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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- Source, James Rickards via the Daily Reckoning

The Gold Chronicles with Jim Rickards and Alex Stanczyk

New Book under development on the Pandemic and Depression *Why Scientists without expert knowledge of the economy may not be the best source for determining economic policy 

*Why discernment of the various views of scientists with opposing views on how to deal with Coronavirus is important *Unemployment Claims have exceeded 38m in the US 

*There has never been a time when the stock market does not accurately reflect what is happening in the real economy 

*S&P 500 is a cap weighted index where a few major companies dominate the index. Major companies which are doing well do not reflect the stock market as a whole or the rest of the economy *Algorithms that decide the majority of trading in markets today were written before the Pandemic 

*Deflation, Inflation, Hyperinflation 

*The psychology of inflation and what leads to increase of velocity of money - quantity theory of money versus phase transitions in psychology 

*In a deflationary environment where the Fed has printed close to $10T but still cant get inflation leaves one tool left in the toolkit.. raising the price of gold 

*Raising the price of gold would require open market operations in gold - Fed printing money to buy gold or to sell gold in order to maintain a specific price range measured in USD 

*Raising the price of gold as a tool to get inflation in the USD during prolonged and massive deflation is not a theory, it has been used in the past 

*Expectations of continuing deflation in the short to mid term, but inflation must be created, the trick for the Fed is making sure it sticks the landing 

*Scenarios for gold price and inflation numbers if the Fed overshoots and ends up with higher inflation than it wants *Censorship and deplatforming of people from major media platforms such as YouTube and Twitter 

*The polarization of views of people around the world in terms of freedom vs authoritarian approaches to governance, and where it is leading 

*Essential versus Nonessential Businesses and Occupations *United States Code: Law enforcement officers, judges, public officials violating Constitutional rights under color of law versus emergency powers granted during threats to national security *Reparations for China such as seizing/cancelling UST’s or delisting Chinese company stocks on US exchanges 

*Will reparations move the US and China closer to kinetic warfare

- Source, The Gold Chronicles

Jim Rickards: Don’t Believe the Happy Talk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- Source, Jim Rickards

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

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

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

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

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

- Source, Life Growth Academy

25 gram (25 x 1 g) 2020 MapleGram25 Sheet of Gold Coins

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

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

- Source

James Rickards: Get Ready for Social Disorder

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

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

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

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

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

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

- Source, James Rickards

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

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

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

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

- Video Source, Jay Taylor Media

James Rickards: Complex Systems Collide, Disease and Financial Contagion

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

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

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

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

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

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

What we’re seeing is a full-fledged global contagion.

Biological and Financial Contagions

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

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

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

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

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

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

A similar dynamic applies in financial panics.

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

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

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

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

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

We’re seeing those effects now...

- Source, James Rickards