Richards On China, SDR - "Next Panic Will Be Bigger Than The Central Banks"

Pfizer is now in advanced talks to buy Allergan, a rival drug maker, for as much as $150 billion and Petrobras is facing a $24 billion repayment over the next 24 months. Ameera David weighs in. Then, Ameera sits down with Jim Rickards – editor of Strategic Intelligence and author of “The Death of Money” – to talk about China.

After the break, Bianca Facchinei takes a look at how ISIS makes its millions. Afterwards, Ameera and RT correspondent Manuel Rapalo discuss how the American Medical Association wants to ban direct to consumer advertising of prescription drugs. And in The Big Deal, Ameera and Edward Harrison talk about risky IPO investments.

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The Time to Play the Oil Rebound is Now

The price of oil hit the Saudi target price of $60 per barrel by the end of 2014. But it kept going down. The price hit $45 per barrel in January 2015 and $40 per barrel by this past summer. That was due to normal market overshooting and momentum trading. It was also due to the fact that desperate frackers actually increased production to meet the interest payments on their debt even thought they were in the process of going broke.

The Saudis knew this was a temporary overshoot. The frackers could not get financing to drill new wells. Also, overpumping the existing wells would just make them disappear faster.

As soon as the price of oil crashed, another human bias began to creep into Wall Street analysis. The same prominent voices that earlier said oil would stay high were now saying it would keep dropping!

Some well-known analysts were calling for $30 per barrel oil; one analyst even set his target at $15 per barrel. These low-ball figures were just as much off base as the earlier expectations of $130 per barrel oil. In fact, the Saudis had things mostly under control.

Using our market intelligence, we could see that when oil hit the $60 per barrel level (as it did in early May), it would soon head down again. When oil got too low (as it did in late August at $38 per barrel), it would soon head up. This analytical frame based on our intelligence sources has proved to be a highly accurate short-term predictive tool.

Absent a geopolitical shock in the Persian Gulf, oil is not going to $100 per barrel, and it’s not going to $30 per barrel. It will remain in a range of $50-60 per barrel (with occasional overshoots for technical reasons) until 2017. That’s how long it will take to destroy the frackers.

After that, the Saudis can gradually increase the price without having to worry about lost market share.

This story has been bad news for frackers and even worse news for leveraged commodities traders such as Glencore. Are there any winners? The answer is yes, but it takes some detachment from the herd to see who they are.

The oil industry is permeated in gloom right now because of oversupply and weak demand. Small producers are going out of business and a wave of energy-related bond defaults is about to wash over the fixed-income markets.

Who wins in this scenario? The answer is that the major global oil producers win. They have the diversification, financial strength and hedging ability to weather the storm.

The majors can bide their time and pick up oil assets for pennies on the dollar once the frackers file for bankruptcy. They also have close relations with the Saudis (through Saudi Aramco, the state-owned energy company of Saudi Arabia). This means that they are insiders when it comes to strategies such as the plan to destroy the frackers.

Because of human biases and crowd behavior, the stock prices of the major oil companies have been beaten down along with the price of oil and the stock prices of smaller players.

But the oil majors are in a league of their own and are positioning themselves to benefit from the rebound of prices in late 2016 and early 2017.

The time to play this rebound is now, not when the crowd catches on.

All the best,

Jim Rickards

Oil, Defaults and Human Behavior

Economics has been greatly enriched by the spread of behavioral insights.

Until the 1990s, economic analysis was dominated by ideas such as “efficient markets” and “rational expectations.” These doctrines were based on the notion that people were robots and would act to maximize wealth in all aspects of their behavior.

It was assumed that if markets were declining, rational investors would enter the market to scoop up bargains. This behavior would tend to stabilize markets and reduce volatility.

It turns out that human behavior is far from “rational” (as economists define it). As the result of some ingenious social science experiments conducted by Daniel Kahneman and others in the 1970s and 1980s, it has been demonstrated that people act in accordance with all kinds of biases and irrational impulses.

If markets are crashing, most investors will panic and dump stocks rather than look around for so-called bargains. More often than not, human behavior tends to amplify extreme movements rather than calm them down.

These biases come in many forms. There is herding (the tendency to follow the crowd), anchoring (the tendency to give too much weight to a particular event) and confirmation (the tendency to embrace data that we agree with and ignore contrary data).

If the crowd tends to be irrational, is there a way for you to remain focused and exploit the irrationality to your advantage as an investor?

The answer is yes, but only if you can overcome the biases of human nature. You need to look for signals (what we call “indications and warnings”) that show you what is really going on.

There is no better example of the tug of war between human bias and market fundamentals than the oil market.

Remember $100 per barrel oil? It wasn’t that long ago. As recently as July 25, 2014, less than 15 months ago, oil was $102.09 per barrel.

What kind of behavior did this high price produce? Many oil producers assumed the $100 per barrel level was a permanently high plateau. This is a good example of the anchoring bias. Because oil was expensive, people assumed it would remain expensive.

The fracking industry assumed oil would remain in a range of $70-130 per barrel. Over $5 trillion was spent on exploration and development, much of it in Canada and the U.S. This led to a flood of new oil, which reduced the market share of OPEC producers. Saudi Arabia was losing ground both to OPEC competitors and the frackers.

In mid-2014, Saudi Arabia developed a plan to destroy the fracking industry and regain its lost market share. The exact details of the plan have never been acknowledged publicly but were revealed to your editor privately by a trusted source operating at the pinnacle of the global energy industry.

The Saudi plan involved a linear optimization program designed to calculate a price at which frackers would be destroyed. But the Saudi fiscal situation would not be impaired more than necessary to get the job done.

A $30 per barrel price would surely destroy frackers but would also destroy the Saudi budget. An $80 per barrel price would be comfortable from a Saudi budget perspective but would give too much breathing room to the frackers. What was the optimal price to accomplish both goals?

Such optimization programs involve many assumptions and are not an exact science. Yet they do produce useful answers to complex problems and are much more reliable than mere guesswork or gut feel.

It turned out that the optimal solution for the Saudi problem was $60 per barrel. A price in the range of $50-60 per barrel would suit the Saudis just fine. That was a price range that would eliminate frackers over time but would not unduly strain Saudi finances.

