Jim Rickards: "Connecting The Dots In The Global Mosaic"

88
Wed, Jun 18, 2014 - 10:23am

The relationship between geopolitics and global finance has rarely been more densely connected and complex as it is today. Knowing how to invest and allocate assets among various classes requires understanding the strategic drivers of valuation and volatility. Here is an around-the-world tour of flashpoints and their implications for investors.

The disintegration of Iraq is far from over. The situation will deteriorate further putting upward pressure on oil prices. The ISIS-Sunni drive to Baghdad has been temporarily slowed due to the Shiite call to arms, and Iranian intervention on the side of Shiites and the al-Maliki government. ISIS sensibly is regrouping and consolidating gains while awaiting further aid form its Saudi sponsors. All of this is a prelude to much larger battles to come.

The war in Iraq has the potential to become a regional war. Turkey may be drawn in by the emergence of a Kurdish state in northern Iraq. Iran has already been drawn in to support al-Maliki. Syria and Iraq have effectively been partly merged because the border has been erased. Jordan is relatively weak and will be hurt by refugees and spillovers. Jordanian territory is used by both ISIS and the United States for base operations. None of these developments will be resolved soon, so the regionalization of the conflict will proceed with negative implications for regional energy supplies.

The relaxed reaction from the White House to the situation in Iraq is easily explained by the fact that Obama reached a detente with Iran last December when he announced a framework for agreement on Iran’s nuclear programs and removed some economic sanctions. Obama’s foreign policy vision is one where the United States withdraws from the world but leaves behind regional “cops on the beat” who keep order in their neighborhoods. Iran is Obama’s preferred cop on the beat in the Middle East so the United States is relying on it to restore order in Iraq without quite saying so.

Détente with Iran is a betrayal of Saudi Arabia. Since 1974, the United States dollar has been propped up by the original “petrodollar” deal whereby the United States acted as a guarantor of the security of the House of Saud in exchange for Saudi agreement to price oil in dollars. This requires countries to maintain dollar reserves in order to secure oil supplies whether they like the dollar or not. Now that the United States is reneging on its half of the deal, Saudi Arabia can abandon the petrodollar especially in its new energy dealings with China. This points to United States dollar weakness ahead, even if the dollar gets a temporary lift on flight to safety momentum.

Nor has the Ukrainian crisis abated. Putin made large gains in Crimea and eastern Ukraine in the early going. United States and European economic sanctions were tame, but the pushback was enough to cause Putin temporarily to relax tensions. As soon as the ISIS attacks in Iraq became a distraction for the White House, Putin seized the opportunity to go on the move again by putting Russian tanks in parts of Ukraine and tolerating the shoot-down of a Ukrainian troop transport plane. Putin is proving himself to be patient, nimble and focused compared to the White House, which is reactive, clumsy and easily distracted. This crisis is also not going away soon and will put upward pressure on the prices of oil and gold.

In Europe, the head of the European Central Bank, Mario Draghi, recently lowered two interest rates, including the creation of a negative rate of interest for the first time. Draghi has proved once again that he is the only central banker who understands central banking. He says little and does less, but it is all quite effective because he keeps dry powder and does not try to do more than he actually can. His recent moves show his dedication to price stability by fighting deflation, but also show that he will not print money or engage in quantitative easing, “QE,” for the purpose of stimulating growth. Draghi knows that money printing doesn’t work to create growth, nor will he join the currency wars by cheapening the euro. The euro has nearly bottomed for now and will trend higher as it becomes clear than Draghi separates himself from the easy money crowds at the Fed, the Bank of England, the People’s Bank of China, and the Bank of Japan.

China is in the midst of a massive credit and property bubble. Many expected this bubble would burst in 2015; however, recent evidence is that the bubble is bursting faster and these problems may come to the fore in 2014. China has enough reserves to bailout its banking system, but not without consequences. Chinese growth will slow sharply and there will be spillovers in other markets as Chinese banks sell good assets in developed economies to raise cash to meet demands at home. Angry mobs will storm banks to demand repayment of the Ponzi scheme “wealth management products” that have been sold by the banks. These money riots will spread.

The global situation resembles the 1970s. The Fed engaged in easy money policies in 1971 and 1972, in part to facilitate the reelection of Richard Nixon. High inflation did not emerge immediately. Money illusion prevailed and behavior was slow to change. But a series of geopolitical events in 1972-1973 culminating in the Yom Kippur War in October 1973 led to an oil embargo and sharply higher oil prices. In turn, that raised inflationary expectations.

