Thursday, March 9, 2017

Trump About to Declare Currency War!

Six years ago in my first book, Currency Wars, I wrote, “There is nothing today that suggests the currency wars will end anytime soon.” Today, those words seem as true as ever.

A currency war is a battle, but it’s primarily economic. It’s about economic policy. The basic idea is that countries want to cheapen their currency. Now, they say they want to cheapen their currency to promote exports. Maybe it makes a Boeing more competitive internationally with Airbus.

But the real reason, the one that’s less talked about, is that countries actually want to import inflation. Take the United States for example. We have a trade deficit, not a surplus. If the dollar’s cheaper it may make our exports slightly more attractive.

It’s going to increase the price of the goods we buy — whether it’s manufactured good, textiles, electronics, etc. — and that inflation then feeds into the supply chain in the U.S. So, currency wars are actually a way of creating monetary ease and importing inflation.

How many times have you heard the Fed say they want 2% inflation? They analyze it over and over and over. They’re desperate to get there.

The problem is, once one country tries to cheapen their currency, another country cheapens its currency, and so on causing a race to the bottom.

Currency wars are like real wars in more ways than one. They can last longer than the combatants expect, and produce unexpected victories and losses. Real wars do not involve all fighting, all the time. There are quiet periods, punctuated by major battles, followed by new quiet periods as the armies rest and regroup.

There are critical turning points where a long-term directional trend is set to reverse. Today’s “winners” (the strong currencies) suddenly become “losers” (the weak currencies), contrary to most expectations and Wall Street forecasts. Today we could be at one of those turning points, which we’ll explore in a moment. But first, let’s see how we got here.

The currency wars of the early 1930s are potentially instructive for what we could be experiencing today. The U.K. devalued the pound sterling in 1931. Soon after, the U.S. devalued the dollar in 1933. Then France, which devalued the franc in the ‘20s, and the U.K. devalued again in 1936.

You had a period of successive currency devaluations and so-called “beggar-thy-neighbor” policies.

The result was, of course, one of the worst depressions in world history. There was skyrocketing unemployment and crushed industrial production that created a long period of very weak to negative growth. This currency war was not resolved until World War II and then, finally, at the Bretton Woods conference. That’s when the world was put on a new monetary standard.

The next currency war raged from 1967 to 1987. The seminal event in the middle of this war was Nixon’s taking the U.S., and ultimately the world, off the gold standard on August 15, 1971.

He did this to create jobs and promote exports to help the U.S. economy. What actually happened instead?

We had three recessions back to back, in 1974, 1979 and 1980.

Our stock market crashed in 1974. Unemployment skyrocketed, inflation flew out of control between 1977 and 1981 (U.S. inflation in that five-year period was 50%) and the value of the dollar was cut in half.

The real lesson of currency wars is that they don’t produce the results you expect which are increased exports and jobs and some growth. What they generally produce is extreme deflation, extreme inflation, recession, depression or economic catastrophe.

But they’re very, very appealing to politicians because they can stand up say, “Hey, it’s good to have a cheap dollar because we promote jobs.” But the reality is, it doesn’t promote jobs. It just promotes inflation.

You’re actually better off with a strong currency because that attracts capital from overseas. People want to invest in the strong currency area, and it’s that investment and those capital inflows that actually creates the jobs. So as usual, the politicians and the central bankers have it completely wrong. But they’re not listening to me or necessarily reading my newsletters.

The period between 1985 and 2010 was the age of what we call “King dollar” or the “strong dollar” policy. It was a period of very good growth, very good price stability and good economic performance around the world.

The United States agreed to maintain the purchasing power of the dollar and our trading partners could link to the dollar or plan their economies around some peg to the dollar. That gave us a generally stable system. It worked up until 2010 when the U.S. tore up the deal and basically declared another currency war to boost U.S. exports. President Obama did this in his State of the Union address in January 2010.

The currency wars have been ongoing ever since, with varying intensity. But with the election of Donald Trump, they look set to enter a new major battle.

Today, the currency wars have brought the U.S. to the cusp of a trade war. President Trump and several of his top advisers in recent days have complained that not only is China a currency manipulator, but so are Japan and Germany. It seems the U.S. is tired of the new “king dollar” phase it’s been in lately, and is willing to take action to cheapen the dollar.

But how can the administration actually do this?

The Fed will not lower rates because it is in a tightening cycle. The Fed will probably be raising rates in March and possibly later this year. That makes the dollar stronger.

China is trying to prop up the yuan but is running out of dollar reserves to do so and will have to devalue before they go broke. Germany might like a stronger euro to fight inflation, but the decision is not entirely in their hands — it’s up to the European Central Bank, and the ECB is still engaged in QE for the time being.

