James Rickards: Economic Numbers Are Less Than Meet the Eye

Investors can be forgiven for thinking they hit the trifecta last Friday.

The U.S. Bureau of Labor Statistics reported that unemployment had dropped to 3.9%, the lowest in almost 20 years.

The Federal Reserve Bank of Atlanta reported that its widely followed GDP forecasting tool was showing projected growth for the second quarter of 2018 at 4%, exactly where Trump boosters like Larry Kudlow said it would be.

Finally, the Dow Jones industrial average rallied 332 points (1.39%), partly in response to the other good news. It was almost enough to make a trader sing, “Happy days are here again.”

Or not.

The fact is that this good news hides more than it reveals. A look behind the numbers discloses a sobering outlook for investors.

Let’s start with the employment report. The U.S. Department of Labor, Bureau of Labor Statistics report dated May 4, 2018, showed the official U.S. unemployment rate for April 2018 at 3.9%, with a separate unemployment rate for adult men of 4.1% and adult women of 3.7%.

The 3.9% unemployment rate is based on a total workforce of 160 million people, of whom 153 million are employed and 6.3 million are unemployed. The 3.9% figure is the lowest unemployment rate since 2001, and before that, the early 1970s.

The average rate of unemployment in the U.S. from 1948 to 2018 is 5.78%. By these superficial measures, unemployment is indeed low and the economy is arguably at full employment.

Still, these statistics don’t tell the whole story.

Of the 153 million with jobs, 5 million are working part time involuntarily; they would prefer full-time jobs but can’t find them or have had their hours cut by current employers. Another 1.4 million workers wanted jobs and had searched for a job in the prior year but are not included in the labor force because they had not searched in the prior four weeks.

If their numbers were counted as unemployed, the unemployment rate would be 5%.

Yet the real unemployment rate is far worse than that. The unemployment rate is calculated using a narrow definition of the workforce. But there are millions of able-bodied men and women between the ages of 25–54 capable of work who are not included in the workforce.

These are not retirees or teenagers but adults in their prime working years. They are, in effect, “missing workers.” The number of these missing workers not included in the official unemployment rolls is measured by the Labor Force Participation Rate, LFPR.

The LFPR measures the total number of workers divided by the total number of potential workers regardless of whether those potential workers are seeking work or not. The LFPR plunged from 67.3% in January 2000 to 62.8% in April 2018, a drop of 4.4 percentage points.

If those potential workers reflected in the difference between the 2018 and 2000 LFPRs were added back to the unemployment calculation, the unemployment rate would be close to 10%.

Of course, there are limits to labor force participation. Some potential workers suffer chronic pain or other disabilities, some are retired, some are students, some are at home raising children. Those are reasons why the LFPR has never been much over 67% since the data have been recorded.

But the drop in LFPR to 62.8% in the ninth year of an economic expansion is stunning. America has a missing workers problem that accounts in large measure for the slow growth, persistent low inflation, stagnant wages, declining velocity of money and social dissatisfaction that have characterized the U.S. economy since the end of the last recession in June 2009.

American labor markets are not tight. America is not even close to full employment. America is in a depression. That’s one reason why wages have been stagnant despite declining unemployment rates.

Another serious problem is illustrated in Chart 1 below. This shows the U.S. budget deficit as a percentage of GDP (the white line measured on the right scale) compared with the official unemployment rate (the blue line measured on the left scale).

From the late 1980s through 2009, these two time series exhibited a fairly strong correlation. As unemployment went up, the deficit went up also because of increased costs for food stamps, unemployment benefits, stimulus spending and other so-called “automatic stabilizers” designed to bring the economy out of recession. That makes sense.

But as the chart reveals, the correlation has broken down since 2009 and the two time series are diverging rapidly. Unemployment is going down, but budget deficits are still going up.

That’s unusual because normally when unemployment drops the economy is getting stronger, benefit spending drops and the budget deficit shrinks. In effect, America uses the good times to save for a rainy day (or at least tries not to spend as much as when it’s raining).

This is good evidence that the economy is not nearly as strong as the low unemployment rate indicates. That’s because of the army of 10–15 million “missing workers” described above, many of whom are receiving benefits in the form of disability payments, early Medicare, food stamps or rental assistance. Instead of shrinking rapidly, these payments are stuck at near-recession levels.

It’s also the case that past deficit spending has now caught up with the U.S. The debt-to-GDP ratio is over 105%. Research shows that any debt-to-GDP ratio over 90% results in slower growth instead of faster growth when you pile on more debt. The U.S. is no longer getting any bang for the buck from deficit spending.

