- A cautionary tale of the police-militarization era
- Trading glitches, missed paychecks, an absent Janet Yellen
- The month an emerging-markets crisis hit U.S shores: What to do now
- The number that just buried any chance of a September rate increase
- “Fiduciaries” and the newest 401(k) confiscation rumor
So this is what life has come to: Police are so attuned to seeing threats everywhere that they can mistake a telescope for a rifle and a sweater for a tactical vest.
At least Levi Joraanstad and Colin Waldera lived to tell about it. They’re students at North Dakota State University. They were setting up their telescope Monday night to photograph the moon.
Then some cops on patrol showed up and flipped out. They shone a light on the students and ordered them to freeze. Evidently, the officers didn’t identify themselves at first.
“I was kind of fumbling around with my stuff and my roommate and I were kind of talking, we were kind of wondering, what the heck’s going on?” Joraanstad tells the Grand Forks Herald. “This is pretty dumb that these guys are doing this. And then they started shouting to quit moving or we could be shot. And so at that moment we kind of look at each other and we’re thinking we better take this seriously.”
At least no shots were fired. Joraanstad said the officers apologized. Police tell the paper — we presume with a straight face — the students were never in any danger.
No, a story like this isn’t our usual beat. But it’s Friday, and it’s our custom to get a little weird as the week winds down.
This Friday — late summer, with Labor Day weekend upon us next week — seems especially freaky.
For starters, online access to Charles Schwab’s trading platform went down about 9:10 a.m. EDT. It was back up about three minutes after the 9:30 open. No word yet on the cause. During Monday’s trading frenzy, TD Ameritrade and Scottrade customers also ran into problems.
Earlier today, meanwhile, HSBC’s electronic payment systems hiccupped. Many British customers didn’t get their direct deposit on payday. Again, explanations are few and far between.
Even the Federal Reserve’s annual central banking shindig today in Jackson Hole, Wyoming, is abnormal. Back in May, Fed chief Janet Yellen said she’d be a no-show this year. When does the chairman not show up for this thing? (Then again, considering her speech was such a crashing bore last year, it was probably a good call.)
It’s at a time like this our mind drifts to Jim Rickards’ avalanche theory.
Strictly speaking, it’s “complexity theory” — but the analogy of an avalanche brings it home. In short, you never know which snowflake might set off a financial avalanche… but once in motion, it really doesn’t matter. The system itself is too rickety to withstand the accumulated snowfall.
“Beginning a few months ago,” Jim explains, “many Wall Street analysts assured us that China’s problems were China’s problems and would not spread outward. They told us growth in the U.S. was solid, and that emerging-market collapses in Russia, Brazil, China, Turkey and elsewhere were due to local factors and conditions that would not impact the U.S.”
If you were reading The 5, you knew better. You knew as long ago as January about a $9 trillion snow shelf made up of emerging-market debt denominated in U.S. dollars. That debt has become much harder to repay with emerging markets stalling out and the dollar growing stronger.
Now here we are in late August. “What began as a slowdown in China has now spread to almost all emerging markets,” says Jim. “Once again, currency ‘pegs’ are being broken from China to Kazakhstan. Finally, the U.S. market is being affected as investors dump risky assets such as stocks and jump into more liquid assets such as money market funds, Treasury securities and bank deposits.”
“This is not the first time that an emerging-markets crisis has found its way to our shores,” Jim reminds us.
“The same dynamic played out in 1997 and 1998. That crisis began in Thailand in June 1997 and very quickly spread to its neighbors in Indonesia and Malaysia. It manifested itself in the form of collapsing currencies and local stock markets, capital outflows and the bankruptcy of many entrepreneurs and investors who had borrowed in dollars and invested in local currency in the mistaken belief that the local currency was ‘pegged’ to the dollar. One by one, the pegs were broken and investors wiped out.”
By fall 1997, the trouble had spread to South Korea. Then, for a while in 1998, it seemed as though the crisis had abated. That is, until Russia defaulted in August — leading to the collapse of the hedge fund Long Term Capital Management (LTCM).
“At the height of the LTCM panic, global markets were just hours away from a complete shutdown,” says Jim. “Only a last-second $4 billion bailout and two interest rates cuts by the Fed saved the day. The panic was over by October.” (Jim knows this episode well. He was lead counsel for LTCM. He was in the room negotiating the bailout.)
“The point is that the time scale of global financial contagion is not necessarily limited to days or weeks,” Jim goes on.
“These panics can play out over months and years. What look like unconnected distant events are actually indications and warnings of something much more dangerous to come.”
So is there any difference between now and 1998? Yes.
For one thing, technology is such that “markets are much more densely linked,” Jim explains. If high-frequency trading computers can’t buy or sell assets in one segment of the market, they’re programmed to sweep into another segment.
“A second difference is that the Fed has no room to cut interest rates as they did in 1998. The Fed blundered by not raising rates in 2010 and 2011 when they had the chance. Now investors must pay the price for that historic blunder.
“Even in the most dire circumstances, there are ways to profit if investors understand the dynamic forces and avoid biased advice from Wall Street. The collapse of emerging markets has just begun.”
If you haven’t tried Jim’s IMPACT system, there’s no better time. China’s devaluation starting Aug. 11 has set off a chain of events that will ripple out for months to come — offering one profit opportunity after another. This month alone, IMPACT has delivered gains of 110% in 24 days… and a 6% gain in the last 10 days. For access to IMPACT, look here.
