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

Jim Rickards: Worst Recession in 150 Years

The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.

Not the Early 19th Century Anymore
It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

If you let England produce sweaters and Italy make shoes, everybody was better off at the end of the day. It’s a simple example, but you get the point.

But in today’s highly integrated and globalized world, where you can simply relocate a factory from one country to the next, comparative advantage has much less meaning. You can produce both sweaters and shoes in China as easily as you can produce them in England and Italy (and much more cheaply besides).

There are many other examples of lazy, dogmatic analysis among mainstream economists, too many to list. Yet there are some exceptions to the rule.

A few economists have developed theories that are supported by hard evidence and do a great job of explaining real-world behavior. One of those economists is Ken Rogoff of Harvard.

The Worst Recession in 150 Years

With his collaborator, Carmen Reinhart and others, he has shown that debt-to-GDP ratios greater than 90% negate the Keynesian multiplier through behavioral response functions.

At low debt ratios, a dollar borrowed and a dollar spent can produce $1.20 of GDP. But at high ratios, a dollar borrowed and a dollar spent will produce only $0.90 of GDP.

This is the reality behind the phrase “You can’t borrow your way out of a debt crisis.” It’s true.

Meanwhile, the U.S. debt-to-GDP ratio was about 105% even before the crisis. It’s only going higher. We’re just digging a deeper hole for ourselves.

So when Ken Rogoff talks (or writes), I listen. In his latest article, Rogoff offers a dire forecast for the recovery from the New Depression resulting from the COVID-19 pandemic.

He writes, “The short-term collapse… now underway already seems likely to rival or exceed that of any recession in the last 150 years.”

That obviously includes the Great Depression and many other economic crises.

This is something you should really consider before you decide the coast is clear and it’s time to jump back into stocks.

- Source, Jim Rickards via the Daily Reckoning

James Rickards: Trump Says “No” to World Money

Over the course of 13 years as a media commentator and nine years as a bestselling author, I’ve had frequent occasion to state the following:

“In 1998, Wall Street came together to bail out a hedge fund. In 2008, the Federal Reserve stepped forward to bail out Wall Street. Each crisis was worse than the one before. In the next crisis, who will bail out the Fed?”

This was more than just rhetoric. It was a clinical description of a pattern of worsening crises on an approximately 10-year tempo, along with escalating bailouts.

Now the worst economic crisis in U.S. history is here and the Fed itself is in need of a bailout.

But what is the source of that bailout?

We now know part of the answer. A few weeks ago, the U.S. Congress passed a $2.2 trillion bailout bill called the CARES Act. This is the law that provided $349 billion in small-business loans, which are forgivable if the employer does not lay off its employees.

That fund has dried up already with most businesses getting either no money or not enough to survive more than a few weeks.

Also buried in that law was a $425 billion bailout fund for the Treasury to recapitalize the Fed. Since the Fed operates like a bank, they will leverage that $425 billion of new capital into $4.25 trillion of new money printing to buy corporate debt, municipal bonds, mortgages and other assets in order to keep liquidity in the system.

Still, that’s also a temporary solution when many more trillions of dollars of new money will be needed.

U.S. GDP is expected to lose an annualized $6 trillion or more in output in the second quarter. I estimate that 50% of retail and 90% of office rents aren’t being paid right now. Many small businesses will fail and probably never reopen.

I had always suggested that the IMF has the only clean balance sheet and would be the only source of liquidity in the world once the Fed was tapped out.

That’s exactly what we’re seeing now. The world is turning to the IMF for help. And that means printing the world money called special drawing rights (SDRs) to bail out the global financial system in the current economic and financial crisis.

SDRs were used in a small way during the 2008 financial crisis. They did not have much impact because the quantity was relatively small (about $250 billion equivalent) and it took a long time to get done. The SDRs were issued in August 2009, almost a year after the acute phase of the crisis and after a recovery had already begun.

Still, the 2009 issuance was a good dry run in preparation for the next crisis. Now the next crisis is here.

The world has never been so deeply in debt.

Societies with low debt burdens are robust to disaster. They can mobilize capital, raise taxes, increase spending and rebuild when the crisis is over.

But heavily indebted societies are much more brittle. They just don’t have that flexibility. Meanwhile, panicked creditors demand repayment that causes distressed sales of assets, falling markets and default.

That’s the situation we’re facing today.

Still, nothing this momentous happens without a heavy injection of politics, especially while Donald Trump and his “America First” agenda are in place.