We’re just going broke faster.

As for the Atlanta Fed GDP estimate of 4% for second-quarter growth, that’s a statistical quirk based on the methodology used by the Atlanta Fed. It’s not that the number is bogus, it’s just that the measures suggesting stronger growth are reported earlier in the quarter and those suggesting weaker growth are not available under later in the calendar quarter. This means the estimates start high but come down to Earth as the quarter progresses.

The Atlanta Fed GDP estimate is useful but you have to know how to interpret it. In the first quarter, the estimate showed 5.4% growth but declined to 2% by the end of the quarter. (The actual reported growth was 2.3%, not too far from the Atlanta Fed estimate).

The same thing is happening again. I expect Atlanta’s number to decline from 4% today to 2% by mid-June, near the end of the quarter. That’s the same-old, same-old weak growth we’ve had since 2009. Nothing to write home about.

As for that stock market rally, it’s a temporary blip. Investors should be reminded that the stock market peaked on Jan. 26, 2018, and is down about 10% since then notwithstanding occasional one-day rallies. The market has traced out a series of “lower highs” after each rally. That’s a sign of a dying bull market and more declines to come.

So don’t believe the TV happy talk. Rigorous analysis of employment, debt, deficits, growth and stock markets reveals a dismal picture. Investors should lighten up on equities and increase their allocations to cash and gold.

Events will probably get worse from here.

- Source, Jim Rickards

James Rickards: The Coming Currency War with China and Gold's Role in It

James Rickards forecasts a grim future in which he sees both China and the United States entering into a full out currency war. Perhaps this has already started and perhaps there is now no turning back?

Who will win, both sides have their leverage and both sides have their moves to make. This will not end well however, for either side. War is upon us, the currency wars are here.

Jim Rickards is a lawyer, investment banker and economist with over thirty years’ experience in capital markets. He is currently Senior Managing Director at Tangent Capital Partners LLC. 

He advises the Department of Defense, the U.S. intelligence community, and major hedge funds on global finance, and served as a facilitator of the first ever financial war games conducted by the Pentagon.

- Video Source, Old Radio

Jim Rickards: The Empire State Moves Against Bitcoin

Bitcoin got hammered yesterday after New York Attorney General Eric Schneiderman announced an investigation into some of the major cryptocurrency exchanges.

I’ve been warning about a coming government crackdown on bitcoin for several months, and now we’re seeing it happening around the world.

From China to Japan to South Korea and here in the U.S., the regulators are closing in on bitcoin. And all those who thought their bitcoin was invisible to the IRS are getting a rude awakening these days.

Bitcoin was the classic bubble. Market bubbles are nothing new. In the 17th and 18th centuries we had the Dutch tulip bubble, the French Mississippi bubble and the U.K.’s South Sea bubble.

The 19th century saw bubbles in canal building (1830s), gold (1869) and railroads (1890s). In the 20th and 21st centuries we have seen bubbles in Florida real estate (mid-1920s), stocks (late 1920s), dot-coms (2000) and mortgages (2007).

All of these episodes of investment mania crashed, causing enormous losses for investors. As always, some investors got in early and got out before the crash and walked away with their winnings. But most did not.

Analysts should remind themselves that those bubble winnings of the lucky few represent not wealth creation or rewards for hard work, but a simple wealth transfer from a mass of latecomer losers to a lucky few winners.

That’s hardly a desirable model for finance in particular or society as a whole, not least because the end result destroys confidence in markets and retards normal financial functions for a full generation.

The latest bubble, of course, is bitcoin. Last December as bitcoin was making its way higher from $8,000, I said that bitcoin might go to $20,000 (it did), but that it would surely come crashing down sooner rather than later.

I based this forecast on a Nasdaq chart showing the dot-com bubble of 1996–2000. The hyperbolic rise in the price of bitcoin and dot-com stocks was a close fit, which made the subsequent crash easy to see coming.

Now that bitcoin has crashed more about 70% based on recent lows, the resemblance to the Nasdaq dot-com episode is even more dramatic.

The biggest difference is that the bitcoin rise and fall happened 15 times faster than the Nasdaq collapse. A projection of bitcoin at $2,000 is easily justified.

My own projection is much lower, but either way economic historians will look back on the bitcoin episode as the greatest bubble since the Dutch tulip bubble, maybe greater.

At least with the tulip bubble, the last investors got to keep the tulips. With bitcoin, investors will end up with nothing.

Goldman briefly flirted with cryptocurrencies but eventually came around to the view that cryptos like bitcoin suffer from too many problems.

