1. Are We in Another Slow-Motion Meltdown?

  2. The Currency Wars and Trade Wars Are Merging Into One Big Fiasco

    I’ve written for a while about how trade wars follow currency wars as night follows day.

    Both types of economic competition arise in a condition where there is weak growth and excessive debt. The economy does not grow fast enough to service the debt, so countries are forced into more debt. They try to increase growth by stealing from their trading partners with a currency devaluation. This can provide a short-term benefit (higher exports, reduced imports, imported inflation), but it doesn’t last, because trading partners retaliate by devaluating their own currencies.

    This can go back and forth for years with no one getting ahead and the whole world worse off because of the costs and uncertainties of continual instability in the foreign exchange markets. After some years, countries resort to trade wars by imposing tariffs and penalties on imports from other countries.

    The goal of increasing growth is the same as the currency wars, and the result is the same. It fails because of retaliation by trading partners. In the end, the global trading system is layered with tariffs and world trade contracts with no one better off. Meanwhile, the debt keeps piling up and the world moves close to a shooting war, a financial crisis or both.

    This article reveals that currency wars and trade wars do not proceed sequentially; they actually exist side by side and quickly become entangled with each other. As Trump escalated tariffs on China, the Chinese ran out of headroom to impose more tariffs on the U.S.

    The Chinese simply did not import enough from the U.S. to match Trump dollar for dollar. Instead, they devalued their currency to lower their unit labor costs to offset the higher costs of the tariffs. This could lead Trump to declare China a “currency manipulator,” with separate sanctions for that.

    The Chinese currency devaluation is a likely cause of U.S. stock market volatility today as it was in August 2015 and January 2016. Expect the trade and currency wars to continue and get worse before the world’s two largest economies find a way out.

    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. This Supposed “Store of Value” Just Lost $13 Billion in One Day

    What is money? It’s a simple question with no simple answer.

    Most Americans assume money is the U.S. dollar, which they may hold in paper form or digitally in a bank account. For now, that’s true, although every paper currency in the history of the world has failed sooner or later.

    It was not long ago that the Venezuelan bolivar was considered money in Venezuela, but today it’s worthless. It was not long ago that the Zimbabwe dollar was considered money in Zimbabwe, but now it’s also worthless.

    Critics claim that contemporary forms of money “are not backed by anything.” Actually, all forms of money are backed by the same thing, which is confidence. If you and I have confidence that a particular form of money will hold its value, and you’re willing to accept it from me with confidence that someone else will accept it from you in time, then that form qualifies as money.

    The classic definition of money is that it is a store of value, medium of exchange and unit of account. The last part is easy; almost anything can be a unit of account. But the roles of store of value and medium of exchange are more difficult. Those parts are based on confidence.

    What about cryptocurrencies? Here the prospects for succeeding as money are not good. This article reports that all cryptocurrencies, led by bitcoin, lost $13 billion in market value in about three hours one day last week. This is all part of a pattern of strong rallies and catastrophic collapses in value that happen all the time in crypto-land.

    The value of your cryptocurrency could be cut in half between the time you buy it in the morning and the time you try to spend it at night. These price moves put cryptocurrencies in the realm of fads and collectibles and deprive it of the stability needed to function as money. It’s one more reason for serious investors and savers to keep away.

    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. The Five Eyes Are Watching China

     

    Who are the “Five Eyes”? The Five Eyes are one of the most important and secretive intelligence agency collectives in the world. The Five Eyes are the intelligence services of the U.S., Canada, the U.K., Australia and New Zealand.

    Intelligence services hold their information closely and are reluctant to share it with other intelligence services for fear that this may disclose sources and methods. Most intelligence-sharing operations are tightly structured to involve minimum numbers of individuals and minimum amounts of intelligence and are used only where common interests outweigh disclosure risks. The Five Eyes are different.

    Because all members are English-speaking democracies with strong cultural ties and shared interests, the willingness to share information is much greater. (The Five Eyes were portrayed fictionally as the “Nine Eyes” in the recent James Bond film Spectre.) In fact, the activities of the Five Eyes are broadened on occasion to include Germany and Japan as a de facto “Seven Eyes.”

