1. The Fed’s Not Just Worried About the U.S. They’re Worried About the World

    Investors are well aware of the Fed’s historic pivot at the end of 2018.

    From December 2015 to December 2018, the Fed had been moving ahead with rate hikes. They had taken the fed funds target rate from 0% to 2.25% in small 0.25% increments over three years with occasional “pauses” along the way. Then in late 2017, the Fed began to “normalize” its balance sheet.

    In plain English, that means reducing their balance sheet from $4.5 trillion to something closer to $2.5 trillion by burning money. This was quantitative tightening, QT, the exact opposite of QE. The effect of doing both was equivalent to raising rates at about 2% per year off a very low base.

    That kind of rate tightening in the absence of inflation was unprecedented. We warned for years that the Fed was tightening into weakness and would produce a recession if they did not back off. They did.

    In late December, the Fed made it clear that rate hikes were on pause until further notice. In mid-March, the Fed announced they were tapering their balance sheet reductions and would move the tempo to zero by next September.

    Observers quickly concluded that this pivot to relative ease was in response to weak data on U.S. growth. That’s true as far as it goes, but it’s not the whole story. As this article reveals, the slowdown is not confined to the U.S. but is global in nature.

    One of the best leading economic indicators is data from shipping. FedEx has reported a material slowdown in shipments and revenues on a worldwide basis. This means that manufacturers, retailers and distributors are finding fewer customers for their goods.

    FedEx is like a thermometer that measures the health of the global economy. Right now, the patient looks ill. It’s time for investors to reduce exposures to stocks and other risky assets and reallocate to cash, Treasury notes and 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.

  2. Even Mainstream Economists Agree That Mainstream Economics Is False

    It’s one thing when a nonmainstream economist criticizes mainstream economics. That happens all the time and is for the most part ignored by economists. It’s another thing when a member in good standing of the economic elite unleashes a harsh criticism. That’s a sure sign that the mainstream neo-Keynesian consensus is on its last legs.

    That’s exactly the implication of this article. The article is written by Jim O’Neill, a former senior office of Goldman Sachs. O’Neill was the originator of the “BRICS” name to describe the group of developing economies (Brazil, Russia, India, China and later South Africa) that would lead emerging-markets growth and boost global growth in the early 2000s.

    O’Neill’s latest work takes aim at cherished economic models such as the Phillips curve (unemployment and inflation are not inversely related, as claimed), strong profits attracting new investment (instead it appears that anti-competitive practices are blocking new investment) and stock buybacks being good for markets (they are actually a kind of corporate liquidation and should not be subsidized by governments). This critique (one we’ve been making for years) is long overdue.

    One area where O’Neill does stick to the mainstream view is that China’s growth is welcome and China will gradually move to a market-friendly model and become a strong economic ally of the U.S. This view was never correct. China is a communist society that is hostile to the U.S. China will take all of the direct foreign investment and intellectual property that we are prepared to hand over (or that they are able to steal), but they will not evolve into a genuinely Western-style economy.

    O’Neill deserves credit for critiquing the touchstones of modern economics, but he is still engaged in wishful thinking when it comes to China. It looks like O’Neill is not ready to give up on the “C” in BRICS just yet. He should. China’s adversarial posture toward the U.S. and rejection of Western norms becomes more apparent by the day.

    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. The Chinese Are Winning the Debt Default Sweepstakes — for Now

    While worries about a U.S. debt default in the future are increasing, the Chinese are engaged in massive defaults today. This article reports that Chinese defaults are accelerating.

    These defaults are coming from the corporate sector and include both dollar-denominated and local currency bonds. As large as these defaults are, they are just the tip of the iceberg in relation to what’s coming.

    China’s debt situation is structured as a massive Ponzi, where one company issues debt and then lends the money to another affiliated company, which lends the money to another affiliated company and so on in a daisy chain of related company debt. This means that if any single company in the chain defaults, the entire group will default because the affiliates will be unable to pay back their loans to the parent company at the top of the food chain. China is between a rock and a hard place.

    On the one hand, China has to tighten monetary policy and restrict lending to avoid letting asset bubbles and potential debt defaults get out of control. On the other hand, China needs new debt to roll over old debt and to prop up asset values that depend on leverage.

    If China tightens too much, it will cause a wave of defaults. But if China does not tighten enough, it will let the asset bubbles in stocks and real estate expand to the point that market collapses are inevitable.

    China’s central bank may have enough assets to bail out the commercial bank lenders, but that bailout will severely deplete China’s hard currency reserves, leaving little to defend the yuan cross-rate to the dollar. China is heading for a crisis in debt, market values or the foreign exchange markets  perhaps all three at once.

    Given the size of the Chinese economy (second largest in the world, with about 15% of global GDP), a disaster in China will inevitably ripple around the world in a new global financial crisis. Based on current headlines, this crisis may be much closer than many believe.

    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. Ready for a U.S. Government Default? Maybe You Should Be

    We’ve all heard reports about how U.S. deficits are out of control and the U.S. debt-to-GDP ratio is heading toward a complete loss of confidence in the U.S. dollar. These facts are true enough, but they beg the question of when the crackup will arrive.