All of the cryptocurrencies that rely on clunky “proof of work” to validate their blockchains, such as bitcoin, are heading for the scrap heap. They are too slow, too cumbersome and too expensive to compete with Visa, Mastercard and PayPal in the payments space.

The only use case for bitcoin is to support criminal transactions, and even criminals have moved to some other cryptos because they have better security and privacy features. Bitcoin also suffers from slow processing times and other inefficiencies.

Goldman’s assessment is mostly right. However, some coins will survive. And as I’ve argued before, blockchain technology has a bright future.

Goldman also admits that blockchain technology has a future, but caution is indicated because processing speeds are still not as fast as existing systems. The bottom line is don’t invest in cryptocoins but invest in blockchain technology instead.

- Source, James Rickards

The World Wants Its Gold Back From the U.S.

We’re all familiar with the so-called “run on the bank.” It usually begins quietly with just a few depositors getting nervous about the solvency of the bank.

They line up to get their cash out before the bank closes its doors. Soon the word spreads and the line gets longer. The bank projects an air of confidence and gives cash to depositors who request it as long as they can, but pretty soon the cash runs out.

The classic image of this is the scene from the Christmas-season film It’s a Wonderful Life, with Jimmy Stewart. We’ve all seen it. Now something similar is happening at the Federal Reserve Bank of New York.

What’s different is that the run on the bank involves gold, not cash. The New York Fed will never run out of cash because they can print all they need. But they could run out of gold.

Until recently, the New York Fed had about 6,000 tons of gold stored in its vaults on Liberty Street in Lower Manhattan. Contrary to popular belief, the gold stored there does not belong to the United States (the U.S. gold is stored in Fort Knox and West Point).

The Fed gold belongs to countries around the world and the International Monetary Fund.

Beginning a few years ago, central banks demanded the return of their gold to their home countries. Germany was the most prominent example, but there were others, including smaller holders such as Azerbaijan.

The process is difficult because the Fed bullion consists of old bars, some stacked up since the 1920s, that don’t meet today’s standard for purity and size. This doesn’t mean the gold is bad, just that the bars have to be melted down and re-refined to meet the new standards.

Now, one of the largest holders, Turkey, is reclaiming its gold also. Turkey has had 220 tons stored in the U.S.

And Turkish President Recep Tayyip Erdoğan has recently suggested that international loans should be made in gold instead of dollars.

Here’s what he told the Global Entrepreneurship Congress in Istanbul on April 16:

I made a suggestion at a G-20 meeting. I asked: Why do we make all loans in dollars? Let’s use another currency. I suggest that the loans should be made based on gold…

With the dollar the world is always under exchange rate pressure. We should save states and nations from this exchange rate pressure. Gold has never been a tool of oppression throughout history.

Meanwhile, Russia and China continue to amass gold.

The gold stash in New York is dwindling and global behavior is coming to resemble a run on the gold bank.

Skeptics claim not all of the gold is there. My own view is that New York does have the gold, although a lot of it may be leased out to support gold price manipulation by the big banks and China.

Either way, we may soon find out if New York has to shut its gold doors just like any other insolvent bank.

And we may also find out how much patience the world has left with the dollar.

- Source, Jim Rickards

Jim Rickards Provides the Best Summary of Gold Price Manipulation to Date

In his latest book, "The New Case for Gold," fund manager, geopolitical analyst, and financial letter writer James G. Rickards may have summarized the international gold price suppression scheme better than anyone, including GATA itself.

Indeed, the book's subchapter titled "Paper Manipulation" is so expert, specific, and compelling that your secretary/treasurer today asked Rickards and his publisher, Penguin Publishing Group, for permission to share it with you, though it is far longer than excerpts for which reprint permission is customarily granted. Your secretary/treasurer argued that the subchapter is really a historic document, containing information the world simply must have if it ever is to achieve free markets and a more democratic financial system.

Rickards and Penguin quickly and most generously granted the request and provided PDF copies of the subchapter's 15 pages. A link to them is appended. (The pages are excerpted from "The New Case for Gold" by James Rickards, in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC, and are copyright 2016 by James Rickards.)

Remarkably, the book is available through Amazon for less than $11 and your secretary/treasurer enthusiastically recommends it:

https://www.amazon.com/New-Case-Gold-James-Rickards/dp/1101980761/ref=sr...

Here is your secretary/treasurer's summary of Rickards' outline of gold market manipulation:

-- It can be done by what gold market observers like to call "banging the close" in the Comex futures market, where there is huge leverage in trading and little transparency for buyers and sellers.

