Thursday, May 28, 2020

Jim Rickards: Real Estate Will Collapse, the Fed Cannot Cure Insolvency

Even if individuals were inclined to spend, there would be reduced spending in any case because there are fewer things to spend money on. Shows and sporting events are called off. Restaurants and movie theaters are closed. Travel is almost nonexistent, and no one wants to hop on a cruise ship or visit a resort until they can be assured that the risk of COVID-19 is greatly reduced.

This will guarantee a continued slow recovery and persistent deflation, which makes the slow recovery worse.

In addition to these constraints on demand, there are serious constraints on supply. Global supply chains have been seriously disrupted due to shutdowns and transportation bottlenecks. Social distancing will slow production even at those facilities that are open and can get needed inputs.

One case of COVID-19 in a factory can cause the entire factory to be shut down for a two-week quarantine period. Companies that depend on the output of that factory to manufacture their own products will also be shut down.

Beyond these direct effects of lost income and lost output, there are significant indirect effects on the willingness of entrepreneurs to invest and of individuals to spend.

First among these is the “wealth effect.” When stock values drop 20–30% as they have recently, investors feel poorer even if they have substantial net worth after the drop. The psychological effect is to cause people to reduce spending even if they can afford not to.

This means that spending cutbacks come not only from the middle class and unemployed but also from wealthier individuals who feel threatened by lost wealth even if they have continued income.

Finally, real estate values will collapse as tenants refuse to pay rent and landlords default on their mortgages, putting properties into foreclosure.

None of these negative economic consequences of the New Depression are amenable to easy fixes by the Congress or the Fed.

Deficit spending will not “stimulate” the economy as the recipients of the spending will pay bills or save money. The Fed can provide liquidity and keep the lights on in the financial system, but it cannot cure insolvency or prevent bankruptcies.

The process will feed on itself expressed as deflation, which will encourage even more savings and discourage consumption. We’re in a deflationary and debt death spiral that has only just begun.

Based on this analysis, investors should expect the recovery from the New Depression to be slow and weak. The Fed will be out of bullets. Deficit spending will slow growth rather than stimulate it because the unprecedented level of debt will cause Americans to expect higher taxes, inflation or both.

The U.S. economy will not recover 2019 levels of GDP until 2022. Unemployment will not return even to 5% until 2026 or later.

This means stocks are far from a bottom. The S&P 500 Index could easily hit 1,870 (it’s 2,943 as of this writing) and the Dow Jones Index could fall to 15,000 (it’s 24,360 as of this writing).

Those are levels at which investors might want to consider investing in stocks.

Any effort to “buy the dips” in the meantime will just lead to further losses when the full impact of what’s described above begins to sink in.


- Source, James Rickards via the Daily Reckoning

Monday, May 25, 2020

The Gold Chronicles with Jim Rickards and Alex Stanczyk


New Book under development on the Pandemic and Depression *Why Scientists without expert knowledge of the economy may not be the best source for determining economic policy 
*Why discernment of the various views of scientists with opposing views on how to deal with Coronavirus is important *Unemployment Claims have exceeded 38m in the US 
*There has never been a time when the stock market does not accurately reflect what is happening in the real economy 
*S&P 500 is a cap weighted index where a few major companies dominate the index. Major companies which are doing well do not reflect the stock market as a whole or the rest of the economy *Algorithms that decide the majority of trading in markets today were written before the Pandemic 
*Deflation, Inflation, Hyperinflation 
*The psychology of inflation and what leads to increase of velocity of money - quantity theory of money versus phase transitions in psychology 
*In a deflationary environment where the Fed has printed close to $10T but still cant get inflation leaves one tool left in the toolkit.. raising the price of gold 
*Raising the price of gold would require open market operations in gold - Fed printing money to buy gold or to sell gold in order to maintain a specific price range measured in USD 
*Raising the price of gold as a tool to get inflation in the USD during prolonged and massive deflation is not a theory, it has been used in the past 
*Expectations of continuing deflation in the short to mid term, but inflation must be created, the trick for the Fed is making sure it sticks the landing 
*Scenarios for gold price and inflation numbers if the Fed overshoots and ends up with higher inflation than it wants *Censorship and deplatforming of people from major media platforms such as YouTube and Twitter 
*The polarization of views of people around the world in terms of freedom vs authoritarian approaches to governance, and where it is leading 
*Essential versus Nonessential Businesses and Occupations *United States Code: Law enforcement officers, judges, public officials violating Constitutional rights under color of law versus emergency powers granted during threats to national security *Reparations for China such as seizing/cancelling UST’s or delisting Chinese company stocks on US exchanges 
*Will reparations move the US and China closer to kinetic warfare

