Monday, October 22, 2018

Modern Wall Street Roundtable LIVE at Delmonico's Featuring Jim Rickards


With the US markets hitting all-time highs, all this action has made action has us hungry... for knowledge and good food! 

That is why we have returned to the iconic Delmonico's in New York City for another special roundtable discussion hosted by MWS' Olivia Voznenko. 

She is joined by Jim Rickards, Stephen Guilfoyle, Douglas Borthwick and David Williams to discuss gold, the US dollar, cryptocurrency, US-China trade relations and much more in the insightful & in-depth meeting of Wall Street's finest!


Monday, October 15, 2018

Economist Jim Rickards On Gold Versus Bitcoin


Jim Rickards is the editor of Strategic Intelligence and the author of Currency Wars: The Making of the Next Global Crisis. He believes gold can go to $10,000 an ounce but he is much more skeptical about bitcoin. Rickards doesn't trust the bitcoin price action and doesn't believe the cryptocurrency will fare well in a financial crisis.

- Source, Money Insider

Monday, October 8, 2018

Oil is Bring Iran and China Closer, Much Closer

A new round of severe sanctions is set to go into place on Nov. 4, 2018. These new sanctions will result in a near complete shutdown of Iranian oil sales and an end of direct investment in Iran. Trump is on the path to regime change in Iran unless a new agreement is reached that is much stronger from the U.S. perspective than the JCPOA.

Here’s where the China and Iran stories converge. Iran has one and only one lifeline to keep its economy going — oil sales to China. And China desperately needs the Iranian oil to keep its own economy growing so it can pay or roll over its debts. The chart below tells the story:


Iran’s oil sales to South Korea, Italy, Japan, the UAE, Spain, France and Greece are likely to be shut down or greatly curtailed by the new Trump sanctions. That leaves China, India and Turkey as Iran’s only large customers. Turkey and India are facing financial crises of their own and may not have the hard currency to pay Iran. That leaves China as Iran’s only source of hard currency going forward.

China will not stop buying Iranian oil; they need the oil desperately. Iran will not stop selling oil to China; they need the hard currency desperately. Still, Trump’s sanctions will force China and Iran into financial and logistical gymnastics to avoid interdiction by Trump.

Iran will use its own tanker fleet to ship the oil because third-party countries won’t allow their tankers to violate the sanctions. China will have to cheat on SWIFT message traffic notices to avoid appearing to credit Iran with hard currency.

Even with these workaround methods in place, the two-way flow of oil and currency will become more difficult. The impact on China and Iran will be to slow both economies even if the oil and currency keep flowing.

China is between a rock and a hard place because it’s trying to control the increase in debt while trying to borrow more and pay its debts at the same time. Iran is in even worse condition because its foreign investment currency lifelines are being cut one by one even as the government struggles with hyperinflation, bank runs and social unrest.

Both of these situations could be alleviated if China would give Trump the trade deal he wants and if Iran would give Trump the nuclear deal he wants. Both outcomes are unlikely in the near term because of the confrontational geopolitics standing in the way.

Markets have been notably docile lately despite crises in Argentina, Turkey, Indonesia, Iran, China, Venezuela and elsewhere. Political crises related to Brexit and U.S. political dysfunction have not roiled global markets so far. The calm and low volatility are about to end.

The China-Iran nexus in confrontation with the U.S. is the last straw.

- Source, James Rickards via the Daily Reckoning

Friday, October 5, 2018

Jim Rickards: A Three Way Train Wreck Is About to Derail the Markets

The U.S. trade war with China and China’s daunting debt problems are well understood by most investors. Coming U.S. sanctions on Iran and Iran’s internal economic problems are also well understood.

What is not understood is how these two bilateral confrontations are intimately linked in a three-way tangle that could throw the global economy into complete turmoil and possibly escalate into war. Untangling and understanding these connections is one of the most important tasks for investors today.

Let’s begin with the China debt bomb. As is apparent from the chart below, China has the largest volume of dollar-denominated debt coming due in the next 15 months.


The chart shows China with almost $100 billion of external dollar-denominated liabilities maturing before the end of 2019. But this debt wall is just the tip of the iceberg. This chart does not include amounts owed by financial institutions nor does it include intercompany payables and receivables. China’s total dollar debt burden is over $200 billion and towers over other emerging-market economy debt burdens.

This wall of maturing debt might not matter if China had easy access to new finance with which to pay the debt and if its economy were growing at a healthy clip. Neither condition is true.

China has entered a trade war with the U.S., which will reduce the prospects of many Chinese companies and hurt their ability to refinance dollar debt. At the same time, China is trying to get its debt problems under control by restricting credit and tightening lending standards.

But this monetary tightening also hurts growth. Selective defaults have already emerged among some large Chinese companies and certain regional governments. The overall effect is tighter monetary conditions, reduced access to foreign markets and slower growth all coming at the worst possible time.

The situation in Iran is even more fraught. The U.S. waged a financial war on Iran from 2011–13. The first step was to impose sanctions on Iranian individuals and entities. Then Iran was banned from using the U.S.-controlled Fedwire system to send or receive U.S. dollars.

Iran responded by switching its oil shipments to payment in euros cleared through the SWIFT system, based in Belgium. Next the U.S. leaned on its SWIFT partners to ban Iran from using that system, a process known as “de-SWIFTing.”

This move effectively cut Iran off from receiving hard currency for its oil. Iranians smuggled dollars into Iran from Iraq and ran a black market to get dollars to pay Dubai-based smugglers to bring in consumer goods. There was a run on the Iranian banks, interest rates were moved to 20% to stop the run and the Iranian rial collapsed. Inflation soared and anti-government demonstrations emerged. Iran was halfway to regime change without a shot being fired.

Obama declared a truce in the financial war at the end of 2013 in exchange for negotiations on the Iranian nuclear program. This resulted in the 2015 Joint Comprehensive Plan of Action, JCPOA, a multilateral agreement on Iran’s pledge to stop uranium enrichment. Obama paid billions of dollars in cash and gold to Iran as a bribe to secure this agreement.

After the agreement, Obama ended many economic sanctions on Iran. Direct foreign investment, mostly from Europe, started up again.

Last May, Trump tore up the JCPOA and resumed sanctions under a doctrine of “maximum pressure.” The difference now is that Iran wasted the Obama bribe money on foreign adventures and terrorism in Iraq, Yemen, Syria, Lebanon, Gaza and Sinai. The situation in Iran today is even worse that it was in 2013.

- Source, Jim Rickards

Thursday, September 27, 2018

James Rickards: Trump Continues to Tighten the Screws on China

At the height of the Chinese capital outflows in 2016, China was losing $80 billion per month of hard currency to defend the yuan.

At that tempo, China would have burned through $1 trillion in one year and become insolvent. China did the only feasible thing, which was to close the capital account; (interest rate hikes and further devaluation would have caused other more serious problems).

This distress might have been temporary if China had managed to maintain good trading relations with the U.S. But that proved another chimera. The trade war, which has broken out between the U.S. and China has damaged Chinese exports and raised costs on Chinese imports at exactly the time China was counting on a larger trade surplus to help it finance its mountain of debt.

Now trade is drying up and China is stuck with debt it can’t repay or rollover easily. This marks the end of China’s Cinderella growth story, and the beginning of a period of economic slowdown and potential social unrest.

The coming Chinese crack-up is not just theoretical. The hard data supports the thesis. Here’s a real-time data summary from the Director of Floor Operations at the New York Stock Exchange, Steven “Sarge” Guilfoyle:

"The greater threat to financial markets will come, in my opinion from the slowing of global growth, at least partially due to the current state of international trade. 