Japan cannot afford a stronger yen, because they have the highest debt-to-GDP ratio of any major economy and are desperate to get inflation. Japan needs inflation to lower the real value of that debt.

If China, Germany and Japan cannot give Trump what he wants in the foreign exchange markets, what options does the U.S. have?

The main option is tariffs, exactly what Richard Nixon did on Aug. 15, 1971.

You may remember that date as the day Nixon ended the convertibility of dollars for gold. But he also imposed a 10% across-the-board tariff on all imported goods as part of his New Economic Plan. Nixon combined the currency wars and trade wars in one policy by hoarding gold and imposing tariffs.

Historically, currency wars do lead to trade wars and, ultimately, to some form of systemic collapse. That seems to be happening again. I’ll be analyzing each side of this coin in the coming weeks.

- Source, James Rickards

Monday, March 6, 2017

Jim Rickards - Markets Are Experiencing Cognitive Dissonance

Cognitive dissonance is a psychological term to describe a situation where perception and reality are out of sync.

It’s similar to what most people refer to as “denial.” The patient sees things one way, but the reality is different. Of course, it’s just a matter of time before reality prevails and the patient is jolted back to reality. This process can be fast or slow, easy or painful, but the important thing to bear in mind is reality always wins.

Something like cognitive dissonance is going on in markets right now. Markets have been temporarily euphoric over Trump’s tax, regulatory and spending policies. Those policies are important to business and credit cycles and economic growth.

The perception is that happy days are here again. The new Trump administration is expected to pour trillions of dollars of stimulus spending and tax cuts into the economy. Immediately after the Nov. 8 election, investors took a quick look at Trump’s policies and decided they liked what they saw.

Trump wants lower taxes, less regulation and higher infrastructure spending. Corporate profits and consumer spending benefit from lower taxes. Banks and pharmaceutical companies benefit from less regulation. Construction firms and defense contractors benefit from infrastructure spending. There seemed to be something for everyone, and the stock market took off like a Roman candle.

And indeed, the major stock indexes hit one record closing after another. The Dow topped 20,000 this week before pulling back. The dollar has been trading near a 14-year high, although it’s slipped in recent days. Gold was moving mostly sideways until it broke out again over the past few days.

Bank stocks went vertical in expectations of wider net interest margins (from Fed rate hikes) and less regulation (from Dodd-Frank reform). Happy days, indeed.

Reality is another matter. I’ve been warning my readers lately that the Trump trade is levitating in thin air and is ready for a fall. Now that reality could be beginning to sink in.

It’s far from clear how much of the Trump economic agenda will see the light of day. Congress wants to offset tax cuts in one area with tax increases in another so they are “revenue neutral.” That takes away the stimulus. Less regulation for banks won’t help the economy if bankers lead us into another financial meltdown like 2008.

Infrastructure spending will increase the debt-to-GDP ratio past the already high level of 105%, putting the U.S. closer to a sovereign debt crisis like Greece. As I wrote Tuesday, many believe a 60% debt-to-GDP ratio retards growth. That’s the standard the ECB uses for members of the Eurozone. Scholars Ken Rogoff and Carmen Reinhart put the figure at 90%.

Again, the U.S. debt-to-GDP ratio is currently at 105%, as stated, and heading higher. Under any standard, the U.S. is at the point where more debt produces less growth rather than more. This is one more reason why the Trump infrastructure spending plan will not produce the hoped for growth. And if infrastructure is funded privately, you’ll need tools and user fees to pay the bondholders, which is just another form of tax increase.

There’s almost no way Trump’s policies can supply the stimulus the market is pricing in. The Dow Jones index peaked on Jan. 26, 2017, one day after cracking the mythical 20,000 mark. It’s now trading around 19,900. The downhill trend may continue and get steeper soon.

Productivity has stalled out in recent months. Economists are not sure why. It could be due to lack of investment by business, or that workers are not being trained in useful skills, or that everyone is spending too much time on social media. Whatever the cause, productivity is flat.

Fourth-quarter GDP came in at 1.9%, below expectations — the final chapter on the worst year of U.S. growth since 2011 when the economy was still healing from the global financial crisis. The strong dollar is a major headwind to growth, along with flat labor force participation and weak productivity growth.

Growth in a major economy is simply the sum of increases in the labor force plus increases in productivity. Think about it. How many people are working and what is the output per worker? That’s it; that’s all there is. The reality is that the workforce is not growing.

Labor force participation is near 40-year lows and is expected to decline further for demographic reasons. Birthrates have never been this low since the Great Depression. The U.S. used to get a labor force lift from immigration, but that might dry up because of Trump’s policies. We’ll have to wait and see.

A flat labor force plus flat productivity equals a flat economy, or almost zero nominal growth. That’s reality.

How will this situation be resolved?

