- Washington experiences blowback from financial warfare
- Dollar death blow? Russia-China scheme on gold, blockchain
- Manufacturing slump stretches into a fourth month
- Record online sales? Or Black Friday BS?
- The precious metal hitting records (again). What next?
- Brazilian president’s humiliation… a reader questions our Social Security numbers (we have backup)… embarrassingly effusive praise for The 5…and more!
This whole “financial warfare” thing is a lot more complicated than folks in Washington make it out to be.
Jim Rickards helps us set the scene this morning: “The United States is using financial warfare against Russia, China, Venezuela, Iran and others.
“Tactics include account freezes, exclusion from payments systems, export embargoes, tariffs, banning foreign investment in U.S. companies and prohibition of commerce with listed entities like China’s Huawei. Prohibitions apply directly to foreign entities and indirectly via banks that do business with targeted parties. Large international banks can do business in the U.S. or Iran, not both.
“U.S. success in financial warfare is rooted in the dollar’s dominant role in global finance. The dollar is the currency of choice for over 60% of global reserves, 80% of global payments and almost 100% of the energy market. Cutting off access to dollars is like cutting off oxygen to a patient on life support.”
But what if the rest of the world starts pursuing alternate sources of “oxygen,” as it were?
We’ve been on the “de-dollarization” beat for 5 and 1/2 years. It’s a slow-motion process… but it’s easy to see where it’s going.
In fact, two stories on the front page of this morning’s Wall Street Journal illustrate the phenomenon beautifully. The paper won’t connect the dots for you, so we will…
“Huawei Manages to Make Smartphones Without American Chips,” says one of the headlines.
Huawei is the Chinese tech giant that’s been in Washington’s crosshairs for many years now, long before Donald Trump entered the realm of presidential politics. (We know from the 2013 Edward Snowden leaks that the NSA burrowed its way into servers at Huawei headquarters.)
Last May, the Trump administration banned U.S. shipments to Huawei. It was a blow to companies like Qualcomm and Intel, which supplied Huawei with chips. Last month, the Commerce Department partially reversed that ban — but too late for Huawei’s (former) U.S. suppliers.
The Journal tells us Huawei’s latest smartphone contains no U.S. parts, per an analysis by UBS and a Japanese lab called Fomalhaut Techno Solutions.
“While Huawei hasn’t stopped using American chips entirely, it has reduced its reliance on U.S. suppliers or eliminated U.S. chips in phones launched since May, including the company’s Y9 Prime and Mate smartphones, according to Fomalhaut’s teardown analysis.”
Sucks to be Qualcomm or Intel, huh? Or a host of smaller companies like North Carolina’s Qorvo Inc.… Massachusetts-based Skyworks Solutions… or Cirrus Logic of Austin, Texas.
“China and Russia Are Partners — and Now Have a $55 Billion Pipeline to Prove It,” says the other headline.
This is a huge story in both Russian and Chinese media today, while the nonfinancial U.S. media are obsessed with impeachment and “Cyber Monday.” Here’s a tweet and screengrab from China’s state-run CGTN network…
The “Power of Siberia” pipeline went into operation today, delivering Russian natural gas to China. The Journal calls it “a physical bond strengthening a new era of cooperation between two world powers that have separately challenged the U.S.”
The paper reminds us the pipeline is part of a 30-year, $400 billion gas deal signed by Russian President Vladimir Putin and Chinese President Xi Jinping in May 2014.
What the Journal neglects to point out — but we pointed out way back then — was an eyebrow-raising phrase in the joint statement issued by the two leaders.
"The sides intend to take new steps to increase the level and expansion of spheres of Russian-Chinese practical cooperation… including an increase in direct payments in the Russian and Chinese national currencies in trade, investments and loan services." [Emphasis ours.]
Anyway, sucks to be a U.S. producer of liquefied natural gas, huh? American LNG exports to China were growing rapidly as recently as last year. Then came the trade war and Chinese tariffs on LNG and those exports shriveled to literally zero. Now with cheaper Russian gas flowing, there’s no chance of those exports resuming.
“Can a new financial system blunt the dollar’s role in financial warfare? The answer is yes, and it’s happening before our eyes,” says Jim Rickards.
Thing is, “this new system will not involve Russian rubles, Chinese yuan or even the euro. None of those existing currencies has the liquid bond markets and rule of law needed to perform as the dominant reserve currency. Instead, this new system is based on gold.
“Almost unnoticed, Russia and China have been accumulating massive quantities of physical gold bullion. Russia’s gold reserves have increased from 600 tonnes to 2,230 tonnes in the past 10 years. China’s gold reserves have increased from 600 tonnes to 1,942 tonnes over the same period.
“The new system will be a hybrid of the oldest form of money — gold — and the newest — digital currency. Russia and China are building encrypted-permissioned distributed ledgers. This is basically a blockchain for members only. They are creating new digital tokens.
“You can think of these as a Putin coins or Xi coins,” Jim goes on. “The coins can be fixed at a value equal to an anchor, perhaps the IMF’s world money called SDRs. Once the coin’s value is fixed, it’s simple to convert each coin to a weight of gold at market prices.
“The coup de grâce comes when Russia and China announce a new trading network that includes Turkey, Iran, North Korea and peripheral states in Eastern Europe and Central Asia. Invitations to join would also be extended to fellow BRICS nations including Brazil, India and South Africa.
“Member nations would agree that trade among them be invoiced in the new digital currency. Iran would sell oil to China. China would sell electronics to Russia. Russia would build nuclear plants for Brazil. Trading partners would periodically settle the balance of payments in physical gold, which could simply undergo a title change in a neutral depository run by the new network.