This thought process is lent some credence by last night’s rather disastrous across-the-board macroeconomic numbers released by China’s National Bureau of Statistics. … For the Month of July, in China – Fixed Asset Investment.Growth slowed to the slowest pace since this data was first recorded back in 1992, printing in decline for a fifth consecutive month. Industrial Production. 

Missed expectations for a third consecutive month, while printing at a growth rate equaling the nation’s slowest since February of 2016. Retail Sales. Finally showing a dent in the armor, missed expectation while slowing from the prior month. Unemployment. This item has only been recorded since January. Headline unemployment “popped” up to 5.1% from June’s 4.8%. Oil Production. 

The NBS reported that Chinese oil production fell 2.6% in July, and now stands from a daily perspective at the lowest level since June of 2011. China will not report Q3 GDP until October 15. The National Bureau of Statistics reported annualized growth of 6.7% for the second quarter. Depending on the veracity of the data, one must start to wonder if China can indeed hang on to growth of 6.5% going forward."

This unpleasant picture Sarge paints is based on official Chinese data. Yet, China has a long history of overstating its data and painting the tape. The reality in China is always worse than the official data reveals.

This slowdown comes just months after Chinese dictator Xi Jinping was offered a dictator-for-life role by the removal of term limits and was placed on the same pedestal as Mao Zedong by the creation of “Xi Jinping Thought” as a formal branch of Chinese Communist ideology.

The Book of Proverbs says, “Pride goeth before destruction, and a haughty spirit before a fall.” Xi Jinping now finds himself in precisely this position. His political ascension inflated his pride just as he now faces the reality of a falling economy and possible destruction of any consensus around his power and the lack of accountability.

Trump continues to tighten the screws with more tariffs, more penalties, and a near complete shutdown of China’s ability to invest in U.S. markets.

Turkey, Argentina, and Venezuela are large developing economies that are in different stages of collapse and threaten the global economy with panic through contagion.

Yet, those three economies combined are not as large or important as China. Only Trump and Xi can salvage the situation with negotiation and reasonable compromise on trade and intellectual property. But, Trump won’t blink first; that’s up to Xi.

So far, a spirit of compromise is not in the air. A spirit of Chinese collapse and contagion is.

- Source, James Rickards via the Daily Reckoning

Monday, September 24, 2018

The Dollars Dominance May Soon be Coming to an End

Cutting a nation off from SWIFT is like taking away its oxygen.

The U.S. had previously banned Iran from the dollar payments system (FedWire), which it controls, but Iran turned to SWIFT to transfer euros and yen in order to maintain its receipt of hard currency for oil exports.

In 2013, the U.S. successfully kicked Iran out of SWIFT. This was a crushing blow to Iran because it could not receive payment in hard currencies for its oil.

This pushed Iran to the bargaining table, which resulted in the Iran nuclear deal with the U.S. and its allies in 2015. Now Trump has negated that U.S.-Iran deal and is putting pressure on its allies to once again refuse to do business with Iran.

And Congress is again pushing to exclude Iran from SWIFT as part of a sanctions program.

The difficulty this time is that our European allies are not on board and are seeking ways to keep the nuclear deal alive and work around U.S. sanctions.

Europe’s solution is to therefore create new nondollar payment channels.

In the short run, the U.S. is likely to enforce its sanctions rigorously. European businesses will probably go along with the U.S. because they don’t want to lose business in the U.S. itself or be banned from the U.S. dollar payments system.

But in the longer run, this is just one more development pushing the world at large away from dollars and toward alternatives of all kinds, including new payment systems and cryptocurrencies.

It’s also one more sign that dollar dominance in global finance may end sooner than most expect. We are getting dangerously close to that point right now.

- Source, James Rickards via the Daily Reckoning

Thursday, September 20, 2018

The World Is Ganging up Against the Dollar

The U.S. has been highly successful at pursuing financial warfare, including sanctions. But for every action, there is an equal and opposite reaction.

As the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.

I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.

These efforts are only increasing.

In the past four months, Russia has reduced its ownership of U.S. Treasury securities by 84% and has acquired enough gold to surpass China on the list of major holders of gold as official reserves.

Russia has almost 2,000 tonnes of gold, having more than tripled its gold reserves in the past 10 years. This combination of fewer Treasuries and more gold puts Russia on a path to full insulation from U.S. financial sanctions.

Russia can settle its balance of payments obligations with gold shipments or gold sales and avoid U.S. asset freezes by not holding assets the U.S. can reach.

Of course, Russia is not the only country engaged in financial warfare with the United States. China and Iran are leading examples, but we can also add Turkey to the list after its latest currency crisis.

Russia is providing these and other nations a model to achieve similar distance from U.S. efforts to use the dollar to enforce its foreign policy priorities.

Take China and Iran. China is the second-largest economy in the world and the fastest-growing major emerging market. China has a voracious appetite for energy but has little oil of its own. Iran is a major oil producer, and China is Iran’s biggest customer.

But oil is priced in dollars and dollars flow through the U.S. banking system. Trump’s Iran sanctions make it impossible for China to pay Iran in dollars. If U.S. sanctions prohibit dollar payments for Iranian oil, then Iran and China may have no choice but to transact in yuan (see below for the implications).

Meanwhile, Europe has remained a faithful partner to the U.S. and has gone along with sanctions against Iran, for example.

That’s because European companies and countries that violate U.S. sanctions can be punished with denied access to U.S. dollar payment channels.

But now, Europe is also showing signs it wants to escape dollar hegemony. German Foreign Minister Heiko Maas recently called for a new EU-based payments system independent of the U.S. and SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would not involve dollar payments.


- Source, James Rickards

Monday, September 17, 2018

New Reality of China’s Failing Economy Is Coming Soon

I’ve written for years that Chinese economic development is partly real and partly smoke and mirrors, and that it’s critical for investors to separate one from the other to make any sense out of China and its impact on the world.

My longest piece on this topic was Chapter Four of my second book, The Death of Money(2014), but I’ve written much else besides, including many articles for my newsletters.

There’s no denying China’s remarkable economic progress over the past thirty years. Hundreds of millions have escaped poverty and found useful employment in manufacturing or services in the major cities.

Infrastructure gains have been historic, including some of the best trains in the world, state-of-the-art transportation hubs, cutting edge telecommunications systems, and a rapidly improving military.

Yet, that’s only half the story.

The other half is pure waste, fraud and theft. About 45% of Chinese GDP is in the category of “investment.” A developed economy GDP such as the U.S. is about 70% consumption and 20% investment.

There’s nothing wrong with 45% investment in a fast-growing developing economy assuming the investment is highly productive and intelligently allocated.

That’s not the case in China. At least half of the investment there is pure waste. It takes the form of “ghost cities” that are fully-built with skyscrapers, apartments, hotels, clubs, and transportation networks – and are completely empty.

This is not just western propaganda; I’ve seen the ghost cities first hand and walked around the empty offices and hotels.

Chinese officials try to defend the ghost cities by claiming they are built for the future. That’s nonsense. Modern construction is impressive, but it’s also high maintenance. Those shiny new buildings require occupants, rents and continual maintenance to remain shiny and functional. The ghost cities will be obsolete long before they are ever occupied.

Other examples of investment waste include over-the-top white elephant public structures such as train stations with marble facades, 128 escalators (mostly empty), 100-foot ceilings, digital advertising and few passengers. The list can be extended to include airports, canals, highways, and ports, some of which are needed and many of which are pure waste.

Communist party leaders endorse these wasteful projects because they have positive effects in terms of job creation, steel fabrication, glass installation, and construction. However, those effects are purely temporary until the project is completed. The costs are paid with borrowed money that can never be repaid.

