Friday, April 21, 2017

James Rickards: End Game for the Global Economy


On Mises Weekends this week, James Rickards joins Jeff to discuss The Road to Ruin, his latest book outlining what financial elites have planned for the next financial crisis. Rickards highlights a number of policy tools governments and central bankers have created for themselves, and points to their handling of recent crises in Cypress and Greece bail-in approach as patterns for the rest of the world.

- Source

Friday, April 14, 2017

James Rickards: China Disaster to Trigger Gold Run...


Is a massive collapse brewing in the Chinese economy? Perhaps, and what would this entail? Can it be staved off, or are we looking at a massive economic collapse on the horizon, that will have drastic effects on the world? James Rickards explores.

- Source

Monday, April 10, 2017

I'm Extremely Bullish on Gold Under a Trump Presidency

Gold's got a little bit of a headwind right here in the short run, because I expect the Fed to raise interest rates in March.

If they don't, they'll almost certainly raise them in June, I think March, but whether it's March or June, you're looking at a rate hike, you're looking at the market discounting further rate hikes. This is what Janet Yellen said in her recent testimony before the Congress, and so that's going to make the dollar stronger which is a little bit of a headwind for gold. But just looking passed that a little bit, we have an extraordinary situation where there are three vacancies on the Federal Reserve Board right now. Two completely empty seats, and one, Dan Tarullo, who just announced his resignation.

He announced it, but I think it'll be effective sometime in April, so count that as a third seat and then we have two others, one Janet Yellen, her term expires next January, so the President's going to have announce that replacement by December, and then beyond that, Stan Fisher in the middle of next year. You're looking at three seats immediately for appointees by the end of the year, including a new chairman, and then one just six months behind that. There are only seven seats on the Board of Governors at the Fed, so Trump is going to fill five of them at a minimum, so five of them in the next 16 months, and there's one Republican already on the board, Jay Powell, you don't hear much about Jay Powell, that's because he's outnumbered by the Democrats. Well, that's about to change.

He's going to find a lot of his buddies sitting next to him, so Yellen, to say her days are numbered as Chairman is an understatement. She's going to be outvoted, outgunned, out manned almost immediately once the President makes these announcements. So, Trump basically owns the Federal Reserve Board because of this appointment position situation, so Trump's going to get whatever he wants. The question is what does he want? Well, he kind of told us. He and Steve Mnuchin, the new Secretary of the Treasury said they want a weaker dollar. Well, okay, if you want a weaker dollar, then don't be raising rates, don't be pursuing a tight money policy.

If Trump follows through on the logic of the cheaper dollar, he's going to appoint doves to the board, the market's going to get the signal immediately, and the price of gold is going to soar because easy money, weak dollar means higher dollar price for gold. So, we've got some very short run headwinds, maybe between now and April, but for the certainly the second half, even the last three quarters of the year, I'm extremely bullish on gold.

- Source, Jim Rickards

Friday, April 7, 2017

Jim Rickards' Predictive Analytics: Brexit and U.S. Election 2016


Meraglim's Chief Global Strategist Jim Rickards demonstrates our predictive analytics on international news shows ahead of BREXIT and US presidential elections...


Tuesday, April 4, 2017

China Will Doing Everything They Can to Stay in the IMF's SDR

If your investors, your citizens perceive that the exchange rate is going to break and you're trying to maintain the exchange rate, the way you do it, you use your reserves to buy your own currency. So, if money's going out the door and my currency's trying to get weaker, and I'm trying to hold it up to a certain level, I'm trying to peg it to a certain level, how do I actually do that?

Well, the way I do it if I'm China, and I'm trying to prop up the yuan, I take dollars and I buy the yuan. Some businessman says, "I want to get my yuan out of the country," and I'm the central bank, I say, "Okay, give me your yuan. Here are the dollars," and you send the dollars out of the country. But I buy it at a fixed rate and that's how I maintain the pace. In other words, you have to use up your reserves to maintain the peg if you have an open capital account and the peg's always going to be under stress because of these interest rate and currency differentials. That's what China's doing. It cannot work, they will go broke, you always fail.

Now, having said that, China is not actually going to go broke. They understand what I just described to the listeners, they see this coming, so they're saying to themselves, "What can I do? What can China do to keep it from happening?" Well, they can close the capital account and they're starting to do that in a small way. The problem is it's kind of all or none. You can completely close the capital account and use firing squads for anyone who tries to get the money out of the country, but now you've taken yourself out of the international monetary system. They can't do that. They just got into the international monetary system, the Chinese yuan was just included in the IMF's special drawing rights, that's this world money that the IMF prints.