A normal SDR printing exercise requires that the total SDRs be issued to all IMF members in proportion to their voting rights in the IMF. This means that U.S. adversaries such as Iran and China would get part of the bailout money along with more needy countries in Africa and Latin America.

The U.S. is now holding up the new issuance of new SDRs for exactly this reason.

We’ll see how this impasse gets resolved. Perhaps new SDRs will be issued right away. But as the depression lingers and the Fed’s impotence is exposed, the issue of printing a trillion SDRs will be back on the table.

China may have their own conditions such as a diminution in the role of the dollar as a global reserve currency. The U.S. may be more desperate when the time comes. Either way, this issue will not go away.

SDRs were originally intended as a kind of “paper gold.” Once the IMF starts the printing presses, investors will probably favor real gold as the proper antidote.

Below, I show you why gold is coming back to the global monetary system. As you’ll see, It can be done either in an orderly fashion, or a chaotic fashion.

- Source, James Rickards via the Daily Reckoning

James Rickards: Globalization is Dead

James Rickards: Are We Facing the Greatest Depression? Worst Economic Crash in History?

Just how dire of a situation are we looking at? Will the COVID-19 outbreak lead to one of the greatest economic depressions of the modern era?

How far will governments go to bailout its people and its businesses?

Nothing like this has ever been attempted before and the ramifications could be felt for years to come.

Join James Rickards and Pippa Mamgren as they take on these questions, plus many more in their recent interview with Trigger Nometry.

- Source, Trigger Nometry

Jim Rickards on How to Protect Your Wealth During the COVID-19 Crisis

Jim Rickards speaks with our friend, the publisher of Paradigm Press, Pete Coyne about the COVID-19 Crisis. 

As is often the case, Jim Rickards has been one step ahead of mainstream analysts through the entire COVID-19 crisis. 

He predicted it would be global catastrophe in early February, well before markets caught the fever. So what does Jim see happening next? 

The answer is unsettling: A complete monetary system shutdown. Starting in the US. Then spreading outwards. At the end of such a scenario, the entire global financial system shuts down, and any Federal Reserve intervention may no longer be effective. 

It’s worth pointing out that this is a scenario Jim has highlighted for several years as the bookend of this historic bull market. 

The difference now is, it appears to be in motion. So what, if anything, can you do to shelter your wealth?

- Source, The Daily Reckoning Australia

James Rickards: Defending Your Wealth During This Global Crisis, A Strategy Guide

Join Hedgeye CEO Keith McCullough for a very special conversation with Strategic Intelligence editor James Rickards.

Keith and Jim dive deep into the current market chaos, key economic ramifications, the failure of central banks to arrest the recent decline and how investors can protect their wealth amidst the market tumult.

- Source, Hedgeye TV

Jim Rickards: Covid-19, The Next Great Depression is Here

Jim Rickards Has Been Warning About an Economic Collapse for Years, Now it is Here

Financial advisor, commentator and author of books like Aftermath, Currency Wars and the Road to Ruin, and with a Twitter following of over 130,000, Jim Rickards has been warning of the day markets seize up, in a new different crisis. 

He spoke to Ticky Fullerton from New England where he is holed up with family and was asked what he made of the US government's massive $2 trillion stimulus.

- Source, Sky News Australia

Jim Rickards: Everyone Should at Least Own a Monster Box of Physical Silver, In Case of an Economic Crash

Markets were down again today, what a surprise. The Dow lost another 600 points, finishing the day at 18,591.

Meanwhile, gold was up about $75 today. Physical supply is drying up and dealers are running out.

That’s why I’ve been warning my readers for years to get their gold before the crisis hits. Once it does (and it has), you won’t be able to get any.

What about silver?

You Should Get a “Monster Box”

Silver’s dynamics are a little bit different than gold because there are some industrial applications, but there’s no question that it’s a monetary metal.

And I always recommend that people have a “monster box.” A monster box is 500 American Silver Eagles, fine pure silver that comes directly from the Mint. It comes in a green case and is sealed.

The 500 coins at retailer commission will run you about $12,000 right now, but everybody should have one.

You ought to have a monster box of silver because if the power grid goes down, which could happen for a lot of reasons, the ATMs won’t work and neither will credit cards.

But if you walk into a store with five or six silver coins, you’ll be able to get groceries for your family.

Believe me, that’ll be legal tender when the time comes, so I definitely recommend silver.