-- Big banks that are "authorized participants" in the gold exchange-traded fund GLD can use their exclusive access to the fund's metal for market rigging.

-- Gold from the U.S. gold reserve and the gold reserves of other countries may be leased, leveraged, or sold.

-- Leasing of unallocated gold -- that is, paper gold, gold credits, imaginary gold -- by bullion banks allows them to sell the same gold as much as 10 times over to 10 different buyers.

-- "A central bank," Rickards writes, "can lease gold to one of the London Bullion Market Association banks, which include large players like Goldman Sachs, Citibank, JPMorgan Chase, and HSBC. Gold leasing is often conducted through an unaccountable intermediary called the Bank for International Settlements. Historically, the BIS has been used as a major channel for manipulating the gold market and for conducting sales of gold between central banks and commercial banks. ... The BIS is the most nontransparent institution in the world. ... The BIS is the ideal venue for central banks to manipulate the global financial markets, including gold, with complete nontransparency."

-- The United States and China share an interest in suppressing the gold price in the short term. The Federal Reserve, Rickards maintains, doesn't so much mind an orderly rise in the gold price but fears sharp and sudden rises that could change inflationary expectations in the markets. China wants the gold price suppressed while it accumulates metal for hedging its huge foreign exchange position in U.S. dollars. The United States, Rickards writes, must accommodate China's accumulation of gold lest China sell its U.S. Treasury bonds. "This." Rickards writes, "is an issue I have discussed with senior officials at the International Monetary Fund and the Federal Reserve, and they have confirmed my understanding that a global rebalancing of gold from the West to the East needs to proceed, albeit in an orderly way. ... The United States is letting China manipulate the market so China can buy gold more cheaply. The Fed occasionally manipulates the market as well so that any price rise isn't disorderly."

-- Rickards concedes that ordinary investors cannot beat central bank manipulation of the gold market in the short run but contends that central banks will fail in the long run. Eventually, he writes, citing examples from history, "the manipulators run out of physical gold or a change in inflation expectations leads to price surges even governments cannot control. There is an endgame. ... Physical gold is also rapidly disappearing as more countries are buying it up. That puts a limit on the amount of paper gold transactions that can be implemented."

-- Rickards advises investors: "It's important to understand the dynamics behind gold pricing. You need to understand how the manipulation works, what the endgame is, and what the physical supply-demand picture looks like. Understanding these dynamics lets you see the endgame more clearly and supports the rationale for owning gold even when short-term price movements are adverse."

The PDF copy of Rickards' "Paper Manipulation" subchapter is posted at GATA's internet site here:

http://www.gata.org/files/NewCaseForGoldExcerpt.pdf

Please read it carefully and send it to those market analysts who disparage complaints of gold market manipulation by governments and to mainstream financial news organizations that ignore the manipulation. Invite those analysts and news organizations to specify where and how they think Rickards is mistaken. While you're at it, invite them to dispute any of the documentation compiled at GATA's internet site here:

http://www.gata.org/taxonomy/term/21

Of course you're not likely to get any response but you just might wake somebody up or give him a guilty conscience. And if you purchase a copy of "The New Case for Gold" you may gain confidence that eventually truth, justice, and what used to be the American way will prevail.

- Source, GATA

James Rickards: Financial Meltdown Just Around The Corner?

Could the next financial crisis be just around the corner? The signs of a looming meltdown are ‘unmistakable,’ this according to best-selling author Jim Rickards. Giving his 2017 outlook to Kitco News, he said the next crisis would be far worse than any previous one markets have experienced...

- Source, Kitco News

Jim Rickards: A Fed Governor Actually Told Me "We Don’t Know What We’re Doing"

“We don’t know what we’re doing.” That’s what one Fed governor recently told investor and bestselling author Jim Rickards at a small private dinner. 

This Fed official continued saying, “We try stuff, and if it works, we do a little more. If it doesn’t, we back off and try something else. We don’t know what we’re doing.” It’s a pervasive feeling among central bankers, Rickards says. 

He recalls another private conversation he had this time with former Fed head Ben Bernanke. “He described everything he did as ‘an experiment’ and said, ‘We won’t know whether it worked or not for another 30 years.’” 

In the video excerpt above, from a broader interview with Hedgeye CEO Keith McCullough, Rickards describes the hubris of central bankers tinkering with their economies. “The problem with all this activism is that it creates uncertainty, and the capital goes on strike,” he says. “That’s the situation you’re in today.” When Jim Rickards speaks, investors listen. 

