- So… We issue a warning about Deutsche Bank and gold…
- … and Deutsche starts screaming that gold’s “crash” isn’t over?
- The problem with Deutsche’s derivatives, even if the mainstream won’t acknowledge it
- A whiff of inflation in global food prices?
- Taxable or tax-advantaged accounts? Helpful hints for your year-end planning
- Losses (and victories) in the War on Cash… Readers rise to Rickards’ defense… The 5 uses the D-word (gasp!)… and more!
Hmmm… What are the odds?
Last Sunday, we sent you a message in which we related that Jim Rickards believes the trouble at Deutsche Bank might well set off a market panic that would drive gold’s next big move up.
That’s still the case as we write this morning… although as you well know by now, in the interim, gold took a drubbing on Tuesday. [Just in: Deutsche is cutting another 1,000 jobs on top of the 3,000 it slashed in June.]
Also on Tuesday, it turns out Deutsche’s chief global strategist — a fellow named Binky Chadha — said on Bloomberg TV that a gold crash is just getting started. “The way we think about it is, gold looks to be 20–25% overvalued.”
He also averred that the strongest catalyst for such a crash would be a recovery in economic growth. “I would argue it’s more likely a tick-up in U.S. growth, on which we remain constructive, and therefore global growth.”
The wonks at the International Monetary Fund beg to differ.
On the eve of its twice-a-year conference in Washington, the IMF is out with its twice-a-year Global Financial Stability Report. As Jim Rickards explained to us a year ago, this report amounts to one of those “warnings you’re not supposed to hear.” They’re written in technical language and read by only a handful of expert analysts — with enough obfuscation to mask what’s often a critical warning to other global elites.
The current edition cites “medium-term” dangers — mostly in Europe, Japan and China. And perhaps the biggest danger of all is — drumroll, please — bank profits. European banks, in particular, are cash-poor and hamstrung by outdated business models.
Deutsche Bank’s name didn’t turn up in the report. But at a briefing for the handful of wonkish reporters who showed up, the deputy director of the IMF’s capital markets unit made clear that’s who he had in mind: Deutsche’s health, or lack thereof, is “of systemic importance. We are confident that authorities are monitoring this.”
Sure, they’re monitoring it now, when it’s too late to do anything about it.
In a Rickards’ Intelligence Triggers alert last month, Jim spotlighted Deutsche’s “vast web of off-balance-sheet derivatives, guarantees, trade finance and other financial obligations on five continents. Deutsche Bank’s gross notional derivatives exposure is $47 trillion — over 25 times what the bank reveals on the size of its balance sheet.”
This morning’s Wall Street Journal did its best to apply lipstick to the feral hog that is Deutsche’s derivatives book. Its size “can be misleading,” says the paper, “since it covers the notional value of the derivatives. For instance, the notional value of an interest rate swap — the amount from which the payments to each party are calculated — may be large but the actual derivative may cover only small interest payments for either party. That makes the risk to either side much smaller than the figures suggest.
“That means its exposure could be considerably smaller than the value of the derivative. Many derivatives contracts also cap their losses.”
Funny, the media were saying the same thing about the giant insurer AIG back in 2008. AIG’s derivatives book? No problemo. The notional value? Peanuts.
Unfortunately, notional value isn’t what AIG’s counterparties — the people on the other side of the trade, like Goldman Sachs — were thinking about as they stared into the abyss during the Panic of ’08. That’s why AIG ended up with a $180 billion federal bailout. An AIG bankruptcy filing “would have shut down the global derivative market,” says Jim’s senior analyst Dan Amoss. (Our 5 Mins. won’t allow for it today, but the backstory is worth a deeper dive some other day.)
Just remember what Jim says: Gross, not net, is the true measure of risk in derivatives. And he would know, being at the center of the Long Term Capital Management crisis that nearly took down the global financial system in 1998.
One more thing while we’re in debunking mode: The Journal also spotlights the fact that at $47 trillion, Deutsche’s derivatives exposure is falling.
That’s actually a dire sign, says Jim: “This figure has dropped recently from over $78 trillion, which means counterparties are already terminating and replacing contracts. There’s a silent run on the bank already. As usual, retail depositors are the last to know. The financial distress at Deutsche Bank is like a ‘Lehman moment’ on steroids.”
Bottom line: Jim believes the trouble at Deutsche is one of several wild cards that could propel gold sharply higher, and soon. With that in mind, he’s closing the window on his “double gold” offer tonight. To date, he’s sent out $1.2 million in gold coins to readers like you. If you don’t have yours, you’ll have to act soon. The offer expires tonight at midnight. After midnight, this link is dead.
To the markets, which appear to be in suspended animation until the Labor Department’s monthly job report comes out tomorrow morning.
The major U.S. indexes are flat, the Dow at 18,274. The 10-year Treasury yields 1.71%. Gold has shed a few more bucks, but it’s holding the line on the $1,250 level. West Texas Intermediate crude has pushed past the $50 barrier.
