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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.

About the Author

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  88 Comments

Hammer · Jun 19, 2014 - 5:35am

As one wit once said, there are lies, damn lies and statistics ;)

Hammer · Jun 19, 2014 - 5:45am

Here you go GD

Not available.
Gold Dog · Jun 19, 2014 - 5:47am

Couldn't find a good one from Bob.....

isis - Bob Dylan Cover - Fifth Day of May (2008) version

YF,

D

PS-I have an account at TDArbitrage, you can call your exchange on the trading input. I only use limit orders anyway. If you want a friend, get a dog, they will all screw you one way or another.

Hammer · Jun 19, 2014 - 6:03am

Just one gripe about the lyrics...impossible to come in from the east with the sun in my eyes (unless he had a mirror)....or is it ?

Quabbalah zone........5/5

Hammer · Jun 19, 2014 - 6:06am

Ouroborus anyone ?

Spartacus Rex · Jun 19, 2014 - 6:09am

ah yes Mark Twain (Samuel Clemens)

Quick Rookie, what was his best line written to then Gen U.S. Grant?

Cheers, S. Rex

Spartacus Rex · Jun 19, 2014 - 6:22am

So are you saying it was totally impossible to be heading West before Sunset?

"impossible to come in from the east with the sun in my eyes"

Cheers, S. Rex

Hammer · Jun 19, 2014 - 6:40am

Not at all.....esoteric

Hammer · Jun 19, 2014 - 6:48am

Easy son, it is not a quiz show. These things are either known or require study. You might learn summat.

I hope we are all here to learn on our way through. I certainly try to and appreciate your input of course :)

Hammer · Jun 19, 2014 - 6:51am

Meanwhile, creditors beware...........?.......or more BS ?

Goldman Wins Dismissal of $450 Million Mortgage-Bond Suit

https://www.bloomberg.com/news/2014-06-13/goldman-sachs-wins-dismissal-o...

Hammer · Jun 19, 2014 - 6:54am

but but........I thought BS was out or is it ?

UPDATE 2-SNB says ready to act as needed in wake of ECB easing

https://uk.reuters.com/article/2014/06/19/swiss-snb-rates-idUKL6N0P01MU2...

Hammer · Jun 19, 2014 - 7:13am

SmPOssZ.gif

Gold Dog · Jun 19, 2014 - 7:57am

Haven't heard that in 35 + years...very evocative for Dog. I was looking around for the bong,the hotties and the mirror laying flat on the desk top!

Buying NOK at 6.10 or better here boss.

Your friend,

Dog

Hammer · Jun 19, 2014 - 8:11am

Rock n roll GD. Good luck with that smiley

My moment of a change in Spain. The King has retired, long live....etc etc.......

Tears For Fears - Raoul And The Kings Of Spain
buzlightening · Jun 19, 2014 - 8:11am

I knew he was the insiders insider. One high and mighty paid pimp to do the bidding of the cabal. He's doing exactly what he's paid to do. Give the secret society of black magic illusionist a point by point hidden in plain sight scenario after all the SHTF. RICKARDS will be the most fane stream media quoted singing canary in the collapsing; imploding financial coal mine ever propped up unto the public. More popular than big bird! What a place in history for the itty bitty sliver tongued jerk wad!

buzlightening · Jun 19, 2014 - 8:23am

The Fed Just Lost Any Shred of Credibility on Inflation

EconMatters's picture

Those High Chicken Prices are just Noise – Tell that to the Cashier

The Fed today in their press conference lost any credibility on a number of issues, and it really goes to show that they have no clue what they are doing at this point. First they called the overheating inflation in the economy Noise, yes you heard right NOISE which is now showing up even in the watered down indexes used to track it by the Fed, and already above their target of 2% on a year over year basis and rising, (wait until you see the next two month`s CPI reports on a spike in gasoline prices as we enter the summer driving season).