Rickards has worked on Wall Street for the past 35 years, including as general counsel for hedge fund Long-Term Capital Management. Rickards is also the best-selling author of the book “The Road to Ruin.” 

He is currently an economic adviser to the Department of Defense and U.S. intelligence community. Rickards brings all of this past experience to bear in the interview above with McCullough.

- Source, Hedegeye TV

James Rickards: Return to the Pentagon

In my 2011 book, Currency Wars, I gave a detailed description of the first-ever financial war game sponsored by the Department of Defense.

This financial war game took place in 2009 at the top-secret Applied Physics Laboratory located about twenty miles north of Washington, D.C. in the Maryland countryside.

Unlike typical war games, the “rules of engagement” for this financial exercise did not permit the use of any kinetic weapons such as bombs, missiles or drones.

The only weapons allowed were financial instrument including stocks, bonds, currencies, commodities and derivatives.

The contestants included about 40 players on the six teams and another 60 participants including uniformed military, civilian defense officials and observers from the Treasury, Federal Reserve, CIA and other government agencies as well as think tanks, universities and financial industry professionals.

In that original financial war game, a scenario involving Russia, China, gold and the destruction of the U.S. dollar was played out against a backdrop of geopolitical events including the collapse of North Korea and a threatened Chinese invasion of Taiwan.

On May 8, 2015, the Pentagon sponsored a new financial warfare session, which I was also invited to attend. This time the financial war took place inside a secure meeting facility at the Pentagon itself.

This new financial war game exercise was smaller and more focused than the one in 2009. I was one of three individuals from the investment management community. Our scenario this time was not global, but was limited to a confrontation between China and the U.S. in the South China Sea.

Our role was not to contemplate the use of aircraft carriers, submarines or missiles in such a confrontation. We were there to consider the use of financial weapons such as disruption of payments systems, cyber-attacks on banks and stock exchanges, and trade sanctions that could cut off supply chains and dry up energy imports.

One of the main topics of discussion was the use of sanctions involving access to the Society of Worldwide Interbank Financial Telecommunication, known as SWIFT.

Contrary to the assumptions of many, SWIFT is not a bank or a financial institution itself. It is more like a phone company or internet service provider that facilitates communication among its members.

SWIFT has over 10,500 banks and asset managers as members and handles over 5 billion messages each year amounting to trillions of dollars of payments from one member to another.

SWIFT message traffic is literally the oxygen supply that keeps the global financial system alive.

In 2012, the U.S. and its allies were successful in kicking Iranian banks out of the SWIFT system.

This was extremely damaging to the Iranian economy and led to hyperinflation, bank runs, instability and social unrest until President Obama eased these sanctions in late 2013.

The U.S. Senate has more recently called for the use of SWIFT-related sanctions against Russia. In response, Russia has said that it would regard an effort to ban access to SWIFT as an act of war.

In our new financial war game, we asked; what would happen if the roles were reversed?

What if financial weapons developed by the U.S. were adopted by China and turned against the U.S. and its allies?

These and other interesting scenarios made for a long and lively day of discussions among our team of experts convened for this exercise in twenty-first century warfare.

I learned two lessons that day.

The first is that when nations engage in financial warfare, individual investors can be collateral damage. If China tries to attack the U.S. by closing the New York Stock Exchange, it will be tens of millions of Americans who will suffer an immediate loss of wealth as prices plunge and accounts are locked-down or frozen.

The second lesson was that the future wars will be fought in cyber-space using digital technology applied to payments systems such as SWIFT, FedWire, MasterCard, Visa and Europe’s Target2 system.

The answer to both threats — collateral damage and digital warfare — is to have some hard assets in physical form that cannot be attacked digitally. Such assets include cash and physical gold and silver, among others. These are the things that cannot be erased in a digital attack or frozen when payments systems are disrupted.

That’s why I recommend you keep some cash in a safe place outside the banking system. I’m talking paper money now. Having some cash is like having a battery and flashlights. I live in a place that occasionally gets hurricanes and nasty storms, so the power goes out on occasion. You want to keep some flashlight batteries around. And that means cash.

Remember, when the power’s out, nothing works. The ATMs don’t work. The gas stations don’t work, etc. It’s good to have some what we used to call in Philadelphia “walking around money.” But you can’t withdraw too much from your bank because the government won’t let you.

Try withdrawing $20,000 in cash from your bank and you’ll be reported to the government on a currency transaction report. That report will be put in a file right next to Al-Qaeda and the drug cartels, with the Financial Crimes Enforcement Network.

