Don’t They Ever Learn?

  • In which we wipe the egg off our collective faces…
  • Uh-oh: Mortgage-backed securities are cool again
  • Butterflies, hurricanes and the dangers of derivatives
  • Watch this future catalyst for silver
  • The $78 trillion guarantee you’ll face “new taxes and weird fees”
  • Should we name and shame banks engaged in the war on cash?… How Canada pushed its dollar coin into circulation… hacking the New York Fed for millions… and more!

“Embarrassing, to say the least,” reads the first of several emails we got from readers who signed up for Jim Rickards’ event live from Tokyo last night.
The kinder ones were more to the effect of, “What happened?”
We could hem and haw and make excuses. But we won’t. Our reach exceeded our grasp. Doesn’t happen often.
Jim and our team were all set up with a dramatic backdrop. Alas, it was in a public venue, and Tokyo’s finest asked them to move along. (Permits? C’mon, it was a handful of people with a compact video camera, not Cecil B. DeMille staging The Ten Commandments.) All attempts at relocating were stymied by poor Internet connections, although Jim and his entourage soldiered on to the end.
If you’re among the viewers who stuck with us for the duration, we’re touched and a little awed by your patience. If you’re among those who understandably bailed, we extend our apologies for what turned into — shall we say — an act of porcine procreation.
Here’s what we’re doing to try to make it up to you: Our crack video team here at Agora Financial headquarters in Baltimore is furiously stitching together the nonglitchy portions of the event into a seamless and concise whole. It’s essential information, and we don’t want you to miss out. As soon as it’s ready for viewing, we’ll send you an email with a link. Thank you for your forbearance.
In the meantime, we turn our attention once more to the dicey derivatives market — the source of Jim’s concern that prompted him to host this event from Tokyo in the first place.
Less than eight years after the Panic of 2008… and mere months after the movie version of The Big Short dramatized those events… derivatives backed by home mortgages are respectable again.
“The Greater London Authority announced a subtle change to its investment strategy this month,” says today’s Financial Times. “Subject to approval from London mayor Boris Johnson, the government body said it planned to buy residential mortgage-backed securities.”
We should back up a bit. The Greater London Authority is a fancy name for London’s city government. There’s the tousle-haired mayor, Mr. Johnson, and a 25-member London Assembly that acts a city council. And yes, the Greater London Authority has an investment fund.
The bloke who runs it is named Luke Webster. He says mortgage-backed securities represent “one of the most defensive diversification options available to us.”
The reaction in the Twittersphere has been, well, less enthusiastic…


We’re not saying this one move by London’s government is destined to bring the financial system to its knees again.
But all the same, we won’t rule out the possibility. We can’t rule it out, because in the modern financial system, everything is connected to everything else.
That idea’s at the heart of “complexity theory,” so essential to Jim Rickards’ work — the phenomenon of a butterfly flapping its wings in Africa and ultimately touching off a hurricane in the Gulf of Mexico, applied to financial markets.
And it’s what drew Jim to Tokyo this week. Everything he’s been told since he arrived early Saturday confirms the chatter that prompted his trip — that trouble with Japan’s government debt will spread to the Japanese banks, then to the global stocks held by those banks, then to the derivatives market… and everyday Americans with retirement accounts will be blindsided.
Again, we’re sorry for the technical difficulties with Jim’s online workshop last night. Our video team is reconstructing the meat of the discussion so you’ll hear everything you need to know, with nothing that wastes your time. If you signed up for the event, we’ll send you an email with a link to the video as soon as it’s ready.
If March weather is “in like a lion, out like a lamb,” the stock market looks appropriately lamblike as the month begins to wind down — volatility is taking a breather, for sure.
As we write this morning, the major U.S. stock indexes are in the red, but not by much — the S&P 500 is off less than half a percent, at 2,041.
The VIX, the market’s “fear gauge,” has spent the last week below the 15 level — territory seen only briefly since the market started going haywire after China’s devaluation last August.
Crude is off nearly 3% after the latest weekly inventory numbers from the Energy Department, a barrel of West Texas Intermediate fetching $40.29.
Gold’s been whacked, and whacked hard — down nearly $30 as we write, to a one-month low of $1,219.

And only a tiny portion of that move can be chalked up to dollar strength. The dollar index is up modestly, a hair above 96.
Silver, which kissed the $16 level overnight, is down 4% at last check, to $15.23.
Here’s a heads-up to what might prove a major new source of industrial demand for silver.
Researchers at Harvard say they’ve perfected “smart window” technology that would make conventional window treatments obsolete.
“The idea is that instead of adding curtains or blinds to windows for privacy and light control,” says a story at the TreeHugger site, “the windows themselves could be programmed to go from clear to more opaque depending on the time of day or as the homeowner sees fit… In warmer months, the windows could block more light and heat from entering to keep cooling needs down and vice versa during colder months.”

