Jim Rickards: The Fed is Triple Tightening Into Crisis

I’m in Dublin, Ireland, today, where I was honored and humbled to receive a writing award from Trinity College.

It’s my job to continue pointing out the risks to the financial system that we still face and to try to help people prepare for the next crisis. Of course, central banks are a big part of the problem.

If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time. There’s no better example of this than the Federal Reserve.

The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system.

The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship.

The Fed uses “value at risk” modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.

As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy, only to produce the weakest recovery in history.

That’s over now. The Fed’s cycle of monetary tightening has been ongoing in various forms for over five years. First came Bernanke’s taper warning in May 2013. Next came the actual taper in December 2013 that ran until November 2014.

Then came the removal of forward guidance in March 2015, the liftoff in rates in December 2015, seven more rate hikes to date and the start of quantitative tightening in October 2017.

Another rate hike is already in the queue for December, which would be the ninth rate hike since liftoff.

During much of this tightening, the dollar was actually lower because markets believed the Fed would not raise in the first place or was overdoing it and would have to reverse course. Now that the Fed has shown it’s serious and will continue its tightening path (at least until they cause a recession), markets have no choice but to believe them.

And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).

When the Fed started QT last year, they urged market participants to ignore it. They said the QT plan was on autopilot, the Fed was not going to use it as an instrument of policy and the money burning would “run on background” just like a computer program that’s open but not in use at the moment.

It’s fine for the Fed to say that, but markets have another view. Analysts estimate that QT is the equivalent of two–four rate hikes per year over and above the explicit rate hikes. Markets have already suffered two significant sell-offs this year, the most recent being October’s.

While there were other contributing factors like the trade war and political uncertainty leading up to last week’s election, this monetary tightening cannot be dismissed.

Tighter monetary conditions in the U.S. have led to a stronger dollar, capital outflows from emerging markets (EMs) and disinflation.

The dollar is up about 4.5% this year against major competing currencies such as the euro, pound and yen.

A stronger dollar is itself a form of monetary tightening. A stronger dollar cheapens imports for U.S. buyers because they need fewer dollars to purchase goods. That’s a deflationary vector that will make the Fed’s goal of achieving a persistent 2% inflation rate even harder to reach.

The U.S. is now getting a triple shot of tightening in the form of higher rates, reduced money supply and a stronger dollar. At this rate, we may be in a recession sometime next year unless the Fed reverses course. We’ll see if the Fed wakes up to the danger before it’s too late.

I’m not holding my breath. The Fed is always the last to know.

- Source, James Rickards via the Daily Reckoning

James Rickards: Trump and the Economy

We continue our discussion of Trump and the economy with New York Times bestselling author Jim Rickards, who makes the case that Trump is on the right track with trade. 

But first, Taylor and Tyler break down the week’s news: the legacy of George HW Bush, the Democrats’ contentious leadership fight, and what to make of the latest turn of events in Special Counsel Robert Mueller’s Russia probe, Michael Flynn’s sentencing memo.

- Source, Roughly Explained

James Rickards Predicts the Next Financial Crisis...

Jim Rickards, a renowned author and the chief global strategist at Meraglim, is now predicting another global financial crisis. 

He explains why, and in so doing, reviews the unusual origins of his predictive analytics tool. 

He also explores complexity theory and Bayesian statistics.

- Watch the Full Interview Here

Harry Dent VS James Rickards: Inflation / Deflation Debate Live

At the latest Casey Research conference, Recovery Reality Check, James Rickards, senior managing director of Tanget Capital Partners and author of Currency Wars: The Making of the Next Global Crisis, debates Harry Dent, founder and president of HS Dent Foundation, on the subject of which is more likely in the near-term economic future, inflation or deflation.

- Source, Casey Research

James Rickards: A Special Economic Discussion

James Rickards & Egon Von Greyerz Discuss $10000 Gold

In this 18 minutes video, recorded in a Swiss vault, Jim and Egon cover many vital factors that investors must be aware of to protect themselves against the major risks in the financial system...

- Source, Gold Switzerland

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?

- Source, Jim Rickards

A Weaker Dollar is Coming, The Currency Wars Renew

What is the outlook for U.S. dollar exchange rates?

The single most important factor in the analysis is that two currencies cannot devalue against each other at the same time. It’s a mathematical impossibility. If one currency is going down against another, then the other must be going up. There’s no other way.

