Sunday, April 22, 2018

Jim Rickards: The Roller Coaster to Nowhere


There are four major factors driving the market. The factors are growth, trade wars, geopolitics and regulation of technology.

Each of the four factors has its own internal contradictions, in effect a binary outcome for each. This means there are 16 possible paths the market might follow (24 = 16). No wonder the market acts confused.

With regard to growth, the bulls expect a boost from the Trump tax cuts. They are also anticipating inflation due to strong job creation, rising labor force participation and a low unemployment rate. They expect interest rates to rise but consider this more a sign of economic strength than a cause for concern.

Strong growth is good for corporate earnings, and a little inflation is usually good for nominal stock prices, at least in the early stages. The bull case for growth is a curious mixture of the Phillips curve and the Laffer curve.

Bears point to an economic slowdown in the first quarter (most projections are around 2% or less). This is consistent with the dismal average of 2.1% growth since the end of the last recession in June 2009.

Stronger growth is impeded by demographic and debt head winds and the impact of Chinese labor and technology on global pricing power. Tax cuts are not expected to help, because the drag on growth caused by increased debt will outweigh any stimulus from lower taxes.

The Fed is giving a weak economy a double dose of tightening in the form of rate hikes and the unprecedented destruction of base money as they unwind QE. The Fed will probably push the economy to the brink of recession before they get the message and pause on rate hikes.

This bearish view combines the Reinhart-Rogoff thesis on debt death spirals with a return visit to Fed policy blunders in 1929 and 1937.

To some, the trade wars are another conundrum. There is little doubt that a true trade war will reduce global growth. But many are wondering if we’re facing a trade war or just a series of head fakes by Donald Trump as he pursues the art of the deal?

For example, Trump imposed Section 232 tariffs on steel and aluminum imports and then almost immediately carved out exemptions for Canada and Mexico pending progress on NAFTA. Then the president trumpeted a trade deal with South Korea that imposed quotas on steel imports but almost immediately said that deal was conditional upon South Korean help in dealing with North Korea.

Trump threatened over $50 billion of Section 301 penalties on China for theft of U.S. intellectual property, but within days China and the U.S. calmed market fears by announcing plans for bilateral trade negotiations.

So is it really a trade war, or just a set of negotiating tactics?

I believe the trade war scenario is more likely.

Yes, Trump offered relief to Canada and Mexico on the steel tariffs. But that was only so he could gain negotiating leverage on the NAFTA talks that are ongoing. If Canada and Mexico fail to give Trump the concessions he wants on NAFTA, those steel tariffs can bounce back to hit Canada and Mexico as they already hit China and Brazil.

Meanwhile, Trump will wait to see if China is willing to make concessions in the intellectual property area. If not, he can easily double or triple that $60 billion figure.

My take is that this trade war is not going away anytime soon. It will last for years, get much worse and be a major headwind for stock prices (click here for an urgent trade war update).

But I admit that Trump has left enough wiggle room to indicate he could back off the trade wars if he can exact enough concessions from China and the NAFTA countries.

Geopolitics are another on-again, off-again market driver. A strong case can be made for a coming war with North Korea.

Decades of North Korean development of nuclear weapons and ballistic missiles and a rapid increase in the operational tempo of tests in the past year reveal that North Korea is determined to build an arsenal of nuclear-armed ICBMs that pose an existential threat to the U.S.

For its part, the U.S. has made it clear that North Korea will not be allowed to acquire or possess these weapons. These two views are irreconcilable and point toward war.

- Source, James Rickards

Wednesday, April 18, 2018

Jim Rickards: Trump Prepares to Drop the Hammer on Amazon


President Trump has ratcheted up his war of words against Amazon.

Late last week, Trump tweeted that Amazon is having a negative impact on competing retailers, as well as the federal and local governments:

I have stated my concerns with Amazon long before the Election. Unlike others, they pay little or no taxes to state & local governments, use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.) and are putting many thousands of retailers out of business!… This Post Office scam must stop. Amazon must pay real costs (and taxes) now!

Then there was this morning’s tweet:

Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country… not a level playing field!

Trump’s campaign against Amazon is nothing new.

He sent out a string of tweets last summer raging against Amazon’s monopolistic business practices. Here’s one from last August, for example, that sounds a lot like last week’s tweets:

Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt — many jobs being lost!

