The forces of inflation and deflation that we’ve talked about take a while to play out, but this market collapse could happen very suddenly and catch investors completely unaware.
Now, the thing is, we’ve come within hours or days of total global financial gridlock, total market collapse in the last 14 years. Everyone knows about 2008. People have a sense of that.
But it also happened in 1998 as a result of the Russia default and the collapse of hedge fund Long-Term Capital Management. At the time, I was involved with Long- Term Capital Management…I actually negotiated that bailout. I was in the room. I saw the $4 billion moved into our bank accounts to prop up the balance sheet. The money came from Wall Street. But there was a lot of give and take that almost didn’t happen and we were literally hours away from markets collapsing. We muddled through that. We kind of found the runways and got through.
But, people learned all the wrong lessons. Instead of banning derivatives and backing away from overleverage and putting a lid on banks, public policy did the opposite. We repealed Glass-Steagall, which allowed banks to act like hedge funds; we repealed Schwab’s regulation, which meant that you could do derivatives on anything. We repealed or increased broker dealer leverage from 15 to 1 to 30 to 1. The SCC did that in 2006 and the Boswell three capital requirements to allow greater bank leverage.
So, we said, game’s on. You can do whatever you want with as much leverage as you want and as much opaqueness as you want because of the use of derivatives. Is it any surprise that in 2008 we had another market collapse? Now, Bear Stearns goes down, Fannie goes down, Freddie goes down, Lehman goes down, AIG goes down – one by one the dominos were falling. We were days away.
Morgan Stanley would have been next, Goldman right behind it and then Citi then Bank of America and then J.P. Morgan — so all the dominos were falling. The government dropped a steel curtain between two of the dominos. They stopped it after Lehman and AIG so Morgan Stanley didn’t fall, but Morgan Stanley was days away from collapse.
James Rickards, best-selling author of Currency Wars, spoke with Hedgeye CEO Keith McCullough about how he finds the truth, the continuation of the currency wars, what the Fed gets wrong and much more in this exclusive interview.
Jim’s first appearance on Hedgeye TV in May 2014 was met with wide acclaim, and he did not disappoint in his return to Stamford for Hedgeye’s first ever,live “Market Marathon”held in January. After 45 minutes of raw & unfiltered commentary on markets and the people that move them, Rickards and McCullough turned it over to the viewers, offering an extended viewer Q&A session powered by user-submitted questions.
We’re out there making the San Andreas Fault bigger so we can have even bigger earthquakes in the future. That’s exactly what’s going on.
So, I would say two things about the monetary collapse. No. 1, it could happen very suddenly — and likely it will — and we won’t see it coming, so investors need to prepare now.
Investors almost say to me, ‘You know, Jim, call me up at 3:30 the day before it happens and I’ll sell my stocks and buy some gold.’
First of all, it doesn’t work that way for the reasons I just explained, but secondly, you might not be able to get the gold and that’s very important to understand. When a buying panic breaks out, you know, and the price starts gapping up, not $10.00, $20.00 an ounce per day, but $100.00 an ounce then $200.00 an ounce and then all of sudden, it’s like up $1,000.00 an ounce and people say oh, I got to get some gold. You won’t be able to get it. The big guys will get it, you know, the sovereign wealth funds, the central banks, the billionaires, the multibillion-dollar hedge funds, they’ll be able to get it, but everyday investors won’t be able to get it.
You’ll find that the mint stops shipping it. That your local dealer has run out so there’ll still be a price somewhere. You’ll be able to watch the price on television, but you won’t actually be able to get the gold. It’ll be too late.
Those are logical questions, but the event that triggers the collapse doesn’t matter — and here’s what I mean by that.
Imagine you’re on a mountainside and there’s snow building up and it’s still snowing and you’ve got some avalanche danger… it’s windswept, it’s unstable. You’re watching the snowpack, and if you’re an expert, you know it’s going to collapse and it could kill some skiers or wipe out the village.
Well, here comes a snowflake, it disturbs a few other snowflakes, that spreads, it starts to shoot, it starts to slide, it gets momentum, it comes loose and the whole mountain comes down and buries the village.
