Author Archives: James Rickards
As the story above on the “Impossible Trinity” notes, an open capital account is an invitation to capital flight when you have unrealistic exchange rates or interest rates. This article explains that that’s exactly what has been happening in China.
The reserve position in China has crashed from over $4 trillion to about $3 trillion in the past eighteen months. The capital outflows are continuing at a rapid rate. Assuming up to $1 trillion of China’s reserves are not highly liquid (such as shares in Zimbabwe mining companies) and another $1 trillion is needed to bail-out China’s banks, then China may be down to just $1 trillion available to defend its currency.
At current rates of capital outflows, China will be broke within one year . The solution is either a maxi-devaluation of the currency or to slap on currency controls. For now, China is putting on capital controls and reducing the ability of Chinese firms and individuals to take money out of the country. But, such controls are typically full of holes.
The end result will still be a devaluation of the Chinese yuan against the U.S. dollar. This will incite calls for anti-manipulating measures including tariffs from the new Trump administration. This is how currency wars turn into trade wars and ultimately damage world growth and make debt crises more likely.
-Jim Rickards, Chief Global Strategist, Meraglim™
Bull markets in stocks seem unstoppable right up until the moment they stop. Then comes a rapid crash and burn phase. Is there ever any warning that a collapse is about to happen? Of course there is.
Analysts warn about it all the time and provide mountains of data and historical evidence to back up their analysis. The problem is that everyone ignores them! You can talk about the dangers represented by CAPE ratios, margin levels, computerized trading, persistent low volatility, and complacency all you want, but nothing seems to slow down this bull market.
Yet, there is one thing that can stop a bull market in its tracks, and that’s corporate earnings. The simplest form of stock market valuation is to project earnings, apply a multiple, and voilà, you have a valuation. Multiples are already near record highs, so there’s not much room for expansion there. The only variable left is projected earnings and that’s where Wall Street analysts are having a field day ramping up stock prices.
Earnings did grow significantly in 2017 on a year-over-year basis, but that’s mainly because earnings were weak in 2016 so the year-over-year growth was relatively easy. Now comes the hard part. How do you expand earnings again in 2018 when 2017 was such a strong year?
Wall Street just uses a simple extrapolation and says next year will be like this year only better! But, this article shows there is every reason to doubt that extrapolation. Earnings are likely to fall short of expectations, which can lead to a correction. Once that happens, multiples can shrink as well. Soon you’re in a full-scale bear market with stock prices down 20% or more.
That’s without even considering a war with North Korea and all of the dangers others have already mentioned. This may be your last clear chance to lighten up on listed equity exposure before the bubble bursts.
We’ve written about the war on cash many times, including the article above about the cash shortage in Puerto Rico. This is not a U.S. or even western phenomenon. It’s happening all over the world including socialist India. This article reports that the world leader in eliminating cash is Communist China.
Why are Communists the leaders in getting rid of cash? The reason is that Communists despise privacy and value control. By forcing all citizen transactions into a small number of digital payments systems, Chinese Communists can keep an eye on their own citizens. They can also cut you off from the system by freezing your bank accounts or blocking your payments if you do not adhere strictly to Communist philosophy or if you cause trouble by expressing dissent or religious views.
There are many forms of violent and non-violent coercion. Control of money is one of the most powerful. Cutting off your money flows is like cutting off oxygen to a patient in intensive care. The result is predictable and fatal.
Whenever you hear about plans to eliminate cash in the U.S., just think about the Chinese example. The reason to eliminate cash is not convenience or efficiency as the proponents claim. The reason is control.
In the past six months, the U.S. stock market has learned how to normalize missile launches by North Korea. Last summer, a new rocket test might cause the stock market to drop about 1% on fears of a war between the U.S. and North Korea. But the market would quickly recover as diplomats hit the airways to reassure investors that everything was under control (it’s not).
Then another missile would fly, the market would go down, it would bounce back, and all was well. Eventually the stock market learned to normalize missile launches. It’s as if someone said, “Hey, if the markets are bouncing back every time, what’s the point of going down in the first place?”