From January 2010 (when Obama launched the currency war) to August 2011 (when the dollar hit an all-time low), the currency wars benefited the U.S. at the expense of Europe, emerging markets and China. This was considered necessary by the participants at the G-20 leaders summit in Pittsburgh in September 2009.

The U.S. was and is the world’s largest economy. If the U.S. could not escape the impact of the 2008 financial panic, no one else would, either. In effect, the world would suffer stronger currencies while the U.S. devalued to jump-start the global recovery.

After August 2011, the dollar was allowed to revalue upward while the rest of the world, especially Europe and China, was allowed to devalue so they could claim some benefit from a weaker currency. This worked in the short run, but the problem was that the U.S. never returned to sustained growth at the prior trend of 3.25% growth per year.

The U.S. endured a long depression from 2007 until today with annual growth of about 2.3%. Europe and China got a boost, but the U.S. never pulled away from the pack.

Since then, it has been a matter of taking turns. The euro is allowed to depreciate to help growth and the banking system as the dollar gets stronger based on a slightly stronger U.S. economy. But no major economy has solved the problem of achieving self-sustaining trend growth.

China has been free-riding the entire time. There have been periods of a soft peg of the yuan to the dollar, but there are intermittent periods of a weaker yuan. China executed shock devaluations in August 2015 and December 2015.

Both times, U.S. stocks fell 11% in a matter of weeks. China has just executed a 10% slow-motion devaluation over the past six months. U.S. stocks have started to sink again.

Now Trump and Mnuchin are saying, “Enough!” The Europeans will have to take their turn with a stronger currency and China will be penalized for their currency manipulation. A weaker dollar is coming.

Whether this will be achieved with cooperation by the Fed or direct intervention by the Treasury remains to be seen, but a weaker dollar is the only way out of the U.S. growth conundrum and debt debacle.

The chart below shows that the euro has settled into a trading range since April after coming down from the $1.25 range in February.

Chart 1:

The euro will break out of that trading range toward the upside ($1.20–1.30) over the next few months. This will be the result of a possible Fed pause in rate hikes as the U.S. economy weakens, continued determination by the ECB to tighten policy and possible intervention by the U.S. Treasury.

Meanwhile, a weaker dollar will give the U.S. another growth spurt after the 2018 tax cuts to help propel Trump’s reelection prospects for 2020.

- Source, Jim Rickards

James Rickards: Be Prepared for a Cheaper Dollar

When will the strong dollar weaken? Ultimately, the answer is whenever the Treasury wants.

When the Treasury is not overly concerned with the dollar, market forces can prevail to raise or lower the exchange rate compared with euros, Swiss francs, yen or any other currency.

Sometimes, other central banks intervene to raise or lower their currencies relative to the dollar and the U.S. does not seem to care. China is notorious for this. Japan and Switzerland are other practiced currency manipulators.

The last fully coordinated currency market intervention was conducted by the G-7 in March 2011 at the time of the Fukushima, Japan, earthquake and tsunami that caused the collapse of a nuclear power plant and ultimately a crash of the Tokyo stock exchange.

The Japanese economy was weakened by the natural disaster. A weaker yen would have helped the economy with cheaper exports and more inflation. But insurance companies had to sell dollar-denominated assets and buy yen in order to pay yen-denominated claims for the disaster losses. The result was a stronger yen.

The G-7 intervention, organized by then French Finance Minister Christine Lagarde, successfully sold yen and bought euros, dollars and sterling to weaken the yen despite insurance companies buying it. Lagarde’s success in this intervention was instrumental in her elevation to head of the IMF shortly thereafter.

In short, except in extraordinary circumstances, the U.S. Treasury does not directly intervene in currency markets to target U.S. dollar exchange rates. If such targeting is needed, the Treasury will work with the Fed to raise interest rates or take a pause in rate hikes to affect the dollar’s value.

All of this may be about to change.

Both President Trump and Treasury Secretary Mnuchin have publicly expressed dismay at the dollar’s persistent strength in the second half of 2018. A strong dollar has adverse effects relative to Trump’s economic plans.

It makes imports less expensive, which has a deflationary impact on the U.S. domestic economy. This is at a time when both the Fed and the White House would like to see more inflation.

A strong dollar also hurts U.S. exports from major companies such as Boeing and GE. That hurts U.S. competitiveness and U.S. jobs. Finally, a strong dollar hurts corporate profits of U.S. global companies because their overseas profits are translated back into fewer U.S. dollars. This is a head wind to U.S. stock market performance.