But Trump’s attacks against Amazon are not just economic — they’re also personal.

Amazon CEO Jeff Bezos also owns The Washington Post, which is strongly anti-Trump. Trump sees The Washington Post as the unofficial leader of the resistance to his administration. The president has even referred to the newspaper as the “Amazon Washington Post.” And he knows it’s been out to get him.

What does all this mean?

It means there’s an excellent chance that Trump could pursue antitrust legislation against Amazon.

Trump’s logic is simple. Most of Bezos’ net worth is tied up in Amazon stock. In the world of billionaires and powerful politicians, the way to hit someone hard is in the pocketbook.

Trump will attack Amazon and clip Bezos’ wings by $10–20 billion as payback for what he considers Bezos’ attacks on him via the Post.


Antitrust law enforcement in the United States is a bit like the weather — unpredictable in the long run and highly changeable.

The Justice Department can go years or even decades without bringing a major antitrust case and then suddenly decide the time has come to send a message to big business, with emphasis on the word “big.”

When that happens, there is always one company that stands out from the crowd as a kind of sitting duck for ambitious prosecutors. Today, the sitting duck is Amazon.

When the case against Amazon begins, the stock will tumble. Amazon’s stock price is vulnerable under the best of circumstances because it ran up so far so fast. The bad news of an antitrust case will be the catalyst that causes investors to dump the stock in a desperate race to get out ahead of the crowd. Selling will feed on itself.

The selling contagion will spread to the rest of the FAANG stocks (Facebook, Apple, Netflix and Google) and to the Nasdaq as a whole.

Amazon stock was down as much as 6% today, based on Trump’s latest attacks. And the Dow is down almost 500 points at writing. The S&P and Nasdaq are also getting hammered.

But this could just be the beginning.

These companies are already vulnerable because China has threatened sanctions against U.S. technology companies. Technology stocks, led by Apple, dragged the broader market lower last week when the news broke. These threats of course come in retaliation against Trump’s latest promise to crack down on Chinese theft of U.S. intellectual property.

Any antitrust action Trump pursues against Amazon will trigger another correction or worse in U.S. stocks.

But investors who can read the antitrust tea leaves correctly stand to make huge profits when the Justice Department strikes.

- Source, Jim Rickards

Sunday, April 15, 2018

James Rickards: Trump Will Use the “Nuclear Option” on Trade


What we have seen so far are just the opening shots of the coming trade war. Think of it as the Battles of Lexington and Concord that opened the Revolutionary War. Much larger tariffs and penalties are waiting in the wings.

Trump will soon receive a report under Section 301 of the Trade Act of 1974. That report has been almost a year in preparation and will reveal that China has stolen over $1 trillion in U.S. intellectual property.

Section 301 of the Trade Act of 1974 is the “nuclear option” when it comes to trade wars.

I don’t want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. The president will have a completely free hand to impose billions of dollars of damages if not more on China.

Trump could receive this report within days or weeks. Regardless, it is coming soon.

Once the president receives it, the law gives him 90 days to react. But he will likely act within days or weeks upon receiving it.

Importantly, Trump does not require Congressional approval to act. Again, the law gives the president enormous flexibility. So he doesn’t need Congressional backing as he did for, say, the tax cuts.

Initial reports indicated that these penalties will be about $60 billion. In fact, Trump used that figure in today’s press conference on tariffs. But that’s just for starters.

Trump will wait to see if China is willing to make concessions in other areas. If not, he can easily double or triple that $60 billion figure.

The penalties Trump seeks to impose are not limited to specific sectors but may apply across a wide range of goods and services from China that benefitted in any way from the theft of intellectual property (IP).

IP is a very tricky subject with a lot of gray area.

Trade restrictions on steel, for example, are much easier to implement. Steel is tangible. You can weigh it, track it, etc.

Intellectual property, on the other hand, is much more vague, much more amorphous. It exists inside human brains, or on the internet or a computer thumb drive. It can be everywhere at once in a sense.

So it’s much more difficult to identify, quantify, and throw tariffs on than traded products like steel, autos, solar panels or washing machines. Yet intellectual property is more important than ever.

We live in a world of technology, a world of the internet, of smart devices, and even cryptocurrencies for that matter. These are all forms of intellectual property.

