Someone in the publicity department at the International Monetary Fund is looking for a new job today. Or so we surmise from this tweet our own Jim Rickards put out yesterday…
Jim sat in on the IMF sessions last week in Washington. As we mentioned on Wednesday, the IMF issued its semiannual World Economic Outlook, warning the Federal Reserve will set off a “cascade of disruptive adjustments” whenever it starts to raise the fed funds rate.
Later in the week came another IMF document. This one’s called the Global Financial Stability Report.
The current edition warns that high-powered investors are borrowing too much money to buy U.S. stocks: “Margin debt as a percentage of market capitalization remains higher than it was during the late-1990s stock market bubble. The increasing use of margin debt is occurring in an environment of declining liquidity.
“Lower market liquidity and higher market leverage in the U.S. system,” it adds, “increase the risk of minor shocks being propagated and amplified into sharp price corrections.”
Here too the Federal Reserve is making matters worse. If it starts raising the fed funds rate at an inopportune moment, borrowing costs could spike suddenly… and liquidity could dry up faster than a puddle in the desert sun.
Or in the words of the report, “A sudden shift in market views that unwinds compressed premiums and sends yields higher could trigger a market liquidity shock.”
But that’s how it goes during a currency war — central banks act unpredictably, with market shocks as the consequence.
As a reminder, Jim Rickards believes we’re now in our third currency war in the last century…
Currency War II (1967-1987): It begins with Great Britain devaluing the pound against the dollar. Soon the dollar is under pressure, and in 1971, Nixon cuts the dollar’s last tie to gold — sending the greenback on a roller coaster ride for the next 16 years. The Plaza Accord of 1985 and the Louvre Accord of 1987 lead to a new equilibrium.
Currency War III (2010-present): It begins with President Obama announcing plans to double U.S. exports in five years. The only way to make that happen is to cheapen the currency. Months later, Brazil’s finance minister declares, “We’re in the midst of an international currency war, a general weakening of currency.”
Early during Currency War III, the dollar was weakening. By mid-2011, even the official U.S. inflation rate was pushing 4%. More recently, inflation has been falling, and it’s the turn of other currencies like the euro and the yen to weaken. That’s how it goes in a currency war — seemingly unpredictable ups and downs.
Overnight, China’s central bank fired a shot of its own — lowering reserve requirements for the banks. Chinese banks must now keep 18.5% of deposits on hand, down from 19.5%. The hope is the move will help reverse a trend toward slower economic growth.
By the way, Obama failed in his aim to double exports in five years. But they did rise close to 50% by late last year.
Then the dollar went on a tear, and exports have plunged in recent months. But sooner or later, the dollar will tumble again. As our fearless leader Addison Wiggin said in this space a week ago, “None of the fundamentals for the dollar has changed.”
Back to Jim Rickards, the man who made “currency wars” a term of art and penned a book of that name. “Today, central bankers around the world are all fighting currency wars. In all major financial centers at once — from Washington, D.C., to Moscow to Beijing. This war is fought 24 hours per day, by bankers, traders, politicians and automated systems. The fates of economies and their affected citizens hang in the balance.”
Earlier, we described the “seemingly unpredictable” ups and downs that result. Emphasis on “seemingly.” That’s because Jim and his research team have developed a system to accurately forecast those ups and downs — enabling you to capture large gains in a short time. It’s called the IMPACT system.
“This proprietary strategy uses the very same secrets I helped develop for the CIA to predict terrorist attacks,” he explains. “Based on 20 years of back-tested data, IMPACT is the only way we’ve ever found that could have allowed you to profit an extraordinary 1,246% (or more) from currency wars.”
You don’t have to engage in risky forex trading to profit from the IMPACT system. And now’s the time to take advantage, as new currency battles break out almost weekly. Here’s where to get started.
The market swoon on Friday turned out to be a fleeting affair. As we write, the Dow has regained all but 50 of the 280 points it lost Friday. The other big U.S. indexes are also in the green, though not as strongly.
The greenback is strengthening, with the U.S. dollar index up to 97.8. That’s sent gold back below $1,200 again; the bid at last check was $1,192.
The stronger dollar is having no impact on crude, however: A barrel of West Texas Intermediate is up more than 2% — only 3 cents shy of $57.
After seven centuries, it’s the beginning of the end for gunpowder in naval warfare.
Or so our Byron King concludes after spending part of last week at the Navy Sea-Air-Space Exposition near Washington. “In essence, Sea-Air-Space is a forum for high-level policy and technical discussions by top Navy, Marine Corps and Coast Guard leadership.”
It was an offhand remark by Chief of Naval Operations Adm. Jonathan Greenert that caught Byron’s attention. He said he wants to “get the Navy off gunpowder.”
“Navies have been using gunpowder since about… oh… the 14th century,” Byron points out. “Still, it’s fair to say that right now we’re moving toward the home stretch for chemical gun propellants.” The transition will take 30-40 years.
What will replace gunpowder? “Lasers and railguns,” says Byron. “Lasers can already shoot down drones, small target aircraft and even incoming mortar and artillery rounds. Just like Star Trek, only real. So for perhaps a few dimes’ worth of electricity, lasers can destroy objects that cost as much as a house in an upscale neighborhood.”