China might report 6.8% growth in GDP, but when the waste is stripped out the actual growth is closer to 4.5%. Meanwhile, China’s debts grow faster than the economy and its debt-to-GDP ratio is even worse than the U.S.

All of this would be sustainable if China had an unlimited ability to rollover and expand its debt and ample reserves to deal with a banking or liquidity crisis. It doesn’t. China’s financial fragility was revealed during the 2014-2016 partial collapse of its capital account.

China had about $4 trillion in its capital account in early 2014. That amount had fallen to about $3 trillion by late 2016. Much of that collapse was due to capital flight for fear of Chinese devaluation, (which did occur in August 2015 and again in December 2015).

China’s $3 trillion of remaining reserves is not as impressive as it sounds. $1 trillion of that amount is invested in illiquid assets (hedge funds, private equity funds, direct investments, etc.) This is real wealth, but it’s not available on short notice to defend the currency or prop up banks.

Another $1 trillion of Chinese reserves are needed as a precautionary fund to bail-out the Chinese banking system. Many observers are relaxed about the insolvency of Chinese banks because they are confident about China’s ability to rescue them. They may be right about that, but it’s not free. China needs to keep $1 trillion of dry powder to save the banks, so that money’s off the table.

- Source, James Rickards

Friday, September 14, 2018

Jim Rickards: Gold Price on the Verge of a Breakout?


In this four-part video series Jim Rickards, bestselling author and investment banker, discusses the core topics of this year´s "In Gold we Trust" report with the two authors Ronald-Peter Stöferle and Mark Valek.

- Source, In Gold We Trust

Monday, September 10, 2018

James Rickards: Russia Rising, The New Axis of Gold


Russia’s financial war against the U.S. is heating up – dumping U.S. Treasuries and buying gold to break U.S. Dollar hegemony. What’s their next move?

Monday, September 3, 2018

Investors Can't See the Pending Disaster Staring Them in the Face

Investors have a tendency to dismiss these threats, either because they have persisted for a long time in many instances without catastrophic results, or because of a belief that somehow the crises will resolve themselves or be brought in for a soft landing by policymakers and politicians.

These beliefs are good examples of well-known cognitive biases such as anchoring, confirmation bias and selective perception. Analysis tells us that there is little basis for complacency. Yet the VIX is back near all-time lows as shown in Chart 1 below.


Even if the probability of any one event blowing up is low, when you have a long list of volatile events, the probability of at least one blowing up approaches 100%.

With this litany of crises in mind, each ready to erupt into market turmoil, what are my predictive analytic models saying about the prospects for an increase in measures of market volatility in the months ahead?

They’re saying that investor complacency is overdone and market volatility is set to return with a vengeance. Even with the Facebook blowup and trouble in the tech space, VIX is just above 13.

Changes in VIX and other measures of market volatility do not occur in a smooth, linear way. The dynamic is much more likely to involve extreme spikes rather than gradual increases. This tendency toward extreme spikes is the result of dynamic short-covering that feeds on itself in a recursive manner — or what is commonly known as a feedback loop.

Shorting volatility indexes has been a very popular income-producing strategy for years. Traders sell put options on volatility indexes, collect the option premium as income, wait out the option expiration and profit at the option buyer’s expense. It’s been like selling flood protection in the desert; seems like easy money.

The problem is that every now and then a flash flood does hit the desert.

When we consider recent financial catastrophes affecting U.S. investors only, without regard to other types of disaster, we have had major stock market crashes or global liquidity crises in 1987, 1994, 1998, 2000 and 2008.

That’s five major drawdowns in 31 years, or an average of about once every six years. The last such event was 10 years ago. So the world is overdue for another crisis based on market history.

Investors expect that the future will resemble the past, that markets move in continuous ways and that extreme events occur rarely, if at all.

These assumptions are all false.

The future often diverges sharply from the recent past. Markets gap up or down, giving investors no opportunity to trade at intermediate prices. Extreme events occur with much greater frequency than standard models expect.

When they do strike seemingly from nowhere, like fire in a crowded theater, everybody panics and a wave of selling feeds upon itself.

The trouble is, most investors will never make it out of the theater in time.


- Source, James Rickards

Thursday, August 30, 2018

James Rickards: Investors Have Fallen Into a False Sense of Security

In January 2018, two significant market events occurred nearly simultaneously. Major U.S. stock market indexes peaked and volatility indexes extended one of their longest streaks of low volatility in history. Investors were happy, complacency ruled the day and all was right with the world.

Then markets were turned upside down in a matter of days. Major stock market indexes fell over 11%, a technical correction, from Feb. 2–8, 2018, just five trading days. The CBOE Volatility Index, commonly known as the “VIX,” surged from 14.51 to 49.21 in an even shorter period from Feb. 2–6.

The last time the VIX has been at those levels was late August 2015 in the aftermath of the Chinese shock devaluation of the yuan when U.S. stocks also fell 11% in two weeks.

Investors were suddenly frightened and there was nowhere to hide from the storm.

Analysts blamed a monthly employment report released by the Labor Department on Feb. 2 for the debacle. The report showed that wage gains were accelerating. This led investors to increase the odds that the Federal Reserve would raise rates in March and June (they did) to fend off inflation that might arise from the wage gains.

The rising interest rates were said to be bad for stocks because of rising corporate interest expense and because fixed-income instruments compete with stocks for investor dollars.

Wall Street loves a good story, and the “rising wages” story seemed to fit the facts and explain that downturn. Yet the story was mostly nonsense.

Wages did rise somewhat, but the move was not extreme and should not have been unexpected. The Fed was already on track to raise interest rates several times in 2018 with or without that particular wage increase. Subsequent wage increases have been moderate.

The employment report story was popular at the time, but it had very little explanatory power as to why stocks suddenly tanked and volatility surged.

The fact is that stocks and volatility had both reached extreme levels and were already primed for sudden reversals. The specific catalyst almost doesn’t matter. What matters is the array of traders, all leaning over one side of the boat, suddenly running to the other side of the boat before the vessel capsizes.

The technical name for this kind of spontaneous crowd behavior is hypersynchronicity, but it’s just as helpful to think of it as a herd of wildebeest that suddenly stampede as one at the first scent of an approaching lion. The last one to run is mostly likely to be eaten alive.

Markets are once again primed for this kind of spontaneous crowd reaction. Except now there are far more catalysts than a random wage report, despite last week’s optimistic GDP report.

We all know what’s happened to Facebook since last Friday. But look at the potential trouble from geopolitical sources alone…

The U.S. has ended its nuclear deal with Iran and has implemented extreme sanctions designed to sink the Iranian economy and force regime change through a popular uprising. Iran has threatened to resume its nuclear weapons development program in response. Both Israel and the U.S. have warned that any resumption of Iran’s nuclear weapons program could lead to a military attack.


Venezuela, lsed by the corrupt dictator Nicolás Maduro, has already collapsed economically and is now approaching the level of a failed state. Inflation exceeds 40,000% and the people have no food. Its inflation rate has now exceeded the hyperinflation of Weimar Germany.

Social unrest, civil war or a revolution are all possible outcomes. If infrastructure and political dysfunction reach the point that oil exports cannot continue, the U.S. may have to intervene militarily on both humanitarian and economic grounds.

North Korea and the U.S. have pursued on-again, off-again negotiations aimed at denuclearizing the Korean Peninsula. While there have been encouraging signs, the most likely outcome continues to be that North Korean leader Kim Jong Un is playing for time and dealing in bad faith. The U.S. may yet have to resort to military force there to negate an existential threat.

This litany of flash points goes on to include Iranian-backed attacks on Saudi Arabia and Israel, a civil war in Syria, confrontation in the South China Sea and Russian intervention in eastern Ukraine. These traditional geopolitical fault lines are in addition to cyber threats, critical infrastructure collapses and natural disasters from Kilauea to the Congo.


