1. Global Hot Spots Remain Hot. More Trouble in the South China Sea

    One of the questions I am asked most frequently in my global travels is what will be the cause of the next financial crisis. This question is asked by those who understand that this crisis is coming but want to pin down the date or a specific turn of events that will help them know when to react.

    My answer is always the same: We can be certain the crisis is coming and can estimate its magnitude, but no one knows exactly when it will happen or what the specific catalyst will be. The second part of my answer is to prepare for the crisis now.

    When it happens, it could unfold very quickly. There may not be time or opportunity in the middle of the crisis to take defensive measures. The time to prepare by increasing allocations to cash and gold is now.

    With that said, it is useful to keep a list of the 10 most likely flash points and to monitor events in each one as a way to improve one’s chances of seeing a crisis at the early stages. This article serves as a reminder that one of the most dangerous hot spots in the world today is the South China Sea.

    There are six countries with recognized claims to parts of the South China Sea. Yet China itself claims the entire sea except for small coastal strips and claims all of the oil, natural gas and fish that can be taken from the sea.

    China has ignored international tribunal rulings against it. The U.S. is backing up the other national claims including those of the Philippines, which is a treaty ally of the U.S. China has built small reefs into large artificial islands with airstrips and sea bases to support its claims. The U.S. has increased naval vessels in the area to enforce rights of passage and the equitable sharing of resources.

    Both sides are escalating and the risk of a shooting war or even an accident at sea is increasing. The South China Sea is mostly out of the headlines at the moment, but it bears watching as a possible catalyst for the next international crisis with global financial implications.

    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. One More Reason Why the Trade Wars Will Last Longer Than Most Expect

    When the trade wars erupted in early 2018 (after threats by Trump and others as early as 2015), I said that the trade wars would be long-lasting and difficult to resolve and would have significant negative economic impacts. Wall Street took the opposite view and estimated that the trade war threats were mostly for show, the impact would be minimal and that Trump and China’s President Xi Jinping would resolve their differences quickly.

    As usual, Wall Street was wrong. This article describes a speech delivered by Peter Navarro, who is Trump’s top trade adviser.

    Navarro makes it clear the trade wars will not be resolved soon. He also tells Wall Street to “get out” of the policy process. Navarro warns that prominent Americans such as Hank Paulson, former secretary of the Treasury, and Blackstone chief Stephen Schwarzman may be acting as “unregistered foreign agents” as a result of their lobbying activities on behalf of China.

    This could subject these principals to criminal prosecution. Investors should expect lower earnings per share from Apple, Sony and entertainment companies dependent on the Chinese market or Chinese manufacturing to make their profits. Companies such as Caterpillar are also caught in the crossfire.

    Get ready for a long and costly trade war. It has already started and won’t be over soon.

    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. World’s Top Economist Says China Recession Coming and It Will Spread

    We’ve written for months about how warnings of economic collapse are no longer confined to the fringes of economic analysis but are now coming from major financial institutions and prominent economists, academics and wealth managers. The latest warning comes from one of the world’s most famous economists, Ken Rogoff, a professor of economics at Harvard University and co-author with Carmen Reinhart of the classic book on business cycles and debt crises, This Time Is Different (2009).

    In this article, Rogoff writes that China is nearing the point of a “growth recession.” A growth recession does not involve declining GDP as in a normal recession, but it does involve a decline in growth to a level below trend that cannot sustain debt repayments and cannot create the jobs needed.

    Evidence of the new growth recession has already appeared but will get worse. Rogoff makes the point that a debt crisis resulting from a growth recession in China will not be confined to only China. Exporters to China will find that their exports drop, which will slow those economies.

    More importantly, Chinese savers will have to reduce savings in order to cover living costs as unemployment rises. This will cause Western interest rates to rise because funds otherwise available to buy U.S. and European debt will be used domestically in China instead.

    These contagion effects have the potential to spread globally. The entire process is exacerbated by the ongoing trade war between China and the U.S.

    In short, investors should not wait for these developments to play out but should increase their allocations to cash and gold ahead of the new meltdown.

    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. Global Growth Now Replaced by Global Slowing. Are You Ready?

    In 2017, the financial world was filled with talk of synchronized sustainable growth in major economies for the first time since before the 2008 global financial crisis. This was being proclaimed by global financial elites including Christine Lagarde, head of the IMF. Now that vision is in ashes.

    As reported in this article, growth is already negative in two of the world’s largest economies, Japan and Germany, and is slowing rapidly in the world’s biggest economies, China and the U.S.

    Synchronized global growth has turned into a synchronized global slowdown. This trend is made worse by the Fed’s monetary tightening policies and the need for other central banks to tighten or pause their easing in order to match the Fed. Global slowdowns of this type are exacerbated by the escalating trade wars and a new Cold War between the U.S. and China.

    While growth may be slowing down, debt creation is not. The massive debts created to achieve growth since 2009 are still on the books while new debts are piled on every day. This combination of slow or negative growth and unprecedented debt is a recipe for a new debt crisis, which could easily slide into another global financial crisis.

