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Rickards: This Time IS Different

Rickards: This Time IS Different

Rickards: This Time IS Different

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

…click on the above link to read the rest of the article…

Worst Recession in 150 Years

Worst Recession in 150 Years

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).

…click on the above link to read the rest of the article…

Markets and Black Swans

Markets and Black Swans

Markets and Black Swans

I began studying complexity theory as a consequence of my involvement with Long-Term Capital Management, LTCM, the hedge fund that collapsed in 1998 after derivatives trading strategies went catastrophically wrong.

After the collapse and subsequent rescue, I chatted with one of the LTCM partners who ran the firm about what went wrong. I was familiar with markets and trading strategies, but I was not expert in the highly technical applied mathematics that the management committee used to devise its strategies.

The partner I was chatting with was a true quant with advanced degrees in mathematics. I asked him how all of our trading strategies could have lost money at the same time, despite the fact that they had been uncorrelated in the past.

He shook his head and said, “What happened was just incredible. It was a seven-standard deviation event.

In statistics, a standard deviation is symbolized by the Greek letter sigma. Even non-statisticians would understand that a seven-sigma event sounds rare. But, I wanted to know how rare. I consulted some technical sources and discovered that for a daily occurrence, a seven-sigma event would happen less than once every billion years, or less than five times in the history of the planet Earth!

I knew that my quant partner had the math right. But it was obvious to me his model must be wrong. Extreme events had occurred in markets in 1987, 1994 and then 1998. They happened every four years or so.

Any model that tried to explain an event, as something that happened every billion years could not possibly be the right model for understanding the dynamics of something that occurred every four years.

…click on the above link to read the rest of the article…

Rickards: It’ll Get Worse it Before It Gets Better

Rickards: It’ll Get Worse it Before It Gets Better

Rickards: It’ll Get Worse it Before It Gets 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.

…click on the above link to read the rest of the article…

How Gold Is Manipulated

How Gold Is Manipulated

How Gold Is Manipulated

Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.

There is hard statistical evidence to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.

I’ve spoken to members of Congress. I’ve spoken to people in the intelligence community, in the defense community, very senior people at the IMF. I don’t believe in making strong claims without strong evidence, and the evidence is all there.

I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period.

He was dumbfounded.

He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.

He said statistically that’s impossible unless there’s manipulation occurring.

I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She has actually testified in gold manipulation cases.

She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.

How do these manipulations occur?

…click on the above link to read the rest of the article…

“1984” Has Come to China

“1984” Has Come to China

“1984” Has Come to China

You’re probably familiar with George Orwell’s classic dystopian novel Nineteen Eighty-Four; (it’s often published as 1984). It was written in 1948; the title comes from reversing the last two digits in 1948.

The novel describes a world of three global empires, Oceania, Eurasia and Eastasia, in a constant state of war.

Orwell created an original vocabulary for his book, much of which is in common, if sardonic, usage today. Terms such as Thought Police, Big Brother, doublethink, Newspeak and memory hole all come from Nineteen Eight-Four.

Orwell intended it as a warning about how certain countries might evolve in the aftermath of World War II and the beginning of the Cold War. He was certainly concerned about Stalinism, but his warnings applied to Western democracies also.

When the calendar year 1984 came and went, many breathed a sigh of relief that Orwell’s prophesy had not come true. But that sigh of relief was premature. Orwell’s nightmare society is here today in the form of Communist China…

China has most of the apparatus of the totalitarian societies described in Orwell’s book. China uses facial recognition software and ubiquitous digital surveillance to keep track of its citizens. The internet is censored and monitored. Real-life thought police will arrest you for expressing opinions opposed to the government or its policies.

Millions of Chinese have been arrested and sent to “reeducation” camps for brainwashing (the lucky ones) or involuntary organ removal without anesthetic (the unlucky ones who die in excruciating pain and are swiftly cremated as a result).

While these atrocities are not going to happen in the U.S. or what passes for the West these days, the less extreme aspects of China’s surveillance state could well be. And while you might not be arrested for expressing unpopular opinions or challenging prevailing dogmas (at least not yet), you could face other sanctions. You could even lose your job and find it nearly impossible to find another.

…click on the above link to read the rest of the article…

Contagion!

Contagion!

Contagion!

The world is confronting the effects of the “coronavirus.” It likely originated in Wuhan, China, where it jumped from animals to humans at a local food market. It has since spread to other parts of China and beyond.

So far, there are 2,886 confirmed total cases of the coronavirus. All but 61 of them are in mainland China. The death toll so far is 81.

But cases have also been found in France, the U.S., Canada, Australia, Japan, South Korea and elsewhere. That list includes the world’s three largest economies (the U.S., China and Japan).

For many, it recalls the SARS outbreak of 2003, which also originated in China. It ultimately killed 774 people and infected more than 8,000 in different parts of the world.