Either growth will rebound based on “animal spirits” and the Trump stimulus working better than expected or markets will collapse once they realize the growth is not coming. By “collapse,” I mean a violent stock market correction, a falling dollar and major rallies in bonds and gold. We expect the latter.

Financial crises are not mainly about the business cycle. They’re about investor psychology, sudden shocks and the instability of the financial system. Right now investors are skittish, numerous shocks are waiting to happen and the system is highly unstable due to overleverage and nontransparency.

Despite Trump’s best efforts and positive policies, a collapse could happen any day unless radical steps are taken to prevent it — such as breaking up big banks and banning derivatives. I’ve been warning about this for a while, but now mainstream economists see the danger too. Nobel Prize winner Robert Shiller, for example, sees a stock market crash coming that could be worse than 1929 or 2000. I hope he’s wrong.

The problem with a financial panic is that panicked investors don’t care if the president is a Democrat or a Republican; they just want their money back. The same dynamic applies to natural disasters like tsunamis and earthquakes.

Once the disaster starts, the dynamics have a life of their own and don’t care if the victims are liberals or conservatives. Everyone gets hurt just the same. I’m not hoping for it, but this is a lesson Trump may learn the hard way.

Above I said collapse means a violent stock market correction, a falling dollar and major rallies in bonds and gold. I expect the latter. The long-term trends favor gold if U.S. growth continues disappoint.

The strong dollar story can’t last, so it won’t. The Trump administration has clearly signaled that the day of the strong dollar is over. When you see a coordinated attack on the dollar from the White House, the Treasury and the Fed, you can bet the dollar will weaken. That means a higher dollar price for gold.

The dollar may get one last boost from a Fed rate hike in March, but after that, even the Fed will acknowledge that they got it wrong again and start another easing cycle with happy talk and forward guidance.

For now, investors should not stand in front of a moving train. Keep cash ready and be prepared to move into gold, bonds and the euro. In fact, it’s not too soon to leg into those positions now.

Instead of watching the tape or short-term trends, my advice is to stay focused on the long-term trends. That’s how you’ll make the most money and preserve wealth in adversity.

- Source, James Rickards via the Daily Reckoning

Friday, March 3, 2017

The Other Executive Action Trump Took Friday

The Dow fell back below 20,000 today. Many in the media are blaming it in part on Trump’s Friday executive order temporarily banning travel from seven Muslim countries.

It’s amusing and a bit discouraging to watch the mainstream media react to the initial wave of executive orders coming from the White House. Headlines blare, “Trump’s Building a Wall With Mexico,” “Trump’s Stopping Syrian Immigrants” “Trump Pulls out of Trans-Pacific Partnership!”

Really? Why are the mainstream media so shocked? After all, didn’t Trump say he was going to build a wall, stop some immigration and pull out of the TPP? Isn’t that exactly what Trump campaigned on? Of course it is.

What has the media baffled is that Trump is the first politician in living memory who actually does what he said he was going to do. Media and most voters are so accustomed to politicians who say one thing to get elected and do another once in office that they literally can’t process a politician who does what he says.

Hence the hysterical headlines about policies you could see coming a mile away.

My point is not to debate these policies. We all have our own opinions on each one; that’s fine.

Among those policies is a huge boost in defense spending, upgrades to the nuclear arsenal, expanded operations in space and reviving something like Ronald Reagan’s “600-ship Navy.”

You can see this defense spending bonanza coming not only because Trump promised it (and he means what he says), but because Trump will have to go down this road to lend credibility to his other statements about the South China Sea, North Korea, Taiwan and NATO.

Trump has suggested confrontational or unilateral actions in all of those areas. You can’t act confrontationally or unilaterally without a strong defense and intelligence capability. That’s exactly what Trump is out to create.

And on Friday, he issued a presidential memorandum pledging to rebuild the military, reading in part: “To pursue peace through strength, it shall be the policy of the United States to rebuild the U.S. armed forces.”

But defense technology is not something you can create by executive order. It takes a year or longer to conduct feasibility studies and make it through the appropriations process. That’s good news for investors prepared to take advantage of the spending boom because it means they have time to get in on the most promising defense tech startups and medium-sized players before the big orders and the big buyouts start to roll in.

This is a once-in-20-years opportunity, and with Trump in the Oval Office, smart investors who understand the implications will have the wind at their backs for a decade.

- Source, Jim Rickards via the Daily Reckoning

Tuesday, February 28, 2017

Jim Rickards: European Central Bank to Tighten Later This Year

Jim Rickards joined CNBC’s The Rundown to offer his analysis for 2017 and what expectations for the European Central Bank (ECB) may be under rising Eurozone inflation and various regional factors.

