- Low crude prices put the squeeze on gulf sheikhs…
- … but the sheikhs know how to squeeze back: Brace for a new currency shock
- China’s mega-nuclear deal with Great Britain; Washington sidelined again
- No, the Iraqis don’t want help from Russia, even if that’s what they say they want!
- Don’t get too close to the Gigafactory… boomers say our millennial readers are right… “death panels” and a prophecy from 1997… and more!
Crude is off more than 1% this morning, sinking back toward the $45 level, at $45.77. That’s nearly as low as a barrel of West Texas Intermediate has fetched all month.
Two weeks ago, Jim Rickards issued an oil forecast here in The 5: A range of $50-60, with occasional excursions outside that range, until 2017. That’s the price and the time frame Saudi Arabia needs to wreck the U.S. fracking industry without straining the budget of Saudi Arabia’s government.
Still, for the gulf sheikhs, there’s a downside to keeping oil prices “lower for longer.”
Yesterday, the International Monetary Fund warned that Saudi Arabia is staring down a budget deficit amounting to 21.6% of GDP this year. (By comparison, Uncle Sam’s deficit in the fiscal year just completed amounts to 2.5% of GDP.) The other gulf sheikdoms are in similar straits.
“Oil exporters will need to adjust their spending and revenue policies to secure fiscal sustainability,” said the IMF report.
Cut spending, raise taxes — that’s the usual IMF recipe.
But those are hardly the only tools the sheikhs have at their disposal — as Jim Rickards explained yesterday in an alert to subscribers of his premium trading service Rickards’ Intelligence Triggers. As irony would have it, his dispatch went out around the same time as the IMF report.
First, a little background. Saudi Arabia is one of six countries belonging to the Gulf Cooperation Council. The others are Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman. Think of it as a sort of European Union of the Persian Gulf.
The GCC isn’t as far along on unification as the EU. But goods do cross the borders freely. And they’ve made substantial progress toward a single currency.
As part of that effort, all GCC currencies are more or less pegged to the U.S. dollar.
Maybe you’re starting to see where Jim’s going with this.
“In the past four years,” Jim wrote yesterday, “practically every important currency in the world has devalued against the U.S. dollar. These include major economies and our trading partners. Canada, Australia, the eurozone, Russia and China have all devalued against the dollar in efforts to export deflation, boost exports and create jobs.
“The one exception to this currency war litany is the GCC; they have not devalued against the dollar.”
“The GCC countries are looking for a way out of their peg with the dollar,” Jim says.
A strong Saudi riyal or Kuwaiti dinar is bad for nonoil exports (oil is priced in dollars, so that’s not affected). Bad for the tourist trade, too.
“When this local slowdown is combined with the global slowdown and the collapse in the dollar price of oil,” Jim explains, “GCC members come under economic attack from two directions. Their budgets are in deficit, and they are drawing down foreign exchange reserves to make up the difference.”
“Most currency pegs break in a spectacular fashion,” Jim reminds us. “Think of George Soros’ attack on sterling, which brought the Bank of England to its knees in 1992.
“Just this January, we’ve seen the Swiss franc break their peg to the euro. We also saw China break their peg to the dollar in August.
“In both cases, massive trading losses resulted. Of course, these widespread losses produced massive gains for the few who were on the right side of the trade.”
Jim aims to have his readers on the right side of the trade as the GCC countries pile aboard the devaluation train. There’s still time to act on Jim’s newest recommendation. For access to Rickards’ Intelligence Triggers, look here.
Stocks are a mixed bag this morning. Blue chips are looking strongest — with the Dow up 70 points as we write, approaching 17,300. Small caps are looking weakest, the Russell 2000 off nearly half a percent.
The Street buzz is about Ferrari — which IPO’ed in the United States this morning. It promptly spiked 15%.
Treasury yields are backing down, the 10-year once again approaching 2%. Gold is losing ground — testing support at $1,166.
Notes from a declining empire, Part 1: “This was super big news in China and the U.K., but it wasn’t mentioned on U.S. news — at least I didn’t see it,” reads a note from Fred Hsu, who heads up our publishing venture in China.
We don’t watch the U.S. news channels here at The 5; to surf a tsunami of information as we do, you have to tune out the trivia. We do, however, keep an eye throughout the day on foreign outlets including China’s English-language CCTV News — where Xi’s visit has dominated the available airtime.
Feel free to insert your own Prince Philip thought bubble…
[Xinhua news agency photo]
U.S. news channels have presumably been too busy on the Lamar Odom/Kardashian watch to notice economic and political power shifting across the Pacific.
But shifting it is: This morning, President Xi and Prime Minister Cameron confirmed a huge energy deal. China General Nuclear Power Corp. will pick up one-third of the $28 billion cost for a new nuclear power plant in Somerset.
Back in March, the White House issued a huffy statement about Britain’s “constant accommodation” of China. Then, the occasion was the U.K. joining the Asian Infrastructure Investment Bank — a Chinese-led effort that might one day become a rival to the U.S.-led World Bank.
Many other U.S. allies have also joined the AIIB — Germany, France, Australia, South Korea — hoping for access to growing Asian markets.
The United States, Canada and Japan are on the outside looking in.
Notes from a declining empire, Part 2: The chairman of the U.S. Joint Chiefs of Staff insists Iraq wants no help from the Russians fighting ISIS.