Monday, August 27, 2018

War With China is Just a Shot Away

China dredged sand surrounding useless rocks and atolls in the South China Sea and converted them into artificial islands and then built out the islands to include naval ports, air force landing strips, anti-aircraft weapons and other defensive and offensive weapons systems.

Not only are the Chinese militarizing rocks, but they are trampling on competing claims by the Philippines, Vietnam, Brunei, Malaysia and other countries surrounding the sea.

China is claiming control based on ancient imperial arrangements and argues that the West and its South Asian allies “stole” the territory from them. The answer is that both the ancient claims and the theft narrative are open to dispute.

More to the point, the world has developed rules-based platforms for resolving these issues without military force. The U.S. is guaranteeing freedom of passage, freedom of the seas and the territorial rights of allies such as the Philippines.

Incidentally, I was at Norfolk naval base last week delivering a lecture on financial warfare with China. There was a “hurry up” feel to it, a definite sense of urgency. I got the impression that something must be up.

So far, the U.S.-Chinese confrontation has been about naval vessels passing in close quarters and surveillance aircraft being harassed by fighter jets. The risk of such tactics is an accidental collision, a rogue shot fired or a command misunderstood.

Any such incident could lead to retaliation, and there’s no telling where it might stop. Trump is not someone to back down, and Chinese leadership does not want to appear weak before the U.S.

That’s especially true at a time of great economic uncertainty. Communist Party leadership is desperate to maintain the support of the people, or else it risks losing the “mandate of heaven.”

China does not want war at this time. But diverting the people’s attention away from domestic problems toward a foreign foe is an old trick leaders use to unite the people in times of uncertainty. Rallying the people around the flag is a tried and true method to garner support.

If China’s leadership decides that the risk of losing legitimacy at home outweighs the risk of conflict with the United States, the likelihood of war rises dramatically.

I’m not predicting it, but wars have started over less.

As Mick Jagger sang, a U.S.-China war is “just a shot away.”

- Source, Jim Rickards

Friday, August 24, 2018

Jim Rickards: Shooting War With China More Likely Than You Think

The mainstream media narrative about the U.S.-China trade war implies that Trump is on a highly damaging ego trip and China holds all the cards.

The exact opposite is true.

Trump has ample financial warfare weapons including tariffs, penalties, bans on direct investment, improved cybersecurity, forced divestiture and freezing of assets.

Meanwhile, China has almost run out of room to impose tariffs. Further, they will invite retribution if they try to devalue their currency further.

China’s vulnerabilities run deeper than that.

The U.S.-China trade war comes in the aftermath of a Chinese Communist Party conference that made Xi Jinping dictator for life and enshrined his doctrines on the same level as Mao Zedong.

Once Xi got these powers, he proceeded on a disastrous policy course that has resulted in a slowdown of the Chinese economy, higher debt defaults, lost investment opportunities in the U.S. and declining hard currency reserves.

The knives are now out in Beijing.

Reports are circulating that Xi’s opponents are questioning his judgment and the wisdom of expanding his powers at such a critical time. Many are starting to blame Xi for the trade war almost as much as they blame Trump.

Xi still has torture, firing squads and concentration camps at his disposal, but the notion of a unified, coherent leadership structure in Beijing is now seen to be a myth.

Trump will keep up the pressure; he never backs off and always doubles down. It will be up to Xi to blink and acquiesce in many U.S. demands.

The U.S. will win this trade war because Xi does not want to lose his throne. Yet there will still be material damage to the global economy and lasting animosity between Xi and Trump.

But there’s more to the U.S.-China dispute than trade.

Yes, headlines and TV interviews are dominated by talk of the trade war. That escalating confrontation is a big deal, but it’s not the only flash point in U.S.-China relations, and not even the most important.

China is as much concerned about a military confrontation in the South China Sea as it is about the economic confrontation in the trade wars...

- Source, Jim Rickards via the Daily Reckoning

Friday, August 17, 2018

Rickards: We Are in a New Currency War

The problem from an investor’s perspective is they are “slow burn” crises and can linger for a long time before producing anything dramatic such as a shooting war or market collapse. They are not date-driven or date-specific in the short run.

One story that’s under the radar and could blow up soon is Chinese currency devaluation.

If Trump puts a 25% tariff on Chinese imports but China then devalues its currency 25%, then the net effect is zero. The impact of the devaluation offsets the impact of the tariff and then you’re back where you started.

This new currency war seems to be happening.

Once Trump focuses on this, he’s likely to be infuriated and retaliate against China in the currency war and take steps to penalize China for currency manipulation over and above the existing tariffs and penalties for theft of intellectual property. This has a hard date of Oct. 15, 2018.

That’s the date of the U.S. Treasury’s semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.

That report is the formal mechanism for labeling a trading partner such as China a “currency manipulator” with severe consequences. Oct. 15, 2018, is just three weeks before the midterm elections, so it could be a highly popular political move in addition to being economically important.

All of this and more is on Trump’s policy plate right now. Just don’t expect him to handle it the way politicos usually do. Investors should expect dramatic policy shifts and extreme threats. But don’t overreact like the Washington pundits.

Remember, it’s all the art of the deal.

- Source, James Rickards via the Daily Reckoning



Tuesday, August 14, 2018

Jim Rickards: Trump Haters Don’t Get the “Art of the Deal”

I’m continually amazed at the legions of politicos, pundits and so-called “experts” who don’t understand President Trump or how he conducts policy.

These elites have a mental model of how a president is supposed to behave and how the policymaking process is supposed to be carried out. Obviously, Trump does not fit their model.

Instead of trying to grasp the model that Trump does use, they continually berate and disparage Trump for not living up to their expectations. A more thoughtful group would say, “Well, he’s different, so why don’t we try to understand the differences and analyze the new model?”

Really, these people need to get out of Washington, New York and Hollywood more and get away from their screens. If they knew more everyday Americans, they would come a lot closer to understanding how Trump gets things done.

It’s not chaos; it’s just a little different and more down to earth.

This is because of Trump’s “art of the deal” style described in his best-selling book by that name. Bush 43 and Obama were totally process-driven. You could see events coming a mile away as they wound their way through the West Wing and Capitol Hill deliberative processes.

All you had to do was understand the process and you could forecast big developments in a relatively straightforward way.

With Trump, there is a process, but it does not adhere to a timeline or existing template. Trump seems to be the only process participant most of the time.

Here’s the Trump process:

  • Identify a big goal (tax cuts, balanced trade, the wall, etc.).
  • Identify your leverage points versus anyone who stands in your way (elections, tariffs, jobs, etc.).
  • Announce some extreme threat against your opponent that uses your leverage.
  • If the opponent backs down, mitigate the threat, declare victory and go home with a win.
  • If the opponent fires back, double down. If Trump declares tariffs on $50 billion of good from China,and China shoots back with tariffs on $50 billion of goods from the U.S., Trump doubles down with tariffs on $100 billion of goods, etc. Trump will keep escalating until he wins.

Eventually, the escalation process can lead to negotiations with at least the perception of a victory for Trump (North Korea) — even if the victory is more visual than real.

No one else in Washington thinks this way. Washington insiders try to avoid confrontation, avoid escalation, compromise from the beginning and finesse their way through any policy process.

Trump is in a league of his own. What amazes me is that the media still do not understand his style and keep taking the bait when he announces something crazy, as in Step 3 above...

- Source, Jim Rickards


Saturday, August 11, 2018

Jim Rickards: When the Financial Flood Hits, It's Too Late to Buy Insurance

"When we consider recent financial catastrophes affecting U.S. investors only, without regard to other types of disaster, we have had major stock market crashes or global liquidity crises in 1987, 1994, 1998, 2000 and 2008.