The major U.S. stock indexes are looking positively calm on this freaky Friday — at least relative to the last week and a half. As we write, the Dow is off less than a half percent at 16,582. The small-cap Russell 2000 is slightly in the green.
Gold is perking up again — up 1% at $1,138. And that’s despite the dollar index hanging in there at 95.9.
Crude is adding on to a monster 9% gain yesterday — up another 3.7% at last check, to $44.13. Only four days ago, it was below $39. Hope you fueled up midweek.
OK, can we drive the final nail into the September-rate-increase coffin?
The Commerce Department is out this morning with its latest “income and spend” report. It shows Americans continued their tightwad ways of the last year-plus: Consumer spending grew 0.3% from June to July… but personal incomes grew 0.4%.
More relevant is this report’s reading of “core PCE” — far and away the Fed’s favorite measure of inflation. The year-over-year change is 1.2%. Last month, it was 1.3%. So not only is it nowhere near the Fed’s 2% target, but it’s moving in the “wrong” direction.
By now nearly every mainstream analyst has jumped off the bandwagon that insisted the Fed would raise the fed funds rate at its next meeting Sept. 16-17.
To which Jim Rickards would say, “What took you so long?”
“Can you guys comment on this?” writes one of our regulars, linking us to a “401(k) confiscation” article by one David Mills, reposted on the website of Alaska radio host Joe Miller.
As it happens, your editor has been on the 401(k) confiscation beat as long ago as 2008 — when Congress briefly debated killing the tax advantages of 401(k) accounts.
And in my role as the Laissez Faire Letter’s 401(k) watchdog, I’m plugged into the new development that’s caught Mr. Mills’ eye. This week, the Labor Department issued new rules that would make brokers and advisers to retirement plans operate under the “fiduciary” standard.
We need to back up a bit. Professionals in the financial services industry generally get paid one of two ways…
- Method No. 1: Clients pay them by the hour or clients pay them a percentage of their assets to manage.
- Method No. 2: Other players in the financial industry pay them commissions to sell their products to clients.
Now, if you’re a client — and if you have a 401(k), you’re a client of the financial services industry, whether you realize it or not — which arrangement is better for you?
It’s the first one, right? After all, if you the client are paying a professional to manage your money, they’re more likely to look out for you.
That’s not how it works with your 401(k). The people who manage it have no legal obligation to make your best interest their priority. They don’t operate under a “fiduciary” standard. They must simply find “suitable” investments for you — which usually turn out to be underperforming high-cost mutual funds.
The president says he wants to change this. “It’s a very simple principle,” he said a few months ago: “You want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest.”
So what’s the hidden agenda?
“Like Obamacare, the idea is to drive small- and midsize service providers out of the retirement business by ensuring that the costs of complying with regulations are unaffordable,” Mills writes in his commentary.
Perhaps. But even the big players are squawking about these rules — and they’re spending a ton of lobbying money trying to get Congress to kill them before they’re ever implemented. The industry says if brokers were forced to abandon the commission model, they’d have to charge fees based on the size of a client’s account. Result? Middle-class people with 401(k)s would be “priced out” of getting any advice at all.
I’ll concede they have a point… and I’m no fan of the big retirement-industry players.
Bottom line: It’s a reach to say these rules are another brick in the 401(k) confiscation wall.
Here’s Mills’ logic, once again invoking Obamacare. “Many Democrats are open about the true goal of Obamacare: to end up with a single-payer health care system, modeled after the National Health Service in the U.K.”
From there he jumps to this: “The Obama administration has its sights set on an incredible amount of your money. By some estimates, Americans are holding well over $10 trillion in private retirement accounts… You can be sure that the real goal of the Obama administration is to nationalize your retirement account and to invest it in [U.S. Treasury] debt that will become increasingly unsellable in the open market.”
As Jim Rickards has said ever since joining us a year ago, there are deflationary forces strong enough to keep people piling into U.S. Treasuries for the foreseeable future. Obama doesn’t need your 401(k) money to fund the national debt.
In any event, we’re neutral on the new rules. If the rules don’t change, Wall Street’s sharks will continue to ply you with their miserable and costly mutual funds. If the rules do change, you’ll be left to fend for yourself in selecting investments for a tax-advantaged retirement account.
Either way, you’ll need independent guidance to preserve your wealth.
That’s why you buy our advisories in the first place, right?
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. Just in: The Fed’s No. 2, Stanley Fischer, said in Jackson Hole that it’s too early to tell whether a September rate increase is justified. Because the Fed must keep up the pretense it’s not being driven by events beyond its control.
The Fed couldn’t control China’s decision to devalue the yuan earlier this month. “A cheaper yuan means a strong dollar, which lowers import prices, which is deflationary for the U.S.,” said Jim Rickards at the time. “You raise rates to fight inflation and cut them to fight deflation.”
China forced the Fed’s hand. That’s how it goes in a currency war.
As we said earlier, China’s devaluation will create profit opportunities for months to come — lucrative opportunities to double or triple your money in a matter of weeks. And using Jim’s IMPACT system, you don’t have to trade the rough-and-tumble forex markets to do so.
Learn how to start profiting from the Chinese devaluation today. Start here.