While the White House and Fed may be united in their desire to see a weaker dollar and more inflation, the Fed is doing nothing to achieve that. The Fed has been on a path of raising interest rates for almost three years, beginning with the “liftoff” rate hike in December 2015.

Since October 2017, the Fed has also been tightening money supply by not reinvesting in Treasury securities when existing securities in their portfolio mature. This “quantitative tightening,” or QT, is the opposite of quantitative easing, QE.

The combination of rate hikes and QT has caused a significant increase in U.S. interest rates in all maturities and, in turn, a stronger dollar as capital flows to the U.S. in search of higher yields. The result is a persistent strong dollar.

This means that if the White House and Treasury want a weaker dollar, they may have to achieve it on their own with no help from the Fed. The Treasury is well-equipped to do this kind of intervention by using their Exchange Stabilization Fund, or ESF.

The ESF was created under the Gold Reserve Act of 1934, which provided legal ratification for FDR’s confiscation of private gold from U.S. citizens in 1933. FDR paid $20.67 in paper money for the gold in 1933, knowing he intended to raise the price of gold.

His plan was to capture the “gold profits” for the government instead of allowing citizens to realize the profits. Those profits were the original source of funding for the ESF.

Importantly, the ESF exists completely outside of congressional control or oversight. It is tantamount to a Treasury slush fund that the Treasury can use as it sees fit to intervene in foreign exchange markets. No legislation or congressional appropriation is required.

Former Treasury Secretary Bob Rubin used the ESF to bail out Mexico in 1994 after Congress had refused to provide bailout money through other channels.

Today, the ESF has net assets of about $40 billion. The gross assets include about $50 billion in SDRs, but the Treasury can issue SDR certificates to the Fed in exchange for dollars if needed to conduct currency market operations. You can find the ESF financial statements here.

- Source, James Rickards via the Daily Reckoning

With Every Passing Day, a Chinese Financial Collapse Draws Closer

A dollar shortage seems implausible in a world where the Fed printed $4.4 trillion. But while the Fed was printing, the world borrowed over $70 trillion (on top of prior loans), so the dollar shortage is real. The math is inescapable.

So the Chinese debt bomb that has been a long time in the making is finally getting ready to explode. The economy is slowing, debt is exploding and the trade war with Trump has hurt China’s exports needed to earn dollars to pay the debts.

The defaults are beginning to pile up. Several large corporations and regional governments have defaulted recently.

China’s leaders have panicked at the slowdown and have started the credit flow again with lower interest rates, higher bank leverage and more debt-financed, government-directed infrastructure spending.

Of course, this solution is strictly temporary. All it does is postpone the day of reckoning and make the debt crisis worse when it does arrive.

With every passing day, a Chinese financial collapse draws closer. The rest of the world will not escape the consequences.

When the crisis strikes in full force, possibly in 2019, the rest of the world will not be spared.

- Source, James Rickards

Jim Rickards: The Debt Bomb is Ready to Explode

The great Chinese growth slowdown has been proceeding in stages for the past two years. The reason is simple. Much of China’s “growth” (about 25% of the total) has consisted of wasted infrastructure investment in ghost cities and white elephant transportation infrastructure.

That investment was financed with debt that now cannot be repaid. This was fine for creating short-term jobs and providing business to cement, glass and steel vendors, but it was not a sustainable model since the infrastructure either was not used at all or did not generate sufficient revenue.

China’s future success depends on high-value-added technology and increased consumption. But shifting to intellectual property and the consumer means slowing down on infrastructure, which will slow the economy.

In turn, that means exposing the bad debt for what it is, which risks a financial and liquidity crisis. China started to do this last year but quickly turned tail when the economy slowed. Now the economy has slowed so much that markets are collapsing.

But doesn’t China have over $1 trillion of reserves to prop up its financial system?

On paper, that’s true. But in reality, China is “short” U.S. dollars. The Chinese may have $1.4 trillion of U.S. Treasury securities in its reserve position, but they need those assets possibly to bail out their banking system or defend the yuan.

Meanwhile, the Chinese banking sector, which in many ways is an extension of the state, owes $318 billion in U.S. dollar-denominated deposits of commercial paper.