What makes Saudi Arabia unique among energy producers is that they actually can dictate the market price to some extent. Saudi Arabia has the world’s largest oil reserves and the world’s lowest average production costs. Saudi Arabia can make money on its oil production at prices as low as $10 per barrel.

This does not mean that the Saudis want a $10 per barrel price. It just means they have enormous flexibility when it comes to setting the price wherever they want. If the Saudis want a higher price, they pump less. If they want a lower price, they pump more. It’s that simple. No other producer can do this without depleting reserves or going broke.


- Source, Jim Rickards via Daily Reckoning

A Massive Wave of Defaults

Debt comes in many forms, including high-quality US Treasury debt, high-grade corporate debt and junk bonds. Debt is also issued by both US companies and foreign companies. Some of the foreign corporate debt is issued in local currencies and some in dollars. In discussing debt defaults, it’s necessary to keep all of these distinctions in mind.

The US companies sitting on hoards of cash, such as Apple, IBM and Google, are not the ones I’m concerned about; they will be fine. The defaults will be coming from three other sources.

The first wave of defaults will be from junk bonds issued by energy exploration and drilling companies, especially frackers. These bonds were issued with expectations of continued high energy prices. With oil prices at $60 per barrel or below, many of these bonds will default.

The second wave will be from structured products and special purpose vehicles used to finance auto loans. We are already seeing an increase in subprime auto loan defaults. That will get worse.

The third wave will come from foreign companies that issued US dollar debt but cannot get easy access to US dollars from their central banks or cannot afford the interest costs now that the US dollar is much stronger than when the debt was issued.

The combined total of all three waves — energy junk bonds, auto loans and foreign corporations — is in excess of $10 trillion, more than 10 times larger than the subprime mortgages outstanding before the last crisis, in 2007.

Not all of these loans will default, but even a 10% default rate would result in over $1 trillion of losses for investors, not counting any derivative side bets on the same debt. This debt will not default right away and not all at once, but look for a tsunami of bad debts beginning in late 2015 and into early 2016.

Regards,

Jim Rickards

Jim Rickards Personal Portfolio

My personal portfolio is a blend of cash, fine art, gold, silver, land and private equity. I do not own any publicly traded stocks or bonds, partly due to restrictions under various regulatory requirements applicable to my role as a portfolio strategist and newsletter writer.

The mix in my portfolio changes from time to time based on valuations of the particular asset classes. My recommended mix is 10% precious metals, 10% fine art, 30% cash, 20% land and 30% alternatives such as hedge funds, private equity and venture capital.

Currently, my personal allocation is overweight land, fine art and private equity and underweight cash and precious metals. However, this will change, because the fine art fund is currently making profit distributions, which are being reallocated to gold, at what I consider to be a good entry point, and to cash.

All investors should be able to purchase precious metals and land and hold cash without difficulty. Alternatives such as hedge funds, private equity and venture capital are not open to all investors, because they are frequently traded as private funds limited to accredited investors with high minimum subscription amounts.

There are also publicly traded equities such as high-quality bond funds and companies holding hard assets in energy, transportation, natural resources and agriculture.

- Source, Daily Reckoning

Jim Rickards: Oil Shocks & The Global Economy

Jim Rickards appears on Russia Today, where he discusses global growth and the ongoing slowdown in China. Is the Death of Money on the way?

Jim Rickards the Fed & Weak US economy, Dollar depreciation; Greece and Europe

JIM RICKARDS on The Currency WAR and ECONOMIC Crisis 2015

Jim Rickards: Recession will force Fed to ease in 2016

Jim Rickards tells Lelde Smits there is no way the US Federal Reserve will hike rates. Instead, Rickards believes the next move will be easing in March 2016 and predicts the impact on markets, metals and currencies.

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Jim Rickards: Will Currency Wars Reorder the World?

Our guest this weekend is Jim Rickards, the author of the 'New York Times' bestseller 'The Death of Money' and a well-known expert in geopolitics and global capital.

Jim and Jeff discuss the unfolding drama at the Fed, which can't decide when—if ever—QE will come to an end. They also discuss possible endgame scenarios for liquidating unprecedented amounts of sovereign, commercial, and household debt; whether coming monetary shocks will present the IMF with an opportunity to demand a global currency reset, and who wins and loses when the game of musical chairs stops. This is a must-hear interview for anyone interested in currency wars, central banks, and the unholy politics behind it all.

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Threat Of Cyber War - Other Reasons to Own Physical Gold

Author and monetary expert Jim Rickards says that gold, apart from its qualities as a form of insurance against conventional economic crises, is an essential hedge against cyber warfare.

In an interview with Henry Bonner at SprottGlobal.com, ahead of the Sprott-Stansberry Vancouver Natural Resource Symposium taking place this week, Rickards said this subject would form part of his talk at the conference.

We have frequently covered the risks posed by cyber warfare and cyber terrorism to markets, investments and deposits, and these risks remain, as yet, widely underappreciated in the mainstream media and the wider world.

For example, the Stuxnet virus believed to have been deployed by the U.S. and Israel in cyber war against Iranian nuclear reactors almost caused a major environmental disaster in 2010. Dormant malware – believed to be of Russian origin – was found hidden and awaiting activation in the software that runs the Nasdaq exchange.

Moscow-based Kaspersky Lab showed earlier this year that an international team of hackers gained access to bank’s customer accounts – with the ability to alter account balances without the banks even being aware of their presence.

These examples show the highly vulnerable nature of the interconnected systems upon which people in the west have come to rely.

As Rickards astutely points out,

“Physical gold is a non-digital asset. You can’t attack it with cyber warfare, so I think it has another insurance function for investors there.”

He believes that the Greek crisis was a foreseeable step in the centralisation of power in Europe. In 1992 when it was agreed to launch a single currency there was an appetite for a common currency but a strong aversion to fiscal and political union.

The architects of the euro knew that the single currency could not exist indefinitely in the absence of fiscal union and so the project was launched in full anticipation of a crisis which could then be used as a “forcing strategy” to achieve fiscal union.