Having gone to great lengths to join the club, they can't now quit the club and close the capital account. So, they're working around the edges, but it will not be successful and always fails. They could raise interest rates, give up the independent monetary policy and say, "We're going to raise interest rates to 10%." Well, that could work because hey, you put the interest rates that high people will say, "Well, I'll leave my money here. I'm not worried about the devaluation anymore because I'm getting so much interest that I'll keep my money here." The problem with that is going back to what I said earlier about the bad loans, there are companies who are already going bankrupt. What's going to happen if you raise interest rates?

They'll go bankrupt faster and then that's going to cause unemployment, that's going to destabilize the people in the Communist Parry of China, so they can't do that, so what's the third thing? If you can't close the capital account, at least not completely, and if you can't raise interest rates without sinking the economy, what can you do? You can devalue the yuan. That's what they're going to do. That makes that a very easy forecast. Now, I'm not going to say it's going to happen tomorrow morning, but you look at how George Soros broke the Bank of England in 1992, this is how he did it. He just said, "I can sell Sterling longer than you can buy dollars," and he did, and eventually the Bank of England devalued the currency.

That's what China's going to have to do, but now, come over to our friend, Donald Trump, President of the United States. What is his biggest complaint? He says that China's a currency manipulator, they keep their currency too weak. Well, from 2000 to 2014, approximately, that was a valid complaint. They were keeping their currency too weak, but it's not true anymore, as I described. China's using their hard currency reserves to prop the yuan up, actually make it stronger, so it's not true that they're weakening the yuan today. They're actually propping it up, as I said, they're going broke in the process, but what's going to happen if they devalue to save the capital account, to save the reserves? What's that going to do? That's going to inflame Trump and he's going to come down with them with hammer and tongs and tariffs, and we're going to have a trade war with China.

By the way, this has happened time and time again where something starts out as a currency war and it turns into a trade war. It's what happened in the 1930's, and I can kind of see that happening again. So, we're looking at a train wreck, but in terms of what to expect, on August 10th, 2015, China devalued 3% in two days. Not 10%, not 20%, 3%. The U.S. stock market crashed immediately from August 10th to August 31st, 2015. The U.S. stock market went down over 10%. Think about where you were at the end of the summer in 2015, on vacation or taking the kids back to school or whatever, but people thought they were staring into the abyss.

Now, the Fed came out, they didn't hike rates in September '15, as expected. That was the famous liftoff which got postponed and there was a lot of happy talk, and yeah, the market turned around and I know it's at an all-time high, but for those three weeks you saw the market completely crash. Well, what do you think's going to happen if China devalues 5% or 10%? It's going to be even worse. So, there's just some big, big stressors in the system and I'm watching them all very closely. Interesting times.

- Source, Minyanville

Saturday, April 1, 2017

China is Going Broke, Regardless of Trump's Policies

The thesis on China is really independent of the election of Donald Trump and Trump's policy. Now, I think that's a big deal obviously. Trump has very firm views on China and he's got a staff of advisors who are going to pursue those, so I think there are a lot of very important things in play in the area of currency manipulation, tariffs, trade, subsidies to Chinese state owned enterprises, et cetera. We'll talk a little bit about that but there are bigger things going on in China that are true, regardless of Trump's policies, even regardless of his president. Just to cut to the chase, China is going broke and when you say that, people roll their eyes. They go, "What do you mean China's going broke? It's the second largest economy in the world and it's got the largest reserve position in the history of the world and it's got a big trade surplus. I mean, what are you talking about?"

Well, all those things are true. When I say they're going broke I don't mean that China's going to disappear or the civilization's going to collapse. What I mean is that they are running out of hard currency. They're going to get to the point where they don't have any money, or at least money that the world wants. Let me explain, Mike, exactly what I mean by that. Going back to the end of 2014, China had a reserve position of about four trillion dollars. That was the largest reserve position in the history of the world. Now, just for the listeners' benefit, what is a reserve position? It's actually very easy to understand.

