- Did the Fed just bury the Shanghai Accord?
- Five reasons dollar weakness (and gold strength) is still in play
- Recessionary indicator: Frightful stats on freight traffic
- Hedge fund giant’s bet on a constipation treatment
- Nuclear war and a certain Nobel Peace Prize winner
To adapt a line from Mark Twain, reports of the “Shanghai Accord’s” death have been greatly exaggerated.
A quick recap: Jim Rickards believes the International Monetary Fund brokered a secret deal three months ago during G-20 meetings in Shanghai. The parties to this secret Shanghai Accord are the central banks of the globe’s top four economies — the Federal Reserve, European Central Bank, Bank of Japan and People’s Bank of China.
Under this deal, the ECB acts to strengthen the euro, the BoJ acts to strengthen the yen and the Federal Reserve acts to weaken the dollar. The PBOC doesn’t do anything; because the yuan is loosely pegged to the dollar, the yuan ends up devaluing — which China’s economic mandarins desperately need.
The objective is to weaken the yuan without the PBOC having to announce a devaluation — something that rocked the U.S. stock market last August and again last January.
Jim says the Shanghai Accord will have long-lasting impacts — at least a year, maybe two.
The mainstream doesn’t buy into the Shanghai Accord thesis, consigning it to the realm of conspiracy theory. And even people whose opinion we respect think the Shanghai Accord story has already played itself out — not least because the dollar weakness of March and April has reversed somewhat during May.
With the release of the “Fed minutes” yesterday afternoon, Jim’s looking increasingly lonesome.
“Fed to Markets: June Rate Increase Is on the Table,” screams the front page of today’s Wall Street Journal.
After we went to virtual press yesterday, the Fed released the minutes of its April meeting. “Until a few days ago,” says the Journal, “traders in futures markets saw almost no possibility the Fed would move short-term interest rates up at midyear. However, a batch of strong economic data, recent comments by Fed officials and a new release by the central bank on the deliberations at its last policy meeting have changed that perception.”
Stock traders didn’t know how to react; the Dow tumbled nearly 200 points before ending the day flat. But holders of Treasuries and gold both hit the “sell” button, figuring more dollar strength is a sure thing. Relative to other major currencies, the dollar is now its strongest since late March.
So… If there’s a case to be made that the Shanghai Accord remains alive and well, what is it?
For starters — and at the risk of repeating ourselves — Fed “minutes” aren’t like the minutes of your local city council meeting. They’re not an objective record of who said what. They’re a carefully crafted statement designed to telegraph a message.
That is, the Fed made a conscious decision to put a “hawkish” spin on the minutes yesterday. Key paragraph: “Most participants judged that if incoming data were consistent with the economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”
Which brings us to the all-important “if” factor the mainstream is so eager to overlook. The Fed will raise rates if there are continued signs of renewed life in the economy.
That’s a questionable proposition. This morning, we got another indicator of how the economy’s faring so far during May. The “Philly Fed” survey is back in negative territory. That’s two straight months that the mid-Atlantic factory sector has been shrinking — and eight of the last nine months.
Progress toward the Fed’s 2% inflation target? As we’ve pointed out in recent weeks, inflation is cooling off after racing higher last fall and winter.
But enough of our jabber: Let’s hear from Jim himself.
“It is true that some regional Fed presidents have been talking about a rate hike,” he says. “But they’re not in control. The inner core of chairwoman Janet Yellen, vice chairman Stanley Fischer and New York Fed president Bill Dudley still run the show. None of them has said a hawkish word since December.”
And then there’s the timing of the next Fed meeting — June 15. That’s eight days before British voters decide whether to leave the European Union. Polls right now indicate it’s a tossup. “If the Brexit vote goes for ‘leave,’ that’s a financial earthquake.
“The Fed will not want to trigger a market meltdown with a rate hike (remember January?) right in front of another meltdown over Brexit. The system might collapse. So the Fed will wait.”
One more factor to ponder — it’s an election year.
“Yellen is a staunch Democrat,” Jim reminds us. “Recessions in election year favor the out party, in this case Republicans. Yellen does not want to be held responsible for electing Donald Trump. That’s another reason she’ll sit tight until December.”
Bottom line: “The forces in favor of doing nothing in June are much more powerful than the voices of a few regional officials. Once this sinks in, markets will be back to the weak dollar, higher gold, higher yen and euro themes of recent months.”
[On the subject of higher gold: As we mentioned yesterday, readers of Rickards’ Gold Speculator have bagged another impressive short-term gain — 37% in a week and a half on Golden Arrow Resources. That comes on the heels of a 30% gain in three days on Kaminak Gold.
Now… to be honest, that’s not the idea behind this new publication. The idea is to collect a basket of junior gold stocks and hold on tight, ideally for months or years, as gold marches steadily upward and these carefully curated stocks far outperform the metal itself. But in the event of a buyout, or the market rumor machine getting ahead of itself… sometimes it pays to take your chips off the table.
In any event, there’s a strategy behind the choice of every junior gold play in Rickards’ Gold Speculator. We’ve taken to calling it the MIDAS system. Jim explains how it works — to say nothing of the immense profit potential — when you click here. No long video to watch, we promise.]
