1. The Fed Blundered Again. Now It’s Time for Their Next Mistake

    The entire sequence of monetary policy since 2007 has been one in which the Fed has blundered repeatedly but picks itself up just in time to blunder again.

    The Fed was slow to recognize the gravity of the financial crisis in 2007 and 2008. QE1 was needed for liquidity reasons, but the Fed bungled the implementation by keeping insolvent banks open and propping up the same failed executives who caused the crisis in the first place. QE2 and QE3 were unnecessary and did nothing to return U.S. growth to its historic 3.2% trend (instead, growth has been stuck at 2.2% since 2009, costing the U.S. trillions of dollars in lost wealth).

    Fed growth forecasts have been wrong for over a decade by orders of magnitude. Since 2017, Fed tightening by raising rates and reducing its balance sheet has slammed the brakes on growth and put the U.S. economy dangerously close to a recession. None of those failures has deterred the Fed from its latest mistake.

    As described in this article, the Fed has now put policy on hold (a so-called “pause”) by promising not to raise rates until further notice and by planning to stop balance sheet normalization later this year.

    The market has cheered these signs of ease with higher stock valuations since the post-Christmas rally. What neither the markets nor the Fed seems to comprehend is that monetary policy works with lags of 12–18 months. The slowing of the economy today is the result of monetary tightening since 2017.

    That slowing will continue over the course of this year. Any beneficial impact from today’s Fed easing won’t emerge until 2020 at the earliest.

    Of course, that happy ending assumes the economy does not fall into recession between now and then, based on the damage the Fed has done already. Don’t count on it.

    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. A New Gold Rush Is Here. It’s a Rush for Shares of Gold Mining Companies

     

    A new gold rush has begun. It’s not a rush for large discoveries of gold in the ground; that’s always underway. The new rush is for stock in gold mining companies as a way to expand control of gold reserves and improve the stock price through economies of scale.

    As this article reports, Barrick Gold, the world’s largest gold producer, has launched a hostile takeover of Newmont Mining, the world’s second-largest gold producer. This comes at a time when Newmont Mining itself is proceeding with the acquisition of Goldcorp, the world’s fifth-largest gold producer. If both deals close (which seems likely) the result will be a mega-merger of three of the five largest gold producers in the world.

    There are customary corporate finance reasons for these mergers including economies of scale, diversification of assets by country and higher share prices as fixed costs are spread over a larger reserve base. But there are also important geopolitical reasons for this gold merger mania.

    Barrick is a Canadian company and has close relations with the Chinese government through its executive chairman, John Thornton. While China does not control Barrick, the close relations combined with Barrick dominance of Newmont and Goldcorp gives China the inside track on future output from the new gold behemoth with minimal interference by the United States.

    The important news for investors comes not just from this mega-merger but also from a series of mergers in small and medium-sized companies seeking the same benefits and economies as the big players. Global gold output has flatlined for the past five years, even as gold prices have rallied and demand remains strong.

    When it’s hard to find new gold in the ground, the easiest way to expand output is to roll up the competition. We expect this gold merger frenzy to continue in the year ahead.

    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. Even the Super-Elites Think Trump May Be Right About the Trade War

    When Trump launched his trade war in January 2018, the elites were apoplectic. They lectured Trump on the benefits of “free trade” and “comparative advantage” and how trade made everyone “better off.” Never mind that the elite theory of free trade is badly flawed.

    There is no free trade because of tariffs, nontariff barriers, government subsidies, currency wars, interest rate manipulation and a host of other tricks and obstacles. There is no comparative advantage because the input factors (labor costs and capital costs) are mobile and can hop from one country to another with ease. And not everyone is better off.

    There are winners (elites who own the technology) and losers (everyday citizens who lose good manufacturing jobs) and the costs and benefits are not equitably distributed. But the elites cling to these free trade myths despite contrary evidence.

    Now comes a huge surprise as described in this article. Mohamed A. El-Erian, former CEO of Pimco and now the chief economic adviser at Allianz, is an economic thought leader and bona fide member of the global financial elite. El-Erian says that most of Trump’s analysis is correct. The positive results of trade have not been fairly allocated. Trade is not just an economic issue; it’s a social and political issue. Finally, he says, “More people now are beginning to wonder whether the new U.S. approach — provided it’s not used repeatedly — could in fact serve as a beneficial disruption that helps reset international trade relationships and place them on a firmer footing.”

