- Market crash! Dollar crash! The Shemitah!
- Jim Rickards with the real story about what’s going down this fall
- The key date to watch: One misstep really could set off a disaster
- “China didn’t really devalue”… What’s in an ounce?… Solar pays… And more!
Oh, my…
There it is, front and center on Drudge this morning.
It’s hard to get away from crash porn during these dog days of August. “Blogs, newsletters and inboxes are cluttered with dire warnings about an event in October 2015,” says our Jim Rickards, “that will supposedly overthrow the dollar as the global reserve currency and cause a catastrophic meltdown of the international financial system.”
Nudging along the doomy outlook: The first indicator revealing economic conditions during August laid a giant egg this morning.
The Empire State manufacturing survey is a Federal Reserve gauge of factory activity in New York state. The “expert consensus” among dozens of economists polled by Bloomberg was that the August number would ring in at a weak-but-still-growing plus 4.8.
In the event, it registered minus 14.9 — the worst reading since April 2009, when the Great Recession was still “officially” underway. The new orders component of the report is the weakest since November 2010.
“Today’s report is a reminder that weak exports and weakness in the energy sector are stubborn negatives for the factory sector,” says a summary from Econoday.
Then again… the second indicator to reveal conditions so far during August looks all right.
The housing market index put out by the National Association of Home Builders clocked in at a new post-2008 high.
To some extent, this crash chatter happens every year: September is typically the weakest month in the stock market. It’s the only month of the year in which the S&P 500 has registered an average monthly loss since 1950.
Then there’s the history of panics and crashes. They tend to be concentrated in September and October. That’s when the Panic of 2008 was most panicky. The one-day crash of 1987 happened in October. Likewise Black Tuesday in 1929.
Then again… in more recent history, the S&P 500 rallied 8.7% in September 2010 and 10.8% in October 2011 — which marked the start of an uptrend that’s still in place nearly four years later.
This year, there’s a prophecy wrinkle to it all — thanks to the Shemitah phenomenon.
We first heard about it early this year; now and then, a handful of readers would refer to it in our voluminous mailbag. Then at the “prepper” workshop we attended in Canada last April, one of our fellow attendees said the Shemitah was what inspired him to show up.
Popularized in books by a Messianic Jewish Rabbi named Jonathan Cahn, the Shemitah — well, we’ll let Wikipedia explain it:
“Cahn also argues that the financial collapses of the Dow Jones industrial average on Sept. 17, 2001, [when the market reopened after Sept. 11] and Sept. 29, 2008, were also prophetic warnings. He says that both happened on the same date of the Hebrew calendar, the 29th of Elul, and relates them to the Shmita, a Sabbath year observed every seven years in Judaism, in which the land isn’t cultivated and debts are cancelled.”
Then again… the current Shemitah year ends on Sept. 13, 2015. The market will be closed because it’s Sunday. Heh…
No insult intended here… but near as we can tell, the Shemitah phenomenon is driven mostly by fundamentalists who feel like they missed out on all the fun more heathen types had with Dan Brown novels and the 2012 Mayan calendar business.
“You should not be frightened by the October scare tactics,” says our Jim Rickards.
It’s true “there are important and significant events happening behind the scenes in the international monetary system,” he acknowledges. “Monetary elites are meeting in Washington, Beijing and Lima, Peru. Decisions are being made that will impact global capital markets in the years to come, and there is a plan underway to solve the global debt problem by stealing your money through inflation.
“But elites do not operate on the big bang theory. They do not announce radical changes overnight. They prefer to make small moves, year after year, through boring technical changes that few notice or understand. The elites have a plan to take your money. Yet they prefer a slow orderly approach, opposed to a rapid disorderly approach.
“As events unfold, you’ll be able to see them in the proper sequence and perspective,” Jim continues. Here’s a calendar of events…
- Sept. 17, 2015 — The Fed’s FOMC announces policy changes in interest rates
- September 2015 (exact date TBA) — President Xi of China visits White House
- Oct. 9, 2015 — IMF annual meeting in Lima, Peru
- November 2015 (exact date TBA) — IMF Executive Board discusses “new” SDR
- Sept. 30, 2016 — New SDR goes into effect.
As a reminder, the SDR is the special drawing right — the International Monetary Fund’s “world money.”
“The SDR is actually not that complicated,” says Jim. “The Federal Reserve can print dollars, the European Central Bank (ECB) can print euros and the IMF can print SDRs — it’s that simple.
“The main difference is that we can keep dollars or euros in our bank accounts or wallets, but SDRs are for countries only. They are added to national reserves by the IMF. SDRs can be swapped for dollars, euros, yen or other major currencies using a secret trading facility inside the IMF in Washington. So the inflationary potential of printing trillions of SDRs is the same as printing trillions of dollars or euros once the recipients make the swap.”
The other major difference: “No one is accountable. When the IMF floods the world with SDRs, you won’t be able to blame the Fed or ECB. Few people will have any idea what’s happening. They’ll just find out the hard way that their savings have been wiped out by inflation.”
The first key date is the Fed meeting Sept. 17. As you might already know, conventional wisdom says the Fed will raise the fed funds rate for the first time since the Panic of 2008… and Jim says the Fed will not because the economic numbers are too weak.
