1. The Fed Could Not Escape the Room. Now We’re Stuck. Got Gold?

    An 11-year monetary experiment is coming to an end in failure. No one knows what happens next, but the need to position portfolios to preserve wealth has never been greater.

    The experiment began in the midst of the financial panic of 2008 when the Fed began printing money under a program called “quantitative easing,” or QE. This first program lasted until June 2010. After a pause, the Fed began a new program of money printing called QE2 in November 2010, which lasted until July 2011. The Fed then took another pause, but the economy weakened so a new program called QE3 started in September 2012, which lasted until October 2014.

    All told, the QE programs expanded the Fed’s balance sheet from $800 billion to $4.5 trillion. At the same time, the Fed held interest rates at zero from December 2008 to December 2015. It has raised rates to 2.5% since.

    The benefits of money printing and zero rates are still under debate. But beginning in December 2015 with the first rate hike in nine years and in October 2017 with the first balance sheet reductions since the crisis, the Fed began to “normalize” interest rates and balance sheet to prepare for the next recession.

    The goal was to get rates up to 4% and get the balance sheet down to $2.5 billion in time to fight a recession. The conundrum was whether the Fed could normalize without causing the recession they were preparing to fight. According to this article and recent remarks by Fed Chair Jay Powell, it appears the answer is no.

    The Fed will pause in its interest rate hikes in March and may also slow the rate of balance sheet reductions in the near future. This is in response to a slowing U.S. economy and slowing global growth. The Fed cannot normalize without causing a recession, which means it cannot prepare for the next recession.

    The Fed is stymied and cannot escape the room. The only way out is inflation. Investors should prepare accordingly.

    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. Debt-Financed Growth Works Until It Doesn’t. We’re Now in the Red Zone

    John Maynard Keynes was famous for the idea that in a liquidity trap where individuals and companies refused to spend or invest and hoarded cash, it was the responsibility of government to stimulate the economy by deficit spending. Keynes’ ideas have some merit in a situation where the government is not heavily indebted to begin with and where the economy is in a severe recession or the early stages of a recovery.

    Keynes died in 1946, but his ideas lived on. The problem was that “deficit spending” became an all-purpose excuse for more government entitlements rather than the limited recession remedy Keynes envisioned. The U.S. has only had three modest surplus years in the past 50 years; the other 47 years were all deficits.

    The U.S. national debt now stands at $21 trillion (not including guarantees and entitlement liabilities) and the debt-to-GDP ratio now stands at 106% (the highest since 1945). Worse yet, the U.S. is past the point where debt creates any growth at all. The U.S. is in a zone where more debt actually hurts growth and slows the economy, while the debt remains.

    This article reports on the return of $1 trillion annual deficits under Donald Trump for the first time since the early years of the Obama administration. Both Republicans and Democrats embrace crude versions of Keynes’ original ideas without regard to the fact that there is no stimulus in current conditions and additional debt risks a complete loss of confidence in the U.S. government’s finances and the role of the dollar.

    If Keynes were alive today, he’d be the first one to object to such out-of-control spending and profligate debt levels. You can lodge your own objection by getting out of risky assets and into a combination of liquid assets and safe havens such as gold.

    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. What’s Better Than Cheap Money? Free Money! Here’s How You Get It

    One of the oldest sayings in economics is, “There’s no such thing as a free lunch.” The point is that even if a lunch appears to be free, you’re paying for it in some hidden way such as reciprocal obligations, higher contract prices or some moral obligation to do business.

    Of course, the principle is even broader than that and applies not just to lunches but to any transaction where the price is too good to be true. Despite that well-considered wisdom, economists and politicians are promising something today that’s even better than a free lunch. It’s free money!

    As this article describes, free money is the promise of a new school of economics called Modern Monetary Theory, or MMT. If you haven’t heard of it yet, you will be hearing a lot as the 2020 presidential race kicks into high gear. Bernie Sanders is a believer in MMT and the vocal Congresswoman Alexandria Ocasio-Cortez claims that it should be part of the “conversation” among Democrats.

    The idea is that the Treasury and Fed are a merged entity. The Treasury creates wealth by spending money. The notes issued by the Treasury can simply be bought by the Fed and stashed away on the Fed’s balance sheet until maturity. There is no limit on the amount of debt the Treasury can create or the amount of money the Fed can print to buy the Treasury debt.

    The money created by the Fed is spent by the Treasury, which increases GDP and enriches the recipients of Treasury spending. This money can be used for infrastructure, health care, free tuition, guaranteed jobs and income or anything else. What’s not to like?

    The MMT plan will lead to national insolvency and the repudiation of the dollar, but very few will see that coming until it’s too late. The simple remedy for investors is to dump dollars and buy hard assets like land, gold and natural resources. You may not get a free lunch, but at least you’ll preserve wealth.

    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. Warren’s Program Is Not Just About Taxes. She’s out to Destroy the Rich

    The article above explains how Elizabeth Warren is out to impose a wealth tax on property in addition to raising income taxes. This article explains how even the wealth tax proposal is just the tip of the spear. Warren has an even more radical hidden agenda to destroy the wealthy as a class in the same way that the French Revolution, the Russian Revolution and Mao Zedong engaged in class warfare to destroy the rich.