“We’re getting closer to that now,” he says. “Greece now has to run its government according to German dictates. Greece has already outsourced its monetary policy to the European Central Bank, and now it’s sort of outsourced its fiscal policy to the German finance ministry.”

“So you’re on a path to unified fiscal policy and ultimately the Eurobonds – bonds backed by full strength and credit of not just any one country but the entire Eurozone.”

He believes that there has been a lull in the currency wars between China and the U.S. but that it will likely resume next year if China manages to get the yuan included in the currency basket that makes up the SDRs at the IMF.

He says the U.S. is the gatekeeper of the IMF and so China is on its “best behaviour”. He says the Chinese are resisting the temptation to depreciate their currency despite a sluggish economy with this goal in mind but that once the objective has been achieved it will go back to currency manipulation.

He points out that the Chinese continue to accumulate large volumes of gold and that China’s stated gold reserves are an understatement.

“I believe that the numbers they have shown are significant but not nearly as high as what they actually have.”

When asked whether now is a good time to hold gold, he replied,

“I think it’s always very important to own gold. I’ve recommended that investors have about 10% of their portfolio in the yellow metal.”

He believes that such a proportion will not hurt investors too much even if the price continues its decline but that,

“If I’m right and some catastrophic event is on the horizon, then that 10% would be your portfolio insurance.”

He emphasises, however, the importance of holding physical gold as opposed to digital or paper gold.

“These products allow the counterparties to terminate the agreement by giving the investor a dollar value of their gains. But that would deprive you of any future gains. You might get cashed out just as the crisis was beginning and not be able to participate in the upside as the crises worsened.”

Rickards is correct in these warnings. If you cannot visit, hold and easily take delivery of your gold in the event of a “catastrophic event” then you do not own gold – rather you are speculating on the gold price.

All financial service and investment providers and indeed gold brokers are at the mercy of and dependent on technology today. However, if you only have one point of contact with your gold – a website – and you cannot buy, sell or take delivery of your gold then you do not own gold as financial insurance and a safe haven asset.

- Source, GoldSeek

How China's Devaluation Impacts the U.S.

In case you missed it, watch my new interview with Fox Business’s Deirdre Bolton. We discussed China’s economy and the currency devaluation of the yuan, and how it will effect other Asian and Western currencies.

- Source, DR

Jim Rickards: We Are in a Global Depression

China’s currency devaluation is a confirmation that the world’s second-largest economy could be on the verge of an economic collapse. At least, that’s the opinion of renowned analyst Jim Rickards.

“There’s no such thing as a one-time thing in currency wars,” he told Amanda Lang on CBC. “It won’t be their last move.” (Source: CBC News, August 14, 2015.)

The Chinese economy is slowing down faster than many economists thought before. China’s exports declined significantly and the country’s stock market crashed by more than 25%. In only a few weeks, this wiped out nearly $4.0 trillion of investors’ wealth. Authorities in China devaluated the yuan to boost the struggling economy and repeatedly said it would be a one-time devaluation.

“Currency wars have no logical conclusion except systemic reform or systemic collapse,” Rickards continued.

He believes currency wars which started in 2010 with devaluation of the U.S. dollar could last a long time. He suggested that there are only two solutions to make peace in the intensifying currency wars.

He also believes that the economic growth in the Chinese economy is lower than officials report. “The actual growth has been about four or five; today is down to two or three [percent].”

In respect to the possible interest rate hike in the U.S., Rickards thinks that the economic condition is much worse than people think and raising rates could create many more problems. “Raising rates are deflationary,” he warned.

The Federal Reserve is expected to raise the interest rate in September. But recent economic data suggested that the skepticism has grown over the Fed’s crucial decision.

“There is no way that the Fed can raise rates,” he added.

When the world’s largest economy has grown less than 1.5% this year and the second-largest economy is slowing down dramatically, the whole global economy may be on a verge of an economic collapse.

“We are in a global depression,” Rickards concluded. “The whole world is slowing down.”

- Source, Profit Confidental

The Dollar Will Not Be Overthrown in October

Blogs, newsletters, and inboxes are cluttered with dire warnings about an event in October 2015. That will supposedly overthrow the dollar as the global reserve currency and cause a catastrophic meltdown of the international financial system. In fact, nothing of the kind is about to happen.

There are important and significant events happening behind the scenes in the international monetary system. Monetary elites are meeting in Washington, Beijing and Lima, Peru. Decisions are being made that will impact global capital markets in the years to come, and there is a plan underway to solve the global debt problem by stealing your money through inflation.

But elites do not operate on the big bang theory. They do not announce radical changes overnight. They prefer to make small moves, year after year, through boring technical changes that few notice or understand. The elites have a plan to take your money. Yet they prefer a slow orderly approach, opposed to a rapid disorderly approach.

Here is a step-by-step walkthrough of what is really happening. You should not be frightened by the October scare tactics. You should be concerned about this long-term elite plan to destroy your wealth.

The centerpiece of the elite plan to wipe out debt and destroy wealth is the world money issued by the International Monetary Fund, the IMF. This world money is called the special drawing right, or SDR.

The SDR is actually not that complicated. The Federal Reserve can print dollars, the European Central Bank (ECB) can print euros and the IMF can print SDRs — it’s that simple.

The main difference is that we can keep dollars or euros in our bank accounts or wallets, but SDRs are for countries only. They are added to national reserves by the IMF. SDRs can be swapped for dollars, euros, yen or other major currencies using a secret trading facility inside the IMF in Washington. So the inflationary potential of printing trillions of SDRs is the same as printing trillions of dollars or euros once the recipients make the swap.

The main difference between SDRs and dollars or euros is that no one is accountable. When the IMF floods the world with SDRs, you won’t be able to blame the Fed or ECB. Few people will have any idea what’s happening. They’ll just find out the hard way that their savings have been wiped out by inflation.

With that as background, let’s look at a chronology of coming events. As events unfold, you’ll be able to see them in the proper sequence and perspective. We’ll be covering each in future issues, in our five recommended articles every Monday and in our live monthly briefings. Here’s the calendar:
Sept. 17, 2015 — The Fed’s FOMC announces policy changes in interest rates
September 2015 (exact date TBA) — President Xi of China visits White House
Oct. 9, 2015 — IMF annual meeting in Lima, Peru
November 2015 (exact date TBA) — IMF Executive Board discusses “new” SDR
Sept. 30, 2016 — New SDR goes into effect.