No doubt the computer algorithms were adjusted accordingly. But, this is a little like a chain smoker rationalizing that somehow nicotine won’t kill him because he hasn’t died yet. That’s false, and the false belief will get you in the end.
Still, we may be reaching the point where the market starts to take this seriously. This article reports that North Korea is preparing to launch a new missile, possibly before you read this article. It’s likely to be an improved version of the Hwasong-14 (US code name “KN-20”). It’s an ICBM that can hit the continental U.S. from mobile launchers that are difficult to track and destroy.
This launch will either start the countdown to war as the U.S. prepares a preemptive strike. Or it will signal a capitulation by the U.S. if we decide that it’s too late and too dangerous to attack. In that case, we can start a countdown to another war — the invasion of South Korea by North Korea.
The market will wake up eventually and reprice for these risks. You don’t have to wait for the market’s wake-up call. This looks like a good opportunity to lighten up on listed equities and reallocate to cash, Treasury notes, gold, silver and other safe haven assets.
We have often made the point that the death of a reserve currency such as the dollar does not happen overnight. It happens little by little over years or decades in ways that most people don’t notice until it’s too late. It’s the death by a thousand cuts.
A good case in point is the replacement of pounds sterling by the U.S. dollar. Today the dollar is 60% of global reserves and sterling is about 3%. But, that wasn’t always so.
We don’t have exact figures, but in 1913 sterling was probably over 50% of global currency reserves (excluding gold at a time when the world was still on the gold standard). The process by which the dollar replaced sterling played out in stages between 1914 (the start of World War I) and 1944 (the Bretton Woods agreement) and reached a crescendo in 1967 (sterling’s shock devaluation against the dollar). Something similar is happening to the dollar today.
Russia and China have moved back to a shadow gold standard; both countries have more than tripled their gold reserves in the past ten years. Meanwhile, Russia and Venezuela (two of the ten largest oil exporters) have agreed to accept yuan in payment for oil from China (the world’s largest oil importer). This marks the beginning of the end of the petrodollar system, which has propped up dollar demand for over 40 years.
This article reports on one more development in this trend. Russia’s move to divert its oil exports from Europe to China means that the replacement of dollar payments with yuan is set to accelerate. Of course, even a long, slow process can accelerate rapidly at the very end. That’s when the final collapse emerges seemingly from nowhere.
The time to prepare for the demise of the dollar is now. With war on the horizon, events surrounding the dollar are just about to get interesting.
You’ve seen a wave of articles over the past year about the death of cash. The news is everywhere. Famous Harvard Professor Ken Rogoff even wrote a book called The Curse of Cash.
Australia is considering elimination of their $100 bill. The European Central Bank has already eliminated the €500 note. The Indian government unilaterally declared the two most popular forms of cash in India to be illegal overnight and without warning. The signs are everywhere.
But, guess what? Cash just made a big comeback in one place, and the reasons are revealing and a warning to us all. Hurricane Maria knocked out power in 90% of Puerto Rico. Even now, the power is only partially restored and about 65% of the island is still without power.
When the power goes out, so does digital money! Credit cards don’t work. Debit cards don’t work. ATMs don’t work. You can’t wire money in or out. Banks shut down. And don’t even think about bitcoin — that’s 100% dependent on electricity and the internet. A few ATMs worked for a while, but lines formed and they quickly ran out of cash and could not be replenished.
People with cash started hoarding it for fear they could not get more. One great irony was that despite the shortage of goods, the few stores that had batteries, water and supplies couldn’t sell them because no one had any money. In short, money disappeared from Puerto Rico almost overnight.
What happened next? The answer is revealing. As this article shows, the Fed chartered airplanes and began flying stocks of cash — physical notes, $100s and $20s — to the beleaguered island. The notes were distributed to banks that began dispersing them through tellers and ATMs. Even the mighty Fed, which wants you to keep cash in digital form in their banks, had to resort to paper money in a pinch.
The lesson is that you should have a stash of cash next to your batteries, flashlights and water in case of emergency. The digital payments system is more vulnerable than most realize.