Sunday, July 20, 2014

Jim Rickards Latest Editorial: Stock Market Reality Check

Jim Rickards is on record earlier this year stating that the believes the economy is weak and that the FED is tapering QE into weakness. He predicted this would lead to another recession either this year or early next year. Today he writes this new editorial updating where he thinks things stand in the economy. How are his predictions panning out? Let's take a look.

We cite Jim Rickards on this blog frequently. There are reasons why we do that. One is that he has a solid track record we have followed over a period of years of making accurate predictions. Another is that when he puts forward a theory he backs it up with documentation that the reader/listener can verify with their own research (something we require here to post articles on this blog). Finally, Rickards resume is strong. He has a strong academic background, a strong career resume, and clearly has high level contacts within the present system. Short version: he has proven to us his predictions are worth noting and tracking. There are others too, but Jim Rickards is one of the best.

So how has he done this year? Reasonably well, but its too early to tell if he will get his recession prediction right or not. When the FED announced their QE tapering program he said he believed the FED was "tapering into weakness" and predicted a summer "Yellen Pause". By this he meant that she would pause the taper this summer due to weak economic data.

I guess he was half right. So far the economic data is very weak with 1st quarter GDP a horrific number. The 2nd quarter data is coming up soon. But he missed on the FED pausing the taper. They did not pause and have stated they will wind down QE by year end. And now they are hinting at interest rate increases earlier than some were expecting (implying the economy is improving). 

The 2nd quarter numbers will be interesting because it will show if the FED stays on this track or has to rethink if the data is weaker than expected again. We'll watch that to see. 

Below are some quotes of interest from this recent Rickards article. He is clearly not backing off his forecast that the economy is still weak and will stay that way and suggests he thinks the stock market is about to reflect that weakness. One thing about him, he goes on the record and then you can see if he gets it right or wrong. We'll follow that into year end.

Here the quotes from his latest article:

"Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indices, at or near all-time highs, will go higher still."

"But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse. Almost everything about the happy talk story is superficial, and falls apart under scrutiny. There is an alternative narrative of bad news that is seldom discussed on mainstream business channels but is well known to analysts. When these adverse trends are taken into account one conclusion in inescapable. The stock market and economic fundamentals are on a collision course. One or the other will have to swerve. Either the economy will have to improve rapidly and unexpectedly and reverse its fundamental weakness, or inflated stock values are heading for a precipitous fall. The evidence suggests that the latter is more likely."

"The news from abroad is no better. China is slowing precipitously and may be on the brink of a credit collapse. European growth is near zero and even the mighty German economy, the locomotive of Europe, is slowing partly because of weaker demand from Ukraine, Russia and China."
"Against this backdrop, mainstream voices are beginning to call U.S. financial markets a bubble. The New York Times recently featured a front page story with the title, Welcome to the Everything Boom, or Maybe the Everything Bubble. The conservative Bank for International Settlements in Switzerland recently warned that stock markets had become “euphoric.” Even Janet Yellen of the Federal Reserve, the institution with the worst record for spotting asset bubbles, said that valuations of some securities “appear stretched.”
"So, the conundrum is complete. Stock indices march to all-time highs while economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing. Structural reform is the job of the White House and Congress, not the Federal Reserve. Since the White House and Congress are barely speaking, no help should be expected from that direction. Therefore a stock market collapse is almost inevitable and is probably coming soon."

My added comments: The above are selected quotes and readers should read the 
entire article to get the full context. Jim provides some supporting details for his general comments I selected. 

This is becoming interesting for me to follow. 

On the one hand there are many credible voices like Jim Rickards, Jim Sinclair, Peter Schiff, Michael Pento, and many others predicting serious systemic crisis and urging people to prepare for that. 

On the other hand, through this blog I have gotten some information from people working inside the system to try and deal with these problems to prevent a systemic crisis. These people are also credible, highly intelligent, and well connected. They view the problems as manageable over time and see much hope that the system can withstand shocks and transition to more stability.

All these people are very intelligent, very knowledgeable, and well respected. They all have strong backgrounds and resumes. And I believe they all are genuinely concerned for the future for people. I believe they are all working in their own way to try and be helpful to the average person who just wants to live in a relatively stable world and make a living. Most don't want to have to think about "major monetary system change" even if it may directly impact them.

These are very interesting and I think historic times. I can see all kinds of possible outcomes from a severe systemic crisis to new technology providing solutions and averting systemic crisis. I have no idea which way it will go, but following it all has been an interesting journey. We will continue to do that here and report the best information we can find as things unfold.

I do still believe major monetary system change is coming one way or another (the reason this blog was started). If anything, what I have learned doing this blog convinces me of that more than ever.The biggest question I have is will the change come quickly as a result of some kind of systemic crisis OR will the change take place over time in a more controlled way and avoid a worst case systemic crisis? And then will the change make things better or worse?

We think, as things do unfold, more and more people are going to be interested in following this topic. This blog actually proves that so far. We have had far more readers than we expected when this blog was started. And that is a good thing. The more people know, the better off we all are.

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