1. Higher rates and a strong dollar are a double-dose of policy tightening.

    The cycle of monetary tightening has been ongoing in various forms for over five years. First came Bernanke’s taper warning in May 2013. Next came the actual taper in December 2013 that ran until November 2014. Then came the removal of forward guidance in March 2015, the liftoff in rates in December 2015, four more rate hikes (so far) in 2016 through 2018, and the start of quantitative tightening in October 2017.

    Another rate hike is already in the queue for June 2018. During much of this tightening, the dollar was actually lower because markets believed the Fed would not raise in the first place, or was overdoing it and would have to reverse course. Now that the Fed has shown it’s serious and will continue its tightening path (at least until they cause a recession), markets finally believe them.

    This changed perception has caused a dollar rally as investors look at interest rate differentials between the U.S., on the one hand, and other rate markets such as Germany and Japan on the other. Yet, as this article describes, a stronger dollar is itself a form of monetary tightening.

    A stronger dollar cheapens imports for U.S. buyers because they need fewer dollars to purchase goods. That’s a deflationary vector that will make the Fed’s goal of achieving inflation even harder to reach. The U.S. is now getting a triple shot of tightening in the form of higher rates, reduced money supply, and a stronger dollar. At this rate, we may be in a recession before the end of 2018 unless the Fed reverses course, which they may well do by this September or December.

    Meanwhile market distress is emerging from Argentina to Turkey. We’ll see if the Fed wakes up to the danger before it’s too late.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  2. Two of the richest people of all time have something to say about bitcoin.

     

    I haven’t had as much to say about bitcoin lately as I did late in 2017 and earlier this year. I was not surprised when bitcoin surged to $20,000; that’s how bubbles work. I was even less surprised when it plunged over 65% to about $6,000 in the first quarter of 2018. That’s the flip side of the bubble and is also completely predictable. My bubble forecasts were totally validated, so I moved on to other topics.

    Since then, bitcoin has traded in a range from about $7,500 to $9,500 with occasional spikes or dips outside those boundaries. That price action reflects dynamic tension between the early investors who are still trying to liquidate positions while they have some profits, and optimists who are trying to buy “cheap” bitcoin in the hopes that it gets back up to its old levels (it won’t).

    Meanwhile, the bubble victims who bought in at $12,000, $15,000 and $18,000 are “holding” their bitcoin in the vain hope that they can at least get even. They won’t. Eventually they’ll give up, accept reality and dump their positions.

    That capitulation will drive bitcoin lower. Over a period of years, bitcoin will sink to about $200 where it was when the mania began a few years ago. This article is a sobering reminder that whenever investors rely on the “greater fool” theory, they are not really making an investment; they are just gambling and hoping that they can get out of the casino before the roof caves in.

    Relatively few manage to do this. Most buy in too high, or wait too long to sell and ride the wave down after riding the wave up. This article reports tat Bill Gates and Warren Buffett, two of the greatest investors and richest individuals of all time, agree with me that bitcoin was never more than a mania — and never will be.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

     

  3. You may not like this, but you’ll be hearing lots about it as elections loom.

    One of the first things I learned as a registered Washington lobbyist, (yes, I admit it, I was a lobbyist in the 1990s), is “you can’t be something with nothing.” That’s a Washington insider’s way of saying that if you don’t like an opponent’s policies, it’s not enough to moan and complain about them and throw insults. You have to come up with a policy of your own that appeals to voters and can be offered to the public as an alternative.

    This has been a problem for Democrats lately. They can’t stand Donald Trump and insult him all day long, but they won’t prevail in major elections scheduled in 2018 and 2020 unless they offer the voters something other than constant ridicule of Trump.

    A few smart Democrats, including Bernie Sanders and Cory Booker, have figured this out. Their alternative to Trump’s policies is a government guaranteed job for every American who wants one.

    This may sound odd coming at a time when the official unemployment rate is 3.9%, the lowest in almost twenty years. Unemployment is 3.7% for adult white men and 3.5% for adult white women, while African-American unemployment is approaching historic lows. Why roll out a jobs program now?

    The answer is that the official unemployment statistics are highly misleading. They do not count approximately 10 million able-bodied working age adults who have simply given up on work. Adjusted for those “missing workers,” the real unemployment rate is about 10%, a depression level figure.