    During the Russian Revolution, V.I. Lenin said, “How can you make a revolution without executions?… We shall return to terror and economic terror.” Lenin and Stalin together were responsible for the deaths of 5 million “kulaks” (lower middle-class property owners) to enforce their revolutionary vision. Mao Zedong was responsible for the deaths of tens of millions of Chinese during the “Great Leap Forward,” another radical economic program. The Nazis starved 10 million Russian prisoners of war (more deaths than the Holocaust) to implement their economic program of Lebensraum (expanded territory) for the German people.

    No doubt, Elizabeth Warren does not have mass execution or starvation in mind. But her basic idea of seizing assets from the wealthy on grounds that the wealth is unmerited is not that far removed from the economic teachings of Lenin, Mao and Hitler.

    Warren is one of the Democratic Party frontrunners for the 2020 presidential nomination at a time when Trump seems vulnerable. If Warren gets elected and the state comes looking for your property, don’t say we didn’t warn you.

    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. High Income Taxes Aren’t Enough for Warren. She Wants Your Wealth

     

    Presidential candidate Elizabeth Warren is not satisfied with the proposal to raise individual income tax top rates to the 70–90% range. She has an even more radical idea as reported in this article. She wants to tax your wealth.

    Income taxes have always been a slippery source of revenue for governments. Back in the 1950s and 1960s, it’s true that certain income tax rates were in the 70–90% bracket. These super-high rates usually applied only to “unearned income” such as dividends and interest, but they were real nonetheless.

    What is left out of that story is that the tax code was loaded with deductions and credits for investment in oil, real estate, new equipment and many other categories. Investors could claim investment tax credits, accelerated depreciation and amortization, depletion allowances and much more. Best of all, the tax losses from one investment could be written off against other income (say, from a doctor’s or lawyer’s ordinary income). The result was that when statutory rates were 70%, the effective rate (the amount actually paid) was closer to 30%.

    In 1981, Ronald Reagan led the way on a landmark deal where tax rates were lowered dramatically (down to 28%), but the deductions and credits were also removed. The economy boomed.

    Since then, tax rates edged up to 40% (under Bush 41 and Clinton), but the deductions never came back. So effective rates climbed closer to 40%.

    Warren’s plan to push rates over 70% will do serious economic harm in the absence of the old tax shelters. But that’s not enough for her. She wants a direct tax on wealth. This includes property, stocks, bonds, houses, boats and swimming pools. She claims it will only apply to the “ultra-rich” (who will move to Puerto Rico to avoid it), but before long it will be targeted at those who are only modestly well-to-do.

    Democrats are in a race to see who can move furthest to the left and be the most radical. So far, Elizabeth Warren is winning.

    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. New York Times Says Trump Will Lose in 2020. So He’ll Probably Win

    They’re at it again. The same publications and pundits who said Hillary Clinton had a greater than 90% chance of winning in 2016 and were preparing magazine covers about the cultural and historic significance of our first female president are now busy proclaiming that a Democratic president in 2020 is inevitable and Trump has no chance of reelection.

    That’s good news for Trump. The greatest strength a presidential candidate can have is to be consistently underestimated by his or her opponent. When you are underestimated by opponents, those same opponents don’t follow your campaign strategy, don’t answer your attacks and don’t promote a policy of their own. They believe it’s enough just to vilify you and flood the zone with happy talk about how wonderful they are.

    Meanwhile, at the grassroots, voters are listening and deciding on their own. The voters don’t always give straight answers to pollsters and may not even decide how they’re voting up until Election Day. The opposition has wasted valuable time either not hearing your message or not campaigning in states that are more in play than they realize until it’s too late.

    This dynamic worked for Ronald Reagan in 1980. He was tagged as a “dumb actor” and associated with his B-film Bedtime for Bonzo. Yet Reagan worked tirelessly with specific policies that Americans agreed with and pulled out a solid victory in the 1980 elections. (In his 1984 reelection, Reagan carried 49 states, one of the greatest landslides in U.S. history. By then it was too late for his opposition to brand him.)

    This dynamic also worked for Trump in 2016. Hillary never even bothered to campaign in Michigan, Wisconsin and Pennsylvania in the final days of the campaign because she was so sure of victory. Trump won them all.

    This article is a clear illustration of history repeating. The author relies on an “I hate Trump” wave to be bigger than the “I like Trump” wave. But that’s not how elections are won. They’re won with positive policy suggestions.

    Until the Democrats come up with something positive (which they may never do), Trump’s chances of reelection remain strong.

    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. China Just Had Its Worst Quarterly Growth Ever. It Gets Worse From Here

    Investors know that China recently reported its worst quarterly growth ever. What they may not know is that this weak growth is not just a temporary blip but is part of a downtrend that has far to run.

    The implications of this slowdown in Chinese growth are extremely negative for the world as whole. This article reports that China’s economy grew at an annual rate of 6.4% in the fourth quarter of 2018. That’s the lowest quarterly growth rate ever reported by China.

