1. The Fed’s Current Conundrum in Five Easy Lessons

    The Federal Reserve seems to be at the center of every major economic issue in the world today. Currency wars are said to be driven by the Fed and other central banks cutting rates. The Fed is also trying to cut rates to stimulate growth in the face of trade wars.

    The new Fed policy of rate cuts has also triggered rallies in stocks, bonds and gold. Oil rallies when the Fed cuts rates and vice versa. Everywhere you turn, Fed policies and expected policies are the drivers of sharp moves in almost every asset class from physical commodities to derivatives.

    The Fed’s impact on markets is undeniable, but what drives the Fed itself? At its base, the Fed is caught in an impossible conundrum. On the one hand, the Fed needs to raise rates and reduce its balance sheet in order to prepare for rate cuts and possible QE in the next recession. On the other hand, the process of raising rates and reducing the balance sheet can cause the recession the Fed is preparing to cure.

    The Fed nearly caused a recession in late 2018 after four rate hikes and massive balance sheet reduction that year. The Fed then did an about-face with rate cuts and an end to balance sheet reduction this year. What forces are driving the Fed as it contemplates its next move?

    Those forces are neatly summarized in this article. Those forces are: an inverted yield curve (which has historically been a recession signal); declining manufacturing output in the U.S.; political uncertainty in Europe; a strong yen; and declining global growth, especially in China. All of these factors (except the strong yen) point toward more rate cuts even though the Fed would like to raise rates in anticipation of the next recession.

    The Fed should recall the Rolling Stones lyric “You can’t always get what you want.” Meanwhile the Fed’s conundrum continues with no end in sight.

    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. The Trade Wars Are More a Symptom Than a Cause. What’s the Solution?

    Financial headlines are dominated by stories about “currency wars,” “trade wars” and possible recession. It’s true that these stories are important and are driving the recent volatility in stock and bond markets.

    China sharply devalued its currency a few weeks ago below the critical red line level of 7.00 yuan to $1.00 as retaliation for Trump’s tariffs. Some new tariffs go into effect on Sept. 1 even though Trump delayed other tariffs because of the coming Christmas shopping season.

    Trade wars are also affecting U.S. relations with Europe, Mexico and Canada among others. In this article, global elite Mohamed A. El-Erian agrees that trade wars and currency wars are important. Yet, he takes a step back from the headlines to ask whether these problems are not symptoms of a deeper malaise.

    Historically, trade wars and currency wars arise in conditions of too much debt and not enough growth. When debt is low, trade surpluses or deficits are manageable. When growth is high, currency exchange rates are not considered problematic. But when debt is high and growth is low, countries are desperate to steal growth from trading partners. They do so with cheaper currencies and tariffs on imports, which give rise to the trade and currency wars.

    What if growth could be increased without resort to devalued currencies? What if debt could be made manageable without resort to tariffs? El-Erian says the root causes of debt and weak growth can be mitigated with international cooperation, selective fiscal policy and spending on desirable goals such as improved infrastructure and stronger safety nets. He says the issue of intellectual property theft can also be addressed inside a multilateral framework similar to the World Trade Organization.

    El-Erian’s ideas have some merit and are worth considering. The problem is that his ideas have little chance of being pursued because of a lack of trust of elites generally and a specific lack of trust between the U.S. and China.

    A favorable resolution of ongoing disputes cannot be ruled out, but investors should brace for the unfavorable outcome of even worse tensions on the trade and currency fronts.

    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. To Impeach Trump or Not to Impeach Trump

    It’s no secret that Democrats and many Republicans have wanted to prevent Trump from taking office or remove him from office once he was sworn in. They used many techniques, including a phony counterintelligence investigation of alleged “collusion” by Trump with the Russians (no such collusion occurred) and an effort at removing the president from office on grounds of inability to carry out his duties using the 25th Amendment (which requires a vote to remove by the Cabinet).

    Other tactics have included continual media and political harassment designed to frustrate Trump and make his administration dysfunctional. All of these efforts have failed. Trump has shown great resilience in the face of the criticisms and persistence in achieving his policy goals of tax cuts, regulatory cuts, a stronger defense posture and more secure borders.