Rickards began the conversation by weighing in that, “Mario Draghi is my favorite central banker, I think he is the only one who really understands central banking.” Draghi is the current head of the European Central Bank and a former Goldman Sachs banker who began his term as leader of the ECB in November 2011. Rickards went on to remark, “Central banks are actually not that powerful but they have been given a pretense. Mario Draghi says little, and does less. That is a very effective way of operating.”

Jim Rickards is the New York Times bestselling author of The Road to Ruin. Rickards has worked previously on Wall Street for several decades and has advised the U.S intelligence community on topics surround currency wars and capital markets.


“(Mario Draghi) has a famous phrase” regarding the European Central Bank (ECB) stepping in to support the European common currency by saying he will do “whatever it takes – three words – and he single handedly saved the euro. I think his language, posture and demeanor is exactly right. Mario Draghi is sending a message. They (ECB) will have to tighten before September. As he said, not yet, we will get around to it.”

The CNBC commentator then shifted gears to ask Rickards for his insights on the sudden rise in inflation within the Eurozone and what the ECB will do in response Jim Rickards notes, “There will be tightening. The thing about inflation in Europe is it is focused through Germany at the moment. Germany is very hawkish on this. German Finance Minister Wolfgang Schaeuble has been complaining about it, but Draghi’s mandate is European and not limited to Germany.”

“This is only of the many problems of the European monetary union, and to a greater extent the Eurozone. You can have deflation in one country and inflation in another country. Which is what happened when Greece was collapsing, though it is not so bad right now. Germany is a little bit hot, but you’ve got other countries including among them Greece, Italy and others where it is a little cooler.”

When asked what specific areas that the head of the European Central Bank might be focusing his attention on Rickards indicated, “He’s got to look at average inflation across the entire Eurozone. That is why Draghi didn’t tighten now.

In getting specific on where Draghi’s primary concern for 2017 will be Rickards turned to Germany and the political environment, “The reason I say the Mario Draghi will tighten later is because average inflation might not be that high, but there is an election in Germany coming up later this year. (Draghi) doesn’t want to lose Angela Merkel. She has been a big supporter of his, so he will do what it takes.”

“The German voter is going to vote on German inflation, not European inflation. While Draghi cares about European inflation, he is going to have to do something to make sure Merkel doesn’t lost.”

- Source, Craig Wilson via the Daily Reckoning


Saturday, February 25, 2017

The Gold Chronicles with Jim Rickards and Alex Stanczyk


Interview with Jim Rickards Part 1 topics: 

*Power Triad Dynamics, USA, China, Russia *Why China is concerned about a Trump Presidency *Capital flows out of China continue at a robust pace *China will burn through all of its liquid reserves in one year at the current pace *Analysis of China's three options *Which conditions could place the USA and China in a state of war over the South China Sea


Thursday, February 16, 2017

Global Financial Meltdown - James Rickards on How To Avoid Financial Ruin


James Rickards on how to avoid another financial crisis. Where should you position your money? What can you do? Is the collapse avoidable?

In this video, James Rickards breaks all of these questions down and attempts to dispell some of the myths that exist out there, while at the same time, not sugar coating the future. Bad times are ahead, but profits can still be made.


Monday, February 13, 2017

James Rickards - Gold Shortages Coming


James discusses: Gold shortages; Gold Banks; Negative Interest Rates; Paper Money Collapse; Pound Sterling; Gold Standard; Digital Currencies; Cyber Financial Warfare; Hyperinflation; and BREXIT.


Sunday, January 29, 2017

James Rickards - The Road To Ruin


James Rickards is an American lawyer and a regular commentator on finance. He is the author of The New York Times bestseller Currency Wars: The Making of the Next Global Crisis, published in 2011, The Death of Money: The Coming Collapse of the International Monetary System.


Thursday, January 26, 2017

Recession, market correction next year, expect rate cuts: Rickards

The Federal Reserve hiked interest rates just two weeks ago for the second time in a decade, but it will soon be cutting them again, said Jim Rickards on Tuesday.

Speaking to CNBC's Squawk Box, the director of The James Rickards Project said a stock market correction is coming as President-elect Donald Trump's economic stimulus plans will not pan out, causing a "head-on collision" between perception and reality.

"When the reality of no stimulus catches up with the perception of stimulus plus the Fed tightening: that's the train wreck. Either we're going to have a recession or a stock market correction," he said.

The markets have been rallying on the back of Trump's win as investors bet on tax cuts and fiscal spending under the new administration.

However, "the stimulus is not going to come" as Trump's proposed tax cuts will hit government revenue while the Congress is likely to block his stimulus plans as the U.S. is already $20 trillion in debt, Rickards added.

This will lead to a recession or a "very severe correction" in the stock market, prompting rate cuts later next year, he said, prompting the Fed to cut rates.

"They will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year," said Rickards, who recommends holding gold and U.S. 10-year Treasurys.

- Source, CNBC