The $750 Billion Threat From America’s “Ally”

  • No oil production freeze? Say it ain’t so!
  • Saudi princes vs. 9/11 widows: Guess whose side Obama takes
  • The Saudis’ empty threat to dump U.S. assets… and what they’ll do instead
  • Scandal: The 5 follows the money in Brazil’s impeachment drama
  • Sanders campaign threatens humble T-shirt designer… anticipating a windfall profits tax on gold… bears, tapirs and honey badgers, oh, my… and more!

This is what “dashed expectations” look like…


Oil drifted upward much of this month on the expectation that OPEC and Russia would come to terms on freezing crude production. But when the proverbial push came to shove yesterday at a meeting in Qatar, the ministers couldn’t make it happen. “Tensions between Saudi Arabia and its regional rival Iran proved too great to overcome,” says the Financial Times.
Well, yes. Iran is only now starting to climb out from under years of global economic sanctions, and its leaders want to bring more Iranian oil to market, no matter the price. Production freeze? Forget that.
What next for the oil price? “If you are an oil bull,” says Greg Guenthner of our trading desk, “you’ll need to see the April lows hold near $36 for this year’s rally to remain intact.”
At last check, a barrel of West Texas Intermediate is down nearly 3% on the day at $39.29.
It’s at this moment this week that several phenomena are about to collide — the oil price, the lingering fallout from the Sept. 11 attacks and the looming threat of a Saudi devaluation.
President Obama heads to Riyadh on Wednesday for a meeting with the leaders of Saudi Arabia and the other five Gulf monarchies that belong to the Gulf Cooperation Council.
After we went to virtual press last Friday, The New York Times dropped a minor bombshell: “Saudi Arabia has told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes a bill that would allow the Saudi government to be held responsible in American courts for any role in the Sept. 11, 2001, attacks.”
The warning came from the Saudi foreign minister last month on a visit to Washington: The kingdom would dump up to $750 billion in Treasuries and other U.S. assets, lest they be frozen by U.S. courts to settle up any 9/11 lawsuit.
An empty threat? The Saudi princes cutting off their noses to spite their faces? Sure.
But the White House is going all out to stifle the bill in Congress, despite bipartisan support. “It’s stunning to think that our government would back the Saudis over its own citizens,” says 9/11 widow Mindy Kleinberg.
Guess we won’t hold our breath for the administration to declassify the “28 pages” about the kingdom’s role in the attacks, either.
Besides, the Saudi princes can execute a far more devastating financial attack on the United States — one that would work to their own benefit.
We’ve alluded to it many times this year — a move by the kingdom to break the Saudi riyal’s peg to the U.S. dollar. Saudi Arabia and the other GCC nations are the only major currency bloc on the planet that hasn’t devalued against the dollar sometime in the last five or so years. So it’s coming, sooner rather than later. “The Great Currency Shock of 2016,” Jim Rickards calls it.
We doubt the Saudi princes will do it this week. No point in humiliating Obama while he’s paying them a visit.
But now that a crude production freeze is off the table, oil prices are likely to stay “lower for longer,” as the saying goes. That’ll continue to squeeze the kingdom’s finances and drain its foreign exchange reserves. A devaluation — at a time of the princes’ own choosing — would put an end to that squeeze in short order.
If you’re positioned properly, the move could mean gains of 530%… 848%… even 2,196%. Check out Jim’s action plan at this link.
The fallout from the failed oil summit is having little impact on other asset classes.
For once, stocks and crude aren’t moving in sympathy: At last check, the S&P 500 has added seven points, to 2,088. If that holds by day’s end, it’ll be another new closing high for the year.
The big earnings number of the day comes from Morgan Stanley. Like the Big Four commercial banks last week, its profits are down but not as much as the vaunted “analyst expectations,” and thus the financials as a whole are in the green again today.
No big economic numbers today, but we are getting a read on homebuilder sentiment so far in April. The housing market index from the National Association of Home Builders clocks in at a respectable 58 for the third straight month.
Gold is consolidating after its takedown late last week, the bid at last check $1,234.
“Brazil’s democracy was dealt a mega blow,” says a tweet from Nomi Prins — ex-investment banker, best-selling author and contributor to Jim Rickards’ Strategic Intelligence.
Perhaps you’ve heard the news: Brazil’s lower house of parliament has voted to begin impeachment proceedings against President Dilma Rousseff. The drama is all but guaranteed to drag on through the 2016 Rio Olympics and beyond.

Dilma: In the cross hairs [official presidential photo]

The important thing to know is that every major political faction in Brazil is corrupt. But the more right-wing factions are fed up that they’ve been shut out of the presidency since 2003. So as the Brazilian economy tumbled into crisis, they pounced on evidence that Rousseff dipped into the funds of state-owned banks to conceal a huge budget deficit during the run-up to her re-election in 2014.
“Dilma denies any wrongdoing,” Nomi tells us, after having spent considerable time in Brazil this spring. “It’s also not clear which law she ostensibly broke, and if breaking that particular law is an impeachable offense.”
That said, it doesn’t help that much of Brazil’s corruption traces to the state-owned oil giant Petrobras… and Rousseff was chairwoman of the board from 2003–2010.
For part of that time, she was also the country’s energy minister. She signed off on the purchase of a Houston-based refinery company called Pasadena for $1.2 billion — about 30 times its worth.
“On July 23, 2014,” Nomi writes, “Brazil’s public-spending watchdog organization, Union Accounting Tribunal (TCU), determined that Petrobras had overpaid for Pasadena… It was a decision that was either crooked or dumb, or both.”
But for all Dilma’s faults, “Dilma’s opposition hasn’t looked in the mirror,” Nomi says, “nor was it required of them.”