That’s five major drawdowns in 31 years, or an average of about once every six years. The last such event was 10 years ago. So the world is overdue for another crisis based on market history.

Does any of this mean you should go to your fortified bunker and curl up in a ball? Of course not. We all wake up every morning and face the day, come what may. I’m not paralyzed by fear and neither should you be.

But it does mean that we need to overcome any cognitive bias about the future being like the past or about recent calm being a good forecast for the future (called “recency bias” by behavioral psychologists).

When the 100-year flood does hit, it’s too late to buy flood insurance. Likewise, when the next financial crisis hits, it will be too late to buy gold at today’s relatively attractive prices. The best time to buy flood insurance is when the sun is shining."

- Source, Jim Rickards via the Daily Reckoning

Thursday, August 9, 2018

Jim Rickards: Get Ready for the “100-Year Flood”

One of the long-standing reasons to own physical gold or invest in gold mining shares is to hedge geopolitical risk or the risk of natural disaster.

From the Black Death in the 14th century to the Thirty Years’ War in the 17th century to the world wars of the 20th century, gold has been a reliable store of wealth. There is no reason to believe that such existential events are no longer a danger.


I don’t think you need any reminder of the litany of risks present today.

The United States is determined to prevent Iran from obtaining nuclear weapons. Iran is equally determined to develop them. Iran’s neighbors, such as Saudi Arabia, have said that if Iran obtains nuclear weapons, they will quickly do the same.

In that case, Turkey and Egypt would follow suit. The choices boil down to a conventional war with Iran or a wider nuclear arms race in a highly volatile region.

North Korea already has an arsenal of nuclear warheads with a yield approximately the size of the Hiroshima atomic bomb, about 15 kilotons of TNT, but it has tested much larger weapons. It has also developed intermediate-range ballistic missiles (IRBMs) and has tested intercontinental ballistic missiles (ICBMs).

Denuclearization discussions are ongoing between the U.S. and North Korea, but President Trump has made it clear that he will attack North Korea if it advances further toward its stated goal of having a deliverable nuclear weapon that can reach the U.S.

If talks fail and the U.S. does attack North Korea, it is likely that North Korea will unleash devastating force on South Korea and possibly launch a nuclear weapon aimed at Japan.

Venezuela is a political and humanitarian catastrophe and is approaching the level of a failed state, which could result in civil war, riots, mass refugees and a cut off of its oil exports, about 3% of the world total today.

Its inflation rate is now running at over 40,000%. That means its hyperinflation has officially exceeded Weimar Germany’s, where the highest recorded monthly inflation rate was “only” 29,500%. The IMF now forecasts Venezuela’s hyperinflation will reach 1,000,000% by the end of the year.

Other hot spots around the world include Syria, Ukraine, Israel and its confrontation with Hamas and Hezbollah, the Saudi war with Iranian-backed Houthi rebels in Yemen and conflicting claims in the South China Sea.

That’s just scratching the surface. Natural disasters abound from the extreme flooding of Hurricane Harvey to the lava flows of Kilauea on Hawaii. The Ebola virus has reemerged in the Congo, four years after a prior epidemic in West Africa caused 10,000 deaths. Other threats are ubiquitous.

New threats are also emerging that are not traditionally geopolitical or natural. These include power grid collapses, cyberwarfare, hacking, data theft and misuse of big data including examples such as Russian interference in recent U.S. elections. Killer robots, swarm attack drones and rogue artificial intelligence applications are coming soon.

An investor would not be blamed for saying, “So what?” Many of the threats mentioned have been festering for years. Going back further in time would produce a different list of threats, most of which never came to fruition.

Americans, in particular, seem safe from the worst of these threats except for the temporary effects of a bad storm or wildfire in a specific area. To most Americans, these threats are just background noise. Complacency rules the day.

But here’s an interesting bit of math, somewhat simplified, that might break investors out of their complacency. Don’t worry about the details, but I strongly urge you to focus the implications.

Let’s consider a “100-year flood,” which can literally be a 100-year flood like Hurricane Harvey or a metaphorical rare event, a so-called “Black Swan.”

Let’s call “P” the probability of a 100-year flood in a known flood zone and consider the odds of the flood happening or not happening each year in a succession of years...

- Source, James Rickards


Monday, August 6, 2018

Jim Rickards: The Weaponized Dollar Will Soon be a Victim of its Own Success

This will not involve dead-end cryptocurrencies like bitcoin but entirely new utility tokens and cryptos. Imagine something like a putincoin and you’ll be on the right track.

China is pushing its trade counterparties to accept Chinese yuan as payment for goods and services. The yuan is a small part of global payments today (about 2%) but the yuan may get a boost as the U.S. sanctions on Iran kick in.

China is Iran’s biggest customer for oil, and if U.S. sanctions prohibit dollar payments for Iranian oil, then Iran and China may have no choice but to transact in yuan.

The International Monetary Fund, IMF, has already announced efforts to put its world money, the special drawing right, SDR, on a distributed ledger. This would make the SDR a global cryptocurrency for settling balance of payments transactions among China, Russia and other IMF members, also without reliance on the dollar payments system.

Alongside the new money in cryptocurrencies, there is the oldest form of money, which is gold. The use of gold is the ideal way to avoid U.S. financial warfare.

Gold is physical so it cannot be hacked. It is completely fungible (an element, atomic number 79) so it cannot be traced. Gold can be transported in sealed containers on airplanes so movements cannot be identified through wire transfer message traffic or satellite surveillance.

There is good evidence that Iran currently pays for North Korean weapons technology with gold, and good reason to expect that future Chinese payments for Iranian oil will be made at least partly in gold.

Imagine a three-way trade in which North Korea sells weapons to Iran, Iran sells oil to China and China sells food to North Korea. All of these transactions can be recorded on a blockchain and netted out on a quarterly basis with the net settlement payment made in gold shipped to the party with the net balance due. That’s a glimpse of what a future nondollar payments system looks like.

Finally, look at the evidence presented in Chart 1 below. This shows Russia’s reserve position from 2013–18. The reserve position collapsed from $540 billion to $350 billion as a result of the oil price crash beginning in late 2014. (And query whether the oil price collapse itself was engineered by the U.S. in retaliation for Russia’s annexation of Crimea).


Since early 2015, Russia has rebuilt its reserve position under the patient stewardship of Russian Central Bank head Elvira Nabiullina. Russian reserves are now back up to $460 billion and rising steadily.

Yet there’s one huge difference between Russian reserves in 2014 and those reserves today. That difference is gold. During the reserve collapse in 2014, Russia sold U.S. dollar assets as needed to maintain liquidity, but it never stopped buying gold.

Russian gold reserves rose from 1,275 tons in mid-2015 (near the reserve low) to 1,909 tons at the end of April 2018. That’s a 50% increase in gold reserves in less than three years. Using current market prices, the Russia gold hoard is worth about $90 billion, or 20% of Russia’s global reserve position.

Why would a country put 20% of its reserves into gold unless it expected gold to be a major part of the international monetary system in the future? It wouldn’t. Russia not only expects gold to be part of the system, it is in strong position to make that happen by working with China, Turkey and Iran in what I call the new “Axis of Gold.”

The bottom line is that the weaponized dollar will soon be a victim of its own success. While the U.S. was bullying the world with dollars, the world was quietly preparing a new nondollar system. The U.S. wanted diplomatic and military clout and it got it with the dollar.

But as the saying goes, “Be careful what you wish for.”

Wise investors will prepare now for a new nondollar payments system. You may not be able to buy crypto SDRs (yet), but you can certainly own gold, and you should.

