- Terrorism at the polls on Election Day, and other cheerful thoughts
- A market-collapse scenario no one else is talking about
- How the fallout from a “financial A-bomb” would spread globally
- The irony of the “big announcement” accompanying Obama’s Cuba junket
- China seeks advice from the Fed (no, we’re not making this up)
- Grocer fires a volley in the war on cash… what a post-cash world might look like… the “cash-back” credit card debate, continued… and more!
Well, this is a heck of a way to start a Monday morning.
“The U.S. election could get worse,” says the first email in my inbox. “It could be a prelude to a civil war.”
It’s a post from John Robb’s Global Guerrillas blog, passed along to your editor by our fearless leader Addison Wiggin.
For years, Mr. Robb has been writing about asymmetric conflicts and fourth-generation warfare — including how it might be waged on U.S. soil.
As a thought experiment, he’s spun an Election Day scenario. After months of violent protests in every state, matters get much worse on the afternoon of Tuesday, Nov. 8…
- “A dozen faux bombs in suspicious packages are placed at heavily (Rep or Dem) polling locations resulting in evacuation and widespread concern
- “Robocalls pour in to police departments and polling places in heavily (Rep or Dem) polling locations with bomb/terrorist threats. Widespread poll closures occur. Calls continue until late
- “Election results are skewed. Electoral college swings to the candidate helped by the threats.
“One candidate declares victory. The other cries foul. Protests go national. Violence, looting and active engagement with police… The global economy collapses due to uncertainty over U.S. economy (ill-conceived financial derivatives ensure that virulent U.S. contagion spreads to every nook and cranny of the global financial and economic system).”
Hold that thought about derivatives. We’ll get back to it shortly.
“The most interesting thing about this scenario,” concludes Mr. Robb, “is that it can be pulled off with only five people.”
An even more disconcerting thought: This is but one of literally dozens of plausible scenarios in which the global economy falls apart.
“Don’t watch the snowflakes, watch the avalanche,” we recall Jim Rickards telling us back in 2013. If you’ve been reading us for a while, Jim likens the inevitable collapse to an avalanche.
“The climbers and skiers at risk can never know when an avalanche will start or which snowflake will cause it,” he wrote in The Death of Money. “But they do know that certain conditions are more dangerous than others and that precautions are possible… One cannot predict avalanches, but one can try to stay safe.”
That said, there’s one snowflake that’s on our mind this week. Even if it doesn’t trigger an avalanche, it’s worth knowing about — not least for the sizeable profit opportunity it presents.
“The next global financial crisis is brewing here and absolutely no one is talking about it,” Jim Rickards writes from Tokyo.
As we told you last week, Jim got on a plane to Japan last Friday to investigate disturbing reports from his network of contacts — that a rogue group of individuals is about to detonate a “financial A-bomb” whose fallout will spread worldwide.
“This group,” he says, “is troubled by the Japanese government’s awful fiscal and monetary policies. They’ve experienced a technical recession, more debt issuance, more deficits and negative interest rates since they were downgraded in December of 2014.”
And this group is in a position to do something about it — to make an announcement that would shake the system to its core. “Soon after the announcement is made,” says Jim, “Japanese debt will go from ‘super-safe’ to ‘slightly risky’ in one move.”
That’s the snowflake.
Here’s the avalanche effect: The debts of large banks in a given country can’t be rated higher than the debts of that country’s government.
“At that point,” Jim explains, “the banks will no longer be acceptable as counterparties to other large international banks on swap agreements. Those swap agreements will have to be unwound. Also, the commercial paper of those banks will no longer be an acceptable investment for U.S. money market funds. That liquidity will not be rolled over. Suddenly, Japanese banks will face difficulties funding themselves and managing their risks via commercial paper and swaps.”
They’ll need to raise cash. Quickly. Japanese banks hold a lot of U.S. and European stocks and bonds.
“That’s when the contagion will start spreading and markets around the world will begin to collapse. All because of Japanese selling.
“At that point,” says Jim, “you need to start worrying about the derivatives market.”
Ah, yes, the $1.4 quadrillion global market of financial instruments theoretically “derived” from other financial instruments — futures, options, swaps and so on.
Those subprime mortgage securities that snowballed into the Panic of 2008? Those were derivatives. The bad currency bets that prompted Jon Corzine to raid customer accounts at MF Global in 2011? Those were derivatives. The $2 billion in “London Whale” losses racked up by JPMorgan Chase in 2012? Those were derivatives.