    This article reports that the Five Eyes have now agreed to coordinate their surveillance efforts and share information pertaining to China’s efforts to engage in financial and commercial warfare and to expand its influence in the Western Pacific and Central Asia. This report shows that China has been moved from the category of a competitor to a threat.

    This development is one more reason why Western investors should be wary of investing in China or engaging too closely with its business and political elites.

    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. Chinese Philosophy: “Kill a Chicken to Scare the Monkeys”

     

    The Chinese have a saying: “Kill a chicken to scare the monkeys.” The idea is that when you have powerful enemies, you can single out a weak player for severe public punishment. The enemies conclude that they could be the next one singled out and they decide to keep their activities at a low boil and not challenge the regime. The victim is an example to the rest.

    This article recounts the real-world case of such a sacrifice. Meng Hongwei was the vice minister of China’s Ministry of Public Security, and was also the head of Interpol, the multilateral organization through which police departments share information on international fugitives and conspiracies and coordinate manhunts and extraditions.

    Recently, Meng returned to China and immediately disappeared. His last act was to text an image of a knife to his wife in Paris as a sign that his life was in jeopardy.

    Subsequently, it was revealed that Meng is in the custody of Chinese security services on various charges. He has resigned his positions at Interpol and the Ministry of Security.

    While his fate is uncertain, his arrest was a familiar turn of events. Chinese President Xi Jinping was recently named dictator for life of China. His power is near absolute, but he has many enemies due to failing Chinese economic performance and an out-of-control trade and currency war with the U.S. In Xi’s eyes, Meng was a convenient “chicken” who could be sacrificed to scare the “monkeys” surrounding Xi.

    This type of arrest happens every day in China, but Meng’s arrest attracted more attention because he is a prominent international official, not just a Chinese official. This arbitrary arrest and persecution should be a warning to Western business leaders that China has no stable rule of law and that its currency, bond markets and investment opportunities cannot be trusted. This loss of trust may account in part for the recent collapses in Chinese stock and credit markets.

    Arrest will not solve that problem. The Chinese economy will get worse from here.

     

    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. Who’s Warning About a Financial Meltdown Now? It’s the IMF

     

    In recent issues, we’ve pointed out that warnings of a financial meltdown are no longer confined to the fringes of economics, but are coming from elite economists such as Larry Summers, Nouriel Roubini and from institutions such as the BIS and major central banks.

    Now comes the most elite warning of all. This article reports that the International Monetary Fund, the IMF, which sits at the top of the global financial pyramid, is now warning of a “financial meltdown” that could come at any time.

    Ironically, this projected meltdown is deemed a “side effect” of the extraordinary measures taken to deal with the last meltdown in 2008. At that time, central banks resorted to printing trillions of dollars of new money and holding interest rates at zero for six years.

    Since 2014, the Federal Reserve has stopped printing new money and has begun to reduce the money supply and raise interest rates. The problem is that those efforts have not gone very far.

    Interest rates are still at 2.25%, whereas they need to be about 5.0% to give the Fed enough room to cut rates to get the economy out of a recession. The money supply is still about $4 trillion, down from $4.4 trillion but still too high to launch more quantitative easing without the risk of destroying confidence in the dollar.

    In short, the Fed and other central banks are not in a position to deal with a recession or panic should one arise in the near future. Of course, central banks would not be in this position if they had not conducted a massive monetary experiment from 2008–2014 with markets and investors as the guinea pigs.

    The implication is that the Fed should have left markets alone in 2008 but for emergency liquidity. In that case, the recession would have been over sooner and we’d be in better shape today for a new recession.

    Yesterday’s paper-money solution to the crisis has set the world up for a new crisis to which there is no easy solution. Even the IMF agrees.

    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. The Bull Market in Bonds Still Has Legs

    Is the thirty-seven year bull market in U.S. Treasury notes dead?

    Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April 2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S. dollars and U.S. Treasury notes.

    To read more of this article, click here.

  8. The Bull Market in Bonds Still Has Legs

    Is the thirty-seven year bull market in U.S. Treasury notes dead?

    Yields to maturity on 10-year U.S. Treasury notes are now at their highest level since April 2011. The current yield to maturity is 3.21%, a significant rise from 1.387% which the market touched on July 7, 2016 in the immediate aftermath of Brexit and a flight to quality in U.S. dollars and U.S. Treasury notes.

    To read more of this article, click here.