- Source, Jim Rickards


Saturday, August 4, 2018

The US Dollar: A Victim of Its Own Success

America’s most powerful weapon of war does not shoot, fly or explode. It’s not a submarine, plane, tank or laser. America’s most powerful strategic weapon today is the dollar.

The U.S. uses the dollar strategically to reward friends and punish enemies. The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.

The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies without firing a shot.

Before turning to specific tactics, consider the following. The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions. European banks that make dollar-denominated loans to customers have to borrow dollars to fund those liabilities.

Those banks do their borrowing in the eurodollar deposit market, or with dollar-denominated commercial paper or notes. Being based in Switzerland or Germany does not allow you to escape from the dollar’s dominance.

The U.S. not only controls the dollar itself. It controls the dollar payments system. This consists of the Treasury’s digital ledger of holders of U.S. debt, the Fedwire payments system among U.S. Fed member banks and the Clearing House Association (successor to the New York Clearing House and proprietor of CHIPS, the Clearing House Interbank Payments System) composed of the largest U.S. banks.

A dollar payment going from a bank in Shanghai to another bank in Sydney runs through one of these U.S.-controlled payments systems.

In short, the dollar is the oxygen supply for world commerce and the U.S. can cut off your oxygen whenever it wants.

The list of ways in which the dollar can be weaponized is extensive. The International Emergency Economic Powers Act of 1977, IEEPA, gives the president of the United States dictatorial power to freeze and seize assets and block payments.

The Treasury’s Office of Foreign Assets Control, OFAC, maintains a blacklist of individuals and companies with whom financial intermediaries, such as banks and credit card companies, are forbidden to transact. Individuals on the OFAC list are like dead men walking when it comes to travel and business.

The Committee on Foreign Investment in the United States, CFIUS, can block any foreign acquisition of a U.S. company on national security grounds.

This list of financial weapons goes on, but you get the idea. The U.S. uses the dollar to force its enemies into fronts, crude barter or the black market if they want to do business.

Examples of the U.S. employing these financial weapons are ubiquitous. The U.S. slapped sanctions on Russia after the 2014 annexation of Crimea and invasion of Eastern Ukraine. The U.S. waged a full-scale financial war with Iran from 2011–13 that resulted in bank runs, hyperinflation, local currency devaluation and social unrest.

The U.S. was pushing Iran to the brink of regime change in 2013 when President Obama declared a truce to pursue what became the Joint Comprehensive Plan of Action, JCPOA, or the Iran nuclear deal. President Trump has now ended that deal and the financial war with Iran has resumed where it left off in 2013, but tougher than ever.

The U.S. is slapping stiff Section 301 penalties on China for theft of intellectual property. Other obvious victims of U.S. financial weapons are North Korea, Syria, Cuba and Venezuela.

The actions described above did not arise in the normal course of trade and finance. The Russian, Iranian and other sanctions noted are explicitly geopolitical, while the Chinese sanctions are geostrategic to the extent the U.S. and China are vying for technological supremacy in the 21st century.

None of these sanctions would be effective or even possible without the use of the dollar and the dollar payments system.

Yet for every action there is a reaction. America’s adversaries realize how vulnerable they are to dollar-based sanctions. In the short run, they have to grin and bear it. They’re fully invested in the dollar both in their reserves and in the desire of their largest companies like Gazprom (Russia) and Huawei (China) to become major global players.

Transacting on the world stage means transacting in dollars.

And dollar-based sanctions are a powerful financial weapon for the U.S. But our adversaries and so-called allies are not standing still. They are already envisioning a world where the dollar is not the major reserve and trade currency.

In the longer run, Russia, China, Iran, Turkey and others are working flat-out to invent and implement nondollar transactional currencies and independent payments systems.

Russia has begun a major research and development effort in the area of distributed ledger technology (also known as “blockchain”) so that financial transactions can be processed and verified without reliance on Western-controlled banks...


- Source, James Rickards via the Daily Reckoning



Wednesday, August 1, 2018

Jim Rickards: Once the Tsunami Hits, No One Will be Spared

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the over-leveraged banking sector.

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.


Monday, July 30, 2018

James Rickards: Here’s Where the Next Crisis Starts

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this…

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% — a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.

Many investors will be caught completely unprepared.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

- Source, The Daily Reckoning, Read More Here



Tuesday, July 24, 2018

Jim Rickards: Here's The Difference Between Paper Gold And Physical Gold

It's not that the price is different, per se.

When gold crashed on Monday, dragging market prices down to a low of $1321.50 an ounce from levels around $1560 only days before, holders of physical gold saw the value of their holdings decline as well.

However, we've seen a lot of claims that somehow there's a difference between the market for physical gold (people buying gold bars or gold coins) and that for "paper" gold (which refers to gold futures traded on the COMEX or shares of GLD, the gold ETF).

Jim Rickards, a prominent gold bull and author of the book Currency Wars, told Business Insider that the disconnect between the two markets evidenced by the crash on Monday is not one of price, but "in terms of behavior, in terms of people's responses to market developments."

So, what does that mean exactly?

Rickards uses a classic "weak hands, strong hands" analogy to compare physical gold buyers and paper gold buyers.

According to Rickards, the "weak hands" in the gold market were the over-leveraged buyers of gold futures and ETFs that caused prices to plummet in the recent sell-off.

"If you're an un-levered buyer of bullion - say, 10% of your investable assets - you kind of watched the headlines and watched the ticker [as gold crashed] on Thursday, Friday, and Monday, but it didn't affect you," says Rickards.

Below, Rickards expands on the analogy and explains where the hedge funds fit in:

Gold ownership is now divided between strong hands and weak hands. The strong hands are Russia, China, some of the other central banks, and anybody else who is buying gold for cash in physical form, without leverage.

The weak hands are retail jumping into GLD, at a top, using margin, futures players, and people who don't really understand gold. There are a lot of trend followers out there who started following gold on a trend basis, but didn't really understand anything about gold, or how it works, etc.

The hedge funds turn out to be weak hands, not strong hands. The reason is they've got redemptions. Hedge funds don't have permanent capital. They may have monthly redemptions, or quarterly redemptions, or one-year lockups, or whatever it is, but it's not permanent capital.

- Source, Business Insider


Saturday, July 21, 2018

Will the Argentina & Venezuela Crisis be Contained, Or Will Contagion Spread?

"Ukraine, South Africa and Chile are also highly vulnerable to a run on their reserves and a default on their external dollar-denominated debt.

The only issue now is whether the new crisis will be contained to Argentina and Venezuela or whether contagion will take over and ignite a global financial crisis worse than 2008.

It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis.

This new crisis could take a year to spread, so it’s not too late for investors to take precautions, but the time to start is now.

The Fed’s path of rate hikes and balance sheet reductions since December 2015 has reinvigorated the U.S. dollar, as I explained above. A stronger dollar means weaker EM currencies in general. Again, that’s exactly what we’ve seen lately. Right now, EM currencies are in free fall against the dollar.

But here’s a curveball question for you:

Now that the Federal Reserve raised rates again last month, is the bottom in for emerging-market currencies? And is the top in for the dollar?"

- Source, Jim Rickards


Wednesday, July 18, 2018

Jim Rickards: The Dollar Is a Source of Global Instability

The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions.

So the dollar’s strength or weakness can have an enormous impact on global markets.

Using the Fed’s broad real trade-weighted dollar index (my favorite foreign exchange metric, much better than DXY), the dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3).

Right now, the index is 95.2, below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets (EM) debtors who borrowed in dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength.

And EM lending has been proceeding at a record pace.

Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

When the focus is put on specific EM currencies, the dollar’s appreciation in some cases is 100% or more.