The first thing to notice about this schedule is that it blends events from the Fed, the White House and the IMF. That’s a reflection of the fact that the IMF is closely coordinating its efforts with central banks and heads of state.

In the past, the U.S. Treasury was the primary agency involved with the exchange value of the dollar. The Fed focused on the U.S. economy but did not involve itself with the dollar in international markets. That has changed.

When I met Ben Bernanke in Korea recently, he told me he was heavily involved in discussions with the IMF in 2009 and 2010 on a variety of issues including IMF voting rights, issuance of SDRs, U.S. funding of the IMF and an increased voice for China. This four-way interaction of the White House, Fed, Treasury and IMF is now well entrenched.

Right now, traders and investors are focused on the Sept. 17 Fed meeting. Most observers expect the Fed to raise interest rates at that meeting. Fed Chair Janet Yellen has given markets little reason to think otherwise.

But the data tell another story. China’s growth is collapsing and the world is slowing down with them. The U.S. is not immune to this global slowdown. The Fed has an inflation goal of 2%, but the inflation measures watched most closely by the Fed are nowhere near that. The core personal consumption expenditure index is about 1.3%, is trending down and has not been over 2% since 2008.

The U.S. employment cost index, another potential inflation measure, is also trending down and recently collapsed to a 0.2% level. Average hourly earnings have increased at an annual rate of 1.75–2.25% since 2012 and have lately moved down; after adjusting for inflation, those earnings have shown about zero real gains.

In short, Yellen’s entire dashboard is blinking red saying, “No inflation, no wage pressure and no reason to raise rates!”

But there’s another reason Yellen won’t raise rates in September, and it brings us back to the SDR story.

Right now, the value of one SDR is determined by reference to the dollar, euro, yen and sterling under a mathematical formula. China would like their currency, the yuan, to be included in that basket.

By itself, including the yuan in the SDR basket will not disrupt the international monetary system and will not overthrow the dollar as the leading global reserve currency. But it is an important sign of respect and does represent enhanced prestige, which China desperately wants.

Tomorrow, we’ll discuss what they have to do to be admitted, over what timeline, and what it means for you. Stay tuned…

- Source, Jim Rickards via Daily Reckoning

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Jim Rickards on Europe and the US economy 2015

The Bond Bubble

‘How many times have you heard the phrase “bond bubble” in the past three years?

‘It seems that every time you turn on financial television or go to a financial website, there’s an analyst warning you about a bond bubble about to burst. The commentary usually consists of the observation that “interest rates are near an all-time low” and “have nowhere to go but up.”

‘There’s not much more to the analysis than that. In fact, interest rates are near all-time highs and could drop significantly, setting off one of the greatest bond market rallies in history.’

- Jim Rickards via Money Morning

The Next Financial Collapse Will Come From Junk Bonds

‘The next financial collapse, already on our radar screen, will not come from hedge funds or home mortgages. It will come from junk bonds, especially energy-related and emerging-market corporate debt.

‘The Financial Times recently estimated that the total amount of energy-related corporate debt issued from 2009–2014 for exploration and development is over US$5 trillion. Meanwhile, the Bank for International Settlements recently estimated that the total amount of emerging-market dollar-denominated corporate debt is over US$9 trillion’.

- Source, Jim Rickards via Money Morning

Deflation and Disruption

Most economic theories that attract a large and devoted following are sooner or later victims of their own success. The quantity theory of money is a good example. This theory is the basis for a school of economics known as monetarism, which has had a powerful influence on central banking since the 1970s.

In its simplest form, the quantity theory of money says that money supply times the velocity of money equals nominal GDP. Velocity is just a measure of how quickly each printed dollar turns into a dollar of goods or services.

If everyone stays home and leaves their money in the bank, velocity is zero. If people go shopping, and those who receive the money spend it too, then velocity grows.

Nominal GDP is the gross dollar value of goods and services. It is broken into two parts. One part represents real value and the other represents inflation or deflation.

As a simple mathematical equation, the theory is written as M * V = P * Q, where M is money supply, V is velocity, P is a price index and Q is real GDP.

Most economists agree that long-run potential growth in a developed economy such as the United States is about 3%. They also agree that price stability is a desirable goal and that neither inflation nor deflation should play much of a role in spending and investment. Monetarists, staring with Irving Fisher in the 1920s and continuing through Milton Friedman in the 1970s, believed that velocity was constant.

Using these inputs of 3% real growth, price stability and constant velocity, monetarists concluded that a slow, steady increase in the money supply — just enough to accommodate real growth — would produce maximum real growth with no inflation or deflation. This is central bank nirvana.

Of course, reality is messier than the theory implies, and there are leads and lags in the response to monetary policy. Real growth could be higher or lower than 3% for certain periods. But the basic idea that steady monetary growth could produce steady economic growth was taken as gospel by Friedman and his followers.

There was only one problem with this neat, tidy monetarist theory. Like a lot of economic theories, it worked better in the faculty lounge than in the real world. In particular, one of the core assumptions — that velocity is constant — turns out to be false.

As Figure 1 below shows, velocity varies widely over time. The velocity of the M1 money supply rose from about 4 in 1960 to 7.5 in 1980, before falling to 6.3 in 1993. Then it rose steeply to 10.6 by 2008, before it plunged sharply to 6 again in 2015. It is still falling today.

This plunge in velocity explains why Federal Reserve money printing since 2008 has not produced much inflation. Many analysts and bloggers have been saying for years that Fed money printing would produce an outbreak of inflation. If velocity actually were constant, the 300% increase in the Fed’s balance sheet would have produced massive inflation by now.

The collapse in velocity shows why that has not happened. The money is available, but people are not spending it. Instead, they are saving it or paying off debts — a form of deleveraging.

The quantity theory of money is a useful tool for conducting thought experiments about alternative scenarios because it sets certain important economic variables in a relationship with others. But as a guide to policy or as a forecasting tool, it has little value because one of its key variables — velocity — is independent of the others and difficult to predict.