    As this article states, interest in the guaranteed jobs program is high. Critics say the program will destroy incentives and undermine the traditional work ethic. Supporters say it will help to raise wages because private employees will have to match the wages being offered by the program itself in order to compete with the government jobs.

    In that sense, this is really a backdoor way to raise the Federal minimum wage and increase benefits. Whichever side you’re on, get used to hearing about this debate in the years ahead.

    Who knows, maybe Trump will end up supporting it. Trump is not a traditional conservative, but he is a shrewd politician who may just steal his opponent’s best idea. You can’t beat something with nothing.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  4. Gold is ready for a breakout to new five-year highs and beyond.

    I’m more of a fundamental and macro analyst than a technical analyst, but I do pay attention to charts and patterns. Charts have low predictive value in my view, but they are information-rich and are great tools for examining multiple data sets in one glance.

    It’s not news that gold has been trading in a range lately and has encountered upside resistance in the $1,360 – $1,370 per ounce range. That’s about where gold got to in early July 2016 in the immediate aftermath of the surprise Brexit vote in the UK. So, gold has been stuck below that ceiling for almost two years.

    On the other hand, gold is well off the lows of $1,050 per ounce reached in December 2015. My view is that the December 2015 low marked an end to the 3 1/2; year bear market that began in August 2011 at $1,900 per ounce and took gold down by almost 50 percent. That means we are now in a new bull market that should run for years and take gold to the $10,000 per ounce level in the next few years.

    The technician described in this article sees the same data somewhat differently. He views the entire period from 2013 to 2018 as a six-year technical base with breakout potential around $1,375 per ounce. My fundamental bull market analysis and the more traditional technical analysis presented in this article have different reference points, but reach the same conclusion.

    Gold is headed much higher beginning with a break-out rally later this year. The last chance to get gold at the old price is right now.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  5. The fed finds a new way to blunder.

     

    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.

    The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system. The Fed uses the Phillips Curve to understand the relationship between unemployment and inflation when fifty years of data says there is no fixed relationship. The Fed uses Value at Risk modeling based on normally distributed events, when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.

    As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy, only to produce the weakest recovery in history. The Fed is now burning money by reducing its balance sheet on the assumption that this reduction in money supply will have no material adverse impact on capital markets. Wrong again!

    Tighter monetary conditions in the U.S. are leading to a stronger dollar, capital outflows from emerging markets (EMs), and disinflation. As this article reports, emerging markets are suffering one of their worst collapses since the infamous “temper tantrum” of May–June 2013.

    Once again, the Fed is misreading the situation. Fed Chairman Jay Powell says, Fed “normalization…should continue to prove manageable” for EM economies. But the EMs are already in distress. Just ask Argentina, which turned to the BIS and IMF recently for emergency rescue loans.

    The Fed has it wrong again. The situation in EMs will get worse before it gets better and the Fed will be the last to know.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  6. FINLAND FINDS OUT THAT FREE MONEY IS NOT SUCH A GOOD IDEA AFTER ALL

    I’ve been writing lately about something called “GBI” which stands for guaranteed basic income. GBI goes by other names including universal basic income, UBI, or just basic income, but the policy is the same regardless of the name.

    The idea is that governments will guarantee every citizen a certain basic income as a matter of right. There is no means testing and no work requirement. The government just hands every man and woman a check every month whether rich or poor, young or old, employed or unemployed.

    My reason for highlighting GBI is that you’re going to be hearing a lot more about it in the next two years. Leading Democratic Party politicians in the U.S. support GBI or a government guaranteed job as part of their platform. Polls show that about half the American people favor it as well.

    The argument in favor is that GBI gives everyone a firm financial foundation on which they can seek other employment, turn down “lousy” jobs, get education and training, provide household services to family, friends and community, or maybe just be artists. The argument against GBI is that it encourages laziness, discourages productive work, is unaffordable by heavily indebted governments, and will produce inflation, which destroys savings and impedes capital formation.

    This debate is not going away soon. But, what about hard evidence? Some countries around the world have already started GBI programs and the initial results are not favorable. This article reports on the fact that Finland has decided not to expand a pilot program of GBI.

    The program’s results in terms of job gains were disappointing. This tends to support the views of those who claim that GBI discourages work rather that encourages it through training. This is a small sample; there will be a lot more discovered about the effects of GBI in the years ahead.

    Meanwhile, the political debate is going full-speed ahead. This issue is not going away.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  7. THE TRADE WARS ARE IN FULL SWING AND THE BODY COUNT IS STARTING TO RISE.