Imagine you make $50,000 a year and your taxes and your expenses and your rent and all of the things you've got to pay come to $40,000 a year, and you have $10,000 left over, you put that in your savings account or you can put it in the stock market, whatever you want with it, but that simple example where you make $50,000, you spend and pay taxes up to $40,000, you've got $10,000 left over, that's your surplus. That goes in your savings account, that's your reserve. It's no different for a country. A country exports things and gets paid in hard currency and then they import things and they have to pay hard currency to get it, and they invest overseas and people invest in them, so you've got all these capital flows and trade flows going back and forth.

But if at the end of the day you have more hard currency coming in than going out, that's your savings, and your national savings account if you want to think of it that way, is your reserves. That's what we mean by reserves and China had basically a four trillion-dollar reserve at the end of 2014. Today, that number is about 2.9 trillion. In other words, they have lost 1.1 trillion dollars in their reserve position in a little over two years, not quite two years. The reserves are going out the door. Now, people say, "Well, you've got 2.9 trillion left, isn't that a lot of money?"

Well, it is a lot of money except of the 2.9 trillion, about one trillion of that is not liquid, meaning it's wealth of some kind, it represents investment, but China wanted to improve their returns actually on their investments, so they invested in hedge funds, they invested in private equity funds, they made direct investments in gold mines in Zambia and so forth, so about a trillion of that is, it's wealth, but it's not liquid. It's not money that you can use to pay your bills. So now, we're down to 1.9 trillion liquid. Well, about another trillion is going to have to be held in what's called a "precautionary reserve" to bail out the Chinese banking system.

When you look at the Chinese banking system, private estimates are that the bad debts are 25% of total assets. Banks usually run with 5, maybe 7-8% capital. Even if you said 10% capital, well, if 25% of your assets are bad, that completely wipes out your capital, so the Chinese banking system is technically insolvent, even though they don't admit that. I mean, they cook the books, they take these bad loans. Let's say I'm a bank and I have a loan to a state-owned enterprise, a steel mill or something and the guy can't pay me, can't even come close to paying me and the loan's due, I say, "Well, look, you owe me 300 million dollars. I'll tell you what. I'll give you a new loan for 400 million dollars, but I'll take the money and pay myself back the old loan plus the interest, and then I'll give the new loan to your maturity and I'll see you in two years."

So, if you did that in the U.S. banking system you'd go to jail. You're not allowed to do that. You're throwing good money after bad and you're supposed to right off a loan that is clearly not performing or where the borrower is unable to pay. But in this case, it's just extend to pretend, and so it's still on the books, in my example, 400 million dollar good loan with a two year maturity, but in fact it's a rotten loan that the guy couldn't pay in the first place, and now he just can't pay a bigger amount. He's probably going to go bankrupt and I'll have to write it off at the end of the day. So, with that as background for the Chinese banking system, people kind of shrug and say, "Well, can't China just bail it out? They've got all this money."

Well, the answer is they could, and they've done so before, and they can bail it out, but it's going to trust a trillion dollars, so you've got to put a trillion dollars to one side, for when the time comes, to bail out the banking system. Well, now you're down to 900 billion, right? Remember, we started with four trillion, 1.1 trillion's out door, 1 trillion's their liquid, 1 trillion you've got to hold to one side to bail out the banking system, well now you only have 900 
billion of liquid assets to defend your currency, to prop up the Chinese yuan. But the problem is the reserves are going out the door at a rate of, it varies month to month, 30, 40, 50 billion dollars a month. Some months more, some months over 100 billion dollars.

So, if you just say, "Well, I've got 900 billion in the kitty, it's going out the door at 50 to 100 billion a month," I'm going to be broke by the end of 2017. That's what I mean by going broke. You say, "Well, wait a second. Where did the 1.1 trillion, the first part we talked about that the reserve position went down, where did the money go? It didn't disappear." Well, no, it didn't disappear. What's happening is that everybody in China is getting their money out. They're scared to death that the yuan's going to devalue, so what are the Chinese doing? By hook or by crook, some of it's legitimate, some of it's corrupt, some of it involves bribery, some of it involves false invoicing.

As I said, by hook or by crook. I travel around the world quite a bit and you go to Sydney, Australia, Melbourne, Vancouver, Canada, London, Istanbul, Paris, New York, the story's the same everywhere. The Chinese are buying up all the high end real estate, the Chinese are buying up condos. Well, they sure are, and that's part of this capital flight, that's part of this money getting out of China. We've seen it before in Argentina in 2000, Mexico in 1994. It's happened over and over again, and it always ends in complete disaster. This is what's confronting China.