In order to understand velocity, we have to move out of economics and into the realms of technology and psychology.

Velocity depends on psychology above all. If people feel certain about their future incomes, job security and the economy in general, they are much more likely to borrow and spend. Conversely, if they are worried about their jobs and unsure about public policies like tax rates and health care costs, they are more likely to save and pay down debt.

This dynamic is different than the fictitious “wealth effect” that central bankers rely on. The wealth effect says that by offering zero rates of interest on bank deposits, savers will channel investment into stocks and real estate instead. The resulting increase in asset values will make people more likely to spend. Research shows that this is mostly nonsense.

The impact of channeling investment into stocks and real estate with artificially low rates produces asset bubbles. When the bubbles burst, confidence is shattered and velocity declines even more. This is clearly visible in Figure 1 where the velocity drop started with the LTCM crisis in 1998 and the dot-com crash in 2000. Then, after another round of easy money and a velocity rebound, it plunged disastrously again in 2008.

Velocity is mostly about confidence. When confidence in the future is low, as it is now, velocity declines and deflationary pressures persist. Confidence is likely to be weak at least through the 2016 elections, and perhaps beyond, because of policy stalemates between the White House and Congress.

Technology also plays a role in causing deflation. As technology drives prices lower, consumer expectations shift. Lower prices become the norm, not the exception. Consumers are no longer in a hurry to buy things before prices go up. Instead, they are content to wait until prices go down. This waiting reduces velocity even more and feeds on itself as lower prices produce more waiting, which causes even lower prices.

These deflationary price pressures are seen clearly in Figure 2, which shows the headline and core producer price indexes since November 2010. The overall index is already in deflationary territory, and the core index is moving in that direction.

Source: Hedgeye

The impact of technology on prices comes from two distinct trends — optimization and disintermediation. Optimization refers to a host of linear programming and similar modeling techniques that show companies how to produce more with less. By finding efficiencies in logistics, scheduling, inventory management and supply chains, companies can pass the savings along to customers in the form of lower prices.

Disintermediation refers to the disruptive process by which new companies, mostly Web-based, connect sources of supply and demand by going around traditional brokers, gatekeepers and agents.

Examples include companies like SoFi, which provides private student loans without banks, and Amazon, which provides shopping without stores. It has been remarked that Uber is the world’s largest taxi company but owns no taxis; Airbnb is the world’s largest lodging company but owns no real estate; and Facebook is the world’s largest advertising company yet provides no content.

All of these companies are not only disrupting existing business models but are lowering costs to consumers in the process. This process feeds expectations of lower prices in the future and further reduces velocity and increases deflationary pressures.

For now, the Federal Reserve is stymied. The psychological, technological and demographic trends causing deflation are not going away. The Fed cannot tolerate deflation because it increases the real value of debt and jeopardizes the banks. The Fed will be forced to return to its inflation tool kit of quantitative easing, currency wars and perhaps “helicopter money” in the year ahead.

These dominant economic trends — natural deflation countered by policy inflation — produce a rich set of indications and warnings.

These models use complexity theory and behavioral psychology, among other tools, to identify trends in their early stages and to foresee companies that are more likely to succeed or fail based on those trends.

Regards,

Jim Rickards

- Source, The Daily Reckoning

Rickards on Greece, China, Iran & Trade

French President Francois Hollande is holding an emergency meeting of his country’s defense council after newly published documents reveal American agents had spied on him and his two predecessors. According to the documents, released by Wikileaks between 2006 and 2012, the National Security Agency spied on the three French presidents by listening in on their work and personal phone calls. Boom Bust’s Ameera David weighs in.

Erin Ade sits down with Jim Rickards – chief global strategist at West Shore Funds and author of "The Death of Money."Between Greece attempting to come to an agreement with creditors, lifting Iran sanctions, and a stable Chinese economy, Jim tells us where we are in the currency wars timeline and gives us his take on why we have trade agreements at all.

Afterwards, Bianca Facchinei takes a look at the rising cost of rent across the United States. Rent has been on a steady rise for a while, causing an especially difficult time for the lower class. But coupled with other issues in our economy, the middle class is struggling now, too.

After the break, Ameera and Erin discuss the Senate voting to advance President Obama’s trade agenda by approving a measure to allow fast-track authority – paving the way for the Trans-Pacific Partnership to follow through.

RT correspondent Lizzie Phelan looks into the latest from Greece, where officials met with eurozone ministers today in yet another attempt to negotiate and strike a deal with its creditors.

And in The Big Deal, Ameera and Edward Harrison discuss countries that are at risk of defaulting. Greece is not the only one. It is not even the most likely to default. Greece is in the limelight because it is a member of the eurozone.

- Source, Russia Today

Jim Rickards on Greece debt crisis, China, Iran and Trade, Industry

Jim Rickards on Greece debt crisis, China, Iran and Trade, Industry.

Jim Rickards – chief global strategist at West Shore Funds and author of "The Death of Money." Between Greece attempting to come to an agreement with creditors, lifting Iran sanctions, and a stable Chinese economy, Jim tells us where we are in the currency wars timeline and gives us his take on why we have trade agreements at all.

- Source

If China’s Yuan Becomes a Reserve Currency it Could Impact Gold: Jim Rickards

Jim Rickards - Greek Exit From EU Not An Inevitability?

Obama Ending Alliance with Saudi Arabia and Killing the Petrodollar

At the San Antonio Casey Research Summit, Jim Rickards sat down with Alex Daley to talk about the pain ahead for the US Dollar, why we'll soon see SDRs...

Jim Rickards United States Recession Will Force Euro Shorts To Cover 2015

Jim Rickards: the Fed & Weak US economy, Dollar depreciation; Greece and Europe

Powerful investment wisdom from Jim Rickards The economy is on a knife’s edge

Erin sits down with Jim Rickards – author of “The Death of Money” and chief global strategist at West Shore Funds – to discuss the US and Europe. In October ...

Which Will Happen: QE4 or a Fed Funds Rate Hike?