“Both the minister of defense and the prime minister said absolutely, there is no request right now for the Russians to support them,” says Marine Gen. Joe Dunford after a trip to Iraq.
Really? Ever since the Russians started bombing ISIS and other opponents of the Assad regime in Syria three weeks ago, Iraqi Prime Minister Haider al-Abadi has called Russian airstrikes in Iraq “a possibility. If we get the offer, we will consider it, and I would welcome it.”
So far, Abadi hasn’t spoken up since Dunford’s visit. But the Iraqis have already accepted intelligence help from Russia… and Washington has scaled back its own intelligence help for Iraq as punishment.
Travel tip if you’re headed to Nevada: Don’t get too close to the Tesla “Gigafactory.”
Tesla Motors is building a huge factory outside Reno where it plans to make batteries for its electric cars and its Powerwall packs, the latter of which we spotlighted last spring.
A few days ago, Tesla issued a long press release claiming Gigafactory security guards intercepted two journalists from the Reno Gazette-Journal who were trying to break in. When security called the sheriff, the trespassers jumped into their Jeep and sped off — knocking over one of the security guards and then colliding with an ATV driven by two other Tesla employees.
Again, that’s Tesla’s account. “This portrayal is scandalous and could not be further from the truth,” says the newspaper’s attorney, Scott Glogovac.
He says it was the security guards on an ATV who slammed into the newspaper’s Jeep. What’s more, he says they smashed the driver’s side window with a rock and cut the driver from his seat belt, pulling him out of the Jeep and throwing him to the ground. “Even if [the two journalists] trespassed,” says Glogovac, “that didn’t give Tesla the right to attempt to detain or apprehend the employees in the manner it did.”
Hmmm… This Tesla-supplied artist’s rendering of the Gigafactory is as close
as we ever want to get to the place.
This much we know for sure: One of the journalists faces two charges of felony assault. And the court case should prove mighty entertaining…
“If I were a millennial,” a reader writes as our generational war grinds on in the mailbag, “I’d be really pissed off at what the previous generation did to me and my generation.
“But I do agree that many millennials were raised with a silver-plated spoon (bought
with borrowed money) in their mouths. They also missed out on having real family — right, Beav?!
“If it’s any comfort, boomers also screwed themselves. We’ve been watching our savings
disappear and our investments turn sour, and Social Security and Medicare (for which we were so royally robbed through the years) will die before many of us.
“At least, millennials, you get some revenge — we boomers will be swimming/sinking in the septic tank right along with you millennials… Except, of course, for the 1%, which you have been instrumental in elevating to their lofty positions. You also gonna support TPP?”
“Dear Millennial Generation,” reads a letter from “a distraught boomer.”
“Sorry for leaving you the mess of a first-world country with the most modern technological miracles ever devised, albeit buried in debt.
“Somehow, we let our elected class, those lawyers who collect millions from billionaires to get elected, do to us all the disservice of crony capitalism. It was enough to make us want to Occupy Wall Street.
“However, the banker class knew they could hide behind the ‘law’ to not get sent to jail.
After all, they can hire better lawyers than the government can afford. You have the right to be totally pissed, as our Constitution is a dead letter torn up by the lawyer class to be whatever they want it to be for their real ($$$) rules.
“Forget trying to change the system, as you can’t raise enough money to get a message out to more than a limited part of the population who would actually vote. The reality is the America I was born into has been hijacked by the highest bidder. After all, you are not really rich unless you can afford a congressman to do your bidding. Your only alternative really is voting with your feet.
“That may sound cruel, but in reality, you still have a choice in what forces control your life.
Think outside of the box (that may be the country you were born into).”
“The millennials are right,” adds a reader who points out he’s 62.
“State pensions? Social Security? Obamacare? Broke. Broke. Broke.
“When the talk of ‘death panels’ in Obamacare took hold, and Democrats showed Republicans pushing granny over a cliff, I predicted, ‘Yes, that’s right. When we’re 80-plus, millennials will be ‘dispatching’ us costly geezers at breakneck (no pun intended) speed.
“They’ll create a fancy, Orwellian, touchy-feely name for this genocide, but it will come. The strong always have the final say.”
The 5: That’s not completely off-base in the thinking of William Strauss and Neil Howe, the researchers who gave us the term “millennial” in several books during the ’90s and early 2000s.
In Strauss and Howe’s generational constellation, the millennials will play the same role in the present crisis era that the “Greatest Generation” played as they came of age during the Depression and World War II. (It’s hard to imagine present-day college students who need “trigger warnings” storming Omaha Beach, but that’s neither here nor there.)
Just as the GI generation was then rewarded with generous housing benefits, subsidized college tuition and so on, perhaps the millennials really will get that student loan forgiveness some of the politicians talk about.
Meanwhile, “Old boomers will construct a new social ethic of decline and death, much like they did in youth with sex and procreation,” Strauss and Howe wrote in The Fourth Turning. “Where their youthful ethos hinged on self-indulgence, their elder ethos will hinge on self-denial. As they experience their own bodies coping naturally with decline and death, they will expect government to do the same.”
Spooky for something written in 1997, no?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As long as we’re on the subject of aging… Look at this photo of rust:
Looks pretty bad, right?
It gets worse. Your body might be suffering from a similar chemical reaction right now as you read these words. And it might be the villain behind your low energy… aching joints… and seeing an old person stare back at you from the mirror.
Fortunately, there could be a solution to this “rust” based on Nobel Prize-winning research:
Click here to discover what it is.