45% Appreciation is Normal Price Discovery & In-Line with Historical Norms

Then Janet Yellen says she sees no signs of a bubble in equity prices after a 35% appreciation followed by what looks like another 10% plus year of appreciation in the cards for 2014. It is one thing to be dovish, but when one goes out of their way to mischaracterize the data to such an extreme that it makes one lose any credibility just to justify a given monetary policy, that is when the proverbial shit hits the fan.

Read More >>> The U.S. Job Market Is Gaining Traction

No Clue at this Point!

We would expect some major market vigilantism and volatility once the next hot Employment report comes in two weeks, and a scorching CPI Report hits the tape in four weeks that only reinforces the fact that the Federal Reserve has no clue what they are doing at this point, and Janet Yellen is basically my Grandmother in charge of the Federal Reserve. 

Frankly, that is doing a major disservice to my grandmother who could spot inflation when she sees it, there is no hope right now after hearing Janet Yellen speak in the press conference, she is completely incompetent and the exact worse person for what we are now entering in the inflation era!

Read More >>> The Inflation Era Has Arrived! https://www.zerohedge.com/news/2014-06-18/fed-just-lost-any-shred-credibility-inflation


fed fud meetings from here on out; especially the coming 7/29-30 will begin the downfall. The fall girl fellen yellen becoming a hiss and bye word. I knew in '08 lil scamBO was set up as the fall guy for the US collapse. A black man. How fitting for the black magic illusionists. Knew yellen would be the fall freak show girl for the dead head fed fuds. It's all accelerating to the end of the game folks. As in Jim Willie's latest at USA Watchdog. The year will not end as it began. He emphasized this from him saying it around Jaqn '14. He's dead on folks and the last half of the year is disastrous for rank and file citizens economically. UNLESS OF COURSE YOU'RE A STACKER! Carry on turdities!

buzlightening · Jun 19, 2014 - 8:37am

not hear the other massive signal of collapse. It seems so long ago now but the saying as GM goes so goes the country. Did you miss the zero hedge commentary the other day. GM RECALLS MORE VEHICLES THAN SOLD IN 2012 & 2013. Your ears ought to be bleeding profusely, with that shrieking canary drum shattering blow horned clarion call for econophile collapse. Like Goon Motors needed all the recalls to collapse into nough nough land. It was all the recalls and not the econophile. Yes! ameriCON'd stupid as Willie said. 70 million with iq's under 90. Jim was to kind. Dollar Ready to Die, We are Losing our Country-Jim Willie https://usawatchdog.com/dollar-ready-to-die-we-are-losing-our-country-ji...

buzlightening · Jun 19, 2014 - 8:41am

Silver just broke 20 handle and not long 30, 40, 50, 60, 70, 80, 90, 100, 110, 600 and you got it or you'll get it if you haven't stacked silver. 

Hammer · Jun 19, 2014 - 8:48am

If er daddy's rich, take er out for a meal. If er daddy's poor, just do what you feel (and then listen to some advice, it aint what you think)

Summertime, unless you're an Aussie or a Kiwi in which case welcome to Winter.

Mungo Jerry - In the summertime
treefrog · Jun 19, 2014 - 9:29am

silver and gold both running up! the pale puppy is leading the way (percentage-wise) for the big yellow dog.

tyberious · Jun 19, 2014 - 11:13am

June 19, 2014 
Bangkok, Thailand

Five years.

In some respects, it’s a blink of an eye. In other ways, five years can be world changing.

Today marks five years since launching Sovereign Man. It’s extraordinary how much the world has changed since then.

I’ll explore all of that with you in a special podcast tomorrow. For now, just for the sake of nostalgia, I wanted to send along the very first email we ever published at Sovereign Man on June 19, 2014.

I’ve edited it slightly for today. But I think you’ll see the message still applies.

-------------------

William “Bud” Post is flat broke.

He has dealt with lawsuits, jail time, bankruptcy, and now lives on food stamps. It seems strange to think that he used to be a multi-millionaire… but it’s true.