But here’s another reason: Remember, China wants its currency included in the SDR along with the dollar, euro, pound and yen. Its devaluation of the yuan last week seems like a setback toward achieving that goal… but right now it’s more important for Chinese leaders to shore up their economy.
“A rate increase by Yellen on Sept. 17 would be disastrous for China,” says Jim, “because they would have to tighten their own interest rate policy in lock step to maintain the new currency peg informally set [last week]. This would be like Yellen poking a stick in President Xi’s eye just as he is sitting down to dinner with President Obama. That’s no way to treat a guest! So don’t look for a rate increase in September.”
“I expect Yellen to blink on a rate increase, but if she raises anyway, it will be a catastrophe,” Jim says.
That’s because while economists are counting on an increase… traders are not. “The fed funds futures contract shows traders assigning only a 40% probability to a September rate increase,” Jim explains. “If Yellen does raise rates, the probability goes from 40% to 100% instantaneously.
“The entire forward part of the futures curve would then be compressed into a much shorter time frame. The impact on markets would be like multiple rate increases all at once. In that case, you should expect a global market meltdown, starting in emerging markets and ending in a collapse of U.S. stocks.
“The critical date this fall is not October. It’s Sept. 17. I don’t expect the Fed to raise rates then, but if they do, look out below. Markets will have no bottom.”
[Ed. note: Tomorrow we’ll look past September and October to other important events later in the year. In the meantime, we direct your attention to Jim’s urgent message about China’s devaluation last week — and what it really means.
Click here for a brief but important message about China and the dollar…
To the markets, briefly: All the major U.S. indexes are in the green, if barely. The S&P 500 sits four points below 2,100. For all the China-fueled volatility, the S&P ended last week up 0.67%.
Treasury yields are moving down, the 10-year at 2.16%. Gold has barely budged at $1,118. Crude has arrested its free fall for the moment at $42.55. The dollar index is up a tad at 96.8.
Aside from the morning’s U.S. economic data, the big news is that Japan’s economy is shrinking. Again. GDP contracted 0.4% during the second quarter.
No, this is not a rerun from the umpty-ump other times Japan’s economy has shrunk in the last quarter-century.
“OK, I’m confused,” a reader writes. “When the Fed was cutting rates, doing three rounds of QE and the Operation Twist, all of which devalued the dollar, everyone was saying we were exporting ‘inflation.’
“So when we devalue the dollar, we are exporting inflation, but when China devalues the yuan, they are exporting deflation! How does that work?
“Now I wonder if it’s also possible that China’s intent is to keep the dollar strong so it can get more purchasing power from its dollar reserves. They get a lot of win/win/wins by unpegging from the dollar. They get to let the yuan weaken, which helps exports while benefiting in dollar reserves purchasing power from the dollar’s rise.
“They also benefit from the related drop in commodities pricing. They could benefit even more if they used those now more valuable dollar reserves to buy those commodities, instead of using yuan. A weaker yuan can also help reverse hot money inflows.
“The thing is China did not actually devalue the yuan. They moved away from a heavily weighted peg to the dollar to a more market-based peg, which allowed the yuan to weaken. If they really wanted a large devaluation, they would not limit the range to just 2%. They actually just must move the yuan closer to becoming a freely floated currency. Something that the clowns in Washington have been demanding for well over a decade. Well, as the saying goes, ‘Be careful what you wish for.’
“On a positive note, China just made it more expensive for wealthy Chinese to buy U.S. real estate and to send their kids to U.S. colleges.”
The 5: You’re absolutely right, and that’s a point we perhaps didn’t emphasize enough last week: China effectively loosened the peg. The immediate effect was a short-term devaluation against the dollar… but for how long?
We’ll tease out the implications with Jim Rickards’ help tomorrow.
“Troy ounces are about 10% heavier than avoirdupois ounces (though both come from the French),” a reader writes of the gold bar at the bottom of a lake in Germany. “A half kilo is the same as 16.0755 troy ounces, worth about $17,924 at the current ‘spot’ price of $1,115.
“Nice of her to just give it to the police, though, since the German police are less aggressive about confiscating things of value from their populace than those in the U.S.”
The 5: Nostra culpa. We know all that, we just carelessly selected the wrong online calculator!
“I was doing business with a company and noticed they had solar panels on their roof,” a reader writes as the subject of solar drifts into a new week.
“I asked how it is working. His electric bills are running about $4,000 a month. Where we are in true Northern California — Redding area — we have a lot of sun year around. The system they installed would produce excess electricity for at least nine months out of the year, which in California the utility company has to pay for at a decent fair market value for the power in a commercial install.
“With the 30% federal credit, 10% state credit and depreciation for three years or less, the return on investment is three-four years — the panels have a life span of 25. Looks like a good deal to me!
“Residential is a little different depending on a lot of factors, but you can probably get an ROI in about five-seven years, still a good deal.
“Final note: You should get a battery backup system (Tesla is working on a great one). If the grid goes down, you will want it. A lot of salespeople will tell you you don’t need it.”
The 5: Of course salespeople will tell you you don’t need it — it would put the price out of reach for many people.
Our early take on the Tesla battery can be found here. It looks sexier than a bank of lead-acid batteries strung together… but it’s no more cost-effective.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Two of our themes from today just collided. Not only is the world not going to end in October, that’s the month that solar investments are set for a new catalyst.
To learn how to grab a piece of a $3.7 trillion bounty, look here.