    The one remaining effort to handicap Trump is impeachment by the House of Representatives. This is well within the ability of the House Democrats to do. However, Speaker Nancy Pelosi does not want to go forward because it would actually increase Trump’s popularity and endanger her House majority; moderate Democrats elected in 2018 would be at risk of losing their seats in 2020.

    This is a problem for pro-impeachment Democrats such as Jerry Nadler, Maxine Waters and Alexandria Ocasio-Cortez. They have tried to subpoena current and former White House officials to testify in order to damage Trump. The White House will not let them testify on grounds of executive privilege. The House has sued in federal court to enforce the subpoenas.

    Here’s the problem, as described in this article. The courts will generally uphold executive privilege and refuse to force the officials to testify. On the other hand, impeachment is well within the powers of Congress. A judge forced to decide on enforcing the subpoena would be more likely to enforce it if relates to impeachment.

    Now Democrats are trying to have it both ways. They want to delay impeachment proceedings because they could help Trump and hurt Democrats. On the other hand, they want to claim impeachment proceedings are underway to improve their chances of having the subpoenas enforced.

    A judge is likely to see through this sham and uphold the White House claim of executive privilege. Yet the fact that this is even being attempted shows how much some Democrats want to go ahead with impeachment at all costs.

    The ultimate outcome is uncertain, although my estimate is that the impeachment process will proceed in a formal manner this fall. Meanwhile, investors should brace for more volatility due to this political turmoil on top of the already intense market turmoil.

    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. White House Adviser Says China’s Economy Is Crumbling. He’s Right

    For years, we’ve been hearing about and reading stories on the coming dominance of the Chinese economy. The storyline is that China is growing faster than the U.S., has a much larger population and a growing military capability and that it is just a matter of time before China surpasses the U.S. as the hegemonic power in East Asia and the Western Pacific.

    In its most extreme form, this storyline said the 1800s were the “British Century,” the 1900s were the “American Century and the 2000s would turn out to be the “Chinese Century.” This narrative was proposed by the same globalist elites from the universities and think tanks (many of whom are Americans) that proposed open borders, zero tariffs, global supply chains and outsourcing of U.S. jobs. As usual, the elites are wrong on all counts. Open borders put downward pressure on U.S. wages.

    Zero tariffs meant goods could be made in cheap-labor countries like China and shipped to the U.S. duty-free. Outsourcing destroyed perfectly viable U.S. operations in steel, autos and electronics and moved those jobs to sweatshops and prison-labor camps in China. The result was a declining U.S. economy and greater income inequality.

    Finally, the U.S. is fighting back as described in this article. Trump’s tariffs have slowed export-led growth in China and expanded U.S. manufacturing. More importantly, China’s growth is slowing for internal reasons that are not entirely related to the trade wars. China has grown with investment, but most of that investment has been wasted on empty “ghost cities” and other white-elephant infrastructure that cannot pay its way.

    China is weighed down with trillions of dollars in dollar debt that it cannot easily repay without depleting its dollar reserves. China’s banking system is insolvent and much of its real estate investment has been financed with “wealth management products” that cannot be paid back because the financing is little more than a gigantic Ponzi scheme. With slower growth, declining reserves and massive debt, the stresses in China’s economy are now apparent to all, despite upbeat talk from Beijing.

    The collapse in China will accelerate and result in capital controls, asset freezes and political repression of social disorder. This collapse is just getting started and has far to run.

    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. China Now Bans Imports of Gold

    We’ve been following the story of Chinese gold purchases for over 10 years. It was in March 2009 that I first proposed China was acquiring gold for geopolitical and strategic reasons and not merely for monetary reasons. I did this at a Pentagon-sponsored financial war game at a top-secret weapons laboratory that I both facilitated and participated in.

    At the time, China had about 600 tons of gold. I suggested that Chinese purchases of gold would expand and persist with a view to creating a new gold-backed currency that could gradually displace the dollar as the global reserve currency. More recently, it also became apparent that a new gold-backed digital currency sponsored by China could help it escape U.S. sanctions that are imposed through the dollar payments system.