Economists ever since have blamed the “oil shock” for the inflation of the later 1970s. But a proper understanding is that easy money before the embargo created dry wood and the oil embargo was a spark that lit the fire. You need both the wood and the spark to have the fire of inflation. The same is true today. The Fed and other central banks have printed trillions of dollars of money in the past four years. So far, inflation has been relatively tame. But the printed money is only the wood; a spark is still required. Events in the Middle East, Ukraine and China today may provide the spark.

The result may actually be the worst of all possible worlds — higher inflation and weaker growth, called “stagflation.” The Fed is between a rock and a hard place. If they withdraw ease by tapering the money printing, they will puncture asset bubbles. If they keep printing, inflation will gather strength. As weak data emerges over the rest of this year, the Fed will realize it has tapered into weakness. This will cause them to launch new money printing, or QE4, in 2015.

By then, a geopolitical witches’ brew will have emerged, and act as a spark for inflation that will race past the Fed’s expectations. Stock and property bubbles will burst, banks will be in distress, and the safest assets will be energy, gold, land, natural resources, agriculture and other hard assets.

James Rickards is portfolio manager for the West Shore Real Return Income Fund and the author of The Death of Money, a New York Times best seller from Penguin Random House. Follow on twitter @JamesGRickards.

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  88 Comments

glenno321sierra skier
Jun 18, 2014 - 12:16pm

Good luck with the move

I am doing the same thing but down grading I think there is still time. We are trying to sell and buy on the same day. That way everything comes in and goes out same day. No time for sitting around in the bank.

Jun 18, 2014 - 12:20pm

These are excellent

Read this: https://www.zerohedge.com/news/2014-06-18/td-ameritrade-admits-virtually...

​Then, you absolutely MUST READ this: https://wallstreetonparade.com/2014/06/citigroup’s-dark-pools-here’s-why-the-public-doesn’t-trust-wall-street/

dgstage
Jun 18, 2014 - 12:36pm

Another Banker Dead

James McDonald Dead: Rockefeller & Co. CEO Found Dead Of Self-Inflicted Gunshot Wound

https://www.huffingtonpost.com/2009/09/15/james-mcdonald-dead-rocke_n_28...

Grubluxdgstage
Jun 18, 2014 - 12:52pm

from 2009?

that article on McDonald???

ancientmoney
Jun 18, 2014 - 12:59pm

Good reason to starve the beast . . .

"We wonder: how long until Americans finally realize they have had enough, and proceed to inform the IRS they have systematically "lost" all W-2 and 1099 statements sent to them in the last several years as well..."

That is a good idea. The IRS is the funding arm for the illegal, fraudulent, banker-owned government we have today. Since it can choose to lose years worth of data, surely they can understand all Americans losing their receipts.

https://www.zerohedge.com/news/2014-06-18/darrel-issa-subpoenas-lois-ler...

Green Lantern
Jun 18, 2014 - 1:01pm

The thing about Rickards, as

The thing about Rickards, as I noted in my conversation with Tabberto last week, is that he has had an incredibly accurate track record in terms of his calls of geopolitical maneuvers. Anybody remember Greece? Just about EVERYBODY called that one wrong about Greece leaving the EU.

But as Tabberto and others have pointed out there are very troubling things about him. Namely, all the gold being at Ft. Knox and his theories on 9/11 (from my perspective.) Tabberto also mentioned that Rickards lifted GATA documents and just put it into his book "Death of Money" I had no idea about that and haven't further researched. That would be plagiarism and that would be the ultimate scummy.

So the way I read Jim Rickards, is the way I read RT news (voice of Putin), the way I read Zerohedge, pumping when the metals were about ready to collapse as AM has pointed out. Disinformation can be useful. Keep track of his record.

treefrog
Jun 18, 2014 - 1:04pm

isis, an odd name for islamists to call themselves

Isis: Goddess of motherhood, magic and fertility

yep, that would be an odd name for them to choose. but then again, i haven't heard THEM using it. i've heard (seen) the western news media using that name. i have no idea what they call themselves. if (remember that word) they take the initial letter from several words, wouldn't they use arabic words, and thence arabic letters? "isis" is obviously a product of the western news media and their fondness for "sound bites."

tyberious
Jun 18, 2014 - 1:09pm

June 18, 2014  Bangkok,

June 18, 2014
Bangkok, Thailand

"Whoever is winning at the moment will always seem to be invincible."
-- George Orwell

Wise words indeed as they aptly describe misguided confidence in the US dollar.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which helps manage the global banking system, tells us that US dollar settlement accounts for the vast majority of global trade.