    In other words, El-Erian is acknowledging that Trump was right all along in understanding the problem and moving to address it, despite some confrontational rhetoric. Let’s hope that other elites are as fast as El-Erian to see the benefits of Trump’s trade policies.

    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. The U.S.-China Trade War Has Far to Run, but an Interim Deal Is Coming

    The March 1 “deadline” for resolving trade disputes with China has come and gone. Trump called off the threat of higher tariffs scheduled to be imposed that day if China did not reach a comprehensive trade deal with the U.S., including more Chinese purchases of U.S. goods and verifiable progress on protection of U.S. intellectual property and forced transfers of U.S. technology.

    None of those things happened, but Trump believed there was sufficient progress to call off the tariff increase until he had a chance for a high-level summit with Chinese President Xi. That summit is now planned for Mar-a-Lago, in Palm Beach, later this month.

    Markets consider this planned summit to be good news and have rallied in response. It looks like the worst of the trade war may be behind us. But according to this articlenot only does the trade war have far to run, but the global economy is weakening with or without trade war progress.

    The summit is likely to take place and some favorable news will be announced. But resolution of the tough issues (intellectual property and technology) is far from complete. More importantly, global growth is slowing regardless of the trade situation because of overly tight monetary policy by the Fed since 2017.

    The markets’ celebration of trade war progress was overdone and premature. As growth slows and trade war tensions continue, expect more market drawdowns and trend reversals.

    The good news reported here is temporary and superficial. The hard part on solving trade issues and reviving growth is yet to come.

    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. Your Digital Assistant Is Spying on You and Is Ready to Call the Cops

    Convenience is not always a benefit; sometimes you pay a very high price for it without even knowing.

    So-called “digital assistants” such as Amazon’s “Alexa” and Google Home are all the rage. You leave them on in your kitchen or den, where they are online 24/7. Using voice recognition, they can turn music on and off, play your favorite tunes, give you a weather forecast, order pizza for home delivery and much more. You don’t have to lift a finger; just give the device your orders and your wish is their command.

    But is that all they do? Turns out the answer is no.

    They listen to what’s going on in your home continually. The devices use sophisticated artificial intelligence and big data to “evaluate” your home behavior and decide if it’s morally correct in accordance with the definitions and standards of software developers crowded into Silicon Valley or Seattle.

    Their values are not yours. These developers are typically left-wing, politically correct and not particularly religious. They’re not guided by the moral standards that moderate your behavior. They do believe in human-caused climate change (false science), the end of internal-combustion engines (impractical) and the Green New Deal (unaffordable), among other things.

    So what happens when your conversations with your friends and family, your selection of books and articles and your political opinions run afoul of the Silicon Valley thought police? According to this article, a network of similar devices from other homes holds a digital kangaroo court (no humans allowed) to decide if you are a threat. If you are judged to be a threat, the devices will report you to the police (usually politicized on their own) or place you on a surveillance list or worse.

    Your digital assistant is actually a well-placed spy and you are the enemy. I don’t own one and have no intention of getting one. If you get one for the convenience, just watch what you say… and think.

    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. Warren Isn’t Done With You Yet. She Needs More Taxes for Free Child Care

    We’ve been warning about presidential candidate Sen. Elizabeth Warren’s threats to raise income taxes to 70% and to confiscate your savings in the form of a “wealth tax.” No sooner do we issue one warning then Warren comes up with another idea that will be financed by taking even more of your wealth and income.

    As described in this article, Warren’s newest proposal is universal child care on top of the universal health care and free college that she has already proposed. Of course, this universal child care plan will need funding.

    Costs are estimated at $700 billion over 10 years, but as with all such estimates actual costs will be much higher, due to bureaucratic waste and program expansion over time. No problem! Warren wants an “ultra-millionaire tax” (on top of her 70% income tax) to raise $2.75 trillion additional revenue to support free child care and more.

    The chance of such programs being enacted in the short run is small. Even if a Democrat wins the White House in 2020, the Senate is likely to remain in Republican hands and they can block this kind of legislation.

    Still, the fact that this is being discussed openly means that it’s on the public policy agenda and it may just be a matter of time before something like it is enacted into law. In the meantime, wealthy Americans will begin their exit plans to get out of the United States and move to Puerto Rico, Ireland or Monaco before such taxes come into effect. The tax may be delayed but the economic head winds start 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.