- Source, James Rickards via Minyanville

Friday, March 31, 2017

Jim Rickards: Gold and a China Trump Trade War


In this interview Jim Rickards explains that China is getting ready for a post dollar world by on going accumulation of gold.

During this 30+ minute interview, Jason starts off by asking Jim about his recent trip to mainland China and if he learned on his trip if physical gold demand in China is still strong?

Jason also asks Jim if China is worried about President Trump starting a trade war by putting a very high tariff on Chinese goods, why Keynesian predictive models with extremely poor long term track records are still given any credibility and whether Janet Yellen and the Federal Reserve will raise interest rates anymore in 2017?


Wednesday, March 29, 2017

The Fed’s Getting Ready to Raise into Weakness

I was surprised this week that the stock market reached new highs — despite the fact that expectations of a March rate hike by the Fed moved from 40% to 60% in three days. Today those expectations are about 75%.

But I’ve been calling a March rate hike since late December. I was almost alone in that view. Wall Street analysts were paying lip service to the idea that the Fed might raise rates twice before the end of the year, but said the process might begin in June, not March. Market indicators were giving only a 25% chance of a rate hike within the past couple weeks.

Is it because I’m smarter than all these other analysts?

No, I certainly don’t claim to be smarter than any of them. It’s just that I use better analytical techniques based on complexity theory, behavioral psychology and other sciences that account for the ways actual markets behave. Meanwhile, most analysts are using outdated, static models that don’t apply to the real world.

Speculation began after Janet Yellen’s testimony to House and Senate committees last month. She said a solid job market and an overall improving economy suggested the Fed would likely resume raising rates soon. But, Yellen did not say anything she hadn’t said in December.

But suddenly this week everything heated up. Now the markets agree that a rate hike is coming, thanks to an orchestrated campaign of speeches and leaks from senior Fed officials. Several Fed members have been talking about the need to tighten, including Fed Governor and uber-dove Lael Brainard. When she starts sounding like a hawk, it’s time to pay attention.

As I said, markets are now pricing in nearly a 75% chance of a March rate hike (my estimate is now 90%).

But there’s a big difference between the dynamics behind my view of a rate increase and the market’s view. In effect, markets are saying, “The Fed is hiking rates, therefore, the economy must be strong.”

What I’m saying is “The Fed is tightening into weakness (because they don’t see it), so they will stall the economy and will flip to ease by May.”

My view is the economy is fundamentally weak, the Fed is tightening into weakness. By later this year, the Fed will have to flip-flop to ease (via forward guidance) for the ninth time since 2013. Stocks will fall, while bonds and precious metals will rally.

Both theses start with a rate hike, but they rest on totally different assumptions and analyses.

Under my scenario, the stock market is headed for a brick wall in April or May, when weak first-quarter data roll in. But for now, it’s still up, up and away.

My take is that the Fed is desperate to raise rates before the next recession (so they can cut them again), and will take every opportunity to do so. I believe the Fed will raise rates 0.25% every other meeting (March, June, September and December) until 2019 unless one of three events happens — a stock market crash, job losses, or deflation.

Right now the stock market is booming, job creation is strong, and inflation is emerging. So, none of the speed bumps are in place. The coast is clear for the March rate hike.

There is a great deal of happy talk surrounding the market right now. But with so much bullishness around, it’s time to take a close look at the bear case for stocks. It’s actually straightforward.

Growth is being financed with debt, which has now reached epic proportions. The debt bubble can be seen at the personal, corporate and sovereign level. Sure, a lot of money has been printed since 2007, but debt has expanded much faster.

In a liquidity crisis, investors who think they have “money” (in the form of stocks, bonds, real estate, etc.) suddenly realize that those investments are not money at all — they’re just assets.

When investors all sell their assets at once to get their money back, markets crash and the panic feeds on itself. What would it take to set off this kind of panic? In a super-highly leveraged system, the answer is: “Not much.”

There’s a long list of potential catalysts, including delays and disappointments with Trump’s economic plans, aggressive rate hikes by the Fed, a stronger dollar, and economic turmoil due to China’s vanishing reserves or the new Greek bailout.

It could also be anything from a high-profile bankruptcy, a failed deal, a bad headline, a natural disaster, and so on.