Jim Rickards on faltering US economy, Karl Denninger on misallocation

A sharp sell-off in major eurozone bond markets deepened Thursday as rising oil prices and a stalemate in Greece’s funding talks raise questions about the sustainability of record low borrowing costs. The decline sent yields on Germany’s 10-year bond – the region’s benchmark sovereign securities – to the highest levels seen this year. German 10-year bond yields climbed seven basis points, to .59%. Erin weighs in. 

Then, Erin sits down with Jim Rickards – chief global strategist at West Shore Funds and author of “The Death of Money.” Jim tells us what the likelihood of the Federal Reserve raising rates or reverting back to the QE is and gives us his take on why the US economy is faltering.

James Rickards - The Death of Money

The Fed Will Start QE4 In 2015

Jim Rickards appears on Fox business, where he discusses deflation and the stagnant economy. Where is the US heading next?

Jim Rickards on Oil Prices Collapse & Russian Currency Crisis

European Central Bank QE and What It Means for Gold

Jim Rickards discusses the recent QE program unleashed by the European Central bank and the effects it is going to have on the global markets.

- Source, Russia Today

The Fed Is Trying to Import Inflation

The Market Collapse Investors Won’t Expect

The forces of inflation and deflation that we’ve talked about take a while to play out, but this market collapse could happen very suddenly and catch investors completely unaware.

Now, the thing is, we’ve come within hours or days of total global financial gridlock, total market collapse in the last 14 years. Everyone knows about 2008. People have a sense of that.

But it also happened in 1998 as a result of the Russia default and the collapse of hedge fund Long-Term Capital Management. At the time, I was involved with Long- Term Capital Management…I actually negotiated that bailout. I was in the room. I saw the $4 billion moved into our bank accounts to prop up the balance sheet. The money came from Wall Street. But there was a lot of give and take that almost didn’t happen and we were literally hours away from markets collapsing. We muddled through that. We kind of found the runways and got through.

But, people learned all the wrong lessons. Instead of banning derivatives and backing away from overleverage and putting a lid on banks, public policy did the opposite. We repealed Glass-Steagall, which allowed banks to act like hedge funds; we repealed Schwab’s regulation, which meant that you could do derivatives on anything. We repealed or increased broker dealer leverage from 15 to 1 to 30 to 1. The SCC did that in 2006 and the Boswell three capital requirements to allow greater bank leverage.

So, we said, game’s on. You can do whatever you want with as much leverage as you want and as much opaqueness as you want because of the use of derivatives. Is it any surprise that in 2008 we had another market collapse? Now, Bear Stearns goes down, Fannie goes down, Freddie goes down, Lehman goes down, AIG goes down – one by one the dominos were falling. We were days away.

Morgan Stanley would have been next, Goldman right behind it and then Citi then Bank of America and then J.P. Morgan — so all the dominos were falling. The government dropped a steel curtain between two of the dominos. They stopped it after Lehman and AIG so Morgan Stanley didn’t fall, but Morgan Stanley was days away from collapse.

- Source, Jim Rickards, via The Daily Reckoning

Jim Rickards Reveals What He Does Differently

James Rickards, best-selling author of Currency Wars, spoke with Hedgeye CEO Keith McCullough about how he finds the truth, the continuation of the currency wars, what the Fed gets wrong and much more in this exclusive interview.

Jim’s first appearance on Hedgeye TV in May 2014 was met with wide acclaim, and he did not disappoint in his return to Stamford for Hedgeye’s first ever,live “Market Marathon”held in January. After 45 minutes of raw & unfiltered commentary on markets and the people that move them, Rickards and McCullough turned it over to the viewers, offering an extended viewer Q&A session powered by user-submitted questions.

A New Era for Credit Suisse

Investors NEED to be Prepared NOW

We’re out there making the San Andreas Fault bigger so we can have even bigger earthquakes in the future. That’s exactly what’s going on.

So, I would say two things about the monetary collapse. No. 1, it could happen very suddenly — and likely it will — and we won’t see it coming, so investors need to prepare now.

Investors almost say to me, ‘You know, Jim, call me up at 3:30 the day before it happens and I’ll sell my stocks and buy some gold.’

First of all, it doesn’t work that way for the reasons I just explained, but secondly, you might not be able to get the gold and that’s very important to understand. When a buying panic breaks out, you know, and the price starts gapping up, not $10.00, $20.00 an ounce per day, but $100.00 an ounce then $200.00 an ounce and then all of sudden, it’s like up $1,000.00 an ounce and people say oh, I got to get some gold. You won’t be able to get it. The big guys will get it, you know, the sovereign wealth funds, the central banks, the billionaires, the multibillion-dollar hedge funds, they’ll be able to get it, but everyday investors won’t be able to get it.

You’ll find that the mint stops shipping it. That your local dealer has run out so there’ll still be a price somewhere. You’ll be able to watch the price on television, but you won’t actually be able to get the gold. It’ll be too late.

How to Survive the Monetary Collapse

Those are logical questions, but the event that triggers the collapse doesn’t matter — and here’s what I mean by that.

Imagine you’re on a mountainside and there’s snow building up and it’s still snowing and you’ve got some avalanche danger… it’s windswept, it’s unstable. You’re watching the snowpack, and if you’re an expert, you know it’s going to collapse and it could kill some skiers or wipe out the village.

Well, here comes a snowflake, it disturbs a few other snowflakes, that spreads, it starts to shoot, it starts to slide, it gets momentum, it comes loose and the whole mountain comes down and buries the village.

Who do you blame? Do you blame the snowflake or do you blame the unstable pack of snow?

I say the snowflake’s irrelevant. If it wasn’t that one, it could have been the one before or the one after or the one tomorrow.

The same goes for the collapse of the monetary system. It’s the instability of the financial system as a whole. So, when I think about the risks, I don’t focus so much on the snowflake, it could be a lot of things that trigger the event. It could be a failure to deliver physical gold because gold’s getting scarce. It could be a Lehman type of collapse of a financial firm or another MF Global. It could be a prominent suicide. It could be a natural disaster.

It could be a lot of things, but my point is, it doesn’t matter. It will be something that causes the system to collapse. What matters is that the monetary system is so unstable. The blunders have already been made. It’s not as if we’re going to do some bad things that’s going to create risks. The risk is already there. It’s embedded. We’re just waiting for that catalyst.