Friday, May 22, 2020

Jim Rickards: Don’t Believe the Happy Talk

Nothing like what we’re witnessing has ever happened before. Even the savviest analysts cannot yet internalize what happened.

As I explained earlier, comparisons to the 2008 crisis or even the 1929 stock market crash that started the Great Depression fail to capture the magnitude of the economic damage of the virus. You may have to go back to the Black Plague of the mid-14th century for the right comparison.

Unfortunately the economy will not return to normal for years. Some businesses will never return to normal because they’ll be bankrupt before they are even allowed to reopen.

Businesses like restaurants, bars, pizza parlors, dry cleaners, hair salons and many similar businesses make up 44% of total U.S. GDP and 47% of all jobs. This is where many of the job losses, shutdowns and lost revenues occurred.

The U.S. government response to the economic collapse has been unprecedented in size and scope. The U.S. has a baseline budget deficit of about $1 trillion for fiscal year 2020. Congress added $2.2 trillion to that in its first economic bailout bill. A second bailout bill added an additional $500 billion. Another bill may add another $2 trillion to the deficit.

Combining the baseline deficit, enacted legislation and anticipated legislation brings the fiscal 2020 deficit to $5.7 trillion. That’s equal to more than 25% of GDP and will push the U.S. debt-to-GDP ratio to as high as 130% once the lost output ($6 trillion annualized) is taken into account. The previous record debt for the U.S. was about 120% of GDP at the end of World War II.

This puts the U.S. in the same category as Greece, Lebanon and Japan when it comes to the most heavily indebted countries in the world.

The Federal Reserve is also printing money at an unprecedented rate. The Fed’s balance sheet is already above $6.7 trillion, up from about $4.5 trillion at the end of QE3 in 2015. The first rescue bill for $2.2 trillion included $454 billion of new capital for a special purpose vehicle (SPV) managed by the U.S. Treasury Department and the Fed.

Since the Fed is a bank, it can leverage the SPV’s $454 billion in equity provided by the Treasury into $4.54 trillion on its balance sheet. The Fed could use that capacity to buy corporate debt, junk bonds, mortgages, Treasury notes and municipal bonds and to make direct corporate loans.

Once the Fed is done, its balance sheet will reach $10 trillion.

That much is known. What is not known is how quickly the economy will recover. The best evidence indicates that the economy will not recover quickly, and an age of low output, high unemployment and deflation is upon us.

Here’s why the economic recovery will not exhibit the “pent-up demand” and other happy-talk traits you hear about on TV…

The first reason the economic downturn will persist is the lost income for individuals. Unemployment compensation and PPP loans will only scratch the surface of total lost income from layoffs, pay cuts, reduced hours, business failures and individuals who are not only unemployed but drop out of the workforce entirely.

In addition to lost wages through layoffs and pay cuts, many other workers are losing pay in the form of tips, bonuses and commissions. Even a fully employed waitress or salesperson cannot collect tips or sales commissions if there are no customers. This illustrates how the economy is tightly linked so that problems in one sector quickly spread to other sectors.

In addition to lost individual income, there is a massive loss of business income. Earnings per share of publicly traded companies are not only declining in the second quarter (and likely the third quarter) but many are negative.