Now, China has been stealing U.S. intellectual property for decades in various ways. Sometimes it happens when a Chinese scientist comes to the United States and takes what he learns back to China.

But a lot of the theft has been done through malicious hacking of U.S. technology companies. These could be big defense contractors like Lockheed Martin or Northrop Grumman. But they could also be small firms with one great innovation or idea. These smaller firms may actually be more vulnerable because they don’t have the defenses against hacking or cyber warfare that the big guys do.

With this stolen intellectual property, China has been able to build up companies like Huawei, a large technology and telecommunications firm. And its defense industry has made enormous strides because of stolen intellectual property.

Because intellectual property is so amorphous, the president could look at a wide variety of Chinese industries and say:

“You know those electronic products you’re assembling, like smart phones? They wouldn’t be so smart if you hadn’t stolen some of our intellectual properties. So we’re going to throw a tariff on them.”

These penalties will have a much broader and deeper impact than the steel and aluminum tariffs, or those on washing machines or solar panels.

- Source, Jim Rickards via the Daily Reckoning

Thursday, April 12, 2018

Jim Rickards: The Fed Is Going “Cold Turkey”



This is the most aggressive tempo of rate hikes of any major central bank and puts U.S. policy rates significantly higher than those in the U.K., Japan or eurozone.

The issue for investors is whether the Fed is raising rates too aggressively considering the strength of the U.S. economy. Higher rates imply a stronger dollar, imported deflation and head winds to growth.

If the U.S. economy is on a firm footing, then the rate hikes may be appropriate, even necessary to head off inflation.

But if the U.S. economy is vulnerable, then the Fed’s actions could trigger a recession and stock market sell-off unless the Fed reverses course quickly. My view is that the latter is more likely. The Fed is tightening into weakness and will reverse course by pausing rate hikes later this year.

When that happens, important trends in stocks, bonds, currencies and gold will be thrown into reverse. Investors who position now for a coming course correction by the Fed can reap huge gains when that Fed flip-flop occurs.

Outwardly, the Fed is sanguine about the prospects for monetary normalization. Both Janet Yellen and new Fed chair Jay Powell have said that interest rate hikes will be steady and gradual. In practice, this means four rate hikes per year, 0.25% each, every March, June, September and December, with occasional pauses prompted by strong signs of disinflation, disorderly markets or diminution in job creation.

Balance sheet normalization is even more on autopilot than rate hikes. The Fed will not dump its securities holdings. Instead, it refrains from rolling over maturing securities. When the Treasury pays the Fed upon the maturity of a Treasury note, the money simply disappears.

This is the opposite of money printing — it’s money destruction. Instead of QE, we now have QT, or quantitative tightening.

The Fed has been transparent about the rate at which they will run off their balance sheet this way, although transparency should not lead investors to complacency. The balance sheet reduction tempo as of late 2018 is $600 billion per year, equal in impact to four 0.25% rate hikes per year.

The annual combined impact of the Fed’s rate policy and QT is a 2% increase in interest rates. For an economy addicted to cheap money, this is like going cold turkey.

The Fed would have investors believe that the rate hikes are already priced into capital markets, and QT is a nonevent, running on “background” in the Fed’s words, like an Excel spreadsheet on your laptop while you watch a film from Netflix.

Neither assumption is correct.

The view that balance sheet normalization can run on background without disruptive effects is unwarranted. The Fed printed almost $4 trillion of new money over six years from 2008–2014 to inflate the value of risky assets.

Yet somehow, the Fed would have investors believe that destroying $2 trillion in even less time will have no negative impact on the value of those same risky assets.

It’s not true...

- Source, James Rickards via the Daily Reckoning

Monday, April 9, 2018

Big Money Questions: Jim Rickards Predicts a Financial Crisis


The next financial crisis will hit us in the next six to eight months and will be triggered by war between the US and North Korea, best-selling author Jim Rickards predicts on the Big Money Questions show.

- Source, This is Money

Sunday, April 1, 2018

Jim Rickards: The Next Financial Panic Will Be the Biggest of All Time


Jim Rickards examines what the next financial crisis will look like and how it will be different from previous panics, gives us his outlook for gold and the key drivers for the yellow metal in part one of a tremendous two-part interview. Don’t miss my conversation with Jim Rickards, coming up after this week’s market update.