1. The “Malaysia Plan” Is Coming Together Even Faster Than I Predicted

    Several years ago, I had the honor of joining Mahathir Mohamad and a small group to celebrate his 90th birthday at a restaurant in the Malaysian capital of Kuala Lumpur. Mahathir was the longest-serving prime minister in Malaysian history, having been in office 22 years, from 1981–2003.

    When we met in 2015, he was retired. Mahathir soon came out of retirement to become prime minister again in 2018, partly as a “cleanup” reaction to the extreme corruption of his successor, Najib Razak, who is currently awaiting trial on criminal charges.

    My reason for meeting with Mahathir was his keen interest in the international monetary system and his search for some alternative to the current system, which is dominated by the U.S. dollar. In the course of our correspondence, I sent the prime minister an advance copy of my new book, Aftermath, which includes a section called “The Malaysia Plan.”

    That section describes a gold standard for countries like Malaysia that do not have much physical gold. It also describes a path for multiple countries to join the Malaysia Plan to reconstitute something like the global gold standard that existed from 1870–1914 without the benefit of the IMF or any central institution.

    I guess he read it! According to this article, Mahathir is now proposing a gold standard to be used for settling balance of payments among Asian trading partners without the use of U.S. dollars.

    We’ll see how far this idea gets. For now, it’s just nice as an author to see your ideas go from the pages of a book to a potential economic reality.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  2. Once You Move Sourcing out of China, It Doesn’t Come Back

    A lot of the criticism of Trump’s trade war tactics with China is based on a misunderstanding of the dynamics of global trade and global supply chains. When the U.S. imports goods from China and then imposes a tariff, the analysts simply multiply the quantity of goods by the size of the tariff and proclaim on happy-talk TV that the “cost” of the tariffs to U.S. consumers will be the result of that multiplication.

    This method is badly flawed in several ways. The first problem is that the tariffs may not be passed along to consumers, especially in a world of low inflation. Tariff costs may be absorbed by the importers (resulting in lower margins) or pushed back to the suppliers (resulting in reduced profits) and not passed to consumers. The actual result is likely to be some combination of all three effects, but the impact on consumers is still far less than the talking heads estimate.

    The second and more serious problem for Chinese exports, as explained in this article, is that U.S. importers will change the source of their imports from China to another jurisdiction that does not suffer from high U.S. tariffs.

    The article describes how Costco, which faces stiff competition from Amazon and Walmart, is already taking steps in this direction. Vietnam is a likely source for manufactured goods currently produced by China. The problem with this kind of resourcing is that once the U.S. importers abandon China, they will not come back.

    This is one of the strongest levers the U.S. holds in the U.S.-China trade war and one reason why China is desperately seeking a solution that will end the war quickly.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  3. Will China and Russia Revive the Ancient Dream of Arctic Sea Travel?

    Much of the early exploration by Europeans of New England and the Canadian Maritime provinces was not based on a desire to settle and farm but was driven by a search for the “Northwest Passage.” This was the name given to a hypothetical sea route from the Atlantic to the Pacific somewhere between North America and the North Pole that would allow direct sea transportation from Europe and Asia without having to navigate the Cape of Good Hope or Cape Horn around Africa and South America, respectively.

    Early voyages up the St. Lawrence, Hudson and Delaware rivers were driven as much by the hope that explorers would find a Northwest Passage as they were by indigenous exploration. The Northwest Passage was never found. It existed on a map north of Canada, but that route is frozen most of the year and extremely dangerous because of ice and bad weather, even when it is not entirely frozen.

    But that was then. Today, with some help from warmer temperatures, improved ice breakers and GPS navigation, vessels can now routinely make the passage. As reported in this article, China and Russia are now prepared to pick up where the 17th-century explorers left off.

    Russia has its own Arctic Passage between its Northern territory and the Arctic Circle similar to Canada’s. China has been building a new maritime “Silk Road” around South Asia, Africa and the Middle East that would facilitate Chinese trade with countries in those regions (and, not coincidentally, enhance the operational flexibility of an expanding Chinese navy).

    Russia has made strides in opening up its Arctic sailing routes through the East Siberian, Kara and Barents seas with connections to Moscow, St. Petersburg, the Baltic Sea and the ports of Europe. The combination of an Arctic passage and China’s Maritime Silk Road would encircle the entire Eurasian continent by sea. That opens up potential for wealth creation (and military dominance) that early explorers could only dream.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  4. U.S. Military Braces for a Cutoff of Rare Earths by China

     

    In recent issues of Five Links, I’ve expressed my estimate that China will not cut off exports of rare earths to the U.S. as a way of fighting the trade wars. (Rare earths are metallic elements than can be used in pure form or combined to produce critical components for electronics and automobiles. They are not “rare” but they are found in small concentrations, which makes them expensive and difficult to produce in large quantities. China is the source of almost all rare earths used in the world today.)