From a bank’s perspective, borrowing in dollars is going short dollars because you need dollar assets to back up those liabilities if the original lenders want their money back. For the most part, the banks don’t have those assets because they converted the dollar to yuan to prop up local real estate Ponzis and local corporations.

There’s not much left over to bail out the corporate, individual and real estate sectors.

This is all part of a global “dollar shortage” attributable to Fed tightening, both in the forms of higher rates but also a reduction in base money...

- Source, Jim Rickards via the Daily Reckoning

Robert Kiyosaki and Jim Rickards Predict the Next Financial Calamity

Find out what central bankers and politicians plan to do after the next financial crash. Jim Rickards, author of “The Road to Ruin,” joins Robert and Kim and offers a clear-eyed view of how the next collapse will unfold and what you can do to preserve your wealth. 

Rickards has worked inside Wall St. and consulted at the highest levels of government. His insights are illuminating and rooted in social science and economic history.

- Source, Rich Dad Poor Dad

Jim Rickards: Cyber Financial Warfare is Upon Us

Topics Include: 

*Cyberwarfare Update – Chinese embedding hacking chips onto server mother boards used in American Industry and Department of Defense Systems at the factory level 

*Why infrastructure will be most likely targets for cyberwarfare 

*How cyber financial-warfare versus financial systems, stock markets, banks is an evolving and real threat 

*How physical gold is resilient versus cyber financial-warfare 

*IMF Global Financial Stability Report 

*How markets are over 90% automated trading, and there are no human market makers available to stabilize falling markets 

*Total official gold adjusted upwards for Central Bank buying. Eurozone countries now buying gold may be signaling important shift in Central Bank behavior 

*Gold requires no counter-parties to retain its value, all other currencies rely on counter parties 

*Game Theory on Future Monetary System Based On A Sovereign Issued Crypto Currency: Permissioned Distributed Ledger sponsored by China / Russia / IMF, Digital Coin tied to the SDR for measure of value, net of payments settled in Physical Gold.


- Source, Physical Gold Fund

Jim Rickards: The Heightened Risk of Financial Calamity is Real

Economist, investment banker, and author James Rickards discusses interest rates, the stock market, the US economy, precious metals, the risk of financial calamity, the future of the Fed and much more.

- Source, Neptune Global

James Rickards: Are We In Another Slow Motion Meltdown?

The biggest thing that I’m concerned about, and that I watch very closely, is the debt-to-GDP ratio.

The Keynesian view is that if the economy isn’t growing fast enough, you’re in a liquidity trap and the private economy won’t spend, the government should spend and there’s your liquidity. From there, you’ll get some growth.

Keynesians have this idea that the more money you borrow, the better, because if the government borrows money they spend it. And when they spend it, they put it in your pocket or my pocket and that’s the money that stimulates the economy.

That’s true right up until the point where everybody changes their mind. The one thing that central bankers do not understand is the importance of confidence. Confidence can be lost and when that happens things can change overnight.

- Source, Seeking Alpha

The Market Will Crash and it Will be Like a Runaway Train with No Brakes

In a world in which most mutual funds and wealth managers are active investors, the passive investor can do just fine. Passive investors pay lower fees while they get to enjoy the price discovery, liquidity and directional impetus provided by the active investors. Passive investors are free riding on the hard work of active investors the same way a parasite lives off the strength of the elephant.

What happens when the passive investors outnumber the active investors? The elephant starts to die.

The following chart shows that this is exactly what is happening. Since 2009, over $2.5 trillion of equity investment has been added to passive-strategy funds, while $2.0 trillion has been withdrawn from active-strategy funds.

The active investors who do their homework and add to market liquidity and price discovery are shrinking in number. The passive investors who free ride on the system and add nothing to price discovery are expanding rapidly. The parasites are starting to overwhelm the elephant.

This chart reveals the most dangerous trend in investing today. Since the last financial crisis, $2.5 trillion has been added to “passive” equity strategies and $2.0 trillion has been withdrawn from “active” investment strategies. This means more investors are free riding on the research of fewer investors. When sentiment turns, the passive crowd will find there are few buyers left in the market.

There’s much more to this analysis than mere opinion or observation. The danger of this situation lies in the fact that active investors are the ones who prop up the market when it’s under stress. If markets are declining rapidly, the active investors see value and may step up to buy.

If markets are soaring in a bubble fashion, active investors may take profits and step to the sidelines. Either way, it’s the active investors who act as a brake on runaway behavior to the upside or downside.