So as to what will cause the global monetary system collapse, my answer is it could be a lot of things, but it doesn’t matter. What matters — and what investors need to be concerned about — is the instability is already baked in the pie.

Now, as to when this will happen, it will be sooner than later. By that I mean three, four years. This is not necessarily something that’s going to happen tomorrow, (although it could) but that’s not a ten-year forecast either, because we’re not going to make it that far and we never do.

These things do happen every four or five years. The dynamics, what we call the scaling metrics, and the size of the financial system and risk. One definition of risk is: What’s the worst thing that can happen?

- Source, Jim Rickards via the Daily Reckoning

FED Has Major Conundrum

The Surge in the US Dollar

Jim Rickards, author of Currency Wars and The Death of Money,says the expectation of rising rates in the US is one reason behind the surge in the US dollar of late. However, the US Fed doesn’t want a strong dollar because it’s deflationary. One of the Fed’s primary policy objectives is to hit 2% inflation. It’s not getting it.

Neither is the European Central Bank. The Financial Times reported yesterday that there are now 1.2 trillion euros in Eurozone debt that have a negative yield. Investors are effectively paying to hold short term government debt.

The problem for the Federal Reserve is, if it raises interest rates now, it makes the US an even more attractive target for capital. Investors get a higher return than in European debt and a strengthening dollar as well. Rickards conclusion is that the Fed will therefore not raise rates in 2015. This goes against the idea that the Fed is set to return them to ‘normal’ levels.

- Source, Daily Reckoning

The innovators in America’s shale patch are rethinking their business plans

The innovators in America’s shale patch are rethinking their business plans, with oil down more than 40% since June. The U.S. stock market keeps roaring up… but we’ve also had two violent downswings in less than three months. The fallout from events in Russia is sending tremors through currencies, bonds and other asset classes.

And as our Jim Rickards told us in this space back on Nov. 20, the global elites are signaling each other about an impending crisis. They’re hiding behind euphemisms like “the potential for a buildup of excessive risk in financial markets”… but that’s how they talk to each other so as not to alarm us rubes.

So here’s the first thing you must know today: Despite those warnings, Jim Rickards is not retreating to the hills with a five-year supply of ammo and Mountain House freeze-dried food.

“I travel, I give speeches, I still live my life,” he tells us.

- Source, Daily Reckoning

China May Enable a Gold Backed Currency

U.S. intelligence advisor Jim Rickards, author of The Death of Money, recounts an episode told to him by a friend who is a senior officer of a high-security transporter of physical metals who had brought gold into China at the head of an armored column, guarded by heavily-armed troops.

One of these days, at a time of its choosing, China may reveal just how much gold it does hold, alongside a possible decision to enable a newly gold-backed currency, the Yuan, to make its debut on the world’s financial stage. Such an event would have profound implications for the primacy of the U.S. dollar, as well as America’s ability to continue running printing press deficits, long financed by Chinese purchases of U.S. debt instruments, to the tune of several trillion dollars.

- Source, Market Oracle

Losses are going to cascade through the system

A “subprime” oil crisis may be looming. If so, shale oil companies and the banks that lent to them will be ground zero. Your 401(k) or pension plan will be the aftermath. And the poisoned fallout will radiate throughout the economy.

“Losses are going to cascade through the system,” says former CIA financial analyst Jim Rickards. “There are unforeseen consequences and hidden losses. I am not so sanguine that this is going to work out so smoothly in the end .… This looks like the beginning of [a crisis].”

These wild gyrations in the price of oil have real-world effects on world economies. Everyone in the sector is stung.

- Source, The Trumpet

Warren Buffett and Hugo Stinnes

Hugo Stinnes is practically unknown today, but this was not always so. In the early 1920s he was the wealthiest man in Germany, at a time when Germany was the third largest economy in the world. He was a prominent industrialist and investor with diverse holdings in Germany and abroad. He was also a close associate of the leading politicians of the time. Chancellors and cabinet ministers of the newly formed Weimar Republic routinely sought his advice on economic and political problems.

In many ways, Stinnes played a role in Germany similar to the role Warren Buffett plays in the U.S. today – an ultra-wealthy investor whose opinion is eagerly sought on important political matters, who exercises powerful behind-the-scenes influence, and who seems to make all the right moves when it comes to playing markets.

Students of economic history know that the period 1922 to 1923 in Germany was the worst period of hyperinflation experienced by a major industrial economy in modern times. The exchange rate between the German paper currency, the Reichsmark, and the dollar went from 208 to 1 in early 1921 to 4.2 trillion to 1 in late 1923, at which point the Reichsmark became worthless and was swept down sewers as litter. Why was Stinnes not wiped out during this hyperinflation?

Stinnes was born in 1870 into a prosperous German family that had interests in coal mining. He worked in mines to obtain a practical working knowledge of the industry and took courses in Berlin at the Academy of Mining. Later he inherited his family’s business and expanded it by buying his own mines.

He then diversified into shipping, buying cargo lines. Stinnes used his own vessels to transport his coal within Germany along the Rhine River, and from his mines abroad. His vessels also carried lumber and grains. His diversification included ownership of a leading newspaper, which he used to exert political influence. Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in Reichsmarks.

When the hyperinflation hit Stinnes was perfectly positioned. His hard assets in coal, steel, and shipping retained their value. It didn’t matter what happened to the Germany currency, a hard asset is still a hard asset and does not go away even if the currency goes to zero. Stinnes’s international holdings also served him well because they produced profits in hard currencies, not worthless Reichsmarks. Stinnes kept some of these profits offshore in the form of gold held in Swiss vaults so he could escape both hyperinflation and German taxation. Finally he repaid his debts in worthless Reichsmarks, making them disappear.

Not only was Stinnes not harmed by the Weimar hyperinflation, his empire prospered and he made more money than ever. He expanded his holdings and bought out bankrupt competitors. Stinnes made so much money during the Weimar hyperinflation that his German nickname was Inflationskönig, which means Inflation King. When the dust settled and Germany returned to a new gold backed currency, Stinnes was one of the richest men in the world, while the German middle classes were destroyed.

