- [D’oh!] Treasury Secretary Janet Yellen’s aha moment
- U.S. economic warfare backfires all over the place (“strategery”)
- Jim Rickards on Top Gun and “ghost fleets”
- An uncanny day in crude oil’s history
- The SEC’s crypto fatwa… Biden’s Chinese tech fatwa… Netflix co-founder Reed Hastings: A true “imagineer”… And more!
American economic policy summed up in one word: Derp!
“There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar,” Treasury Secretary Janet Yellen told CNN’s Fareed Zakaria on Sunday. “Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative.”
No excrement, Sherlock! We said as much in this space six weeks before Russia invaded Ukraine and Washington imposed unprecedented sanctions.
For that matter, “I explained this dynamic to the Pentagon and Treasury 10 years ago,” tweets Paradigm Press macroeconomics maven Jim Rickards. “The slow kids in the class are finally catching up.”
As it happens, Jim also explained it very well to our readers one year ago today: “It was fully expected that the U.S. would impose sanctions on certain Russian industries, exports and its oligarchs,” he said. “It was not expected that the U.S. would seize and freeze the reserve assets held by the Central Bank of Russia.”
Yup. That was the event that made politicians and central bankers worldwide spit out their coffee and say They did WHAT?!
“Now that that has happened,” Jim went on, “every central bank in the world is reevaluating its dollar-denominated reserves and asking itself if the U.S. will freeze those holdings in some future dispute.
“Ministers of finance are not waiting to find out. They’re acting preemptively to reduce dollar holdings.”
And they’ve continued doing so for the last 365 days.
Of course, as we’ve said more than once lately, de-dollarization is a process and not an event. All those dollars sloshing around overseas? They won’t come flooding back here in one fell swoop. That’s the good news: The inevitable inflation will be a slow burn, not an instant inferno.
In the meantime, more conventional measures of economic warfare are also backfiring.
Remember the harebrained “price cap” scheme the G7 nations imposed on Russian oil last December?
“India and China have snapped up the vast majority of Russian oil so far in April at prices above the Western price cap of $60 per barrel,” according to the Reuters newswire. “That means the Kremlin is enjoying stronger revenues despite the West’s attempts to curb funds for Russia’s military operations in Ukraine…
“India and China have not agreed to abide by the price cap, but the West had hoped the threat of sanctions might deter traders from helping those countries buy oil above the cap.”
So how did that threat turn out to be so hollow? Jim Rickards’ answer starts with this: “I’ve taught a seminar in financial warfare at the U.S. Army War College for the past seven years.
“I usually have about 12 students from all branches (Army, Navy, Marines, Air Force and Coast Guard) as well as civilians from the State Department, CIA and other agencies. They are generally midcareer, about 35 years old, some older with the rank of lieutenant colonel, commander or fighter pilot.
“The students are all handpicked as part of the Advanced Strategic Art Program and are being fast-tracked toward future high leadership positions in combat commands or the National Security Council.”
Last year’s seminar was a first: Post-invasion, financial warfare got all mixed up with shooting warfare. “I told the class that the U.S. sanctions would be worse than failures. Not only would the sanctions fail to deter Russia or even cause much economic damage, but they would also blow back to the U.S. and injure our economic standing in the world.”
Among Jim’s reasons were the ease with which sanctions can be evaded — “even in a world of satellite surveillance and GPS tracking.”
As if to prove Jim’s point, Bloomberg reported last month how in the wake of the price cap scheme, a “ghost fleet” of tanker ships is moving Russian oil, sanctions be damned.
“The vessels were sold by prior owners to new owners whose names and addresses are unclear,” Jim explains. “The tankers can turn off GPS transmitters while underway. Offices of the ship operators are moved frequently. Insurance is obtained from ad hoc syndicates that can use self-insurance pools or that can obtain reinsurance through layers of shell companies. Some needed services can be obtained from countries like India and China that never joined the sanctions regime.
“In short, it’s business as usual for Russian oil exports subject to a few documentation hurdles and some fees to middlemen,” Jim says.
We end our main topic today where we began: “Seasoned observers of international trade and sanctions know the sanctions are easy to work around,” says Jim. “The only ones who don’t know how easy are eggheads like Janet Yellen who have spent their entire careers in a government cocoon and have never worked in the real world of international trade.”
[Ed. note: When Russia joined the OPEC nations to announce a shock production cut on April 2, they set in motion what Jim calls “a catastrophic snowball effect.” It’s bad news for U.S. energy supplies… but great news for Jim’s favorite oil play right now. Check out his up-to-the-minute presentation right here before it goes offline at midnight tonight.]
To the markets — where for the moment, the big story is a sharp drop in oil prices.
At last check a barrel of West Texas Intermediate is down nearly two bucks, back below $79 for the first time this month.
It being Wednesday, the Energy Department is out with the weekly inventory numbers. The headline number seems bullish — a 4.6 million barrel drop to 466.0 million barrels.