Lost business income will be another source of lower stock valuations and a source of dividend cuts. Reduced dividends are also a source of lost income for individual stockholders who rely on dividends to pay for their retirements or medical expenses.

Programs such as PPP and other direct government-to-business loans will not come close to compensating for the losses described above. The loans (which can turn into grants) will help for a month or two but are not a permanent solution to lost customers.

For still other firms, the loans won’t help at all because the firms are short of working capital and will simply close their doors for good and file for bankruptcy. This means the jobs in those enterprises will be permanently lost.

From these straightforward events (lost individual income, lost business income, dividend cuts and bankruptcies) come a host of ripple effects.

Once the government aid is distributed, many recipients will not spend it (as hoped) but will save it. Such savings are called “precautionary.” Even if you are not laid off, you may worry that your job is still in jeopardy. Any income you receive will either go to pay bills or into savings “just in case.”

In either case, the money will not be used for new spending. At a time when the economy needs consumption, we will not get it. The economy will fall into a “liquidity trap” where saving leads to deflation, which increases the value of cash, which leads to more saving. This pattern was last seen in the Great Depression (1929–40) and will soon be prevalent again.

- Source, Jim Rickards

Friday, May 15, 2020

Insights from Jim Rickards: Gold Price Manipulation, How it's Done and Will it Continue For Much Longer?


Jim Rickards argues that the price of gold is manipulated. Today, we examine his view on gold price manipulation, how it occurs and whether the suppressing of gold prices can be sustained. 

After all, if you’re buying gold you want to understand all of the factors that can influence its price. 

We then explore arguments made by Real Vision Co-Founder Grant Williams exploring the gold leasing mechanism which he likens to a pyramid scheme. 

Taking on board the views of these experts we determine whether gold price manipulation can be sustained.



Monday, May 11, 2020

James Rickards: This Crisis Will Affect Us for Generations, Expect a Very Weak, Slow Rebound



James Rickards is the New York Times bestselling author of Aftermath, The Road Road to Ruin, The Death of Money, Currency Wars, and The New Case for Gold, which have been translated into sixteen languages. He is the editor of the newsletter Strategic Intelligence and is a member of the advisory board of the Center for Financial Economics at Johns Hopkins University. As an adviser on international economics and financial threats to the Department of Defense and the U.S. intelligence community, he served as a facilitator of the first-ever financial war games conducted by the Pentagon. He lives in New Hampshire.

Monday, May 4, 2020

James Rickards: Get Ready for Social Disorder

"Yet even this three-system analysis I just described (pandemic > economy > politics) does not go far enough. The next phase has been little noticed and less discussed.

It involves social disorder. An economic breakdown is more than just economic. It leads quickly to a social breakdown that involves looting, random violence, fraud and decadent behavior.

The Roaring ’20s in the U.S. (with Al Capone and Champagne baths) and Weimar Germany (with riots and cabaret) are good examples.

Looting, burglary and violence in the midst of a state of emergency are the shape of things to come.

The veneer of civilization is paper-thin and easily torn. Most people don’t realize how fragile it is. But they’re going to learn that lesson, I’m afraid.

Expect social disorder to get worse long before it gets better."



- Source, James Rickards

Friday, May 1, 2020

James Rickards: Geopolitical and Monetary Impact of the China Virus?


James Rickards, New York Times bestselling author of The Death of Money and Currency Wars, gives his opinion about the possible demise of fiat currencies.

How is this all going to play out and how far are governments going to take their money printing?

Will the fiat based system survive the coronavirus crisis, or will it implode under all this newly created debt, out of thin air?

- Video Source, Jay Taylor Media

James Rickards: Complex Systems Collide, Disease and Financial Contagion


Zooming out a bit, and as I’ve argued before, the pandemic is a prime example of complex systems colliding into one another…

Investors and everyday citizens are focused on how the COVID-19 pandemic (one complex dynamic system) is crashing into the economy (another complex dynamic system) and influencing the political process and the upcoming U.S. presidential election (still another complex dynamic system).