    Yet even that growth rate is overstated. Much of that growth is investment and as much as half of Chinese investment is wasted on industrial overcapacity, white elephant infrastructure and ghost cities financed with unpayable debt. Adjusted for that waste, actual growth is probably closer to 4.9%.

    Some dissident analysts in China report that even the 4.9% figure is high. China’s rate of growth for all of 2018 was 6.6%, down from 6.8% in 2017. China’s 2018 growth was the lowest rate since 1990. This weak growth affects not only China but also its trading partners.

    Slow growth in China means fewer purchases of commodities from countries like Australia, Brazil and Iran. It also means less outbound investment by China in places like Canada and the U.K. Slow growth for China means slower growth for the world. All signs are that this slowdown is not temporary but will grow worse in 2019 and beyond.

    What happens in China does not stay in China. Weak growth could be a major contributor to recession in its trading partners and possible a global recession, the first since the financial panic of 2008.

    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. The China-U.S. Confrontation at Sea Has Just Taken a New Turn

    We have written frequently about possible confrontations between the U.S. and China in the South China Sea. International law recognizes claims of six separate nations to parts of that sea, and the U.S. is treaty partners with one of them (the Philippines). China claims the entire sea (except for a narrow shoreline stretch near each surrounding country), while the U.S. and the other nations involved reject those claims and insist on rights of passage and free navigation and sharing of natural resources (oil, natural gas, undersea mining and seafood among others).

    The risks are not limited to intentional combat but include accidental shootings and collisions, which are not uncommon at sea, especially when two vessels are shadowing each other. But the South China Sea is not the only body of water where the conflicts and risks exist. An even greater conflict, as reported in this article, lies in the Strait of Taiwan, which separates the island of Formosa from the mainland of Red China.

    The article describes how two U.S. warships recently passed through the strait as a reaffirmation of rights of free passage and a show of support for Taiwan. China claims Taiwan as a “breakaway province” and part of China. The Taiwanese government claims that it is the lawful government of all of China, although there is a strong independence movement there also.

    China regards the passage of U.S. vessels as highly provocative and has threatened to block such transits with force. The South China Sea is a problem, but the Taiwan Strait is viewed in existential terms by China. Investors can never be certain that conflicting naval activities in both bodies of water will not result in a violent incident or even war.

    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. How Many More Flash Crashes Will Happen Before Markets Don’t Bounce?

    A flash crash is understood as a sudden extreme market movement with no obvious cause and often connected with automated trading systems. Markets have been subject to crashes throughout history, but the flash crash is a more recent phenomenon closely associated with derivatives and computerized algorithmic trading.

    The first of the computer-era flash crashes was the Oct. 19, 1987, stock market crash that took major indexes down over 22% in one trading day (equivalent to a loss of about 5,400 Dow points in one day using today’s levels). That 1987 flash crash involved a complex interplay between Chicago futures markets and the U.S. stock exchanges based in New York.

    Other famous flash crashes include the Oct. 15, 2014, flash crash in Treasury yields, the May 6, 2010, flash crash in the Dow Jones index (a 9% crash in less than 30 minutes) and the January 2015 crash of the euro against Swiss francs (down 25% in 30 minutes). There are many other examples.

    The latest flash crash, a $41 billion loss in the market value of Jardine Matheson in a matter of minutes, is described in this article. What all of the flash crashes have in common is computerized trading and a piggyback effect where an initial price movement is copied by other automated traders to produce a cascade that soon spins out of control.

    In most (not all) cases, the overshoot is recognized and markets correct, sometimes the same day. What happens if the flash crash losses are not truncated? What happens when the flash crash spreads to other instruments or other markets and a full-scale one-way panic emerges?

    The ability of central banks to mitigate a flash crash today is greatly limited compared with 2008 because the central banks have not normalized their balance sheets since then. Investors need to prepare with diversification across asset classes and larger-than-normal cash reserves to withstand the damage.

    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. This Global Slowdown Is Real. How Bad Will It Get?

    The time for warnings of a global slowdown is over. The slowdown is here.

    Over the past few months, we’ve highlighted warnings of slower growth, excessive debt and the potential for a new market crash coming from prominent officials in the international monetary system, including Christine Lagarde of the IMF, economists from the BIS and preeminent academics like Larry Summers of Harvard and many others. This article includes new warnings as well as new data on growth and a summary of recent warnings by others.

    What sets this article apart from others is the claim that the slowdown is not just coming but that it has already arrived. The article reports that global trade volumes are in decline, air freight volumes in Hong Kong were down 5% in December and certain economies outside the U.S. (Germany, France, Japan and Italy) showed negative growth or material slowing in the second half of 2018.

    Most striking was the fact that the OECD composite leading indicator fell to 99.3 in November 2018. In the last 50 years, whenever that index fell below 99.3, a recession almost always resulted (1970, 1974, 1980, 1981, 1990, 2001 and 2008).

    The time to brace for a recession by reducing allocations to risky assets (stocks, corporate debt, emerging markets) and increasing allocations to cash is now.

    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.