Railguns? We mentioned those a year ago. Using electromagnetic energy, they can fire an inexpensive 23-pound projectile at a staggering seven times the speed of sound.
“The idea is that with a railgun,” says Byron, “you can take, say, a one-pound steel dart, apply immense energy and shoot it hypersonic such that it rips straight through even battleship armor — and I’ve seen some of that armor post-hit. For a low-cost ‘dart’ (well… low-cost relatively speaking) and a few bucks worth of electrons, you can destroy very expensive things. New paradigm, right?”
Byron will keep readers abreast of the investing possibilities in the pages of his Military-Tech Alert.
Speaking of FDR’s 1933 devaluation of the dollar against gold… it’s time to revisit a lingering dispute from that episode.
In September 2012, we related the story of the Langbord family — heirs of a Philadelphia coin dealer. They were the proud owners of 10 1933 Double Eagle gold pieces.
Most of the 1933 issue never made it into circulation; it was melted down after President Roosevelt’s gold-confiscation order. Only 13 are believed to have survived. The U.S. Mint gave two to the Smithsonian. One is in private ownership… and the Langbords have been fighting with the government for years over the other 10. The feds insist the coins were stolen. The evidence for that is murky.
One of the rarest coins ever…
On Friday, a federal appeals panel ruled 2-1 that the Langbords are the rightful owners… in part because the feds missed a deadline to seek their forfeiture way back in 2005.
The story may not be over, though. “We are weighing our options,” says a spokeswoman for the U.S. attorney in Philadelphia.
“You have been telling us for years to prepare to pay the Fed’s bad debt,” a reader writes after we took note of “the $470 billion swindle” 10 days ago.
That’s the amount of money U.S. savers have lost to near-zero interest rates. Meanwhile, Uncle Sam’s interest expense has fallen from $454 billion in 2008 to $433 billion today, even as the national debt has exploded.
“And this is how they got their co-signers to pay for their trouble,” the reader goes on. “We’ve been paying all along, and their plan appears to have worked out well. For them. I can imagine they like the results so much they will see no need to change course.”
“Sorry to bring up taxes again,” writes a reader, “but I just prepared and filed my return (still pretty bruised on the check, I had to write).
“I don’t own a home; I have a few charitable donations, but not mind-blowing amounts; and a couple of little miscellaneous deductions here and there. But what I do pay is a lot of California state income taxes. So much, in fact, that the deduction for paying those taxes put me into the AMT, and I was thus disallowed much of that deduction. In other words, I had to pay more federal taxes because I paid too much state taxes.
“If that is not simply the most f-d-up result, I don’t know what is. Just another way that we W-2 moderately high earners get screwed. Buffett and Gross can go to hell!!
“Love The 5, by the way, especially all the bitchin’ at the end that comes up every so often.”
“You guys do yourselves and your readers a disservice when you publish this b***s*** from Guenthner and Elmerraji,” a reader protests.
“It’s mindless drivel. You used to be so much better than this. Now we get chart chimps with the latest flash-in-the-pan speculation and a permabull mantra. I guess great writing and honest commentary don’t pay like selling subscriptions to tout sheets Sad.
“Stock prices are about average, MY ASS. If this isn’t THE most risky market in history, it’s in the top two or three.
“You really insult people’s intelligence when you offer Rickards’ informed commentary and then pair it up with the CNBC-like effluvium offered by that [expletive deleted] moron Guenthner and his idiot sidekick.”
The 5: Aw c’mon. Permabulls? Really now, we have a reputation as a firm to uphold!
Jonas will be the first to tell you — indeed, he did last week — that the Fed is driving many stocks higher. His charts are a critical tool to help us figure out when those inflated prices will start coming back to Earth.
Without that insight, you end up saying, “It’s unsustainable! The end is near!” every day for six years while the market races up 215%…
“I wonder if Jonas’ graph showing cumulative outflows from stock mutual funds is representative of fund flows in/out of equities in general,” a reader writes after Thursday’s episode.
“The popularity of index ETFs has soared since 2009, and not without good reason, as these have outperformed most actively managed mutual funds. If you include these fund flows, what does the graph look like?”
True, the figures from the Investment Company Institute account for only mutual funds. In part, says Jonas, that’s to keep a consistent data set, since it goes back long before the advent of ETFs.
But consider the estimated money flows for the SPDR S&P 500, the biggest stock index ETF. “Since 2009,” says Jonas, “that fund has only added a net new $6.6 billion (for an ETF worth $180 billion today).
“My guess is that things look less bad in the ETF world, but clearly not by much. And remember, lots of ETFs today don’t track U.S. stocks. So even if assets in alternative ETFs like USO or GLD or VWO have been growing, the bottom line is that retail investors haven’t been participating in this historic rally for domestic equities.”
“To tie two of the Friday themes together,” writes our final correspondent, “just wait till Al Gore hears we may start global warming on Mars.
“He will surely be taking his private rocket to the red planet to propose new taxes to thwart the effort.”
The 5: Elon Musk, call your office!
Best regards,
Dave Gonigam
The 5 Min. Forecast
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