The “expert consensus” is looking for the Bureau of Labor Statistics to conjure 168,000 new jobs in the September nonfarm payroll report due tomorrow. That’s not great, but it would be better than the previous month’s 151,000.
In the meantime, what little Street buzz there is surrounds Twitter. It’s down 20% today, as it appears all the rumors about potential suitors in recent days — Google! Apple! Disney! — are fizzling faster than it takes to type 140 characters.
Don’t count out inflation yet: Maybe it’s a one-off, but we’ll note this morning that global food prices leaped 2.9% in August and 10% year over year, according to the United Nations Food and Agriculture Organization.
Much of that increase was driven by a 6.7% surge in the price of sugar, thanks to poor weather in Brazil — the world’s biggest producer.
The FAO’s index is now the highest since March 2015 — but still well below levels of two years ago, to say nothing of the record levels in 2011 that helped set off the Arab Spring.
“Every year, some investors give away a significant portion of their investment income to taxes that could be avoided,” says our income specialist Zach Scheidt.
“Making sure that you structure your investments properly can go a long way toward minimizing how much tax you pay and how much of your income you actually get to keep. Because how much we actually keep is what really matters.”
For starters, Zach likes the bread-and-butter of Lifetime Income Report — dividend-paying stocks. “Dividends are almost always classified as ‘qualified dividends.’ That is good because it means that the maximum tax rate on those dividends is generally lower than the tax rate you pay on ordinary income.”
The most you’ll pay is 20%, and that’s only half the rate of the top federal tax bracket.
“Since this income is taxed at such a low rate,” says Zach, “it is often best to hold these positions in a taxable account.” Indeed, the same holds true for nearly anything you can buy on the stock market, including real estate investment trusts and master limited partnerships. The main exception? BDCs, or business development companies. Those work better in an IRA.
If there’s any confusion, the listing of each recommendation on the back page of Lifetime Income Report tells you what’s better in a taxable account and what’s better in a tax-advantaged account.
Bonds, you ask? They’re best held in a retirement account because the interest is taxed as ordinary income — unless they’re municipal bonds, which are tax-exempt.
And Zach’s “ultimate retirement loophole”? That’s best done in a retirement account… for reasons that’ll become clear as you discover how the loophole works.
“Another sign of the war on cash,” a reader writes from the Pacific Northwest.
“This is from a fun bar in Kirkland, Washington, that serves about 24 rotating beers and ciders on tap and has an indoor putt-putt golf course. I went there last night to find this sign:
“They are low budget in general and use Square to charge your credit card. Curious, they’ll still take tips in cash. It’s not dead yet.”
“Jim knows his stuff!” writes a reader rising to Jim Rickards’ defense after yesterday’s episode.
“I’m sticking with his advice and opinion. Thank you so much for this comment and reassurance that in the face of such volatility, precious metal stocks will rise. I did feel my heart sink watching the chart drop in the last two days.
“You do a good job of hitting various topics. I like your material.”
“Most of your readers should know by now that when the price of gold drops as much as it did on Oct. 4 that it is the doing of the central bankers and nothing to do with the fundamentals of the economy,” adds another.
“Now, I’m not sure why these bankers can keep getting away with this type of manipulation, but hopefully, someday they will get badly burnt. In any event, don’t fire Jim Rickards. He’s one of your best analysts.”
The 5: See, you’ve got the right attitude. You know the manipulations can’t go on forever, the game will be up sooner or later and you’re willing to be patient.
This is why we don’t obsess about gold manipulation around here, even as Jim acknowledges its existence is obvious and in previous episodes of The 5 we’ve described the mechanisms as succinctly as possible.
Yes, it’s obvious, but there’s nothing you can do about it — and it does no good at all to stew in your own juices, as so many in the financial blogosphere do. Right now, we’re sure you can find dozens of posts about “X” bullion bank carrying out “Y” transaction three weeks ago, which — only in hindsight, of course — made it obvious gold would get crushed on Tuesday.
Fat lot of good that information did anyone, right?
“It was refreshing,” snarks our final correspondent, “to see in print you finally admit we are ‘in a disinflationary, if not deflationary, environment.’
“You just couldn’t quite bring yourself to say ‘deflation’ without the rest of the jibber-jabber. What’s next? You’ll fire Jim Rickards and hire Harry Dent?”
The 5: Feel better now?
You do realize Jim says we’re in the grip of deflation at this time, right? Or that at least in the tug of war between deflation and inflation, deflation has the upper hand.
I only said “disinflationary, if not deflationary” to throw a bone to the people who inevitably write in to tell me there’s no sign of deflation in their health insurance premiums or their kids’ tuition.
Just goes to show there’s no pleasing everyone…
The 5 Min. Forecast
P.S. Last chance: You want Jim Rickards to send you two G-series gold coins? You need to act before midnight tonight. Here’s where to go.