The point is, you might think you can get your cash, but you can’t. When you go down to the bank and actually try to, you’ll be treated like a criminal. This is of course part of the war on cash. The American people are being led like sheep to the slaughter. They’re being herded into digital pens, which are the banks.

Most people think we have a cash system. But we really don’t. How much cash do you carry in your purse and wallet? Probably not that much. You use your debit card. You use autopay. You use your online banking account. You use your iPhone if you have Apple Pay. You use your credit card. It’s all digital.

You don’t actually have that much cash, and if you try to get it, you won’t be able to get it.

That’s why I also recommend you put some money into physical gold or silver, in a monster box. A monster box has 500 ounces of American silver eagles, one ounce each. They cost about $10,000 on the market. You should find a good dealer that doesn’t charge too much commission.

But it’ll preserve your wealth. In an emergency situation, people will take it. Many people will gladly give you some groceries for a solid ounce of silver because no one trusts any other money.

I also recommend real estate as part of your portfolio. It’ll still be there if there’s a storm or a power outage or your bank’s shut down.

These are some of the things I recommend before the next great crisis strikes. They are important ways to preserve your wealth in the years ahead.

- Source, James Rickards via the Daily Reckoning

Jim Rickards: Is This the Moment of Truth?

One of the most famous passages in American literature occurs in Chapter 13 of Ernest Hemingway’s The Sun Also Rises. It takes place in a café in Pamplona, Spain during the running of the bulls.

Bill Gorton, a friend of the protagonist, Jake Barnes, has just arrived from New York. Bill is in the café talking with Mike Campbell, an upper-crust Englishman, now fallen on hard times but keeping up appearances.

In the course of telling a story about his tailor, Mike casually mentions his bankruptcy. Here’s the dialogue:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

“What brought it on?”

“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

Mike admits to his own helplessness; his descent into bankruptcy was apparently totally beyond his control. This reflects upon his lack of control with regards not only to his business matters, but to his life in general.

You’ve probably seen variations of the part of the passage that says, “Gradually and then suddenly.” It’s often paraphrased or misquoted as, “slowly at first, and then quickly.”

The short version of the quote is offered as a warning that a slow, steady accumulation of debt with no particular plan for repayment can continue longer than expected, and then suddenly descend into a full-blown financial distress scenario and a rapid end-state of collapse.

Ernest Hemingway was not only a Nobel-Prize winning author, but was an astute observer of human nature and a fine armchair economist. His description of going bankrupt in Chapter 13 of The Sun Also Rises is a pitch-perfect narrative of how the United States is now barreling toward a crisis of confidence in the dollar.

I selected the longer version to give the short quote some context. The debtor, Mike, didn’t just go bankrupt. He had a lot of “friends” who relied on him for his generosity and support, with no willingness to pay him back or help him in distress.

He also had a general “lack of control” with regard to his financial situation. Most debtors can see problems coming and either cut back spending or take other steps to deal with the debt. Either course will bring the situation to a head sooner than later.

It’s the lack of control that allows the debtor to reach the point of non-sustainable debt, the “gradually” part, and then have a crisis thrust on him all at once, the “suddenly” part. This is how the inevitable becomes a surprise.

Sound familiar? It should. This is exactly the situation in which the U.S. now finds itself. The U.S. national debt has been accumulating slowly for decades. There is no plan to make it sustainable; just a vague wish that the creditors will keep expanding the debt or rolling it over.

The U.S. has a lot of “friends,” both at home and abroad, who expect benefits whether in the form of entitlements, foreign aid, government contracts, or tax breaks. Clearly the U.S. Congress and White House each exhibit a complete lack of control. The café scene is complete.

The question is whether the U.S. is now at the point of “suddenly” going bankrupt. Of course, the U.S. won’t actually go bankrupt. It can print all the money it needs to pay off its debts in nominal terms. The issue then is a matter of when that kind of money printing becomes necessary, and under what conditions.

The dynamic of “gradually, and then suddenly” is well-known to physicists and applied mathematicians. In physics, it is known as a phase transition. A good example is a pot of water being boiled and then turning to steam. The flame can be applied to the pot for quite a while and absolutely nothing happens to the naked eye. Of course, the temperature is rising, but hot water looks just like cold water.

Suddenly the surface of the water becomes turbulent and quickly after that the bubbly surface bursts into steam. The water has been transformed. If nothing is done, the entire pot will evaporate.

In mathematics, the same dynamics are known as hypersynchronicity. That’s a fancy word for a lot of people suddenly all doing the same thing at the same time. A run on the bank is a perfect example...