    As we learned in 2008, this shift from positive to negative conditions can happen seemingly overnight. Investors should prepare now for the inevitable crackup.

    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. Fed Shows No Signs of Stopping Rate Hikes. Markets Have Other Ideas

    The recent Federal Open Market Committee (FOMC) meeting of Federal Reserve officials made it clear that the Fed is determined to stay on its course of raising rates until the official policy rate reaches 4% in early 2020.

    As this article shows, the Fed continues to see strong growth and expects inflation, based on the lowest unemployment rate in almost 50 years. But these views are highly misleading.

    The real reason for Fed rate hikes is to prepare for a new recession. Research shows that it takes about 4% in rate cuts to pull the U.S. out of a recession.

    How do you cut 4% when rates are only 2.25% (the current level)? The answer is you can’t.

    If a recession started today and the Fed cut rates to zero, it wouldn’t be enough to stop the recession. The Fed would have to return to quantitative easing, or “QE,” which it used from 2008–2015. In order to avoid that, the Fed is raising rates 0.25% every March, June, September and December until it reaches its 4% goal.

    Growth is already slowing and the unemployment rate is misleading because it does not include the 10 million able-bodied workers who are not in the labor force. The conundrum for the Fed is what happens if the U.S. hits a recession before the Fed hits its 4% goal, a highly likely outcome?

    At that point, the Fed will have to pause in its rate hike cycle. The market sees this coming, but the Fed does not. As usual, the Fed will be the last to know.

    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. As Growth Slows Down, the Fed Will Be the Last to Know

    You are well aware that the Federal Reserve is raising interest rates. This policy started in December 2015 with Janet Yellen’s “liftoff” from zero and has continued through seven more rate hikes in 2016, 2017 and 2018, with another hike expected this December.

    The cumulative impact is to put the high end of the range for the fed funds rate at 2.5% by year-end. More of the same is widely anticipated for 2019. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going.

    Click here to read the rest of this article.

  7. Rickards: The Fed Is “Triple Tightening” Into Crisis

    I’m in Dublin, Ireland, today, where I was honored and humbled to receive a writing award from Trinity College.

    It’s my job to continue pointing out the risks to the financial system that we still face and to try to help people prepare for the next crisis. Of course, central banks are a big part of the problem.

    If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time. There’s no better example of this than the Federal Reserve.

    To read the rest of this article, click here.

  8. The United States Is Going Broke

    Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on.

    The U.S. debt-to-GDP ratio is at the highest level in history (106%), with the exception of the immediate aftermath of the Second World War. At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt without the global dominance.

    To read more of this article, click here.

  9. Why What the U.S. Owes Really Is Different This Time

    Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on. The U.S. debt-to-GDP ratio is at the highest level in history (106%), with the exception of the immediate aftermath of the Second World War.

    At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt without the global dominance.

    The U.S. has always been willing to increase debt to fight and win a war, but the debt was promptly scaled down and contained once the war was over. Today, there is no war comparable to the great wars of American history, and yet the debt keeps growing.

    This article by the celebrated James Grant reviews not only the current debt and deficit situation but provides an overview of the U.S. national debt since George Washington and Alexander Hamilton. Grant makes the point that the debt has been increased and decreased on a regular basis but never until today was there a view that the deficit didn’t matter and could be increased indefinitely. Grant also describes how these historic debt management efforts have been bipartisan.

    Republicans Harding and Coolidge reduced the debt; the Democrat Andrew Jackson actually eliminated the debt in 1836. Today there is bipartisan profligacy.

    This article is longer than our usual selection but well worth your time and effort to understand the big picture and the likelihood of a U.S. debt crisis sooner rather than later.

  10. We’ve Got Plenty of Gold, but We’re Running out of Cash

     

    Generally speaking, well-managed gold mining operations have never had much difficulty getting the dollars needed to begin and sustain their efforts. Gold is highly liquid and easily turned into cash, so getting cash loans by pledging future gold production is a straightforward financing technique. But nothing is ever quite so simple in Zimbabwe.

    The Zimbabwe currency was turned to scrap paper years ago through hyperinflation. Since then, Zimbabwe has financed itself through a hybrid of dollarization and Chinese direct foreign investment. But that still leaves local businesses under the thumb of the central bank, which controls who receives whatever dollars might be available.

    This article reveals the extent of corruption and shortsightedness in that process. The Zimbabwe gold miner RioZim had an understanding with the central bank that dollars received from its gold sales would be available to RioZim — 50% by direct deposit to a RioZim account and 50% upon application to the central bank for good cause shown. Instead, RioZim received only 14% of the dollars available.

    As a result, RioZim cannot pay its bills and has now had to shut down three mines. Of course, this only makes the situation worse because the gold from those mines is no longer available to generate dollar proceeds for anyone.

    Zimbabwe is in desperate condition and no doubt needs every dollar it can lay hands on. But depriving your top exporters of working capital is like cutting off your nose to spite your face. It seems the likely outcome is that China will provide the needed working capital — in exchange for shipping the gold produced straight to China.

    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.