Now comes the hangover from the Fed minutes: The major U.S. stock indexes are all down about 1% as we write this morning.
The S&P 500 rests at 2,030 — precisely 100 points below its record-high close notched a year ago this coming Saturday. Defying the market drop, however, is Lifetime Income Report pick Wal-Mart — up 9% on an earnings report that crushed expectations.
As noted above, Treasury rates spiked after the Fed minutes yesterday, but they’re in retreat now, the 10-year yielding a shade below 1.84%.
In the face of momentary dollar strength, gold is back to a three-week low — hanging onto the $1,250 level by a rapidly fraying thread. Ditto for crude, back below $47 now.
If the Fed is looking for signs of a strengthening economy, it won’t find them on America’s freight rail system. Or the nation’s fleet of 18-wheelers.
“We’re looking down the barrel of tighter times all around,” says Byron King, who directs our attention to the latest Cass Freight Index, measuring freight volumes and spending in the U.S. and Canada.
“Cass is known for spotting trends within industrial and consumer supply chains,” explains Byron, “because most ‘hard assets’ — from coal to cars to food on the shelf at your supermarket — move by truck or rail. In essence, Cass surveys thousands of shippers on a regular basis and comes up with a broad measure of the overall economy. It’s a great source of basic, data-driven perspective.”
And right now, it’s the weakest in four years…
“Expenditures on shipping are down as well,” Byron tells us. “That is, there’s far less cash flow going to transportation companies. All in all, it’s clear that the U.S. economy has slowed down during winter/early spring of this year. If this were a barometer, it would indicate stormy times coming soon.”
Hedge fund king John Paulson just made a substantial bet on… constipation.
About nine months ago, we told you about a tiny company Ray Blanco recommended to his FDA Trader readers. It’s working on a best-in-class constipation drug. Ray figured it’ll do for constipation what Nexium did for heartburn — generate billions in prescription drug sales every year for a problem people once treated with over-the-counter products.
This week, Paulson — who made his fortune shorting subprime mortgages before the Panic of 2008 — disclosed he’s taken an $8.3 million position in the firm. Shares popped 20% in an instant.
Last year, Ray urged his readers to sell half their position for a 155% gain in only four months. But even bigger gains may be on the way. The FDA plans to give its yea or nay on the drug by next January. Clearly, Paulson thinks it’s going to be a “yea”…
“So many villains, so little time,” a reader writes after our musings yesterday about Russia and the prospects of nuclear war.
“Russia, ISIS, China, North Korea, hackers, etc., etc. The world is wired for trouble. And our politicians are the electricians. I don’t know what people who don’t believe in a higher power do. If I didn’t believe in the great chess Master, checkmating some of the stupid, well, ‘depressing’ comes to mind.
“Meanwhile, we mostly rely on the Bill Bonners of the world to add a touch of humor as well as enriching advice as we blissfully take the downward path.”
“If there ever is a nuclear war,” writes another, “then I will be blaming the U.S. and NATO for not ridding the world of NATO after the Soviet Union collapsed and for now expanding eastward.
“Hopefully, Jim is right and the idiotic warmongers in Washington don’t take the world to the brink of destruction once again. If Gen. Curtis LeMay had gotten his way, I wouldn’t be writing this now. Hopefully, sanity rules the day once more.”
The 5: Heh… It’ll be interesting to see what happens in a few days when Obama visits Hiroshima. How will the Nobel Peace Prize winner spin the planned “modernization” of the U.S. nuclear arsenal, with a price tag of $348 billion over 10 years?
“Guys, living here in the Baltics, after 50 years of occupation by Russia, those remarks yesterday about not defending Estonia are sarcastic and just emphasize the shortsighted and mercantile nature of Americans.
“I wish you would be as sarcastic when writing about American ‘defense’ in Iraq (famous Powell presentation), policy in Middle East and others…
“The Baltics are nice buffer zone to EU versus hostile Russia.. One cannot underestimate the importance of commitment of NATO to defend us. Yours, from Latvia.”
The 5: The 5 wasn’t around for the start of the Iraq War, but The Daily Reckoning was… and many of its readers bailed when Bill Bonner and Addison Wiggin gently suggested the war was a fool’s errand.
If Americans are “mercantile,” it’s in a way we take pride — much the same way we suspect Britons did after Napoleon supposedly dissed them as “a nation of shopkeepers.” There’s a strong undercurrent of “mind your own business” in this country, not unlike that of the Swiss.
That undercurrent has been largely suppressed the last 60-plus years with the advent of the national security state. It came to the surface during and after the Vietnam War, but to little effect. It’s coming to the surface again, a bit, during this year’s presidential campaign. We’ll see if it has any more effect…
The 5 Min. Forecast
P.S. In case you missed my note yesterday…
If you own any of the following devices, you need to view this message immediately:
All of these devices have one MAJOR “flaw” in common.
And I can almost guarantee yours has it too.
It’s not the size of the screen… It’s not the applications… It’s not even the size of the battery…
It’s far more basic than that. But it’s also far more important.
Click here to find out what it is… and see if you agree.
P.P.S. This flaw could actually be great news for you and your family. Click here to find out why.