  7. What Is Gold Telling Us About Central Banks, Debt and Inflation?

    Gold has had a nice run lately, trading around $1,325 per ounce as of this writing after briefly trading up to the $1,340 per ounce level last week. This has been an impressive rally off a base of $1,185 per ounce as recently as last fall.

    The recent gold rally dynamics are captured in this article. I am frequently asked where gold prices are going next and for my analysis of the price of gold. My answer is that investors should spend less time forecasting the price of gold and more time discerning what the price of gold is forecasting for other markets.

    Many factors go into the price of gold (real rates, dollar strength, safe-haven investing, central bank purchases, etc.). But, the gold price itself is a powerful leading indicator about other markets.

    Gold’s recent rise says that central banks will remain on hold or even lower interest rates later this year. It says that inflation is not on the horizon, stocks will move sideways and economic growth will slow down. In that kind of sluggish, low-rate environment, the opportunity cost of owning gold goes down and therefore the price of gold goes up.

    The price of gold can be considered to be in a “bear rally” (due to low growth) rather than a “bull rally” (due to inflation), but a rally is a rally.

    Investors should not worry so much about the price of gold. They might worry more about what the price of gold is telling you about other markets and the economy ahead.

    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. What Happens When a Political Fights Turns to the Courts?

    No doubt most Americans are somewhat familiar with Donald Trump’s fight with Congress over funding for a border wall. Over the course of December and January, Trump shut down the government because Congress refused to pass spending bills that included funds to build a wall along the Mexican border.

    The shutdown did not produce results and finally Trump and Congress agreed on a spending bill that provided minimal wall funding but was also loaded with restrictions that limit the size and location of the wall and require approval of local town officials (mostly Democrats). The funding bill was better than nothing, but not by much (as intended).

    Trump next declared a state of emergency so he could obtain wall funding from various other sources including the departments of Defense, Treasury and Homeland Security. A variety of state governments led by California promptly filed a lawsuit against this move while Nancy Pelosi took steps in Congress to vote on a resolution of disapproval. The lawsuits and the vote were both intended to derail Trump’s plans for the wall.

    Trump critics were quick to conclude that either the resolution of disapproval or the lawsuits would stop Trump in his tracks. But don’t be so sure.

    This article makes the point that the critics and mainstream media may have this wrong. The relevant National Emergencies Act does not define “emergency,” which gives the president broad discretion to decide what is an emergency. More importantly, this is a “political dispute” between the executive and legislative branches.

    Federal judges, whether liberal or conservative, are extremely reluctant to act as referees on political disputes where no grave constitutional issues are involved. The fact that Nancy Pelosi has a legislative remedy (the resolution of disapproval) will make judges even more reluctant to get involved. And even if this case is taken up, it will end up in the Supreme Court, where a conservative majority may well rule in favor of the president.

    Don’t sell Trump short on this; he knows what he’s doing. Bet on the wall, which may mean higher labor costs and lower corporate profits in the years ahead.

    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 Countdown Clock on a China Shock Keeps Ticking Louder

    We’ve written numerous times about the likelihood of a Chinese credit crisis and the risks of contagion from such a crisis in China and the global economy. Despite long-standing concerns, this is an issue that simply won’t go away. China has repeatedly turned to more debt, lower interest rates, currency devaluation and other cheap tricks of economic stimulation (really pulling demand forward without solving problems) to boost its economic output one more time.

    The problem is that such tricks are subject to what economists and statisticians call “diminishing marginal returns.” This means that stimulus can have some temporary benefits when first used or if used in a recession. But over time, the stimulus effect grows smaller and smaller.

    Eventually the gimmicks result in “negative marginal returns” where the debt trick not only does not provide stimulus but reduces growth. What you are left with are no stimulus and more debt, followed by a debt death spiral, which leads to default, confiscation or hyperinflation.

    Now China seems to be at the end of this road, as explained in this article. The Chinese economy had grown at an annual rate of over 10% from the 1980s until a few years ago. Now annual growth is 6.4% and promises to drop even lower. Even those figures are overstated because China ignores wasted investment included in the government figures. Some analysts put actual Chinese annual growth in the 3% range.

    When the crisis emerges and China suddenly has to correct its economy, a currency devaluation of 30% or more and massive write-downs are the best outcome. The worst outcome is something more closely resembling the Great Depression on a global basis.

    It’s almost too late for China to correct this path because of the inflexibility of political and civic institutions and intolerance for dissent. It may be too late for the Chinese to change the outcome, but it’s not too late for individual investors to pivot away from exposure to China.

    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.