Not surprisingly, global markets are on edge over fears of the “coronavirus” contagion spreading. And the U.S. stock market sold off today.

The Dow lost 454 points. The S&P and Nasdaq also had awful days. But gold has a good day, up over $10 to $1,582, as investors looked for safety.

But let’s discuss the word “contagion,” 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.

…click on the above link to read the rest of the article…

Don’t Mess With the U.S. (Financially)

Don’t Mess With the U.S. (Financially)

Don’t Mess With the U.S. (Financially)

I’ve been documenting financial warfare in my articles for years, but it still doesn’t get the mainstream attention it deserves.

Because as you’ll see below, it can directly impact your wealth.

Financial warfare tools include account seizures and freezes, expulsion from global payment systems, secondary fines and penalties on banks that do business with targeted entities, embargoes, tariffs and many other impositions.

These tools are amplified by the unique role of the U.S. dollar, which is the currency behind 60% of global reserves, 80% of global payments and almost 100% of transactions in oil.

The U.S. controls the banks and payments systems that process dollar transactions. This leaves the U.S. well positioned to impose dollar-related sanctions.

Much has been made of the recent killing of Iranian terrorist mastermind Qasem Soleimani. Many say it was an act of war. But guess what, folks?

We’ve been in a full-scale war with Iran for two years now. It’s just that most people don’t realize it.

It’s not a kinetic war with troops, missiles and ships (except Iran’s use of terrorist bombs and the U.S.’ use of drones). And it’s severely damaged the Iranian economy, which has led to protests against the regime.

From the U.S. side, it’s a financial war. People need to stop thinking about financial sanctions as an extension of trade policy, for example.

This is warfare. It’s just a different form of warfare.

It’s critical to understand that financial war is not a sideshow. It may actually be the main event in today’s deeply connected and computerized world.

North Korea is also the current target of a U.S. “maximum pressure” campaign, where harsh sanctions are applied to a wide range of banks, companies and individuals.

…click on the above link to read the rest of the article…

Helicopter Money Is No Panacea

Helicopter Money Is No Panacea

Helicopter Money Is No Panacea

In recent decades, the Fed has engaged in a series of policy interventions and market manipulations that have paradoxically left it more powerful even as those interventions left a trail of crashes, collapses and calamities.

This contradiction between Fed omnipotence and Fed incompetence is coming to a head. The economy has been trapped in a prolonged period of subtrend growth. I’ve referred to it in the past as the “new depression.” And the Fed has been powerless to lift the economy out of it.

You may think of depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment. Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline. But that is not the definition of depression.

The best definition ever offered came from John Maynard Keynes in his 1936 classic, The General Theory of Employment, Interest and Money. Keynes said a depression is, “a chronic condition of subnormal activity for a considerable period without any marked tendency towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity. In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt. That is exactly what the U.S. is experiencing today.

Long-term growth is about 3%. From 1994 to 2000, the heart of the Clinton boom, growth in the U.S. economy averaged over 4% per year.

…click on the above link to read the rest of the article…

Trade Wars Just Getting Started

Trade Wars Just Getting Started

Trade Wars Just Getting Started

Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.

A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

…click on the above link to read the rest of the article…

New Multi-year Gold Rally Has Emerged

New Multi-year Gold Rally Has Emerged

New Multi-year Gold Rally Has Emerged

The dollar price of gold has been on a roller-coaster ride for the past six years. But the past six weeks have been a turbocharged version of that. Investors should expect more of the same for reasons explained below.

The six-year story is the more important for investors and also the more frustrating. Gold staged an historic bull market rally from 1999 to 2011, going from about $250 per ounce to $1,900 per ounce, a 650% gain.

Then, gold nose-dived into a bear market from 2011 to 2015, falling to $1,050 per ounce in December 2015, a 45% crash from the peak and a 51% retracement of the 1999-2011 bull market. (Renowned investor Jim Rogers once told me that no commodity goes from a base price to the stratosphere without a 50% retracement along the way. Mission accomplished!)

During that precipitous decline after 2011, gold hit a level of $1,417 per ounce in August 2013. It was the last time gold would see a $1,400 per ounce handle until last month when gold briefly hit $1,440 per ounce on an intra-day basis. At last, the six-year trading range was broken. Better yet, gold hit $1,400 on the way up, not on the way down.

The range-bound trading from 2013 to 2019 was long and tiring for long-term gold investors. Gold had rallied to $1,380 per ounce in May 2014, $1,300 per ounce in January 2015, and $1,363 per ounce in July 2016 (a post-Brexit bounce).

But, for every rally there was a trough. Gold fell to $1,087 per ounce in August 2015 and $1,050 per ounce in December 2015. The bigger picture was that gold was trading in a range. The range was approximately $1,365 per ounce at the top and $1,050 per ounce at the bottom, with lots of ups and downs in between. Yet, nothing seemed capable of breaking gold out of that range.