This issue is not the catalyst; the issue is the leverage and instability of the system. The bulls are ignoring the risks.

My view is we’re well into bubble territory, and stocks will reverse sooner than later. Stocks are a bubble that will certainly crash. But you must realize that the timing is uncertain. Recall that Greenspan gave his “irrational exuberance” speech in 1996, but stocks did not crash until 2000. That’s a long time to be on the sidelines.

Conversely, bonds are not in a bubble, despite the large number of analysts who make that claim. These analysts are looking at nominal rates. You need to look at real rates, which are still fairly high.

Nominal and real yields on the 10-year Treasury note were much higher at the end of 2013 than they are today. Wall Street yelled “bubble” then and shorted the bond market when the 10-year note yield-to-maturity was 3% in 2013.

Those who shorted Treasury notes got crushed when yields fell to 1.4% by early 2016 (they have reversed since). I expect another bond market rally (bonds up, rates down) to play out between now and this summer.

One source of investor confusion is that the White House and Congress are moving toward fiscal stimulus, while the Fed is moving toward monetary tightening. That’s a highly unstable dynamic. Markets could tip either way.

Investors have to be prepared for countertrends and reversals while waiting for this picture to unfold. The Trump administration is perfectly capable of shouting “strong dollar” on Monday and “weak dollar” on Tuesday. That’s one reason I recommend a cash allocation — it allows you to be nimble.

Something else to remember going forward is that Trump will have a minimum of three, and perhaps as many as four or five, chances to appoint members of the Fed board of governors, including a new chairman in the next 10 months. I expect these new governors will be dovish based on Trump’s publicly expressed preference for a weaker dollar.

The Senate will definitely confirm Trump’s choices. So get ready for an extreme makeover at the Fed, with the likelihood of easy money, more inflation, higher gold prices and a weaker dollar right around the corner.

That combination of Fed ease (due to slowing) and Fed doves flying into the boardroom on Constitution Avenue in Washington will give gold prices in particular a major lift in the second half of the year.

- Source, Jim Rickards via the Daily Reckoning

Sunday, March 26, 2017

Jim Rickards - Markets Have Finally Woken Up

I’ve been warning my readers since last December that the Fed was on track to raise interest rates on March 15.

I was almost alone in that view. Market indicators were giving only a 25% chance of a rate hike. Wall Street analysts were paying lip service to the idea that the Fed might raise rates twice before the end of the year but said the process might begin in June, not March.

Wall Street expectations and market indicators did not catch up with Fed reality until last week, when expectations moved from 30% to 90% in four trading days before converging on 100%.

So expectations of a Fed rate hike March 15 are now near 100% based on surveys of economists and fed funds futures contracts.

Markets are looking at things like business cycle indicators, but that’s not what the Fed is watching these days. The Fed is desperate to raise rates before the next recession (so they can cut them again) and will take every opportunity to do so.

But as I’ve said before, the Fed is getting ready to raise into weakness. It may soon have to reverse course.

My view is that the Fed will raise rates 0.25% every other meeting (March, June, September and December) until 2019 unless one of three events happens — a stock market crash, job losses or deflation.

But right now the stock market is booming, job creation is strong and inflation is emerging. So none of the usual speed bumps is in place. The coast is clear for a rate hike this Wednesday.

But growth is being financed with debt, which has now reached epic proportions. A lot of money has been printed since 2007, but debt has expanded much faster. The debt bubble can be seen at the personal, corporate and sovereign levels.

If the debt bubble bursts, things can get very messy.

In a liquidity crisis, investors who think they have “money” (in the form of stocks, bonds, real estate, etc.) suddenly realize that those investments are not money at all — they’re just assets.

When investors all sell their assets at once to get their money back, markets crash and the panic feeds on itself.

What would it take to set off this kind of panic?

In a super-highly leveraged system, the answer is: Not much. It could be anything: a high-profile bankruptcy, a failed deal, a bad headline, a geopolitical crisis, a natural disaster and so on.

This issue is not the catalyst; the issue is the leverage and instability of the system.

This looks like a good time to get out of stocks, increase cash and buy some gold if you are not fully allocated. Gold faces some head winds in the short run, but today’s prices offer an excellent entry point. Gold is a great safe-haven asset.


Thursday, March 23, 2017

The Next Signal to Watch

Trump advisors believe they can avoid a debt crisis through higher than average growth. This is mathematically possible but extremely unlikely.