At $1.5 quadrillion, the global derivatives market is 20% bigger now than it was in 2008. But every new derivative trade that’s laid on multiplies the potential threat many times over.
Like many things in high finance, derivatives started with the best of intentions — spreading the risk, as the saying goes. Then someone figured out how to make a fast buck and it all went to hell.
“Most derivatives do not derive value from an original loan or investment, but are created exclusively to make new bets,” says Jim. “Instead of moving risk into strong hands, derivatives actually create risk out of thin air. Risk is not being reduced by derivatives — it is growing exponentially.”
Snowflake piled upon snowflake, as it were. When it goes, it will go fast and it will go hard.
“If it hits in the middle of the presidential election campaign,” Jim says, “Washington could be paralyzed.”
That’s why Jim is hosting a live online workshop from Tokyo tomorrow night at 7:30 p.m. EDT. You won’t have to pay a thing to look in on this event. You’ll learn the identity of the rogue group about to set off this financial A-bomb… how to take shelter… and how to seize on the turmoil for what Jim calls a once-in-a-lifetime chance to collect up to 450% gains as the avalanche gathers speed.
If you can’t make it tomorrow night at 7:30 p.m. EDT, a replay will be available later. Either way, you don’t want to miss out. Click here to reserve your spot now.
To the markets, which are eerily quiet this morning. As we check our screens, the major U.S. stock indexes are pancake-flat, the S&P 500 up a third of a point, a whisker below 2,050.
“Since the broad market bottomed back in the middle of February,” says Jonas Elmerraji of our trading desk, “the S&P has rallied almost 11%. And it’s not just the size of the move that matters — it’s the number of stocks that have participated. During that time frame, 489 of the individual stocks in the S&P 500 are higher than they started. That’s some huge breadth behind the rebound.”
Traders appear to be shrugging off the lone economic number of note this morning: Existing home sales fell 7.1% last month, way off the “expert consensus.” The slump comes despite a 1.4% drop in the median home price, to $210,800.
Gold has lost some ground, down to $1,242, and you can’t blame it on dollar weakness — the dollar index is up slightly at 95.2. Crude took a tumble overnight, but at last check has recovered the $40 level.
Chinese ironies, Part 1: At the risk of sounding conspiratorial, we find it interesting that Starwood Hotels and Resorts accepted a takeover offer this morning from Marriott.
Yesterday, President Obama began his historic trip to Cuba. At the same time, Starwood became the first American firm to agree to a deal with the Cuban government since the 1959 revolution.
But as it happens, Starwood’s been the subject of a bidding war. Not only is Marriott involved, but so is the Chinese insurance outfit Anbang. Were Anbang to succeed, it would be the biggest takeover of a U.S. business by a Chinese buyer, ever.
Would’ve been mighty embarrassing for Air Force One to land in Cuba and an “American” first immediately rendered moot by a Chinese takeover, no?
The story may not be over yet. Anbang might up the ante.
Chinese ironies, Part 2: You can’t make this stuff up. When China’s stock market was melting down last summer, the People’s Bank of China asked for advice from the Federal Reserve.
“Your urgent assistance is greatly appreciated!” read the earnest subject line of an email the PBOC sent on July 27, according to the Reuters newswire.
The Chinese stock market tumbled 8.5% that day. The PBOC wanted the Fed’s playbook for the “Black Monday” crash of 1987. “Could you please inform us ASAP about the major measures you took at the time?”
“Within a few hours,” says Reuters, “the Fed sent China’s central bank a trove of publicly available documents detailing the U.S. central bank’s actions in 1987.”
“Black Monday was the true inflection point in modern financial history,” writes our David Stockman in his 2013 tome The Great Deformation.
The Federal Reserve, with Alan Greenspan only two months on the job as chairman, “had a chance to stop the casino by letting the chips fall. Instead, they hit the panic button, ordering the Fed’s open market desk to flood Wall Street with cash.”
It was an act that “began to eviscerate the market’s capacity for self-correction. This breakdown, in turn, ensured that ‘free money’ liquidity-pumping campaigns would be needed repeatedly to offset future panics in the free market.”
Huh… We’re not sure how any of this would be relevant to China’s experience last year: As David observed in our virtual pages two weeks ago, the Chinese Communist Party long ago discovered “the miracle of an unhinged printing press,” to say nothing of “mindless, debt-fueled speculation.”
