1. How Can There Be a “Dollar Shortage” When the Fed Printed $4 Trillion?

    One source of the next financial crisis may be the one you least expect — a global dollar shortage. How is that possible? The Federal Reserve printed over $3.6 trillion of new money beginning in 2008 to deal with the last financial crisis. That’s not even counting tens of trillions of dollars of “swaps” with foreign central banks such as the ECB, plus guarantees of trillions of dollars more of money market funds and bank deposits.

    With so many dollars floating around or backed-up by the Fed, how could there possibly be a dollar shortage? The answer is debt.

    While the Fed has printed trillions of dollars of money, governments and the private sector have created hundreds of trillions of dollars of new debt. In other words, for every dollar the Fed printed, borrowers have created twenty-five dollars of new debt. As long as the debt is performing or lenders are willing to roll it over for new debt, all is well. But, in a liquidity crisis, suddenly borrowers cannot afford to pay and lenders are unwilling to roll over maturing debt. Everybody wants his money back!

    Debtors who cannot afford to pay start selling other assets to raise cash. This is how contagion spreads from one market to another and around the world. There are usually early warning signs that liquidity is starting to dry up and borrowers are feeling the squeeze. This article describes how cross-currency swap spreads are starting to widen. Foreign borrowers who borrow in dollars like to swap the dollars for other currencies they can use in their local economies, a kind of carry trade.

    The spreads widen when demand for dollar borrowings is high. Something similar happened in the summer of 1998 just before the global financial panic that hit in late August of that year. This situation is causing concern but has not yet reached the level of full-scale panic. But this definitely bears watching.

    When swap spreads widen, it’s like an early warning that the system is about to have the financial equivalent of a heart attack.

  2. China Will Hit Stall Speed in 2018. The World is Not Ready

    This may be the most important article you read this year. It’s written by Lee Miller, a good friend of mine, and his colleague Derek Scissors. Lee is the founder and proprietor of an economic research service called “China Beige Book.”

    The name “beige book” was borrowed from the surveys conducted by regional Federal Reserve Banks of economic conditions in their regions. (In the days before internet, the Fed issued hard copy booklets with different colored covers based on subject matter. The economic conditions booklet has a beige-colored cover, hence the name). Lee does in China what the Fed does in its regions, except he covers the entire country.

    He has a diverse network of over 3,000 companies and entrepreneurs in all business sectors. He gets his information straight from the source and bypasses government channels. It’s like a private intelligence service. In fact, Lee’s network is better than the CIA’s when it comes to economic data. The CIA actually turns to Lee for advice.

    The detailed research service costs about $100,000 per year for one subscription. But, Lee publishes summaries on a quarterly basis, which are freely available. This article is his latest summary and it’s not a pretty picture.

    China Beige Book, CBB, says that China has been covering up and smoothing over problems related to weak growth and excessive debt in order to provide a calm face to the world in advance of the National Congress of the Communist Party of China, which began last week. CBB also makes it clear that the much-touted “rebalancing” of the Chinese economy away from investment and manufacturing toward consumption and spending has not occurred. Instead China has doubled down on excess capacity in coal, steel, and manufacturing and has continued its policy of wasteful investment fueled with unpayable debt.

    CBB forecasts that either China will experience a significant slowdown in 2018, which will have ripple effects on world growth, or else it will face an even bigger debacle down the road. Both outcomes are bad news for the global economy.

  3. China Slaps on Controls, But It Won’t Be Enough to Stop Capital Flight

    As the story above on the “Impossible Trinity” notes, an open capital account is an invitation to capital flight when you have unrealistic exchange rates or interest rates.  This article  explains that that’s exactly what has been happening in China.

    The reserve position in China has crashed from over $4 trillion to about $3 trillion in the past eighteen months. The capital outflows are continuing at a rapid rate. Assuming up to $1 trillion of China’s reserves are not highly liquid (such as shares in Zimbabwe mining companies) and another $1 trillion is needed to bail-out China’s banks, then China may be down to just $1 trillion available to defend its currency.

    At current rates of capital outflows, China will be broke  within one year . The solution is either a maxi-devaluation of the currency or to slap on currency controls. For now, China is putting on capital controls and reducing the ability of Chinese firms and individuals to take money out of the country. But, such controls are typically full of holes.

    The end result will still be a devaluation of the Chinese yuan against the U.S. dollar. This will incite calls for anti-manipulating measures including tariffs from the new Trump administration. This is how currency wars turn into trade wars and ultimately damage world growth and make debt crises more likely.

    -Jim Rickards, Chief Global Strategist, Meraglim™

  4. The Signs of a Stock Market Crash Keep Coming. Here’s the Latest

    Bull markets in stocks seem unstoppable right up until the moment they stop. Then comes a rapid crash and burn phase. Is there ever any warning that a collapse is about to happen? Of course there is.

    Analysts warn about it all the time and provide mountains of data and historical evidence to back up their analysis. The problem is that everyone ignores them! You can talk about the dangers represented by CAPE ratios, margin levels, computerized trading, persistent low volatility, and complacency all you want, but nothing seems to slow down this bull market.

    Yet, there is one thing that can stop a bull market in its tracks, and that’s corporate earnings. The simplest form of stock market valuation is to project earnings, apply a multiple, and voilà, you have a valuation. Multiples are already near record highs, so there’s not much room for expansion there. The only variable left is projected earnings and that’s where Wall Street analysts are having a field day ramping up stock prices.

    Earnings did grow significantly in 2017 on a year-over-year basis, but that’s mainly because earnings were weak in 2016 so the year-over-year growth was relatively easy. Now comes the hard part. How do you expand earnings again in 2018 when 2017 was such a strong year?

    Wall Street just uses a simple extrapolation and says next year will be like this year only better! But, this article shows there is every reason to doubt that extrapolation. Earnings are likely to fall short of expectations, which can lead to a correction. Once that happens, multiples can shrink as well. Soon you’re in a full-scale bear market with stock prices down 20% or more.

    That’s without even considering a war with North Korea and all of the dangers others have already mentioned. This may be your last clear chance to lighten up on listed equity exposure before the bubble bursts.

  5. Have You Ever Wondered Why Communists Are Leading the War on Cash?

    We’ve written about the war on cash many times, including the article above about the cash shortage in Puerto Rico. This is not a U.S. or even western phenomenon. It’s happening all over the world including socialist India. This article reports that the world leader in eliminating cash is Communist China.

    Why are Communists the leaders in getting rid of cash? The reason is that Communists despise privacy and value control. By forcing all citizen transactions into a small number of digital payments systems, Chinese Communists can keep an eye on their own citizens. They can also cut you off from the system by freezing your bank accounts or blocking your payments if you do not adhere strictly to Communist philosophy or if you cause trouble by expressing dissent or religious views.

    There are many forms of violent and non-violent coercion. Control of money is one of the most powerful. Cutting off your money flows is like cutting off oxygen to a patient in intensive care. The result is predictable and fatal.

    Whenever you hear about plans to eliminate cash in the U.S., just think about the Chinese example. The reason to eliminate cash is not convenience or efficiency as the proponents claim. The reason is control.