    The reasons China will not resort to an export ban are that substitute rare earth production from other countries could be brought online easily and retaliation by the U.S. would be swift and fierce. Once China loses the rare earth export market, they will not get it back and they know it.

    That said, China is repeating the threat and one cannot rule out an export ban. According to this article, the Pentagon is already taking steps to line up alternate sources of supply. The U.S. military may even place some orders for rare earth exports from countries other than China just to test the alternatives and blunt the threat from China in advance.

    It may be difficult to know if China will or will not actually cut off rare earth exports. It is not difficult to know where this is all headed.

    The trade wars are rapidly escalating in unexpected ways. Let’s hope the struggle is confined to trade and does not spill over into finance and capital markets, or even into a shooting war. History does not offer much comfort on this front.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

     

  5. China Issues a Trade War Threat Using War Language Not Seen Since 1979

    The phrase “Don’t say we didn’t warn you” may be a cliché in English but the Chinese equivalent is anything but.

    The Chinese used this phrase in 1962 just before they went to war with India. They used it again in 1979 just before they went to war with Vietnam. And they just used it for only the third time in over 50 years against the United States, according to this article.

    The context, of course, was the U.S.-China trade war. Events are moving so quickly in this war that it’s hard to keep up with the news.

    The threat was used in the context of an ominous warning about China’s ability to retaliate against U.S. tariffs on Chinese exports that have been imposed by the Trump administration. China cannot match the U.S. tariff for tariff for the simple reason that the U.S. imports far more from China than they import from the U.S., so they simply run out of room to put on tariffs.

    China is already there. Trump can still tariff another $200 billion of Chinese goods (and has threatened to do so) and China has nothing left to tariff. But China has many non-tariff responses including dumping Treasury notes, cutting off exports of rare earths, restricting U.S. foreign direct investment in China and diverting import orders to competing suppliers in Europe and South America, among other tactics.

    The real meaning of the threat is that the trade war has far to run and will end up affecting more than just trade. Let’s hope the threat doesn’t extend all the way to a shooting war as it did in the cases of Vietnam and India.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  6. It’s Early in the Game, but Models Are Already Predicting a Trump Victory

    I’m not surprised that Trump supporters believe he’s going to win reelection in 2020. What’s amazing is the number of Democrats and Trump opponents who think the same thing.

    This article is a survey of recent model outputs that show Trump is a clear favorite in the 2020 presidential election. Models are not polls. Instead, they take various data points such as economic growth, unemployment, real wages and whether the nation is at war. These inputs are then put into models built on past elections and correlations are determined based on whether past presidents won or lost.

    The models discussed here were produced by Steven Rattner, an Obama adviser, and Mark Zandi, another Obama supporter. No one can accuse them of pro-Trump bias. They are also seasoned Wall Street hands who focus on the most reliable results regardless of whether it fits their political preference or not.

    My own model currently has Trump at a 65% probability of winning, although that probability has room to grow as we move closer to Election Day without a recession. Election Day is still far away, but the early signs definitely favor Trump.

    That result also favors investors looking for continued economic expansion and continuation of one of the longest bull markets in history.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  7. How Do Globalists View the Trade War?

    The U.S. and Chinese governments have made their views on the ongoing trade wars clear. The U.S. insists that China is breaking all the rules and China insists that they will not allow the U.S. to dictate the operation of their economy.

    What about the global elites? They are watching from the sidelines since the nationalists are in charge in both countries. But what is their view?

    This article is written by two of the leading global elites. Their analysis is entirely conventional and mostly wrong. They argue that U.S. consumers will suffer from higher tariffs since tariffs act like taxes on consumers of imported goods. They also argue that slower growth from reciprocal tariffs may result in a U.S. recession.

    This simple analysis ignores how dynamic global markets are today. Many U.S. importers lack the ability to pass cost increases along to consumers, so the costs of tariffs are actually borne by importers in the form of reduced margins or have to be absorbed by the Chinese exporters.

    Supply chains are flexible. Goods not produced in China can be produced in Vietnam or Indonesia, resulting in lower tariffs and permanent loss of exports for China. By moving supply chain origins and not passing tariff costs to consumers, the actual impact of the trade war on the U.S. economy could be quite small and not nearly enough to induce a recession.

    At the same time, gains from new U.S. manufacturing needed to replace some Chinese exports could actually boost the U.S. economy. The complaints in this article are the same misguided economic nostrums the elites have been peddling for decades.