“My only question to all the readers who write in to tell about the cash problems they are having at Chase or Bank of America, etc., is why are you still banking there?” begins a new week’s mailbag.
“I have none of those problems at my credit union. I dumped Bank of America about seven years ago when they decided I should pay an annual fee of $35 on top of the $70 per month they were already getting to process my merchant credit card transactions. The big banks really do not give a damn about the little guy. So take your business somewhere else. I did.”
“The Aldi chain of low-priced food stores until recently accepted only cash or debit cards,” writes another reader. “A week or two ago, they began also taking credit cards. Now I notice some of their prices, at least, have begun to move up a bit.
“Aside from that negative, it is simply another instance of the war on cash. They aren’t making credit mandatory — yet — but they are making credit convenient, to get people used to it. How long before the ‘authorities’ order us to turn in all cash to the banks and go completely to credit?
“What happens to those who have more than a couple of thou hidden around the house for emergencies when they turn it in? Is it confiscated under suspicion of being drug money or laundered money?”
“Bureaucrats and politicians may have a ‘sturdy’ incentive to maintain a cash-based society,” a reader writes with a different take.
“Aside from the Colorado form of seedy business based on cash, there is another form of business (considered by some as ‘seedy’) where cash rules, and that is located in Nevada as well as in every other state of the USA and elsewhere. This form of business is found in the red light districts and in open and hidden places.
“Can you imagine a bureaucrat in a state of dire stress asking if his debit card is acceptable? That would be like imprinting oneself with the return of the scarlet letter.”
The 5: That’s what the black market is for — a point Marc Faber addressed in his most recent Gloom Boom & Doom Report.
In a cashless society, “black markets and barter trades will thrive,” he writes, “and underground organizations in every city will issue ‘local mafia notes,’ which will increase the black economy enormously.
“An interesting question is to what extent existing banknotes will appreciate in value if they are abolished as legal tender. In my opinion, their value will soar as illegal tender because no new supply will be printed.”
“Dave, you’ve got to explain how paying cash to local merchants keeps the money in the community instead of sending it to New York,” reads our next email.
“Money is a means of exchange, no matter what form it takes, and it can be spent anywhere. The only way it could stay in the community is if all business, including banking, is conducted locally. Not ever likely to happen in a high-tech world.”
The 5: True enough. I only meant it in the sense that if I pay the same price cash or credit, I’d rather have the local merchant keep the 2% that he’d otherwise fork over to Visa, etc.
“About credit card purchases and ‘cash back,’” writes one of our regulars: “I agree that if everyone used cash/checks, that costs could be lower in the stores by 1.5–2%.
“But since everyone is not paying cash, the stores will maintain the higher offsetting margins and the cash payers get screwed.
“I’ll continue to use my credit card for purchases like toilet paper, which, considering their crappy policies, I am sure the NSA and Homeland Security are anxious to track.”
“I take exception to the letter writer who says it’s a bad idea to use cash-back credit cards,” writes our final correspondent.
“On the contrary, I use credit cards for every purchase I possibly can, pay the balance each month and then plow the 2% cash back into junk silver.
“What’s more, the wife and I go to creditcards.com, apply for 15–20 cards at a time that have hefty rewards for initial purchases in the first 90 days, collect the rewards, pay off the cards and cancel them.
“No, every application won’t result in a gleaming new card in your mailbox. And yes, this activity has driven down my FICO score by 100-plus points, but the score always comes back in time and I have no real loans I need to take out. Lather, rinse, repeat.
“I’ve been doing this off and on since 2007, and expect we’ll net $8,000–9,000 with this strategy this year. We plan on paying for a $15K Russia trip next year with this.
“P.S. You guys do good work, so please don’t ever say you’re going to discontinue The 5!”
The 5: Heavens, whatever gave you that idea?!
The 5 Min. Forecast
P.S. “If you have any money in the markets at all, or in a retirement account, you don’t want to miss this event,” says Jim Rickards.
The event is live from Tokyo tomorrow night. It describes a phenomenon that will begin in Japan… but will quickly ricochet around the world, affecting every asset class.
You won’t hear about it anywhere else. And it won’t cost you a thing to be in the loop. Jim’s hosting this event tomorrow night at 7:30 p.m. EDT. For access, all we ask is that you sign up in advance. Here’s where to do so.
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