Who do you blame? Do you blame the snowflake or do you blame the unstable pack of snow?
I say the snowflake’s irrelevant. If it wasn’t that one, it could have been the one before or the one after or the one tomorrow.
The same goes for the collapse of the monetary system. It’s the instability of the financial system as a whole. So, when I think about the risks, I don’t focus so much on the snowflake, it could be a lot of things that trigger the event. It could be a failure to deliver physical gold because gold’s getting scarce. It could be a Lehman type of collapse of a financial firm or another MF Global. It could be a prominent suicide. It could be a natural disaster.
It could be a lot of things, but my point is, it doesn’t matter. It will be something that causes the system to collapse. What matters is that the monetary system is so unstable. The blunders have already been made. It’s not as if we’re going to do some bad things that’s going to create risks. The risk is already there. It’s embedded. We’re just waiting for that catalyst.
So as to what will cause the global monetary system collapse, my answer is it could be a lot of things, but it doesn’t matter. What matters — and what investors need to be concerned about — is the instability is already baked in the pie.
Now, as to when this will happen, it will be sooner than later. By that I mean three, four years. This is not necessarily something that’s going to happen tomorrow, (although it could) but that’s not a ten-year forecast either, because we’re not going to make it that far and we never do.
These things do happen every four or five years. The dynamics, what we call the scaling metrics, and the size of the financial system and risk. One definition of risk is: What’s the worst thing that can happen?
Jim Rickards, author of Currency Wars and The Death of Money,says the expectation of rising rates in the US is one reason behind the surge in the US dollar of late. However, the US Fed doesn’t want a strong dollar because it’s deflationary. One of the Fed’s primary policy objectives is to hit 2% inflation. It’s not getting it.
Neither is the European Central Bank. The Financial Times reported yesterday that there are now 1.2 trillion euros in Eurozone debt that have a negative yield. Investors are effectively paying to hold short term government debt.
The problem for the Federal Reserve is, if it raises interest rates now, it makes the US an even more attractive target for capital. Investors get a higher return than in European debt and a strengthening dollar as well. Rickards conclusion is that the Fed will therefore not raise rates in 2015. This goes against the idea that the Fed is set to return them to ‘normal’ levels.
The innovators in America’s shale patch are rethinking their business plans, with oil down more than 40% since June. The U.S. stock market keeps roaring up… but we’ve also had two violent downswings in less than three months. The fallout from events in Russia is sending tremors through currencies, bonds and other asset classes.
And as our Jim Rickards told us in this space back on Nov. 20, the global elites are signaling each other about an impending crisis. They’re hiding behind euphemisms like “the potential for a buildup of excessive risk in financial markets”… but that’s how they talk to each other so as not to alarm us rubes.
So here’s the first thing you must know today: Despite those warnings, Jim Rickards is not retreating to the hills with a five-year supply of ammo and Mountain House freeze-dried food.
“I travel, I give speeches, I still live my life,” he tells us.
U.S. intelligence advisor Jim Rickards, author of The Death of Money, recounts an episode told to him by a friend who is a senior officer of a high-security transporter of physical metals who had brought gold into China at the head of an armored column, guarded by heavily-armed troops.
One of these days, at a time of its choosing, China may reveal just how much gold it does hold, alongside a possible decision to enable a newly gold-backed currency, the Yuan, to make its debut on the world’s financial stage. Such an event would have profound implications for the primacy of the U.S. dollar, as well as America’s ability to continue running printing press deficits, long financed by Chinese purchases of U.S. debt instruments, to the tune of several trillion dollars.
A “subprime” oil crisis may be looming. If so, shale oil companies and the banks that lent to them will be ground zero. Your 401(k) or pension plan will be the aftermath. And the poisoned fallout will radiate throughout the economy.
“Losses are going to cascade through the system,” says former CIA financial analyst Jim Rickards. “There are unforeseen consequences and hidden losses. I am not so sanguine that this is going to work out so smoothly in the end .… This looks like the beginning of [a crisis].”
These wild gyrations in the price of oil have real-world effects on world economies. Everyone in the sector is stung.