    Since 2009, events have played out exactly as I forecast in 2009. China has more than tripled its gold reserves from 600 tons to almost 2,000 tons. It’s likely China has even more gold “off the books” in the State Administration of Foreign Exchange (SAFE), a Chinese sovereign wealth fund that acts as an alternative to the People’s Bank of China when it comes to managing reserves, including gold.

    With this as background, it came as a shock to read this article that reports China is strictly limiting gold imports. Yet there are important reasons for this import ban notwithstanding China’s voracious appetite for gold.

    The first is that China is the world’s largest gold producer (about 500 tons per year), so it can continue to acquire gold internally even without imports. The second is that China is facing a severe dollar shortage due to contracting world trade and U.S. tariffs.

    China has enormous dollar-denominated debts, so it needs to preserve its dollar reserves to repay those debts. Cutting back on dollar-denominated imports of gold is one way to do that. Finally, China fears a drain on its capital account as Chinese tycoons try to get their money out of a collapsing economy or buy assets that will retain value (and can be smuggled without using wire transfers).

    China still wants gold, but it has more immediate problems with reserves and capital flows. Ironically, this stress in China is bullish for gold even if China itself reduces imports. There are plenty of other buyers in line.

    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. Now Inside Hackers Are the Threat

    We’ve all read about cybercrime consisting of expert hacking attacks on consumer information databases. The targets have included major banks and retailers such as Target. The information stolen includes names, addresses, credit card numbers, Social Security numbers, passwords and much more.

    One of the most damaging hacks was a Chinese attack on the U.S. Office of Personnel Management, in which hackers stole personal files on millions of federal employees and government contractors that could allow Chinese intelligence to identify U.S. intelligence operatives, many of whom operate as contractors with nonofficial cover. Now comes an even more dangerous threat.

    As described in this article, data theft is now being conducted not just by outside hackers but by insiders including employees of the victim company. In this example, the incident “involved theft of more than 100 million customer records, 140,000 Social Security numbers and 80,000 linked bank details of Capital One customers.”

    The individual accused of stealing the records was an employee who exploited a flaw in the firewall to steal the information. The usual process is that the party stealing the information tries to sell it to criminal gangs through the dark web and those gangs sell it to other criminals, who can make false purchases or hold the information for ransom from the customer victims.

    No amount of firewalls or scrutiny can prevent this kind of theft. Customers have some statutory protection that comes from the data custodians. Still, it’s just a matter of time before some custodian goes bankrupt, leaving defrauded customers high and dry.

    The only partial recourse for customers is to hold some assets in nondigital forms such as gold, silver, land or natural resources. Those hard assets are unhackable.

    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. Not Only Does the Chinese Government Lie, the Auditors Lie Too

    There’s nothing new about official Chinese lies. China made commitments to be admitted to the World Trade Organization in 2001 and then proceeded to break every one with illegal subsidies, disregard of WTO rulings and theft of intellectual property.

    China’s GDP is routinely overstated by about 25% because they included wasted “investment” in ghost cities and other dead-on-arrival projects. Some analysts conclude that China’s GDP is even more deceptive and is perhaps only at 3% instead of the over 6% they report.

    None of this comes as any surprise because China is led by an atheistic Communist Party with an “ends justify the means” mentality. In a culture of that type, it’s no surprise that lying and cheating filter down to civil society and professional organizations.

    The latest example is shown in this article. One of the largest auditors in China has been accused of faking client data. The implications of this go beyond the auditor itself and extend to their many clients who have been issuing fake financial statements.

    This scandal has also led to a halt on client IPOs that were using the fake financials to issue stock to unwitting investors. There will be more revelations like this. The entire Chinese financial system is filled with unpayable loans, Ponzi finance and insolvent banks.

    There are plenty of investment opportunities in the world. China should not be on anyone’s 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.

     

  8. California’s Illegal Tricks Are Another Sign Trump Is Heading to Victory

    I do forecasting as a full-time job and use my proprietary Bayesian models (and other applied science techniques) to do it. This is how I was able to predict the U.K. would vote for Brexit in June 2016 and the U.S. would elect Trump in 2016. Polls and pundits said that the U.K. would remain in the EU (70% probability) and Hillary would win (90% probability). My methods produced correct forecasts against all odds in both cases.

