Sunday, August 10, 2014

Jim Rickards Latest: The Safest Investments in a Dangerous World Market

Jim Rickards is out with a new article that basically is a summary of many of the events and issues we are covering here on the blog. We will select a few quotes from the article and add a few comments at the bottom. Here is a link to the article.


Here are the selected quotes:


"The relationship between geopolitics and global finance has rarely been more densely connected and complex as it is today."

"The disintegration of Iraq is far from over. The situation will deteriorate further putting upward pressure on oil prices. "

"The war in Iraq has the potential to become a regional war. Turkey may be drawn in by the emergence of a Kurdish state in northern Iraq. Iran has already been drawn in to support al-Maliki. Syria and Iraq have effectively been partly merged because the border has been erased. Jordan is relatively weak and will be hurt by refugees and spillovers."

"D├ętente with Iran is a betrayal of Saudi Arabia. Since 1974, the United States dollar has been propped up by the original “petrodollar” deal whereby the United States acted as a guarantor of the security of the House of Saud in exchange for Saudi agreement to price oil in dollars. This requires countries to maintain dollar reserves in order to secure oil supplies whether they like the dollar or not."

"Now that the United States is reneging on its half of the deal, Saudi Arabia can abandon the petrodollar especially in its new energy dealings with China. This points to United States dollar weakness ahead, even if the dollar gets a temporary lift on flight to safety momentum."
"Nor has the Ukrainian crisis abated.  . . . Putin is proving himself to be patient, nimble and focused compared to the White House, which is reactive, clumsy and easily distracted. This crisis is also not going away soon and will put upward pressure on the prices of oil and gold."
"In Europe, the head of the European Central Bank, Mario Draghi, recently lowered two interest rates, including the creation of a negative rate of interest for the first time. Draghi has proved once again that he is the only central banker who understands central banking."
"China is in the midst of a massive credit and property bubble. Many expected this bubble would burst in 2015; however, recent evidence is that the bubble is bursting faster and these problems may come to the fore in 2014. China has enough reserves to bailout its banking system, but not without consequences."
"The global situation resembles the 1970s. The Fed engaged in easy money policies in 1971 and 1972, in part to facilitate the reelection of Richard Nixon. High inflation did not emerge immediately. Money illusion prevailed and behavior was slow to change. But a series of geopolitical events in 1972-1973 culminating in the Yom Kippur War in October 1973 led to an oil embargo and sharply higher oil prices. In turn, that raised inflationary expectations."
"The Fed is between a rock and a hard place. If they withdraw ease by tapering the money printing, they will puncture asset bubbles."
"If they keep printing, inflation will gather strength. As weak data emerges over the rest of this year, the Fed will realize it has tapered into weakness. This will cause them to launch new money printing, or QE4, in 2015."
"By then, a geopolitical witches’ brew will have emerged, and act as a spark for inflation that will race past the Fed’s expectations. Stock and property bubbles will burst, banks will be in distress, and the safest assets will be energy, gold, land, natural resources, agriculture and other hard assets."
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my added comments: If you read through this article you can pretty much form a checklist of events and issues we have been covering here on the blog. In this article Jim Rickards repeats his view that by next year we will be in trouble again and the FED will be forced to return to QE. The Fed meanwhile is still making public statements that the economy is picking up and will allow them to finish QE and start to think about raising interest rates. Someone has to be very wrong about 2015 as we noted in this blog article, so we can follow that to see who gets it right.
Other note: I am old enough that I remember the 1970's. Many readers here may not be old enough to know what that decade was like. Jim Rickards is right that some things we see happening now are similar to things that happened then. The difference now is that all the numbers involved are exponentially larger so the potential for volatility is exponentially larger today. Back then, there were no such things as hundreds of trillions in derivatives products for example. Paul Volcker was able to kill off inflation back then by raising interest rates into the double digits. Today, doing that would probably lead to a depression as all the trillions and trillions of existing sovereign debt would drop sharply in book value (bonds go down when interest rates go up) and already overburdened government budgets would be overcome by interest costs. 
This is why I keep saying we live in historic times and that some big changes are likely in our future. The question remains over what time frame and under what conditions.




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