A debt-to-GDP ratio is the product of two parts — a numerator consisting of nominal debt and a denominator consisting of nominal GDP. In this issue, we have focused on the numerator in the form of massively expanding government debt. Yet, mathematically it is true that if the denominator grows faster than the numerator, the debt ratio will decline.

The Trump team hopes for nominal deficits of about 3% of gross domestic product (GDP) and nominal GDP growth of about 6% consisting of 4% real growth and 2% inflation. If that happens, the debt-to-GDP ratio will decline and a crisis might be averted.

This outcome is extremely unlikely. As shown in the chart below, deficits are already over 3% of GDP and are projected by CBO to go higher. We are past the demographic sweet spot that Obama used to his budget advantage in 2012–2016.



The Congressional Budget Office, CBO, estimates that inflation and real GDP will each grow at about 2% per year in the coming ten years. This means that nominal GDP, which is the sum of real GDP plus inflation, will grow at about 4% per year. Since debt is incurred and paid in nominal terms, nominal GDP growth is the critical measure of the sustainability of U.S. debt.
The Fiscal Budget

The Congressional Budget Office, CBO, estimates that inflation and real GDP will each grow at about 2% per year in the coming ten years. This means that nominal GDP, which is the sum of real GDP plus inflation, will grow at about 4% per year. Since debt is incurred and paid in nominal terms, nominal GDP growth is the critical measure of the sustainability of U.S. debt.

From now on, retiring Baby Boomers will make demands on social security, Medicare, Medicaid, Disability payments, Veterans benefits and other programs that will drive deficits higher.

The CBO projections show that deficits will increase to 5% of GDP in the years ahead, substantially higher than the hoped for 3% in the Trump team formula.

As for growth, we are now in the eighth year of an expansion — quite long by historical standards. This does not mean a recession occurs tomorrow, but no one should be surprised if it does.

Official CBO projections, shown in the chart below, expect approximately 2% growth and 2% inflation for the next ten years. That would yield 4% nominal growth, not enough to match the deficit projections. The debt-to-GDP ratio is projected to soar even under these rosy scenarios.


There are numerous problems with the CBO projections. They make no allowance for a recession in the next ten years. That is highly unrealistic considering that the current expansion is already one of the longest in history. A recession will demolish the growth projections and blow-up the deficits at the same time.

CBO also makes no allowance for substantially higher interest rates. With $20 trillion in debt, most of it short-term, a 2% increase in interest rates would quickly add $400 billion per year to the deficit in the form of increased interest expense in addition to any currently project spending 

The Impact Signal of Debt on Growth

Finally, CBO fails to consider the ground-breaking research of Kenneth Rogoff and Carmen Reinhart on the impact of debt on growth. We have discussed the 60% debt ratio danger threshold in this article. But there is an even more dangerous threshold of 90% debt-to-GDP revealed in the Rogoff-Reinhart research. At that 90% level, debt itself causes reduced confidence in growth prospects — partly due to fear of higher taxes or inflation — which results in a material decline in growth relative to long-term trends.

These headwinds practically insure that the Trump growth projections are wholly unrealistic. With higher than expected deficits, and lower than projected real growth, there is one and only one way for the Trump administration to reduce the debt ratio — inflation.

If inflation is allowed to rip to 4% and Fed financial repression can keep a lid on interest rates at around 2.5%, then it is possible to achieve 6% nominal growth with 5% deficits, which would be just enough to keep the debt ratio under control and even reduce it slightly.

Can Trump pull-off this finesse? Are his advisors even analyzing the problem along these lines?

We will know soon. As we’ll discuss in upcoming issues, Trump will have the chance to make an unprecedented five appointments to the Fed board of governors in the next 16 months, including a new chair and two vice chairs.

If he appoints doves, that will be the signal that inflation in the form of helicopter money and financial repression is on the way. That will also be the signal to move out of cash and increase our allocation to gold beyond the current 10% level.

If Trump appoints hawks to the board, that will be a signal that his team does not understand the problem and is relying on overoptimistic growth assumptions. In that case, we could expect a recession, possible debt crisis and strong deflation. That is a signal to keep our 10% gold allocation as a safe haven, but also buy Treasury notes in expectation of lower nominal rates.

We are watching for a signal on Trump’s nominations to the Fed board. The first three should be announced soon. Once the names and their views are known, the die will be cast.


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