In 1988 he won $16.2 million from the Pennsylvania lottery (valued at $30 million in today’s increasingly worthless money), and Bud became drunk on his own wealth.

You’ve probably heard similar stories—the struggling, working class lottery hopeful hits it big in the Powerball only to return to the trailer park, broke, within a few years.

In irresponsible hands, wealth can evaporate faster than Barack Obama’s approval ratings… and some lottery winners like Bud generally make bad decisions.

They become careless and foolish with their wealth, spending enormous sums of money on opulent consumer goods, gambling trips, and nights in the champagne room.

Banks line up to provide them with generous lines of credit that they blow on useless toys or handouts to a fawning entourage.

At the height of this bubble, someone like Bud has fame, wealth, power, friends, women, houses, yachts… but no foundation for the future. Each trip to the ATM is a missed opportunity to make a smart decisions… but Bud never cared.

He thought the money would last forever. He thought the banks would always give him a loan. He thought his friends would never leave him.

Then one day Bud went to the ATM and found that his balance was ZERO. He went to the bank for a loan and was declined. The money was gone. His friends had disappeared. The lawsuits started rolling in.

Suddenly poor Bud found himself with absolutely nothing but distant memories of drunken consumption.

Sound familiar? It should. Bud is the United States of America.

America hit the lottery after World War II being the only developed country in the world not devastated by the war. And like Bud, the US spent the next several years in an alternate universe devoid of rational thinking.

Decades of poor financial decisions were made based on the idea that the money would never run out. LBJ fought a costly war in Vietnam while building the Great Society. 
George W. Bush fought two wars and told America to go shopping. Barrack Obama thinks he can provide universal healthcare while cutting the deficit.

The common theme here is the avoidance of difficult choices. When Bud went to buy a new car and saw five that caught his eye, he bought all of them and built a bigger garage.

America’s politicians have made a similar series of irrational choices for decades, and now the money is gone… all that remains is America’s winner syndrome.

The US has been a winner for so long, no other reality exists. The country lives in a bubble where the United States is the biggest, richest, smartest, most powerful country on earth, even every shred of evidence suggests otherwise.

America continues to spend like a wealthy lottery winner with a divine right to avoid tough decisions.

Individually, such delusional behavior and separation from reality are symptoms of a severe mental illness.

If the collective body of America’s politicians were a psychological patient, he would be locked up as a danger to himself and society.

The only antidote is a healthy dose of reality and rationality. At any point, Bud could have pulled himself out of his downward spiral with a little clear thinking, a little less ‘yes we can,’ and a little more ‘maybe we can’t…’

Clear thinking could still save America. If the country takes it on the economic chin, allows its businesses to fail, and restructures the economy, the United States will come out of this slump stronger than before.

Unfortunately, there are no near-term indications of rationality in Washington… though while the country may be on a slide, clear thinking could still save you—and that’s where we come in.

Clear, rational thinking in today’s world means considering the full range of global opportunities to protect yourself and safeguard your assets.

We specialize in these opportunities; we travel the world in search of the best lifestyle choices, financial deals, privacy options, and asset protection strategies, some of which we’ll share with you in this daily letter.

treefrog · Jun 19, 2014 - 12:00pm

thurteen hunnert gold!

Grublux · Jun 19, 2014 - 12:23pm

not in effect today!

treefrog · Jun 19, 2014 - 12:55pm

silver uppa dolla inna day!

Grublux · Jun 19, 2014 - 1:00pm

I remember the dollar a day phenomena back in 2011. This is definitely interesting

erewenguy Grublux · Jun 19, 2014 - 1:10pm

Yep. Was thinking that myself. Strange to see the charts go vertical and UP.

Grublux · Jun 19, 2014 - 2:17pm

 to make sense of it all!

meluaufeet · Jun 19, 2014 - 4:16pm

That we are seeing ISIS money flowing into pm's?

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