To date, most smart windows have used costly and potentially toxic chemicals. The Harvard approach is completely different: “The window consists of a sheet of glass or plastic sandwiched between two transparent elastomer sheets sprayed with silver nanowires. The nanowires are too small to scatter light on their own so the window is clear, but apply an electric voltage, and that’s when the magic happens.”
It’s still not ready for prime time. The researchers are trying to make the elastomer coating thinner, so it would require a level of voltage typical for homes and businesses. Worth watching…
A new warning to add to our “new taxes and weird fees” file: “Total global government debt may be three times as large as people currently think it is,” says a new report from Citigroup.
The researchers studied the pension promises made by governments in 20 developed countries — promises totaling $78 trillion, much of it unfunded.
“If you owed student loans of $44,000, and the bank called you up and said, ‘Actually, you owe $134,000,’ you’d fall off your chair,” Citi’s Charles Millard tells The New York Times. “That’s what this is.”
Millard doesn’t foresee a sudden collapse of the municipal services we’ve come to take for granted. “It’s not going to be, for most cities and states, some enormous collision or explosion,” he says. “It’s going to be 10 fewer cops, or three fewer teachers and ‘Let’s fix the bridge three years from now.’”
And, we’re sure, new taxes and weird fees. We see the Albany, New York city council imposed a trash fee on small apartment buildings late last year.
“The $180 annual per-unit fee applies to the second, third and fourth units in buildings with up to four apartments,” reports the Albany Times Union. “Because the first unit is free, single-family homeowners don’t have to pay it.”
A move to the repeal the tax was beaten back this week: “Even opponents of the repeal acknowledged the trash fee is flawed,” says the paper, “but they argued it would be irresponsible to scrap it now without a plan to replace it.”
That’s because without the revenue, Albany won’t qualify for $12.5 million in state aid it needs to help close an $18.5 million budget gap. Oy…
“What are we supposed to do?” a reader pleads. “On one hand, there is a silent war on cash being waged. On the other, Mr. Rickards and others recommend we hold cash for reasons that are understandable and make sense.
“I’ve been reading your articles on the cash war, and I have a suggestion. Why don’t you wage a silent war against banks that are waging a war against cash? By this, why not propose to your readers that if their banks are doing this to them, draw up a list of banks that are not engaged in such activity and recommend that they switch to one of the banks on your list?
“Perhaps the outflow of cash from these banks will draw their attention. So far, your articles have only lamented about this situation. Why not give your readers some ammunition to push back?”
The 5: Our expertise as a firm lies in finding ways to make yourself more prosperous. We’re not nearly as confident we can show you how to demonstrate your virtue.
Each of us must decide the extent to which we’re willing to engage with a corrupt system. For instance, readers had a spirited disagreement in our virtual pages recently over the benefits of “cash back” credit cards versus paying local businesses in cash so the 2% merchant fees stay with the business and don’t go to Visa. I prefer the latter, but I’m not about to condemn the choices of the former.
There is one solution to the war on cash your editor’s been pondering — an extremely practical one. You won’t be making any statements to the world taking this course of action, but you would surely preserve your purchasing power in the face of negative interest rates, bail-ins and so on. I’m still hashing it all out, though. Stay tuned…
“The U.S. has made several attempts at introducing a wide-circulation dollar coin, all to no avail,” writes another reader, revisiting a tangential cash topic.
“However if you look at other jurisdictions where a coin has replaced a bank note, the common denominator for a successful transition has been the willingness of the government to discontinue the printing of the bank note that the coin replaces.
“When the government of Canada announced the introduction of the ‘loonie’ (so named because a loon is depicted on the coin), it also announce that the one dollar bill would no longer be printed. Dollar bills disappeared from circulation within two months of the introduction of the coin.
“Yes, there was a lot of grumbling beforehand about pockets being weighed down with coins, but that quickly died down shortly after introduction. The coin became so successful that the government eliminated the $2 bill with a coin, and several decades later even took the penny out of circulation.
“Stop printing the dollar bill and, believe me, the dollar coin will be in circulation in no time.”
The 5: When your editor lived in Buffalo during the late ’90s, I usually kept some Canadian cash on hand for the occasional hiking trip in Ontario. Have to say I never confused the $1 coin for a quarter, and I became rather fond of the $2 coin.
(Yes, it’s clad coinage is worth only a fraction of its face value. I get it. That’s not the point here…)
“Recently I read that someone hacked the Fed and managed to transfer $81 billion from the Bangladesh account to several casinos on the Philippines, from where it was promptly dissipated,” a reader writes.
“Is this true, and can you shed any light on this subject?”
The 5: We don’t have a lot of light to shed; we’ve read the same stories you have.
Bangladesh’s central bank has hired a U.S. lawyer and might sue the New York Fed, according to the latest today. The New York Fed has been its usual nontransparent self, saying only there was nothing unusual about the payments and no evidence its systems are compromised.
From where we sit, the episode reinforces a point Jim Rickards makes in his latest book, The New Case for Gold: “As a 21st-century investor, I don’t want all my wealth in digital form. I want some of my wealth in tangible form, such as gold. You can’t hack gold, you can’t digitally delete or erase gold and you can’t infect it with a computer virus, because it’s physical.”
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As a reminder, publication of The New Case for Gold is set for April 5. Amazon is charging $16.66. Order from us and you’ll pay only $4.95 for shipping, and you’ll get a bonus chapter exclusively for Agora Financial readers — plus a couple of other benefits available only at this link.

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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