Analyzing the operations of one complex dynamic system is difficult enough; most analysts can’t do it because they’re using the wrong paradigms.

Analysis becomes far more challenging when multiple complex systems interact with each other and produce feedback loops. That’s where the real so-called “Black Swans” reside.

And this crisis is the blackest swan most people alive today have ever seen, especially if Rogoff’s insight is correct — 150 years is a very long time.

That’s not to minimize in any way recent events like 9/11 or the 2008 financial crisis. Both were devastating. But neither led to a virtual lockdown of the entire economy like we’re seeing now. The current crisis simply has no precedent.

What we’re seeing is a full-fledged global contagion.
Biological and Financial Contagions

Let’s discuss the word “contagion” for a minute because it applies to both human populations and financial markets — and in more ways than you may expect.

There’s a reason why financial experts and risk managers use the word “contagion” to describe a financial panic.

Obviously, the word contagion refers to an epidemic or pandemic. In the public health field, a disease can be transmitted from human to human through coughing, shared needles, shared food or contact involving bodily fluids.

An initial carrier of a disease (“patient zero”) may have many contacts before the disease even appears.

Some diseases have a latency period of weeks or longer, which means patient zero can infect hundreds before health professionals are even aware of the disease. Then those hundreds can infect thousands or even millions before they are identified as carriers.

In extreme cases, such as the “Spanish flu” pandemic of 1918–20 involving the H1N1 influenza virus, the number infected can reach 500 million and the death toll can run over 100 million.

A similar dynamic applies in financial panics.

It can begin with one bank or broker going bankrupt as the result of a market collapse (a “financial patient zero”).

But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008.

Still, the comparison between medical pandemics and financial panics is more than a metaphor.

Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus.

But what happens when these two dynamic functions interact? What happens when a biological virus turns into a financial virus?

We’re seeing those effects now...

- Source, James Rickards

Tuesday, April 28, 2020

Jim Rickards: Worst Recession in 150 Years


The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.
Not the Early 19th Century Anymore
It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

If you let England produce sweaters and Italy make shoes, everybody was better off at the end of the day. It’s a simple example, but you get the point.

But in today’s highly integrated and globalized world, where you can simply relocate a factory from one country to the next, comparative advantage has much less meaning. You can produce both sweaters and shoes in China as easily as you can produce them in England and Italy (and much more cheaply besides).

There are many other examples of lazy, dogmatic analysis among mainstream economists, too many to list. Yet there are some exceptions to the rule.

A few economists have developed theories that are supported by hard evidence and do a great job of explaining real-world behavior. One of those economists is Ken Rogoff of Harvard.
The Worst Recession in 150 Years

With his collaborator, Carmen Reinhart and others, he has shown that debt-to-GDP ratios greater than 90% negate the Keynesian multiplier through behavioral response functions.

At low debt ratios, a dollar borrowed and a dollar spent can produce $1.20 of GDP. But at high ratios, a dollar borrowed and a dollar spent will produce only $0.90 of GDP.

This is the reality behind the phrase “You can’t borrow your way out of a debt crisis.” It’s true.

Meanwhile, the U.S. debt-to-GDP ratio was about 105% even before the crisis. It’s only going higher. We’re just digging a deeper hole for ourselves.

So when Ken Rogoff talks (or writes), I listen. In his latest article, Rogoff offers a dire forecast for the recovery from the New Depression resulting from the COVID-19 pandemic.

He writes, “The short-term collapse… now underway already seems likely to rival or exceed that of any recession in the last 150 years.”

That obviously includes the Great Depression and many other economic crises.

This is something you should really consider before you decide the coast is clear and it’s time to jump back into stocks.

- Source, Jim Rickards via the Daily Reckoning

Friday, April 24, 2020

James Rickards: Trump Says “No” to World Money


Over the course of 13 years as a media commentator and nine years as a bestselling author, I’ve had frequent occasion to state the following:

“In 1998, Wall Street came together to bail out a hedge fund. In 2008, the Federal Reserve stepped forward to bail out Wall Street. Each crisis was worse than the one before. In the next crisis, who will bail out the Fed?”

