Monday, March 20, 2017

Jim Rickards - The Coming Big Freeze


"In 1998, he helped save the financial system from the collapse of LTCM… In 2006, he warned Washington officials of the coming $12.6 trillion mortgage meltdown…

Now CIA financial-threat analyst Jim Rickards warns of a looming $326 trillion crisis poised to freeze the world financial system indefinitely… in just 48 hours…"


Sunday, March 12, 2017

Trump? Alarm Bells in Beijing

Yes, war with China could break out in the South China Sea...

HISTORY shows that many wars begin not by design but by accident, writes Jim Rickards in The Daily Reckoning.

World War One is the classic case study.

No one really wanted a world war. And 16 million people died as a result. The Ottoman, Russian, German and Austro-Hungarian empires all collapsed in the aftermath. Still, the war happened anyway – through miscalculation and misreading the intentions of the other side.

Today the US and China are confronting each other in the South China Sea the way Germany and Russia confronted each other just before World War One. Could another world war happen by accident?

The answer is yes, it could.

The shoving matches between China and Japan in the East China Sea, and between China and the Philippines in the South China Sea are getting worse. It's just a matter of time before some incident or accident at sea sparks a war.

The problem is that the US has treaty obligations to Japan and the Philippines, as well as to Taiwan. So a Chinese war with them can quickly become a Chinese war with America.

The maritime regions off China's east and southeast coasts are vital to Chinese interests...

The South China Sea is rich in natural resources. It has rich fishing grounds and as much as $5 trillion in oil and gas.

But apart from its fisheries and vast energy resources, the South China Sea is home to some of the most important sea routes in the world. A third of all the world's seagoing trade, and roughly $5 trillion worth of goods transit through South China Sea each year.

The Malacca Strait links the Indian Ocean to the South China Sea. The amount of oil transported from the Indian Ocean through the Malacca Strait and into the South China Sea is three times the amount that passes through the Suez Canal every year. And fifteen times the amount that passes through the Panama Canal. The Malacca Strait is therefore one of the great choke points in global shipping.

Without access to the strait, China's access to oil and other raw materials from the Middle East and Africa would become greatly reduced. In wargames, American ships and bombers have rehearsed blockading the Malacca Strait. Chinese leaders are well aware of the implications and have watched these wargames with alarm.

China has now essentially claimed the entire South China Sea for itself (except for small zones immediately adjacent to the surrounding nations). But its control is disputed by six countries – China, Vietnam, Philippines, Malaysia, Brunei and Taiwan, all of which lay claim to some portion of it.

Of course, Chinese assertiveness in the South China Sea is nothing new. China has claimed territorial rights to almost the entire South China Sea in defiance of international arbitration and the competing claims of the other nations.

China has been backing up its claims by dredging the ocean floor to create artificial "islands" on existing rocks and atolls. Then it's built military bases on those islands and threatened to interdict any fishing or commerce which it does not approve.

Control of the South China Sea would be a sensitive subject at the best of times, but now it is more of a tinderbox than ever.

Lately, the seriousness of the confrontation has been dialed up.

The US has conducted freedom of navigation patrols in the area by sea and air. Numerous incidents have occurred between China and other claimants involving fishing and coast guard vessels in accidental collisions and intentional boardings.

China also seized a US underwater surveillance drone and has been conducting strategic bomber overflights in the area.

Some of this is in response to comments by President-elect Trump about China's currency manipulation and unfair trade practices and the suggestion that the US acceptance of Beijing's "One China" policy may be up for review.

Soon after his election, Trump received a congratulatory phone call from the president of Taiwan.

That might seem like a routine courtesy.

But from the Chinese perspective, the Taiwan issue is nonnegotiable. Beijing insists Taiwan is a "breakaway province" and not a separate country. US politicians usually tiptoe around this issue, but not Trump.

Not only did Trump chat with Taiwan's president, but he questioned the US "One China" policy in a tweet.

Trump's actions set off alarms in Beijing. The Communist leadership decided to send Trump a message by stealing the underwater drone operating in Philippine waters, nowhere near the disputed South China Sea waters claimed by China.

The drone was later returned, (after Trump tweeted that the Chinese should "keep it"), but the point was made. In short, geopolitical tensions between China and the US are definitely on the rise.

What about the future?

The indications for that are not good. In his confirmation hearing for secretary of state, Trump's nominee, Rex Tillerson, said that China should be denied access to the artificial islands they created in the South China Sea.

Attempting to deny China access by a blockade or other means would be tantamount to an act of war. China fired back immediately. A leading Communist Chinese publication said, "Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent China access to the islands will be foolish."

President Xi of China is on the world stage at the Davos World Economic Forum this week even as Donald Trump is about to be sworn in as 45th president of the United States. We are certain to hear more on this topic soon from both leaders.

But Trump's not even president yet. That won't happen for a few more days. Imagine how much worse this could get once Trump takes office and his policy suggestions become reality.

The prospects for peaceful resolution are not good. This volatile mix of disputed claims, natural resources and complex treaty networks has the ingredients needed to escalate into a Third World War.

All it would take to start a war is some spark such as a collision at sea or an attack based on mistaken identity or misunderstood intentions. For example, an accidental collision at night between a Philippines' naval vessel and a Chinese fishing boat resulting in Chinese casualties has the potential to start the next world war. Now, I'm not saying it necessarily would, but the potential exists.

So in addition to trade wars and currency wars, China and the US could soon find themselves in a shooting war in the South China Sea.

Of course, the implications of this for markets are nothing short of catastrophic. But the serious potential for a shooting war in the South China Sea has largely being ignored by markets.

World Wars often emerge in unexpected places or on thin pretexts. The same could happen here. In fact, a war there is probably just a matter of time.

The entire situation is a tinderbox waiting to explode.

- Source, Bullion Vault

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.