Then again, inventories are slightly above the five-year average for this time of year — and that average would include 2020, when the globe was awash in crude that nobody wanted while billions of the globe’s inhabitants were under lockdown. (Tomorrow is three years to the day that oil prices briefly went below zero.)
Elsewhere in the commodity complex, gold is back below $2,000 an ounce but silver has firmed a bit to $25.24. Copper has backed off to $4.05 a pound.
The major U.S. stock indexes are a snooze — the S&P 500 pancake-flat at 4,153, the Dow down a quarter percent at 33,899 and the Nasdaq up fractionally at 12,163. Big movers include Netflix — down more than 4% after announcing plans to expand its crackdown on password sharing.
Crypto is steady as she goes — Bitcoin $29,361, Ethereum $1,987 — as we keep half an eye on the stablecoin hearing on Capitol Hill that we mentioned off the top yesterday.
No fireworks that we’ve seen so far today… but wow, did SEC chair Gary Gensler get roasted during a different hearing yesterday.
House Financial Services Committee chair Patrick McHenry (R-North Carolina) ran down a litany of complaints against Gensler — starting with Gensler’s jihad against crypto.
“Under your leadership, the SEC has brought nearly 50 separate enforcement actions against digital asset firms. And now your agency is requesting an additional $78 million to expand your enforcement agenda.
“At the same time, you have refused to provide clarity on whether digital assets offered as part of an investment contract are subject to securities laws. And, more importantly, how these firms should comply with those laws.
“You’re punishing digital asset firms for allegedly not adhering to the law when they don’t know it will apply to them. That’s nonsensical.”
McHenry is a partisan hack… but he’s not wrong.
Alas, we’re not done today with the topic of Washington’s economic warfare.
Politico reports that Joe Biden is about to sign an “unprecedented” executive order requiring American companies to notify the U.S. government of new investments in Chinese technology firms… and banning investments altogether in sectors like microchips. That’s on top of export restrictions imposed last year targeting China’s chip industry.
The Treasury and the National Security Council are said to be at odds over some of the details, but the edict will likely be handed down by month’s end.
Of course, Beijing is not helpless in the face of such measures. “Over the past two months,” says the Financial Times, “Chinese officials have slapped new sanctions on U.S. weapons companies Lockheed Martin and Raytheon, launched an investigation into U.S. chipmaker Micron, raided U.S. due diligence firm Mintz and apprehended local staff, detained a senior executive from Japan’s Astellas Pharma group and hit London-headquartered Deloitte with a record fine.
“President Xi Jinping’s administration is now considering curbing Western access to materials and technologies critical to the global car industry, according to a commerce ministry review.”
It’s at this point we’ll once again suggest reviewing our edition of Oct. 19, 2018, with the cheeky title “The Day China Kicked out Apple and GM.”
As long as we brought up Netflix earlier, we should mention a milestone: Its red-envelope DVD rentals by mail will end on Sept. 29.
It’s worth noting today only because of something we discussed in 2019: Netflix co-founder Reed Hastings had the vision to anticipate video on demand way back in… 2002.
Back then, DVDs were Netflix’s bread and butter. “Streaming video” usually meant choppy, low-resolution clips delivered via dial-up modem.
“The dream 20 years from now,” he told Wired magazine, “is to have a global entertainment distribution company that provides a unique channel for film producers and studios…. downloadables as well as DVDs… a full service.”
In 2002, the tech industry was still reeling from the dot-com bubble and that era’s excessive build-out of fiber-optic cable. But Hastings rightly figured one day he could fill all that cable with video.
Hastings stepped aside as CEO in January. Netflix isn’t the dominant player in streaming that it was at the time of our 2019 writeup… but that doesn’t take away from his remarkable accomplishment.
Something different for the mailbag today — an actual piece of snail mail sent by a very long-time reader in New England to our firm’s Baltimore headquarters.
”Dave, fan letters are not my cup of tea, but I suppose this could be counted as such. Actually, since I was taught to always say ‘please’ and ‘thank you’ where appropriate, this is more of an acknowledgement of your fine research and writing for The 5.
“Along with the wisdom of Bill Bonner, and the analysis of Addison Wiggin and, eventually, Jim Rickards’ contributions, we have reached our goals, which were more than just financial. So many thanks to you and the whole Agora crew for the help. You’ve done your job well.
“P.S. Condolences on the passing of your office kitty Scarlett. It’s much tougher than most people know.”
The 5: Thank you so kindly. Of course, Bill is doing his Bonner Private Research on Substack these days and Addison is busy with his Wiggin Sessions podcast/YouTube venture… but I’m still plugging away here, now under the Paradigm Press banner.
As this e-letter approaches its 17th year — the anniversary is next Wednesday — we have some exciting changes coming. Stay tuned!
Happy Patriots’ Day,
Dave Gonigam
The 5 Min. Forecast
