Saudi and China, Sittin’ In a Tree…

  • Not just falling oil prices: Why Saudi Arabia hates the Iran nuclear deal so much
  • Saudi king’s pivotal meeting today: Prelude to the “Great Currency Shock”?
  • Chinese economic numbers, bogus and real
  • Lookie here: Economy tanks, deficit grows!
  • Looking under the hood of today’s “relief rally”… the strangest thing about the three Powerball winners… “resilient cultures,” continued… and more!

And so it begins: “With international sanctions lifted, the Iranian government called on its oil industry Monday to open the taps on production,” says The New York Times, “a move that could add to a global glut of crude that has sent prices into a tailspin.”
This morning, the International Energy Agency is warning global crude markets might “drown in oversupply.”
For the moment, crude prices have arrested their 2016 free fall. Brent crude, the global benchmark, is up 2.5% on the day at $29.28.
But make no mistake: As we said yesterday, if crude prices end up “lower for longer,” as the saying goes… it’s Iran’s archenemy Saudi Arabia that will feel the heat the most. “The strong dollar and low price of oil,” says Jim Rickards, “is strangling the Saudi economy and causing a drain on Saudi reserves.”
As we’ve been saying for several days, Jim believes sooner or later the Saudi riyal will be de-pegged from the U.S. dollar — touching off another global currency shock. If you missed his live briefing last night, we’ll tell you how to catch the replay in just a moment.
But first, a bit more background — so you can understand what makes this currency shock a sure thing…
From the standpoint of the Saudi princes, the end of the Iran sanctions has caused something even worse than a crashing oil price.
In short, Iran is becoming a respectable country again.
That’s what has all of Iran’s enemies so upset about the nuclear deal reached last year with the United States and five other governments. Their worst fear? That Iran will abide by every article and clause of the agreement — ending its status as a global pariah.
Israeli Prime Minister Benjamin Netanyahu said as much during a Cabinet meeting last April.
The Israeli daily Haaretz quoted an anonymous senior official: “Netanyahu said at the meeting that it would be impossible to catch the Iranians cheating simply because they will not break the agreement.”
That’s right: All of Netanyahu’s fulminating about an “Iranian bomb” is just for show.
As Haaretz explained it, “Netanyahu also told the ministers that in 10–15 years… the Iranians will show that they met all their obligations. They will then receive a ‘kashrut certificate’ from the international community, which will see Iran as a ‘normal’ country from which there is nothing to fear.”
And by then, Iran will have become a major Middle Eastern power — on a par with Israel and Saudi Arabia.
“Saudi Arabia, long an ally of the United States, considers Iran’s rise an existential threat for political, financial and religious reasons,” elaborates Jim Rickards.
“Tensions between Saudi Arabia and Iran are escalating, as witnessed by the recent execution of a senior Shiite cleric in Saudi Arabia and the Iranian retaliation of burning down the Saudi Embassy in Tehran.
“This U.S. tilt to Iran will force Saudi Arabia to find a new patron,” Jim goes on. “Obviously, the new patron will be China (the largest customer in the world for Saudi oil).
“The market implications are clear: Saudi Arabia will de-peg from the dollar (a financial avalanche of major proportions).
“Saudi will then re-peg to a basket (possibly the SDR, or more likely an ad hoc basket including the Chinese yuan).” Recall the SDR, or special drawing right, is the “supercurrency” issued by the International Monetary Fund to world governments.
“From there,” Jim says, “it’s a short step to pricing oil in the basket currency or perhaps the yuan itself. This will cause a major run on the dollar and cause major dollar inflation (even as the ‘basket price’ remains stable).”
Will you be ready?
Hey, look who’s paying a call on Saudi Arabia’s King Salman today…

The Strait Times Tweet.png

Among the events on the docket — a visit to a refinery that’s a joint venture between state-owned Saudi Aramco and Sinopec, one of China’s “Big Three” oil firms.
That’s the official agenda anyway. Might there be something unofficial too?
Well, you get the picture. Last night, Jim laid out the case for why this next great currency shock is inevitable. He showed people how to brace for impact. And he described a way to play this currency shock for as much as 300% upside over the next six months.
If you missed this live event, you can watch the replay at this link right now. Please note: Because of its time-sensitive nature — events are moving very quickly right now — we’re taking the video offline at midnight tonight. Catch it while you still can.
As “relief rallies” go, today’s market action is looking anemic.
About three hours before the open this morning, Dow futures were up 241 points. As we write late morning, the Dow itself is up only half that much, although that’s good enough to reach 16,100. Which happens to be around the level the Dow sat at this time two years ago.
The S&P 500, meanwhile, is bouncing off support at 1,894.