- Source, James Rickards

James Rickards: It’ll Get a Whole Lot Worse Before It Gets Any Better

We’re well into the coronavirus pandemic at this point. As of this writing, there are 360,765 reported infections and 15,491 deaths worldwide.

Over the next few days, you may be certain that those numbers will be significantly higher.

That’s how pandemics work. The cases and fatalities don’t grow in a linear fashion; they grow exponentially.

It’s widely acknowledged that this pandemic will get much worse before it gets better. There’s no doubt about that.

It didn’t take long for the coronavirus crisis to turn into an economic and financial crisis.

The Worst Collapse Since the Great Depression

The U.S. is falling into the worst economic collapse since the Great Depression in 1929. This will be worse than the dot-com collapse of 2000–01 and worse than the Great Recession and global financial crisis of 2008–09.

Don’t be surprised to see second-quarter GDP drop by 10% or more and for the unemployment rate to race past 10% on its way to 15% or higher.

The questions for economists are whether the lost output will be permanent or temporary and whether U.S. growth will return to trend or settle on a new path that is below the pre-virus trend.

Some lost expenditure may just be a timing difference. If I plan to buy a new car this month and decide not to buy it until August, that’s just a timing difference; the sale is not permanently lost.

But if I don’t go out for dinner tonight and then do go out a month from now, I’m not going to order two dinners. The skipped dinner is a permanent loss.

Unfortunately, 70% of the U.S. economy is based on consumption and the majority of that consists of services rather than goods. This suggests that much of the coronavirus impact will consist of permanent losses, not timing differences.

More important is the question of whether growth returns to trend by next year or follows a new lower trend. (Bear in mind that “trend” for the past 11 years has been 2.2% growth compared with average growth in all recoveries since 1980 of 3.2%; any decline in trend growth would be from an already low base.)

This is unknown, but the result will be as much psychological as policy driven.

The Fed’s Bazooka Is Empty

In situations like this, the standard policy response is for the Fed to cut rates, which it has certainly done.

The Fed has also launched massive amounts of quantitative easing.

In addition, they have guaranteed or offered credit facilities to banks, primary dealers, money market funds, the municipal bond market and commercial paper issuers so far.

Now the central bank has taken the unprecedented step of committing to buy as many U.S. government bonds and mortgage-backed securities as needed to keep the market functioning.

The problem is that the Fed’s programs won’t work as a form of stimulus. We’re seeing a supply shock as the economy grinds to a standstill. What’s everyone going to buy with all the money?

Still, they may have done things exactly backward.

Mohamed El-Erian, chief economic adviser at Allianz, says that the Fed should have focused on payment system problems and liquidity first but should not have cut rates.

Interest rates were already quite low. Once the Fed goes to zero as they did, they are incapable of cutting rates further (leaving aside negative rates, which also don’t provide stimulus).

El-Erian argues the Fed should have saved their rate cuts in case they are needed more acutely in the weeks ahead. Too late now. The interest rate bullets were fired. Now the Fed’s bazooka is empty at the worst possible time.

No Stimulus Bill

Meanwhile, Congress is working to pass a “stimulus” bill to fight the economic effects of the coronavirus pandemic.

Negotiations stalled this morning as Democrats want to insert provisions that would give tax credits to the solar and wind industry, give more power to unions and introduce new emissions standards for the airline industry.

“Democrats won’t let us fund hospitals or save small businesses unless they get to dust off the Green New Deal,” said Senate Majority Leader Mitch McConnell.

Once again, I need to emphasize the point: The economic impact of coronavirus could be devastating.

If consumers get used to not spending and decide that increased savings and debt reduction are the best ways to prepare for another virus or natural disaster, then velocity will fall and growth will be weak no matter how much money the Fed prints or the Congress spends.

The bottom line is that these spending bills provide spending but they do not provide stimulus. That’s up to consumers. And right now consumers are hunkered down.

It may be that the last of the big spenders just left town.

- Source, James Rickards via The Daily Reckoning

Here’s what Jim Rickards Tells People Who Think it’s Just the Flu

Comparing the current outbreak to the flu is like comparing apples to oranges, said best-selling author Jim Rickards. 

“I think last year, 20,000 people died of the flu, and so far in the United States, we have about 100 fatalities, and they say it’s not a big deal. But that completely misses the point,” Rickards said, pointing to the uncertainty around the disease’s contagion factor, how it spreads, and current lack of a viable vaccine.

- Source, Kitco News