    Readers are familiar with our thesis that currency wars lead to trade wars, which lead ultimately to shooting wars. Currency wars begin in the condition of too much debt and not enough growth. Countries try to steal growth from their trading partners by devaluing their currencies.

    The problem is that this doesn’t work because the trading partner devalues in retaliation. The devaluations go back-and-forth and no one gets ahead. That’s when the trade wars begin.

    The result is the same; no one wins in a trade war; it’s just a question of who loses less. The only proven way out of the debt/growth trap is a shooting war, but we’re not there yet. The currency war began in 2010 and the trade war began in 2018.

    Real wars produce collateral damage and trade wars are no different. Companies with good business models get caught in the crossfire and suffer pain in terms of lost orders and lost opportunities to expand through investment or acquisitions. This article reports that the body count is starting to pile up.

    U.S. companies with business in China are being harassed and pending acquisitions are being slow-rolled or denied outright. The same is true in terms of U.S. treatment of Chinese acquisitions here.

    Investors should expect this state of affairs to get worse and act as another drag on global growth. Meanwhile, the debt keeps piling up and the countdown to a shooting war, perhaps in 2020, keeps ticking.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  8. CURRENCY MOVES BAFFLE THE EXPERTS. DON’T WATCH TRENDS, WATCH REVERSALS.

     

    There’s never a shortage of pundits and TV talking heads who are willing to tell you what stocks and bonds are going to do next. They use fundamental and technical analyses to chart and explain every wiggle in stock prices all day long. But, what about currencies? There are far fewer experts who are willing to go out on a limb to forecast future exchange rates.

    The reason, as explained in this article, is that foreign exchange cross-rates are notoriously hard to forecast. After all, you don’t have corporate earnings, management calls, unemployment rates or other statistical tools to rely on. Those who do forecast exchange rates tend to rely on obsolete tools such as purchasing power parity, PPP, trade deficits or surpluses or interest rate differentials to do their homework.

    Those tools worked back in the good old days of the Bretton Woods gold standard and the pre-globalization days of closed capital accounts. Today exchange rates are driven almost entirely by capital flows and those capital flows are driven largely by sentiment in terms of the risk on/risk off dynamic and the potential for “carry trades” where large investors borrow in one currency, (a short FX position), to invest in another currency, (a long FX position).

    Despite the difficult of forecasting day to day moves (that really is impossible without inside information), investors can reliably predict exchange rates to a three- or six-month horizon by looking for trend reversals. Stocks and bonds can go to zero in the event of bankruptcy of the issuer, or they can go to the moon based on strong profits and bubble dynamics. But, major currencies trade in a range; they move up and down against each other but never reach extreme levels.

    When you see a strong move in a currency pair, a temporary reversal is a good bet.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

     

  9. THE NEXT WORLD WAR WON’T START IN KOREA OR IRAN. WATCH THE SOUTH CHINA SEA

    We’ve had some good news on North Korea lately. As of last October, the U.S. and North Korea were on a definite path to war. Beginning with a thaw in relations around the time of the Olympics last February, the situation has improved to the point where President Trump and North Korean leader Kim Jong Un will meet at a summit conference, probably in June, to discuss peace on the Korean peninsula.  It remains to be seen whether Kim is dealing in good faith, but so far, the news is positive.

    Iran is another hot spot that has flared up because of Trump’s decision to tear-up the Joint Comprehensive Plan of Action, JCPOA, negotiated among Iran, the U.S. and our allies in 2015 regarding Iran’s nuclear weapons program. That puts the focus of the world on a potential war involving Iran, Israel, Saudi Arabia, the U.S., and possibly Russia or Turkey. That bears watching, but it will take years to play out.

    Meanwhile another hot spot has even more potential to trigger a war than North Korea or Iran. That involves the increasingly confrontational approach being taken by China in the South China Sea. China insists that all of the South China Sea is a virtual “Chinese Lake” based on some artificial islands that have been dredged up around existing rocks and atolls. The U.S. insists that these are international waters with rights of free passage and navigation.

    As this article reports, China is putting advanced weapons systems on these fake islands. The U.S. is stepping up its naval patrols in the area to demonstrate freedom of navigation. The world’s two largest economies are on a collision course that could trigger World War III. Investors need to factor these confrontations into their allocation decisions.

    An increased allocation to cash and gold is prudent at this stage of world history.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.