    Bayesian models basically start with an assumption that may be not much more than an educated guess. But the assumption is continually updated by testing the conditional probability that new data would or would not arise if the initial assumption were true or false. That can gradually move the original assumption from 50/50 to 90/10, in which case your forecast is on safe ground.

    I’m using that technique again to forecast the 2020 election result. Right now, I have Trump as a winner with a 68% probability. Of course, that could change in either direction.

    One of the data points I search for to update my forecast is evidence that progressive anti-Trump forces have learned anything in 2016. Will they offer policies Americans want (Trump’s odds might go down) or will they do nothing but bash Trump (Trump’s odds go up)? As shown in this article, the evidence is that progressives have learned nothing and will continue on the “bash Trump” path, which helps to ensure Trump’s victory.

    California has passed a law that keeps a candidate off the primary election ballot unless they release their tax returns. This will have no impact on Trump because he’s certain to be nominated and equally certain not to win California in the general election. It’s just a form of blatant political harassment that has never been aimed at another party or candidate.

    The law is probably unconstitutional and will be thrown out by the courts. In the meantime, I’ve updated by Bayesian equation to add weight to the thesis that progressive have learned nothing.

    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. A Climate Change Pot Is Calling the Kettle Black

    A reliable feature of progressive ideological movements is that practitioners eventually turn on each other. That seems to be happening now among climate change alarmists.

    Climate change is a reality. I used to live on Long Island Sound, which was a glacier 10,000 years ago. Today, it’s a nice body of water (with a rocky shore typical of former glaciers) good for sailing, fishing and other water sports. But climate change is relatively slow and is driven by large forces such as solar cycles, volcanoes and other natural phenomena.

    There’s no evidence that C02 has anything to do with climate change. C02 is a trace gas that affects almost nothing, except it’s an essential source of plant food. (Plants “inhale” C02 and “exhale” oxygen.) The best evidence is that we’re in a C02 drought (about 400 parts per million compared with 1,000 parts per million in past periods).

    Alarmist models of correlation between warming and higher amounts of C02 have the causality backward. C02 does not cause warming. Warming causes C02 release through tundra thaws and other channels.

    Warming trends ceased in the late 1990s and sea level increases today are about seven inches per 100 years, hardly noticeable and likely to be reversed. Still, the alarmist climate agenda lives on.

    In this article, the climate alarmist Adair Turner criticizes the climate change moderate William Nordhaus for not being alarmist enough. Turner fails to mention that his models (and Nordhaus’ models, for that matter) are riddled with false assumptions, bad data, inverted causation and erroneous extrapolations.

    Their real agenda is to define a “global problem” so they can advance “global solutions” such as world governance, world taxation and world rule by elites. Beware of wolves in sheep’s clothing and beware of false science dressed up as climate change.

    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. A Central Banker Says Don’t Blame the Central Banks

    Raghuram Rajan is one of the top global monetary elites. He’s a professor at the University of Chicago and at various times has served as governor of the Reserve Bank of India and in senior capacities at the IMF and Bank for International Settlements. He’s what the top elites call “a safe pair of hands,” which means he can be appointed to any one of a number of top positions with no fear of him rocking the boat with heterodox views.

    He just wrote a new article on the role of central banks in the economic recovery since 2009. Guess what? According to Rajan, the central banks have done everything right and fiscal authorities are to blame for weak growth, below-target inflation and other maladies from the weakest economic expansion in over 60 years.

    Rajan is correct when he says that central banks cannot create inflation or stimulate growth. But he runs off the rails when he says that populist politicians (such as Trump, Boris Johnson, Giuseppe Conte and Jair Bolsonaro, whom Rajan disparages) are now threatening central bank independence.

    The causality is the other way around. It is central bank incompetence that has given rise to populism. Central banks should have their powers curtailed and their independence limited. Incompetence has a cost, and in the case of central banks that cost involves exposure of their smokescreen around failure in economic management.

    Central banks are really good for one thing only: being lenders of last resort. All other goals should be repealed. Better yet, maybe we should get rid of central banks entirely.

    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.