- Source, The Daily Reckoning, Read the Full Article Here

Here’s Where the Next Great Crisis Originates

All financial crises are the same and different at the same time.

They are the same when it comes to the dynamics of contagion, illiquidity, bank failures and the high-panic state in which everyone in the world wants his money back at the same time.

Yet each crisis is different in its specific causes.

The 1994 Tequila Crisis was caused by Mexico’s inability to roll over short-term unsecured debts. The 1998 Russia-LTCM crisis started in 1997 with Thailand devaluing its currency. That panic spread around the world through Indonesia, South Korea, Malaysia and Russia before finally landing in Greenwich, Connecticut, home of Long-Term Capital Management.

Wall Street, and Lehman Brothers in particular, would have been the next victims if LTCM had not been rescued by the same banks with the most to lose. Of course, the 2008 panic had its roots in subprime mortgages, but quickly spread to debt obligations of all kinds, especially money market funds and European bank commercial paper.

But what about the next crisis?

According to one recent Bloomberg article, the next crisis will begin in the private bank debt market.

The specific culprit is a kind of debt called “contingent convertible” debt, or “CoCos.” These bonds start out like ordinary debt, but a bank in distress could convert them to equity to improve its capital ratios.

The problem is that bondholders know this and start dumping the bonds before the bank can pull the trigger on the conversion clause. This can cause a run on the bank and trigger cross default clauses in other bonds. Far from adding safety to bank capital structures, CoCos can make banks more unstable by igniting panics.

This is just one more example of capital market complexity, and it signals the fact that the next crisis will be worse than the last.

The bottom line is that today, systemic risk is more dangerous than ever. Each crisis is bigger than the one before. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.

New automated trading algorithms like high-frequency trading techniques used in stock markets could add to liquidity in normal times, but the liquidity could disappear instantly in times of market stress. And when the catalyst is triggered and panic commences, impersonal dynamics take on a life of their own.

These kinds of sudden, unexpected crashes that seem to emerge from nowhere are entirely consistent with the predictions of complexity theory.

In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses. This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.

The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which despite some movement in that direction still have not been normalized since the last crisis.

For now, it’s not clear which way things will break next. Markets are still in a precarious position and volatility is high. Regardless of which direction markets go from here, we cannot escape the risks hidden linkages pose to modern capital markets.

We’ve already had a correction this year. But the next correction could turn into a 30% or 40% crash.

The conditions are in place. But you can’t wait for the shock to occur because by then it will be too late. You won’t be able to get your money out of the market in time because it’ll be a mad rush to the exits.

I recommend you reduce your exposure to the stock market and move into cash, gold, Treasuries, land and fine art.

You might possibly miss out on some stock market gains, but you won’t have to worry about losing everything when the crash comes.

- Source, Jim Rickards via the Daily Reckoning

Jim Rickards: The Roller Coaster to Nowhere

There are four major factors driving the market. The factors are growth, trade wars, geopolitics and regulation of technology.

Each of the four factors has its own internal contradictions, in effect a binary outcome for each. This means there are 16 possible paths the market might follow (24 = 16). No wonder the market acts confused.

With regard to growth, the bulls expect a boost from the Trump tax cuts. They are also anticipating inflation due to strong job creation, rising labor force participation and a low unemployment rate. They expect interest rates to rise but consider this more a sign of economic strength than a cause for concern.

Strong growth is good for corporate earnings, and a little inflation is usually good for nominal stock prices, at least in the early stages. The bull case for growth is a curious mixture of the Phillips curve and the Laffer curve.

Bears point to an economic slowdown in the first quarter (most projections are around 2% or less). This is consistent with the dismal average of 2.1% growth since the end of the last recession in June 2009.

Stronger growth is impeded by demographic and debt head winds and the impact of Chinese labor and technology on global pricing power. Tax cuts are not expected to help, because the drag on growth caused by increased debt will outweigh any stimulus from lower taxes.

The Fed is giving a weak economy a double dose of tightening in the form of rate hikes and the unprecedented destruction of base money as they unwind QE. The Fed will probably push the economy to the brink of recession before they get the message and pause on rate hikes.

This bearish view combines the Reinhart-Rogoff thesis on debt death spirals with a return visit to Fed policy blunders in 1929 and 1937.

To some, the trade wars are another conundrum. There is little doubt that a true trade war will reduce global growth. But many are wondering if we’re facing a trade war or just a series of head fakes by Donald Trump as he pursues the art of the deal?