And as Orwell suggests, many people take it for granted that just because the dollar is in the lead today, it will be that way forever.

They couldn't be more wrong. There's been a dominant reserve currency for thousands of years.

The Byzantine Empire's gold solidus was the world standard for centuries; when they hit the reset button in the 11th century, it became the gold hyperpyron.

Eventually this was abandoned for Venetian ducats. Soon Spain's silver pieces of eight became the dominant reserve standard to the point they were still legal tender in the United States until 1857.

By the 1860s, the British pound sterling was the world's primary reserve currency, and over 60% of world trade was settled in pounds.

Reserve currencies come and go. So will the dollar. This is nothing new.

It's bad enough that US debt is greater than any other nation's in the history of the world. Or that the dollar is being rapidly debased by a tiny banking elite.

But what's really driving the nail in the dollar coffin is the US government's continued appalling arrogance, particularly in bullying around foreign banks.

Just one tiny example is the US government's $10 billion threat against French bank BNP Paribas, which may even include criminal charges.

BNP's bank in Geneva stands accused of financing deals with Iran. Never mind that it's perfectly legal for a bank in Switzerland to do business with Iran. Iran, after all, is one of Switzerland's largest trading partners in the Middle East.

The issue is that BNP violated a 2012 -executive order- from Barack Obama (#13622) that requires non-US companies to enforce US sanctions.

The arrogance is really overwhelming. This isn't even an actual law. It's just an executive order-- a royal decree from King POTUS, first of his name.

And even if it were an actual law, on what possible grounds could the US government claim jurisdiction to regulate foreign banks? None. But this doesn't stop them from doing so.

FATCA is another great example-- a seismically destructive law passed in 2010 that mandates all sorts of US compliance requirements on foreign banks.

The only reason the US is able to get away with this is because the dollar (and hence the US banking system) is so important to their global business.

Their patience has run out, and things are starting to change.

The Chinese government has been rapidly loosening controls over the renminbi to increase its reserve status and compete with the dollar. And the rest of the world has quickly adapted to the opportunity.

The proof is clear. According to SWIFT, China's renminbi is now the second most used currency in the world for global trade settlement, putting it ahead of even the euro.

In London, renminbi trade last year surged 50% to $25.3 billion per day. And there's every indication that this growth will continue.

Singapore's central bank is now offering overnight renminbi liquidity. Russian companies are preparing to pay for trade in renminbi. Even the World Bank's IFC just issued its first renminbi-denominated bond.

It's happening. And based on the data, it's completely obvious... to just about everyone but the US government.

I was surprised to see an article in the Financial Times' banking intelligence subsidiary ('The Banker') entitled "The US's dollar domination is coming to an end."

Shocking. This reality has become obvious to just about everyone... except for the US government.

And seeing it reminded me of another great Orwell quote-- "[W]e have now sunk to a depth at which restatement of the obvious is the first duty of intelligent men."

Orwell was right. Fortunately, intelligent people can choose to embrace this obvious reality and benefit from it... rather than ignore reality and be devastated by it.


Until tomorrow,

Simon Black

ancientmoneydgstage
Jun 18, 2014 - 1:24pm

dgstage, DragonFly . . . did a Roth kill a Rock?

"McDonald, a New York City resident, was also on the board of stock exchange operator NYSE Euronext. He was formerly on the board of CIT Group Inc."

The man who knew too much? Under investigation, but:

"Barclay McFadden III, a longtime friend, said McDonald "took his own life," and added that neither he nor the family had further comment." Barclay? Coincidence that Barclay's is a European bank? A Roth? Was Barclay there?

https://www.huffingtonpost.com/2009/09/15/james-mcdonald-dead-rocke_n_28...

(repost of dgstage link).

Green Lantern
Jun 18, 2014 - 1:32pm

Somebody call my name.

Somebody call my name. ISIS


Anybody know anything about fertitlity cults? You know the whole sacrafice the blood of a virgin to appease the Gods aka Mayan, Phonecian, Egypt, etc... The Vampire craze...

Let's review. Appeasing the Gods to keep the big bad monster away.

King Kong | 1933
Video unavailable

​4:57 see interview with David Gergen

https://youtu.be/r5Yq_0Gg2Oc

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