Active investors perform a role akin to the old New York Stock Exchange specialist who was expected to sell when the crowd wanted to buy and to buy when the crowd wanted to sell in order to maintain a balanced order book and keep markets on an even keel.

Passive investors may be enjoying the free ride for now but they’re in for a shock the next time the market breaks, as it did in 2008, 2000, 1998, 1994 and 1987.

When the market goes down, passive fund managers will be forced to sell stocks in order to track the index. This selling will force the market down further and force more selling by the passive managers. This dynamic will feed on itself and accelerate the market crash.

Passive investors will be looking for active investors to “step up” and buy. The problem is there won’t be any active investors left or at least not enough to make a difference. The market crash will be like a runaway train with no brakes.

The elephant will die.

- Source, the Daily Reckoning via James Rickards

Free Riding Investors Set up Markets for a Major Collapse

Free riding is one of the oldest problems in economics and in society in general. Simply put, free riding describes a situation where one party takes the benefits of an economic condition without contributing anything to sustain that condition.

The best example is a parasite on an elephant. The parasite sucks the elephant’s blood to survive but contributes nothing to the elephant’s well-being.

A few parasites on an elephant are a harmless annoyance. But sooner or later the word spreads and more parasites arrive. After a while, the parasites begin to weaken the host elephant’s stamina, but the elephant carries on.

Eventually a tipping point arrives when there are so many parasites that the elephant dies. At that point, the parasites die too. It’s a question of short-run benefit versus long-run sustainability. Parasites only think about the short run.

A driver who uses a highway without paying tolls or taxes is a free rider. An investor who snaps up brokerage research without opening an account or paying advisory fees is another example.

Actually, free-riding problems appear in almost every form of human endeavor. The trick is to keep the free riders to a minimum so they do not overwhelm the service being provided and ruin that service for those paying their fair share.

The biggest free riders in the financial system are bank executives such as Jamie Dimon, the CEO of J.P. Morgan. Bank liabilities are guaranteed by the FDIC up to $250,000 per account.

Liabilities in excess of that are implicitly guaranteed by the “too big to fail” policy of the Federal Reserve. The big banks can engage in swap and other derivative contracts “off the books” without providing adequate capital for the market risk involved.

Interest rates were held near zero for years by the Fed to help the banks earn profits by not passing the benefits of low rates along to their borrowers.

Put all of this (and more) together and it’s a recipe for billions of dollars in bank profits and huge paychecks and bonuses for the top executives like Dimon. What is the executives’ contribution to the system? Nothing. They just sit there like parasites and collect the benefits while offering nothing in return.

Given all of these federal subsidies to the banks, a trained pet could be CEO of J.P. Morgan and the profits would be the same. This is the essence of parasitic behavior.

Yet there’s another parasite problem affecting markets that is harder to see and may be even more dangerous that the bank CEO free riders. This is the problem of “active” versus “passive” investors.

An active investor is one who does original research and due diligence on her investments or who relies on an investment adviser or mutual fund that does its own research. The active investor makes bets, takes risks and is the lifeblood of price discovery in securities markets.

The active investor may make money or lose money (usually it’s a bit of both) but in all cases earns her money by thoughtful investment. The active investor contributes to markets while trying to make money in them.

A passive investor is a parasite. The passive investor simply buys an index fund, sits back and enjoys the show. Since markets mostly go up, the passive investor mostly makes money but contributes nothing to price discovery.

The benefits of passive investing have been trumpeted by Jack Bogle of the Vanguard Group. Bogle insists that passive investing is superior to active investing because of lower fees and because active managers can’t “beat the market.” Bogle urges investors to buy and hold passive funds and ignore market ups and downs.

The problem with Bogle’s advice is that it’s a parasitic strategy. It works until it doesn’t...

- Source, James Rickards

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!

- Source, Modern Wall Street

James Rickards: Chinese Are Buying Gold As Fast As They Can...

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

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

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

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

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

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

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

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

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?

Jim Rickards: Predicting the Next Financial Crisis

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

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.

- Source, The Daily Reckoning

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

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

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

1 oz 2013 25th Anniversary of the Maple Leaf High Relief Piedfort Silver Proof Coin

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

Trump: The Art of the Deal

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

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

1 oz Sunshine Mint Morgan Silver Round

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

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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

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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.

- Source, James Rickards via the Daily Reckoning

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