For example, Trump imposed Section 232 tariffs on steel and aluminum imports and then almost immediately carved out exemptions for Canada and Mexico pending progress on NAFTA. Then the president trumpeted a trade deal with South Korea that imposed quotas on steel imports but almost immediately said that deal was conditional upon South Korean help in dealing with North Korea.

Trump threatened over $50 billion of Section 301 penalties on China for theft of U.S. intellectual property, but within days China and the U.S. calmed market fears by announcing plans for bilateral trade negotiations.

So is it really a trade war, or just a set of negotiating tactics?

I believe the trade war scenario is more likely.

Yes, Trump offered relief to Canada and Mexico on the steel tariffs. But that was only so he could gain negotiating leverage on the NAFTA talks that are ongoing. If Canada and Mexico fail to give Trump the concessions he wants on NAFTA, those steel tariffs can bounce back to hit Canada and Mexico as they already hit China and Brazil.

Meanwhile, Trump will wait to see if China is willing to make concessions in the intellectual property area. If not, he can easily double or triple that $60 billion figure.

My take is that this trade war is not going away anytime soon. It will last for years, get much worse and be a major headwind for stock prices (click here for an urgent trade war update).

But I admit that Trump has left enough wiggle room to indicate he could back off the trade wars if he can exact enough concessions from China and the NAFTA countries.

Geopolitics are another on-again, off-again market driver. A strong case can be made for a coming war with North Korea.

Decades of North Korean development of nuclear weapons and ballistic missiles and a rapid increase in the operational tempo of tests in the past year reveal that North Korea is determined to build an arsenal of nuclear-armed ICBMs that pose an existential threat to the U.S.

For its part, the U.S. has made it clear that North Korea will not be allowed to acquire or possess these weapons. These two views are irreconcilable and point toward war.

- Source, James Rickards

Jim Rickards: Trump Prepares to Drop the Hammer on Amazon

President Trump has ratcheted up his war of words against Amazon.

Late last week, Trump tweeted that Amazon is having a negative impact on competing retailers, as well as the federal and local governments:

I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.) and are putting many thousands of retailers out of business!… This Post Office scam must stop. Amazon must pay real costs (and taxes) now!

Then there was this morning’s tweet:

Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country… not a level playing field!

Trump’s campaign against Amazon is nothing new.

He sent out a string of tweets last summer raging against Amazon’s monopolistic business practices. Here’s one from last August, for example, that sounds a lot like last week’s tweets:

Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt — many jobs being lost!

But Trump’s attacks against Amazon are not just economic — they’re also personal.

Amazon CEO Jeff Bezos also owns The Washington Post, which is strongly anti-Trump. Trump sees The Washington Post as the unofficial leader of the resistance to his administration. The president has even referred to the newspaper as the “Amazon Washington Post.” And he knows it’s been out to get him.

What does all this mean?

It means there’s an excellent chance that Trump could pursue antitrust legislation against Amazon.

Trump’s logic is simple. Most of Bezos’ net worth is tied up in Amazon stock. In the world of billionaires and powerful politicians, the way to hit someone hard is in the pocketbook.

Trump will attack Amazon and clip Bezos’ wings by $10–20 billion as payback for what he considers Bezos’ attacks on him via the Post.


Antitrust law enforcement in the United States is a bit like the weather — unpredictable in the long run and highly changeable.

The Justice Department can go years or even decades without bringing a major antitrust case and then suddenly decide the time has come to send a message to big business, with emphasis on the word “big.”

When that happens, there is always one company that stands out from the crowd as a kind of sitting duck for ambitious prosecutors. Today, the sitting duck is Amazon.

When the case against Amazon begins, the stock will tumble. Amazon’s stock price is vulnerable under the best of circumstances because it ran up so far so fast. The bad news of an antitrust case will be the catalyst that causes investors to dump the stock in a desperate race to get out ahead of the crowd. Selling will feed on itself.

The selling contagion will spread to the rest of the FAANG stocks (Facebook, Apple, Netflix and Google) and to the Nasdaq as a whole.

Amazon stock was down as much as 6% today, based on Trump’s latest attacks. And the Dow is down almost 500 points at writing. The S&P and Nasdaq are also getting hammered.

But this could just be the beginning.

These companies are already vulnerable because China has threatened sanctions against U.S. technology companies. Technology stocks, led by Apple, dragged the broader market lower last week when the news broke. These threats of course come in retaliation against Trump’s latest promise to crack down on Chinese theft of U.S. intellectual property.

Any antitrust action Trump pursues against Amazon will trigger another correction or worse in U.S. stocks.

But investors who can read the antitrust tea leaves correctly stand to make huge profits when the Justice Department strikes.

- Source, Jim Rickards