This was more than just rhetoric. It was a clinical description of a pattern of worsening crises on an approximately 10-year tempo, along with escalating bailouts.

Now the worst economic crisis in U.S. history is here and the Fed itself is in need of a bailout.

But what is the source of that bailout?

We now know part of the answer. A few weeks ago, the U.S. Congress passed a $2.2 trillion bailout bill called the CARES Act. This is the law that provided $349 billion in small-business loans, which are forgivable if the employer does not lay off its employees.

That fund has dried up already with most businesses getting either no money or not enough to survive more than a few weeks.

Also buried in that law was a $425 billion bailout fund for the Treasury to recapitalize the Fed. Since the Fed operates like a bank, they will leverage that $425 billion of new capital into $4.25 trillion of new money printing to buy corporate debt, municipal bonds, mortgages and other assets in order to keep liquidity in the system.

Still, that’s also a temporary solution when many more trillions of dollars of new money will be needed.

U.S. GDP is expected to lose an annualized $6 trillion or more in output in the second quarter. I estimate that 50% of retail and 90% of office rents aren’t being paid right now. Many small businesses will fail and probably never reopen.

I had always suggested that the IMF has the only clean balance sheet and would be the only source of liquidity in the world once the Fed was tapped out.

That’s exactly what we’re seeing now. The world is turning to the IMF for help. And that means printing the world money called special drawing rights (SDRs) to bail out the global financial system in the current economic and financial crisis.

SDRs were used in a small way during the 2008 financial crisis. They did not have much impact because the quantity was relatively small (about $250 billion equivalent) and it took a long time to get done. The SDRs were issued in August 2009, almost a year after the acute phase of the crisis and after a recovery had already begun.

Still, the 2009 issuance was a good dry run in preparation for the next crisis. Now the next crisis is here.

The world has never been so deeply in debt.

Societies with low debt burdens are robust to disaster. They can mobilize capital, raise taxes, increase spending and rebuild when the crisis is over.

But heavily indebted societies are much more brittle. They just don’t have that flexibility. Meanwhile, panicked creditors demand repayment that causes distressed sales of assets, falling markets and default.

That’s the situation we’re facing today.

Still, nothing this momentous happens without a heavy injection of politics, especially while Donald Trump and his “America First” agenda are in place.

A normal SDR printing exercise requires that the total SDRs be issued to all IMF members in proportion to their voting rights in the IMF. This means that U.S. adversaries such as Iran and China would get part of the bailout money along with more needy countries in Africa and Latin America.

The U.S. is now holding up the new issuance of new SDRs for exactly this reason.

We’ll see how this impasse gets resolved. Perhaps new SDRs will be issued right away. But as the depression lingers and the Fed’s impotence is exposed, the issue of printing a trillion SDRs will be back on the table.

China may have their own conditions such as a diminution in the role of the dollar as a global reserve currency. The U.S. may be more desperate when the time comes. Either way, this issue will not go away.

SDRs were originally intended as a kind of “paper gold.” Once the IMF starts the printing presses, investors will probably favor real gold as the proper antidote.

Below, I show you why gold is coming back to the global monetary system. As you’ll see, It can be done either in an orderly fashion, or a chaotic fashion.

- Source, James Rickards via the Daily Reckoning

Friday, April 17, 2020

James Rickards: Are We Facing the Greatest Depression? Worst Economic Crash in History?


Just how dire of a situation are we looking at? Will the COVID-19 outbreak lead to one of the greatest economic depressions of the modern era?

How far will governments go to bailout its people and its businesses?

Nothing like this has ever been attempted before and the ramifications could be felt for years to come.

Join James Rickards and Pippa Mamgren as they take on these questions, plus many more in their recent interview with Trigger Nometry.

- Source, Trigger Nometry