    Trump is the one who is following in the footsteps of Alexander Hamilton and Henry Clay when it comes to protecting U.S. jobs and U.S. industry from overbearing foreign competition.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  8. If There Is Impeachment, the Senate Trial Will Be Fast and Trump Will Win

    The odds of an impeachment of President Trump by the House of Representatives fluctuate daily. There is a large group of House Democrats who firmly want impeachment and are ready to begin the hearings tomorrow. There is another large group of moderate Democrats, many newly elected, who want to keep away from impeachment and instead focus on legislation involving matters voters care about such as health care, immigration and infrastructure.

    House Speaker Nancy Pelosi is trying to balance these competing factions by favoring investigations but discouraging actual impeachment proceedings. She knows that’s a political loser for the Democrats. But by playing with fire, Pelosi may get burned with an actual impeachment process whether she likes it or not.

    One thing that’s not in doubt is the ultimate outcome of a trial in the Senate. Impeachment is just an accusation; it does not remove the president from office. Removal requires a conviction in the Senate.

    As this article explains, the Senate is firmly under Republican control. If impeachment occurs, you can expect the trial in the Senate to be relatively brief and lead to Trump’s acquittal.

    This is exactly what happened to Bill Clinton in 1998–1999. After his Senate trial was over, Clinton was more popular than ever. The same thing will happen with Trump.

    A House impeachment followed by a Senate acquittal will more or less solidify Trump’s chances of winning reelection in 2020. It should be an interesting next six months in Congress.

    This will definitely add to volatility and uncertainty in markets. Investors should stay focused on the conclusion of this article: Trump will prevail.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  9. The China-U.S. Trade War Is Not Over. In Fact, It Has Only Just Begun

    We’ve heard a lot about the China-U.S. trade war from the U.S. side. President Trump and Vice President Pence have strongly criticized the Chinese for subsidized Chinese exports, theft of intellectual property, requiring U.S. companies in China to hand over trade secrets, currency manipulation and other unfair trade practices.

    In his landmark speech on Oct. 4, 2018, Vice President Pence laid out these and many other violations of international agreements by China. Pence’s speech is generally understood as not being limited to the trade war, but being a declaration of a new cold war if China does not improve its behavior.

    After these well-publicized critiques, what is China saying in its own defense? The news here is not encouraging.

    As described in this article, China is showing no signs of a change in posture. In fact, China is digging in for a long struggle in which it rejects U.S. claims as an infringement of China’s “core interests.”

    China has pivoted from talk about trade to discussion of territorial issues such as Taiwan and the South China Sea. China also rejects U.S. efforts to alter the behavior of China’s state-owned enterprises, SOEs, that compete in the private sector but are government owned, controlled and subsidized.

    Both the U.S. and China are escalating their countervailing claims and rhetoric. The end of the trade war is not in sight. In fact, it is rapidly turning into a deeper competition that will slow global growth for years to come.

    Investors are turning to cash, Treasury notes and gold as safe havens while these two global giants fight it out. That fight will continue and get worse.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.

  10. Who’s for Real (and Who’s Not) in the Democratic 2020 Horse Race?

    It’s far too early to make hard-and-fast predictions on who will be the Democratic nominee for president in 2020. My estimate today is that Biden will fade, Sanders will hang in there (even though he’s not liked by the Democratic establishment) and Warren may gain in the homestretch.

    And as I mentioned in last week’s Five Links, let’s not count out Hillary Clinton. She has been staging campaign-style events and may just be waiting for a deadlocked convention or a frontrunner stumble before being turned to by the party as a white knight candidate.

    For a consensus view, this article lists the top 10 Democratic candidates as of now. (The candidates ranked between 11–23 are barely showing 1% in the polls today; some are at 0%, so it’s safe to ignore them for now).

    As expected, Joe Biden is ranked No. 1 with a strong lead in the polls. But that’s mostly based on name recognition. He’s likely to fade once voters get a closer look at him in the debates and once the multimillion-dollar crony deals with China and Ukraine involving his son are fully vetted.

    Sanders and Warren are Nos. 2 and 3 respectively. They may do well in the New Hampshire primary since both are from neighboring states, Sanders from Vermont and Warren from Massachusetts. Kamala Harris and Pete Buttigieg round out the top five although both are in single digits in national polls.

    The rest of the top 10 are in the low single digits as some such as Beto O’Rourke are fading fast. All of these candidates will have a difficult time beating Trump, but for now they’re off and running for the chance to go up against him.

    Keep an eye on Warren; she’s a dark horse who’s showing real progress. She may also be the worst choice for investors because of her high-tax, pro-regulation policies.

    Institutional investors can schedule a proof of concept with the world’s first predictive data analytics firm combining human and artificial intelligence with complexity science. Check out Jim Rickard’s company at Meraglim Holdings to learn more.