Interestingly, we see Warren Buffett using the same techniques today. It appears that Buffett has studied Stinnes carefully and is preparing for the same kind of financial calamity that Stinnes saw coming.

Buffett recently purchased major transportation assets in the form of the Burlington Northern Santa Fe Railroad. This railroad consists of hard assets in the form of rights of way, adjacent mining rights, rail, and rolling stock. The railroad makes money moving hard assets such as ore and grains.

Buffett next purchased huge oil and natural gas assets in Canada. Buffett can now move his Canadian oil on his Burlington Northern railroad in exactly the same way that Stinnes moved his coal on his own ships in 1923. Buffett is also a major holder in ExxonMobil, the largest energy company in the world.

For decades, Buffett owned one of the most powerful newspapers in the U.S., the Washington Post. He sold that stake recently to Jeff Bezos of Amazon, but still retains communications assets. Buffett has also purchased large offshore assets in China and elsewhere that produce non-dollar profits that can be retained offshore tax-free.

A huge part of Buffett’s portfolio is in financial stocks in banks and insurance companies that are highly leveraged borrowers. Like Stinnes in the 1920s, Buffett can profit when the liabilities of these financial giants are wiped out by inflation, while they nimbly redeploy assets to hedge their own exposures.

In short, Buffett is borrowing from the Stinnes playbook. He’s using leverage to diversify into hard assets in energy, transportation and foreign currencies. He’s using his communications assets and prestige to stay informed on behind-the-scenes developments on the political landscape. Buffett is now positioned in much the same way that Stinnes was positioned in 1922. If hyperinflation were to hit the U.S. today, the result would be the same for Buffett as for Stinnes. His hard assets would explode in value, his debts would be eliminated, and he would be in a position to buy out bankrupt competitors. Of course, the middle classes in the U.S. would be wiped out as they were in Germany.

Stinnes saw the German hyperinflation coming and positioned accordingly. Buffett is following the Stinnes playbook. Perhaps Buffett sees the same hyperinflation in our future.

It’s not too late for investors to take some of the same precautions as Stinnes and Buffett. In the short run, deflation has the upper hand. But, it’s just a matter of time before central banks slay the deflation monster and open the door to much higher inflation. Do not rely on your fixed dollar assets like savings, insurance and pensions. Diversification into energy, mining, transportation, gold, land and fine art will serve you well. Also don’t be afraid to build up a cash position. Critics will say that cash has “no yield” these days. But cash in a portfolio helps to reduce volatility and gives you the ability to pick up bargains when the inevitable financial traumas emerge.

- Source, Jim Rickards via Darien Times

Jim Rickards Says Russia Is Funding ISIS

The Japanese QE experiment, Rickards on China and Merkel on investing

Our lead story: Just yesterday, we told you that QE was done – the Fed closed the door on its third program of large scale asset purchases to expand its balance.

- Source, Russia Today

Jim Rickards on Economic Crisis in America and Europe & Collapse Oil Prices

Jim Rickards on Economic Crisis in America and Europe & Collapse Oil Prices
The coming 'tsunami of debt' and Collapse of the US economy in 2015.

- Source, Russia Today

Jim Rickards China Wants The SDR

Jim Rickards discusses the ongoing currency wars, the United States, China and the upcoming SDR.

The Smartest Man in the FINANCIAL WORLD Stansberry Research

JIM RICKARDS : The Smartest Man in the FINANCIAL WORLD Stansberry Research.

Jim Rickards The Golden Truth

Jim Rickards is a financial lawyer with a doctorate and other advanced degrees. He’s a New York Times best-selling author and a hedge fund manager. He's been sought out for his currency expertise by: CNBC, Fox, CNN, NPR, the Financial Times, the New York Times and the Washington Post, just to name a few.
And he serves as an advisor to the Office of the Director of National Intelligence, which oversees the CIA, the NSA, and 14 other U.S. intelligence agencies.

Get Your Gold Now Before It’s Too Late

(Video cannot be uploaded, click image to watch)

Kitco News is kicking off its Outlook 2015 coverage with an interview with bestselling author Jim Rickards to see what he thinks will happen to the U.S. economy in the coming year and how it may affect gold. “We’re absolutely in a currency war,” he tells Daniela Cambone. “In 2011, we saw the weak dollar; today, we see the strong dollar. I expect a year from now we’ll see the weak dollar again.” Recent strong economic data out of the U.S. has many analysts expecting ...

- Source, Kitco

 

Jim Rickards on Europe and the US economy

Erin sits down with Jim Rickards – author of “The Death of Money” and chief global strategist at West Shore Funds – to discuss the US and Europe. In October, data coming out of the US demonstrated lower mortgage yields and a surge in refis added to 4-year lows in gas prices to give consumers more disposable income. Jim tells us what he thinks of the new data and also gives us his thoughts on divisions at the ECB. He also projects how far Chinese growth will have to fall in order to make a successful rebalancing a possibility and gives us his prediction on what will happen if oil prices continue to stay weak.

- Source, Russia Today

Jim Rickards on Russia and the most important stories of 2014

Inflation in Japan dropped to a 14-month low in the month of November. The disinflation comes as a relief to consumer who, since April, have been struggling with an increased consumption tax, which put a squeeze on many household finances. It was the first consumption tax in 17 years. However, the latest fall in the core consumer price index – to 0.7% in November, down from 0.9% in October – will cause some concerns for the central bank, which has staked its credibility on hitting a 2% inflation rate within two years. Erin weighs in.

Then, Erin is joined by Jim Rickards – chief global strategist at West Shore Funds and author of “The Death of Money.” Jim tells us if he thinks the Ruble rout is a crisis similar to those of 1998 or 2008 and gives us his take on the strong dollar.

After the break is Defining Moments, featuring comments made by recent Boom Bust guests David Collum, Jim Grant, Steve Hanke, Eswar Prasad on IBM, the Federal Reserve in 1920, emerging markets, Raghuram Rajan, and US GDP.

And in The Big Deal, Erin and Edward Harrison are taking a look at some of the biggest deals of 2014. Enjoy!

- Source, Russia Today