 …click on the above link to read the rest of the article…

The Trade War Is Back

The Trade War Is Back

The Trade War Is Back

President Trump shocked markets yesterday when he announced that a new, heavy round of tariffs on Chinese goods will take effect this Friday. Complacent markets had assumed that a trade deal would get done, that it was just a matter of sorting out the details. Now that is far from certain. Failing a last minute deal, which is certainly possible, the trade war is back. And it could get worse.

What most surprised me about the new trade war was not that it started, but that the mainstream financial media denied it was happening for so long. The media have consistently denied the impact of this trade war. Early headlines said that Trump was bluffing and would not follow through on the tariffs. He did. Later headlines said that China was just trying to save face and would not retaliate. They did.

Today the story line has been that the trade war will not have a large impact on macroeconomic growth. It will. The mainstream media have been wrong in their analysis at every stage of this trade war. And it did not see this latest salvo coming.

The bottom line is that the trade war is here, it’s highly impactful and it could get worse. The sooner investors and policymakers internalize that reality, the better off they’ll be.

For years I’ve been warning my readers that a global trade war was likely in the wake of the currency wars. This forecast seemed like a stretch to many. But it wasn’t.

I said it would simply be a replay of the sequence that prevailed from 1921–39 as the original currency war started by Weimar Germany morphed into trade wars started by the United States and finally shooting wars started by Japan in Asia and Germany in Europe.

 …click on the above link to read the rest of the article…

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

This is one of the great ironies of the debate. The Fed criticizes MMT, but it was its very own money creation after 2008 that MMT advocates point to as proof that it works.

Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations. The rich simply got richer. MMT advocates say it will simply redirect the money towards the poor, students, everyday Americans, people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

And it will go into the real economy, where it will boost productivity and finally give us significant growth.

When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

 …click on the above link to read the rest of the article…

Exposing the Myth of MMT

Exposing the Myth of MMT

Exposing the Myth of MMT

Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

What’s not to like?

If MMT were just a fringe idea with a few fringe followers, I wouldn’t waste my time or your time on it. But it’s coming your way, so it is important to understand it.

If you missed yesterday’s reckoning, go here for a refresher.

The people who are thinking about MMT, who understand it at least in some superficial way, are the people who are driving the policy debate or running for president.

Many mainstream economists and money managers have attacked MMT, including Fed Chairman Jay Powell, Larry Summers, Paul Krugman, Kenneth Rogoff, Larry Fink, Jeff Gundlach, Jamie Dimon and Ray Dalio.

But much of their criticism is unjustified (see below for more). I’m an opponent of MMT — but for different reasons. As far as I know, I’m the only analyst who’s raised the objections I list below.

Today, I’m going to show you what I believe to be the real problem with MMT.

Again, it’s easy to see why so many politicians on the Democratic side would be such big supporters of MMT.

Some or all of them have come out in support of the following programs:

Free college tuition, student loan forgiveness, Medicare for all, free child care, universal basic income (UBI) and a Green New Deal. Some support them all.

Needless to say, that’s going to cost a lot of money. Just consider the Green New Deal alone.

 …click on the above link to read the rest of the article…

2019 Headwinds Are Getting Stronger

2019 Headwinds Are Getting Stronger

In 2017, every prominent economic forecasting entity was shouting from the rooftops about “synchronized global growth.” This was a reference to the fact that not only were certain economies growing, but they were all growing at the same time.

Chinese GDP growth had come down but was still substantial at 6.85%. U.S. GDP growth was posting solid gains of 3.0% in the second quarter of 2017 and 2.8% in the third quarter. Japan and Europe were not growing as quickly as the U.S. and China, but growth was still accelerating from a low level.

Synchronization was a big part of the story. Growth was not isolated and episodic. Growth was fueling more growth in what seemed to be a sustainable way. The world economy was firing on all cylinders.

Then in 2018 the global growth story came screeching to a halt. Japanese growth went negative in the third quarter of 2018. Germany also went negative. Chinese growth continued its drop (6.5% in the third quarter) instead of stabilizing.

The U.K slowed partly because of confusion around Brexit. French growth slid amid riots triggered by a proposed carbon emissions tax. Australian home prices declined precipitously because export orders from China dried up and Chinese flight capital slowed to a trickle due to Chinese capital controls.

The U.S. economy held up fairly well in 2018, with 4.2% growth in the second quarter and 3.5% growth in the third quarter. But much of that growth was inventory accumulation from foreign suppliers in advance of proposed tariffs.

That inventory growth will likely dry up once the tariffs are either imposed or abandoned early this year. Fourth-quarter growth in the U.S. is currently projected at 3.0%, continuing the downtrend from the second quarter.

What happened?

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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