Not good for a country barely three decades removed from a military dictatorship, no?
In her dogged efforts to “follow the money,” Nomi has suggested a way for readers of Rickards’ Strategic Intelligence to play the Brazilian turmoil. It’s in the red right now… but the story has barely begun to play out.
Stupid intellectual property tricks: The Bernie Sanders presidential campaign is threatening to go to court to suppress this parody…

It’s the brainchild of Daniel McCall, the proprietor of Liberty Maniacs, a Web store hawking T-shirts, coffee mugs and other merchandise. Let’s see… In order, that’s Marx, Engels, Lenin, Stalin, Mao and Bernie.
On Friday, McCall got a letter from a Seattle law firm working for the Sanders campaign demanding McCall cease and desist.
On what grounds, we can’t quite figure out. But as McCall’s lawyer Paul Levy points out, Sanders’ is hardly the first campaign that’s tried to suppress parodies by stretching the outer limits of trademark law. Representatives of Hillary Clinton, Ben Carson and even Ron Paul have tried to do likewise.
Nor is Levy isn’t backing down. In a letter to the Sanders law firm, he writes, “You cannot use trademark theories to silence members of the American public who disagree with your client’s views and oppose his candidacy.”
And Liberty Maniacs is milking the controversy for all it can…

Hey, why not?
“How does gold protect in periods of inflation and deflation?” writes a reader who’s seen Jim Rickards’ musings to that effect. “Deflations are depressions, and with depressions come big economic stress and forced sales.
“Also, for years, only one outfit was on TV trying to sell me gold. Now, in the last month, there are others on TV ‘looking out’ for me by trying to sell me gold.
“Looking forward to reading Jim Rickards’ new gold book.”
The 5: In a deflationary scenario where gold crashes to, say, $500, it’s also likely the S&P would crash to, say, 500. “In that world,” Jim explained three years ago, “I might like my $500 gold better than my $5,000 gold.”
In the event of outright deflation, the Fed will act to push up the gold price, he added: Remember in the 1930s, the dollar was devalued against gold from $20.67 an ounce to $35. And then there’s the stellar performance of Homestake Mining and Dome Mines in the 1930s. A dollar put into Homestake in 1928 turned into $6.76 by 1938.
“OK, so let’s say, sooner or later, gold goes to $10,000 an ounce or more,” writes a reader who likewise has some familiarity with Jim Rickards’ thinking.
“Does one then sell it? If selling gold seems like the right thing to do… and… the gold dealers you bought from are, at that time, forced to collect a huge windfall profit tax for the government, what do you try to trade/barter the gold for… a deed to raw land? Bitcoins? A boat or car?
“It seems that trading the gold for cash will be out of the question… no one will have any cash. Being paid by the buyer’s cashier’s check, which you then deposit in your checking account, will make you nervous that your account will be subject to a ‘buy in’… and… will probably mark you as drug dealer, or worse.
“In other words: In the end-of-days time after a currency collapse, how can the buy-low-sell-high profit loop be completed, while keeping most of the profit?
“Love The 5.”
The 5: One of the key points Jim makes in The New Case for Gold is that a windfall profits tax could not be imposed by presidential decree.
“A windfall profits tax on gold is not something that can easily be accomplished by executive order because of congressional control over taxation. Such a tax requires legislation, and the legislative process is slow.”
In other words, you’ll have time to respond.
There are other emergency measures Jim says you should be more worried about. He describes those in the book as well.
“Any way you can get the tapir involved with the frolicking bears?” writes someone who’s clearly a longer-term reader responding to Friday’s episode.
“And maybe the honey badger? Loved the honey badger period of The 5.
“If people are getting upset about a beautiful scene involving two presumably consenting bears, I don’t think they are paying enough attention to what is really vile in the world — like government monetary perversion and punishment of savers.
“I’m not rationalizing with moral relativism, either.
“The photo of the bears really is beautiful. The panda is smiling and the griz seems to be entering a state of bliss. And the pastel colors remind me of a classic Pissarro.
“Keep it classy, 5!”
The 5: Oh man, the Putin video that was patterned after the honey badger thing. You had to bring that up?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “A scramble for gold has begun,” writes Jim Rickards in an Op-Ed published today in the London Telegraph.
We’ll rerun it today at The Daily Reckoning. If you’re not familiar with Jim’s math-based argument for $10,000 gold, you’ll find it a good introduction. Or if you want the full explanation, it’s in his book The New Case for Gold. Order through Agora Financial and you’ll get a special edition with bonus chapter unavailable anywhere else.

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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