“Since violating the downtrend that shares were in at the start of the year,” says Jonas Elmerraji of our trading desk, “the big S&P 500 index has been in free-fall mode, ending last week at a potentially critical support level that connects the lows from August and September.
“That price floor is critical because it also coincides with the bottom of the long-term primary uptrend that this market has been enjoying for the last seven years.”
And no, today’s action is not reason to breathe the proverbial sigh of relief: “The bounce is too small to be material at this point.”
With traders in a bit more of a “risk-on” mindset today, Treasury yields are backing up — the 10-year note at 2.05%. Gold is steady at $1,086.
Meanwhile, there’s news from China that’s not awful for once — which the Financial Times suggests is one factor behind today’s rally.
The Chinese government issued its final GDP figure for 2015. Allegedly, the economy grew 6.9%, the slowest rate in a quarter century. But it’s in line with the government’s target of “about 7%.”
Heh… Longtime readers know Chinese Premier Li Keqiang thinks China’s GDP figures are bogus. We learned this in late 2010 from one of the State Department cables pinched by Chelsea Manning and released by WikiLeaks.
If Li really wants the pulse of the economy, he needs to know just three things — electricity consumption, rail cargo volume and bank lending. “By looking at these three figures,” the cable said, “Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,”
In the years since, analysts have tried to construct a “Li Keqiang Index” from these figures…

The Real Picture of China's Economy

Hmmm… That second chart’s been moving steadily in the wrong direction since mid-2013. And it’s approaching zero.
For the record: The federal budget deficit is growing again. Or so figures the Congressional Budget Office, which says the deficit will grow during fiscal 2016 from $439 billion to $544 billion.
The deficit’s size relative to the economy will grow too — reaching 2.9% of GDP. If that forecast bears out, it will be the first such increase since 2009.
Gee, what did we say on Saturday after a slew of lousy economic numbers on Friday? Oh, yes, “tax receipts are liable to fall… and the annual deficit will blow out again.”
Caveat: The CBO is assuming the U.S. economy will grow 2.7% this year. That’s even higher than the Federal Reserve’s forecast of 2.4%… and the Fed has been consistently over-optimistic for years.
What are the odds? The winners of the record Powerball jackpot all hail from states where their winnings won’t be subject to state withholding.
“In most states (and at the federal level), taxes on lottery winnings over $5,000 are withheld automatically,” writes Jared Walczak at the Tax Foundation. Typically, lottery winnings are taxed as ordinary income.
But get this: Three winners split a $1.6 billion prize last week. Two of the tickets were bought in Florida and Tennessee… which have no state income tax. The third was bought in California — which has a high state income tax, yes, but it’s not applied to lottery winnings.
In case you wondered about your state, the Tax Foundation put together a handy map…

Big Jackpot, Fine Print

Before you write in, yes, it’s possible the winners might live in states other than where they bought their tickets. Only the Tennessee winners have gone public so far, and they are, in fact, from Tennessee. But as we say, what are the odds?
[Ed. note: Whatever your income last year, whatever source it came from, don’t file your taxes until you’ve seen the latest edition of Vanishing Point: How to Disappear From the IRS This Tax Season and Save a Boatload of Money in the Process.
This guide, revised and updated for tax year 2015, is packed with tips that might save you a minimum $2,000 come April 15. Here’s where to snag a copy.
“I am so elated to have embraced Jim Rickards and The 5 Min. Forecast! a reader enthuses in an email we got yesterday. “Nearly finished with The Big Drop, and I cannot express to Agora enough how much my entire perspective on investing has changed!
“When I eagerly read in your special edition of the Iran sanctions being lifted, my mind was, ‘Jim warned us,’ and I can hardly wait for his event in a few hours! My poor husband is reading books now as I finish them. Not sure he can so fully embrace what is being said, but he has confidence in me that if I understand it, that is quite OK with him!
“My point is this: I have fired my previous investing teachers because they not only don’t get it, but it is obvious to me they are consciously choosing not to get it! I can understand the whole of the science community, the Fed, the IMF and others being quite slow.
“But in my mind, every investor with any kind of a thinking mind should be looking at Jim, Bill, Doug Casey, to name a few, just from a fundamental analysis perspective alone! Thanks for today’s ‘1 Min. Extra.’”
The 5: You’re welcome. Again, for anyone who missed Jim’s event last night, here’s where you can watch it right now. We’ll leave it posted online through midnight tonight.
Oh, a couple of readers called us on it: I got sloppy yesterday when I said Switzerland “devalued” a year ago. Of course I meant “revalued.” We have smart readers!
“Just a comment on the ‘resilient and sustainable cultures,’” writes a reader who wishes to weigh in on a topic from last week…
“I know you are fond of Russia/the Russians — but I’d bet most countries have sustainable cultures and can take a lot of ‘grief’ before they fall.
“For example, the Argentinians, Colombians, Brits, Palestinians, Israelis, Chinese and any European country post-WWII all survived and prospered!
“Keep up the great work for 2016.”
“One of the scariest things I have heard in recent months,” writes our final correspondent, “is one of our world monetary titans saying, ‘We have a new understanding of the meaning of money.’ That says a lot.
“It reminds me of one of the later Roman emperors covering a bronze slug with a silver wash and calling it a silver denarius. Because he said so, of course.
“That did not work out well, either.”
The 5: We looked up the quotation, but we didn’t find it. At least not with those exact words.
But we don’t doubt someone in the power elite said something to that effect.
If only we didn’t have to live with the consequences of other people’s ivory-tower theories…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Last chance: We’re leaving Jim Rickards’ presentation last night on “The Great Currency Shock of 2016” online for only a few more hours. Because it could be rendered out-of-date at any moment, we’re taking it offline at midnight tonight. Click here for your last chance to watch.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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