    Both Japan and Italy have higher debt-to-GDP ratios than the U.S. and they are still issuing new debt, despite recessions and other negative indicators. Estimating the timing of a debt default or loss of confidence in the dollar requires continual observation of events related to a default and the assessment of the conditional probability of those events occurring if a default were or were not close at hand.

    This article is one of the most dramatic indications yet that a default of some kind may be closer than most expect. It describes what the author calls a “soft default.” This involves resetting the dollar to equal a basket of commodities, including oil, gold, natural gas and other key commodities.

    This idea has been around for decades and is not unlike what John Maynard Keynes proposed at Bretton Woods in 1944 in connection with the creation of world money that he called the “bancor.” What’s different is that the new peg would be at prices greatly in excess of current market prices. For example, gold would be valued at $10,000 per ounce (a figure I have predicted for years as part of an endgame dollar reset).

    This gives the economy a massive one-time dose of inflation, which wipes out the real value of the national debt. After the debt devaluation, the dollar would remain stable based on the commodity basket at the new prices. This is a variation of what FDR did in 1933 when he devalued the dollar by raising the price of gold from $20.67 per ounce to $35.00 per ounce.

    Whether this peg and devaluation play out is less important than the fact that it is receiving high-profile consideration. That alone tells you the dollar’s days are numbered as a store of value. The best remedy for investors is to beat the government at its own game by acquiring gold today at comparatively low prices.

    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. No Good Options

    The U.K. Brexit referendum on whether to remain with or leave the European Union (EU) took place on June 23, 2016. The result was a clear victory for the “leave” forces. But markets were shocked. All the “experts” had predicted voters would elect to stay.

    I was among the few to prepare investors for that shock. In the days before the vote, I urged my readers to short the British pound and buy gold. Those who did made huge gains. Some readers even wrote to me to say thanks for paying their kids’ college tuitions for that year — that’s how much money they made.

    You can find the rest of this article 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. Brexit: No Good Options

    The Battle of Britain (1940) was one of the most famous and important conflicts in history. The Battle of Brexit is proving no less decisive even if the weapons are financial and political, not kinetic.

    The U.K. joined the European Communities in 1973 and that membership was ratified by a U.K. referendum in 1975. Membership divided the right and left in U.K. politics in the late 1970s and 1980s with the left initially opposing membership.

    To read the rest of this article, click 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.

     

  7. The Economics Profession Needs New Models

    The list of policy and predictive failures by mainstream economists is longer than the typical 9-year-old’s Christmas list. They failed to foresee the 2007 mortgage bubble and the 2008 financial crisis. They cheered “green shoots” in 2009 when that was a complete illusion. They welcomed the “recovery summer” in 2010, which was nothing but more of the same punk growth.

    They spent six years pursuing QE and seven years with zero interest rates and had nothing to show for it except an inflated balance sheet, inflated asset values and $4 trillion of lost wealth through below-trend growth. The latest failure was proclaiming “synchronized global growth” in 2017 when there was nothing of the sort. Major economies are now slipping into recession.

    To read the rest of this article, click 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.

  8. Exposing the Myth of MMT

    Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

    That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

    What’s not to like?

    To read the rest of this article, click 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.

  9. The Real Problem With Modern Monetary Theory

    MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

    Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

    Click here for the rest of this article.

    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. Another Day, Another Fraud in Cryptocurrency Land

    Remember tether? That’s a cryptocurrency that calls itself a “stable coin.” A stable coin says that its value remains constant against some other type of currency.

    In theory, this offers the benefits of cryptocurrency usage (anonymity, easy transfer abroad, etc.) without the volatility that comes from speculation and panics (bitcoin fell 80% in a matter of weeks in early 2018). Tether was supposedly anchored to the dollar. Tether accomplished this by simply taking dollars from tether buyers and putting those in escrow accounts.

    When tether users wanted to convert back to dollars, they could simply deliver the tethers and receive dollars from the escrow at a set exchange rate. Or so they said.

    From the start, tether has been plagued by rumors that they did not keep all of the proceeds in dollars. Some forensic specialists estimated that dollars paid for tether were converted to bitcoin and used to prop up bitcoin and other crypto markets. The actual powers behind tether have been mysterious and many suspect that they are miners or others who had a vested interest in propping up bitcoin and that the escrow dollars are long gone as the price of bitcoin imploded.

    Now, according to this article, tether has admitted that it does not back all of its coins with dollars. In fact, many of the dollars have been diverted to loans to affiliates. The ability of those affiliates to repay the loans is not clear. The use of the loan proceeds is also not clear.

    Tether has produced some statements showing that dollar reserves are sufficient. However, those statements are not from major banks and have not been audited. It’s also not clear if the “dollar reserves” are liquid dollars or just dollar-denominated notes of dubious creditworthiness. Perhaps all is well at tether, but there is substantial room for doubt.

    The cryptocurrency market has been swamped with frauds, thefts and mysterious coin disappearances. The best approach is to avoid the market entirely except for a very small handful of coins that do have valid use cases and protective governance. Tether is not on that list.

    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.