“This system is impervious to U.S. sanctions since no dollars are involved,” Jim concludes. “The physical gold cannot be hacked, frozen or erased because it’s not digital. The tokens are just a way to keep score and a convenient medium of exchange.
“An age of U.S. dominance in financial warfare would come to an end.”
No, it won’t happen tomorrow or even next year. But as gold steadily supplants the dollar, you’ll want gold in your portfolio mix — Jim has long recommended a 10% allocation. “We expect the gold price to exceed $2,000 per ounce in 2020 and move as high as $5,000 per ounce by 2022.”
Meanwhile, if you don’t have the patience for gold to make that kind of leap over the next three years, you could try out Jim’s short-term trades — with the potential for gains of $15,760 every two weeks.
And wait till you see the technique he uses to generate these trades — there’s nothing else like it, as you’ll see when you follow this link.
Well, looky here: Financial warfare is proving a drag on the stock market today.
When the Trump administration imposed tariffs on imported steel and aluminum in May of last year, Brazil and Argentina got an exemption. No more: This morning the president tweeted that both governments “have been presiding over a massive devaluation of their currencies, which is not good for our farmers.” Thus the tariffs come into effect immediately.
(Gee, we thought Trump was buddy-buddy with President Bolsonaro in Brazil. Bolsonaro actually saluted then-National Security Adviser John Bolton when Bolton came calling earlier this year. Humiliating!)
With that, all the major U.S. stock indexes are down close to 1%, if not more. The Dow has once again surrendered the 28,000 level.
Not helping matters — another disappointment from the most-watched metric of U.S. manufacturing.
The ISM manufacturing index clocked in this morning at 48.1. Not only is that a point less than expected, it’s the fourth straight sub-50 reading — which indicates a shrinking factory sector.
The “internals” of the report are likewise discouraging. New orders sunk to 47.2 — the lowest since April 2009, when we were still in the throes of the “Great Recession.”
The best that can be said is that the headline number isn’t getting substantially worse. An upturn going into 2020 is possible, and maybe even likely.
“We still do not know everything about Black Friday or the weekend yet. Astonishingly, the media falls for this bull**** every year,” says money manager and Bloomberg columnist Barry Ritholtz.
As usual this time of year, we turn to Mr. Ritholtz for a corrective to Big Media’s conspicuous-consumption claptrap. Forget whatever you see about online-shopping records; it might turn out to be true, but for the moment it’s “a mix of actual data, surveys and predictions.”
Brick-and-mortar retail was due for a shakeout even without the advent of online shopping: “The United States has been wildly overstored for at least two decades,” Ritholtz writes: “the U.S. has 7.3 square feet of retail space per capita, versus 1.7 square feet per capita in Japan and France.”
Indeed as we said in 2017, the United States has three times more retail square footage per capita than any other Western country.
There’s some context for the growth of e-commerce you won’t hear from the mainstream.
While gold is stuck in neutral this morning at $1,464, another precious metal has notched all-time highs yet again.
The bid on palladium — used for pollution control in vehicles’ catalytic converters — is $1,828 as we write. That’s more or less a 50% rise in the last year.
The world’s biggest miner of palladium, Russia’s Norilsk Nickel, expects a supply-demand crunch through 2025. Its reasoning? Pollution regulations around the world get tougher every year. Meanwhile, auto production in China is set to ramp up in 2020 thanks to government support for the industry.
That said, some precious metals experts — like Jeffrey Christian from CPM Group — believe the palladium price has plateaued for now. To their minds, the big run-up this year has been driven by investors chasing the proverbial next big thing; supply-demand dynamics actually need time to catch up.
To the mailbag, and a follow-up on “the end of Social Security as we know it”…
“Dave, I would like to know the specific source for your comment that those paying FICA taxes on earnings in excess of $400K would derive no additional benefit for same. If it’s the Social Security 2100 Act introduced into Congress this year, you are incorrect. But perhaps the Democratic candidates have another plan?”
The 5: We’re going off the research of Baylor professor emeritus William Reichenstein, which we cited earlier this year.
He ran the numbers on the very bill of which you speak, which has the backing of basically every Democrat in the House. He concluded someone with a $500,000 income would pay $6,200 more in taxes every year… and collect only $156 in additional lifetime benefits.
“Dave, Emily, Happy Thanksgiving! Hopefully, you’ll get some quiet time with family and friends over the holiday,” says a note that came in from one of our regulars before we closed up shop for the long weekend.
“I’ve been thinking lately about things that I’m thankful for. The 5 is one of them.
“I sincerely think everyone would benefit from reading it. It’s one of the most invaluable communication channels we have.
“The skill involved in delivering it is world-class. You make it look easy, but I know it isn’t. I have a bit of experience from my first career as an author and editor — not for a newsletter like this, but I realize how challenging it is to do each thing well. With the real-time issues you address each day, it must get wild and crazy.
“It is a privilege to contribute from time to time. I’m sure my posts draw some fire and, unfortunately, you get to deal with that. Hopefully, any flak that I trigger is at least good for laughs.
“I really appreciate the way you keep moving the discussion forward and focusing on issues that affect everyone. I hope my participation helps a bit. Thanks for entertaining my musings.
“Keep rocking. What you’re doing may be even more important than you know.”
The 5: Thanks. It’s our privilege.
The 5 Min. Forecast
P.S. We have some cool things in the works for next year. Much too early to get into details, but stay tuned!