Much of this dollar appreciation has been driven by the U.S. Federal Reserve’s policy of raising interest rates and tightening monetary conditions with balance sheet reductions. Meanwhile, Europe and Japan have continued easy-money policies while the U.K., Australia and others have remained neutral.

The U.S. looks like the most desirable destination for hot money right now because of interest rate differentials. And that is having far-reaching consequences on EM economies.

A new EM debt crisis has already started. Venezuela has defaulted on some of its external debt, and litigation with creditors and seizure of certain assets are underway. Argentina’s reserves have been severely depleted defending its currency, and it has turned to the IMF for emergency funding...

- Source, James Rickards



Sunday, July 15, 2018

Rickards: Here’s How to Crack the Code on Gold


Jim Rickards joined Kitco News and Daniela Cambone to discuss the latest news and analysis from gold markets, geopolitics and even bitcoin. The Wall Street veteran took on the bigger picture facing metals investors and what could be just around the corner in a bubbling market.

When asked why certain geopolitical tensions have greater impacts on gold and hard assets than others Rickards remarked, “There are two things going on, first is that the North Korean missile threat goes from high tension to back down again. This is a very serious threat and we are headed for war with North Korea. While I don’t know what it will take to not just get gold to go up but stocks and other sectors, ultimately markets are going to be impacted.”

- Source


Thursday, July 12, 2018

Trying to Invest in Precious Metals the Day Before a Collapse is Too Late

"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."


 - Source, James Rickards


Monday, July 9, 2018

Avalanche Ahead: How to Survive the Monetary Collapse


The two questions I’m asked most frequently about the monetary collapse are: what’s the event that’s going to take down the system and when is it going to happen?

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?

It’s not a linear function. It’s an exponential function. What that means is that when you triple the system, you don’t triple the risk. You increase risk by ten or a hundred times.

That’s what we’re doing. 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.


- Source, The Daily Reckoning, Read More Here



Friday, June 29, 2018

No Room to Cut Rates, Debt Levels Are at Frightening Levels

Polls show that about half the American people favor it as well. The argument in favor is that GBI gives everyone a firm financial foundation on which they can seek other employment, turn down “lousy” jobs, get education and training, provide household services to family, friends and community, or maybe just be artists.

The argument against GBI is that it encourages laziness, discourages productive work, is unaffordable by heavily indebted governments, and will produce inflation, which destroys savings and impedes capital formation.

But, what about hard evidence? Some countries around the world have already started GBI programs and the initial results are not favorable.

Finland has decided not to expand a pilot program of GBI. The program’s results in terms of job gains were disappointing. This tends to support the views of those who claim that GBI discourages work rather that encourages it through training. This is a small sample; there will be a lot more discovered about the effects of GBI in the years ahead.

Meanwhile, the political debate is going full-speed ahead. And it is not going away soon. The advocates for GBI see no problem with the budget deficit aspects of this. In their view, the Fed can monetize the debt forever; so there’s no problem finding the money.

The guaranteed jobs plan sounds better to politicians than GBI, but it still causes massive budget deficits without much in return.

In the end, the GBI and guaranteed jobs plans will fail as they always do. But that does not mean they won’t be tried. You should expect this to be a big political issue in the 2018 mid-term elections later this year and the 2020 presidential election. The deficits that go along with GBI will guarantee that America continues to go broke.

The combination of tax cuts and massively expanded government already guarantee ballooning deficits ahead. And this is when the economy is supposedly strong.

But the economy is long overdue for a recession. The typical post-WWII economic expansion lasted only 58 months or so. The current “expansion” — and I use the scare quotes because it’s been so week by historical standards — is 108 months.

What happens when the inevitable recession does strike?

Tax receipts will dry up and the government will almost certainly unleash a flood of deficit spending to stimulate the economy. And the Fed’s current policy of quantitative tightening (QT) will swing into reverse.

Debt, already at frightening levels, will spike. But the economy is in the condition it’s in today because of too much debt and not enough growth. More debt will only make things worse.

Central banks have little room to cut rates or print money in a future crisis, even with the Fed’s recent hikes. That’s why the Fed is so determined to raise rates, so it can cut them again when it needs to.

Meanwhile, taxpayers have no tolerance for more bailouts. And governments around the world are experiencing political polarization. It’s not just here in the U.S. There is simply no will and no ability to deal with the next panic or recession when it hits.

The systemic dangers are clear.

The next panic will be unstoppable without extreme measures — including IMF money printing, and lockdowns of banks and money market funds.

The calls for a guaranteed job or guaranteed basic income will soar. Unfortunately, the money won’t be there to support it.

- Source, James Rickards

Tuesday, June 26, 2018

Jim Rickards: Welfare by Another Name

I’m Jim Rickards, a colleague of Nilus here at Agora, filling in for him this weekend.

One of the first things I learned as a registered Washington lobbyist, (yes, I admit it, I was a lobbyist in the 1990s), is “you can’t beat something with nothing.”

That’s a Washington insider’s way of saying that if you don’t like an opponent’s policies, it’s not enough to moan and complain about them and throw insults. You have to come up with a policy of your own that appeals to voters and can be offered to the public as an alternative.

This has been a problem for Democrats lately.

They can’t stand Donald Trump and insult him all day long, but they won’t prevail in major elections scheduled in 2018 and 2020 unless they offer the voters something other than constant ridicule of Trump.

A few smart Democrats, including Bernie Sanders and Cory Booker, have figured this out. Their alternative to Trump’s policies is a government guaranteed job for every American who wants one. The jobs will be low or negative productivity government jobs requiring few or no skills and offering no advancement.

This proposal may sound odd coming at a time when the official unemployment rate is 3.9%, the lowest in almost twenty years. Unemployment is 3.7% for adult white men and 3.5% for adult white women, while African-American unemployment is approaching historic lows.

Why roll out a jobs program now?

The answer is that the official unemployment statistics are highly misleading. They do not count approximately 10 million able-bodied working age adults who have simply given up on work.

Adjusted for those “missing workers,” the real unemployment rate is about 10%, a depression level figure.

Interest in the guaranteed jobs program is high. Critics say the program will destroy incentives and undermine the traditional work ethic. Supporters say it will help to raise wages because private employees will have to match the wages being offered by the program itself in order to compete with the government jobs.

In that sense, this is really a backdoor way to raise the Federal minimum wage and increase benefits. Whichever side you’re on, get used to hearing about this debate in the years ahead.

Who knows, maybe Trump will end up supporting it. Trump is not a traditional conservative, but he is a shrewd politician who may just steal his opponent’s best idea. You can’t beat something with nothing.

There is also a parallel idea beginning to gain traction in important circles…

I’ve been writing lately about something called “GBI,” which stands for guaranteed basic income. GBI is the new buzz phrase that’s the talk of academia, Silicon Valley and the elites on both coasts.

GBI goes by other names including universal basic income, UBI, or just basic income, but the policy is the same regardless of the name. The idea is that governments will guarantee every citizen a certain basic income as a matter of right. Everyone making below a certain amount of money gets a check.

It’s really just welfare by another name, but it would apply to a much broader group than just the poor and you would not have to pass any income tests or work requirements to qualify.

There is no means testing and no work requirement. The government just hands every man and woman a check every month whether rich or poor, young or old, employed or unemployed.

The idea behind GBI is that technology is making many jobs obsolete and those jobs are not coming back. Some Americans can compete in the new high-tech high-reward world, but most cannot.

If people cannot get jobs and incomes stagnate, then there will be no consumption and no one to buy the gadgets that the tech companies are making. Instead, everyone will get a check so they can spend freely.

My reason for highlighting GBI is that you’re going to be hearing a lot more about it in the next two years. Instead of a guaranteed job, leading Democratic Party politicians in the U.S. support GBI as part of their platform...


