past two weeks, persistently low oil prices represent a risk on par with the housing bust. And in recent days we’re seeing the signs of another global financial and economic crisis creeping uncomfortably closer to a “part two.”

As we’ve said, this time would be much worse because governments and central banks have exhausted the resources to bailout failing banks, companies and countries. But central banks, namely the Bank of Japan and/or the European Central Bank do have the opportunity to step-in here, become an outright buyer of commodities (particularly oil), as part of their QE programs, to avert disaster. But time is the oil industries worst enemy and therefore a big threat to the global economy. The longer policymakers drag their feet, the closer we get to the edge of global crisis — a crisis manufactured by OPEC’s price war.

Unfortunately, there are the building signs that the market is beginning to position for the worst outcome…

Key bank stocks in Europe are trading at levels lower than in the depths of both the global financial crisis (2009) and the European sovereign debt crisis (2012).

Source: Reuters, Billionaire’s Portfolio

The credit default swap market for key industries is sending up flares. This is where default insurance can be purchased against a company or country – and the place speculators bet on a company’s demise. Billionaire John Paulson famously made billions betting against the housing market via credit default swaps. Now the fastest deteriorating companies in Europe are banks. And the fastest deteriorating companies in North America are insurance companies (a sector that tends to have investments in high yield debt … in this case, exposure to the high yield debt of the oil and gas industry).

Source: Markit

The early signal for the 2007-2008 financial crisis was the bankruptcy of New Century Financial, the second largest subprime mortgage originator. Just a few months prior the company was valued at around $2 billion.

On an eerily similar note, a news report hit this morning that Chesapeake Energy, the second largest producer of natural gas and the 12th largest producer of oil and natural gas liquids in the U.S., had hired counsel to advise the company on restructuring its debt (i.e. bankruptcy). The company denied that they had any plans to pursue bankruptcy and said they continue to aggressively seek to maximize the value for all shareholders. However, the market is now pricing bankruptcy risk over the next five years at 50% (the CDS market).

Still, while the systemic threat looks similar, the environment is very different than it was in 2008. Central banks are already all-in. On the one hand, that’s a bad thing for the reasons explained above (i.e. limited ammunition). On the other hand, it’s a good thing. We know, and they know, where they stand (all-in and willing to do whatever it takes). With QE well underway in Japan and Europe, they have the tools in place to put a floor under oil prices.

In recent weeks, both the heads of the BOJ and the ECB have said, unprompted, that there is “no limit” to what they can buy as part of their asset purchase program. Let’s hope they find buying up dirt-cheap oil and commodities, to neutralize OPEC, an easier solution than trying to respond to a “part two” of the global financial crisis.

Bryan Rich is a macro hedge fund trader and co-founder of Forbes Billionaire’s Portfolio, a subscription-based service that empowers average investors to invest alongside the world’s best billionaire investors. To follow the stock picks of the world’s best billionaire investors, subscribe at Forbes Billionaire’s Portfolio.