Friday, June 22, 2018

James Rickards: A New Global Debt Crisis Has Begun

Emerging-market debt crises are as predictable as spring rain. They happen every 15–20 years, with a few variations and exceptions.

In recent decades, the first crisis in this series was the Latin American debt crisis of 1982–85. The combination of inflation and a commodity price boom in the late 1970s had given a huge boost to economies such as Brazil, Argentina, Chile, Mexico and many others, including countries in Africa.

This commodity boom enabled these emerging-market (EM) economies to earn dollar reserves for their exports. (By the way, we didn’t call them “emerging markets” in the 1980s; they were the “Third World” after the Western world and the communist world.)

These dollar reserves were soon supplemented with dollar loans from U.S. banks looking to “recycle” petrodollars that the OPEC countries were putting on deposit after the oil price explosion of the 1970s.

I worked at Citibank from 1976–1985 during the height of petrodollar recycling and even discussed the process personally with Walter Wriston, Citibank’s legendary CEO. In the 1960s, Wriston invented the negotiable eurodollar CD, which was later critical to funding those EM loans.

Wriston is considered the father of petrodollar recycling once the petrodollar was created by Henry Kissinger and William Simon under President Nixon in 1974. I remember those days extremely well. The bank made billions and our stock price soared. It was a euphoric phase and a great time to be an international banker.

Then it all crashed and burned. One by one, the lenders defaulted. They had squandered their reserves on vanity projects such as skyscrapers in the jungle, which I saw firsthand when I visited Kinshasa on the Congo River in central Africa. Most of what wasn’t wasted was stolen and stashed away in Swiss bank accounts by kleptocrats.

Citibank was technically insolvent after that but was bailed out by the absence of mark-to-market accounting. We were able to pretend the loans were still good as long as we could refinance them or roll them over in some way. Citibank has a long and glorious history of being bailed out, stretching from the 1930s to the 2010s.

After the defaults, the reaction set in. Emerging markets had to flip to austerity, devalue their currencies, cut spending, cut imports and gradually rebuild their credit. There was a major EM debt crisis in Mexico in 1994, the “Tequila Crisis,” but that was contained by a U.S. bailout led by Treasury Secretary Bob Rubin. On the whole, the EMs used the 1990s to rebuild reserves and restore their creditworthiness.

Gradually, the banks looked favorably on this progress and new loans started to pour in. Now the target of bank lending was not Latin America but the “Asian Tigers” (Singapore, Taiwan, South Korea and Hong Kong) and the “mini-tigers” of South Asia.

The next big EM debt crisis arrived right on time in 1997, 15 years after the 1982 Latin American debt crisis. This one began in Thailand in June 1997.

Money had been flooding into Thailand for several years, mostly to build real estate projects, resorts, golf courses and commercial office buildings. Thailand’s currency, the baht, was pegged to the dollar, so dollar-based investors could get high yields without currency risk.

Suddenly a run on the baht emerged. Investors flocked to cash out their investments and get their dollars back. The Thai central bank was forced to close the capital account and devalue their currency, forcing large losses on foreign investors.

This sparked fear that other Asian countries would do the same. Panic spread to Malaysia, Indonesia, South Korea and finally Russia before coming to rest at Long Term Capital Management, LTCM, a hedge fund in Greenwich, Connecticut.

I was chief counsel to LTCM and negotiated the rescue of the fund by 14 Wall Street banks. Wall Street put up $4 billion in cash to prop up the LTCM balance sheet so it could be unwound gradually. At the time of the rescue on Sept. 28, 1998, global capital markets were just hours away from complete collapse.

Emerging markets learned valuable lessons in the 1997–98 crisis. In the decade that followed, they built up their reserve positions to enormous size so they would not be disadvantaged in another global liquidity crisis.

These excess national savings were called “precautionary reserves” because they were over and above what central banks normally need to conduct foreign exchange operations. The EMs also avoided unrealistic fixed exchange rates, which were an open invitation to foreign speculators like George Soros to short their currencies and drain their reserves.

These improved practices meant that EMs were not in the eye of the storm in the 2007–08 global financial crisis and the subsequent 2009–2015 European sovereign debt crisis. Those crises were mainly confined to developed economies and sectors such as U.S. real estate, European banks and weaker members of the eurozone including Greece, Cyprus and Ireland.

Yet memories are short. It has been 20 years since the last EM debt crisis and 10 years since the last global financial crisis. EM lending has been proceeding at a record pace. Once again, hot money from the U.S. and Europe is chasing high yields in EMs, especially the BRICS (Brazil, Russia, India, China and South Africa) and the next tier of nations including Turkey, Indonesia and Argentina.

As Chart 1 and Chart 2 below illustrate, we are now at the beginning of the third major EM debt crisis in the past 35 years.

Chart 1 measures the size of hard-currency reserves relative to the number of months of imports those reserves can buy. This is a critical metric because emerging markets need imports in order to generate exports. They need to buy machinery in order to engage in manufacturing. They need to buy oil in order to keep factories and tourist facilities operating.

Chart 1 shows how many months each economy could pay for imports out of reserves if export revenue suddenly dried up.

Chart 2 shows the gross external financing requirement, GXFR, of selected countries calculated as a percentage of total reserves. GXFR covers both maturing debt denominated in foreign currencies (including dollars and euros) and the current account deficit over the coming year.


Both charts reflect a crisis in the making.

The hard-currency import coverage for Turkey, Ukraine, Mexico, Argentina and South Africa, among others, is less than one year. This means that in the event of a developed-economy recession or another liquidity crisis where demand for EM exports dried up, the ability of those EMs to keep importing needed inputs would be used up quickly.

Chart 2 has even more disturbing news. Turkey’s maturing debt and current account deficit in the year ahead is almost 160% of its available reserves. In other words, Turkey can’t pay its bills.

Argentina’s ratio of debts and deficits to reserves is over 120%. The ratio for Venezuela is about 100%, and Venezuela is a major oil exporter.

These metrics don’t merely forecast an EM debt crisis in the future. The debt crisis has already begun.

Venezuela has defaulted on some of its external debt, and litigation with creditors and seizure of certain assets is underway. Argentina’s reserves have been severely depleted defending its currency, and it has turned to the IMF for emergency funding.

Ukraine, South Africa and Chile are also highly vulnerable to a run on their reserves and a default on their external dollar-denominated debt. Russia is in a relatively strong position because it has relatively little external debt. China has huge external debts but also has huge reserves, over $3 trillion, to deal with those debts.

The problem is not individual sovereign defaults; those are bound to occur. The problem is contagion.

History shows that once a single nation defaults, creditors lose confidence in other emerging markets. Those creditors begin to cash out investments in EMs across the board and a panic begins.

Once that happens, even the stronger countries such as China lose reserves rapidly and end up in default. In a worst case, a full-scale global liquidity crisis commences, this time worse than 2008.

A full-blown EM debt crisis is coming soon. It is likely to start in Turkey, Argentina or Venezuela, but it won’t end there.

The panic will quickly affect Ukraine, Chile, Poland, South Africa and the other weak links in the chain.

The IMF will soon run out of lending resources and will have to pass the hat among the richer members. But the Europeans will have their own problems, and the U.S. under President Trump is likely to reply, “America First,” and decline to participate in bailing out the EMs with U.S. taxpayer funds.

At that point, the IMF may have to resort to printing trillions of dollars in special drawing rights (SDRs) to reliquify a panicked world. SDRs are essentially world money. Elites are working behind the scenes to ultimately replace the dollar with SDRs as the leading reserve currency.

A new crisis will bring that goal one step closer to reality.

- Source, James Rickards via the Daily Reckoning