By James Rickards

This post Trump Haters Don’t Get the “Art of the Deal” appeared first on Daily Reckoning.

I’m continually amazed at the legions of politicos, pundits and so-called “experts” who don’t understand President Trump or how he conducts policy.

These elites have a mental model of how a president is supposed to behave and how the policymaking process is supposed to be carried out. Obviously, Trump does not fit their model.

Instead of trying to grasp the model that Trump does use, they continually berate and disparage Trump for not living up to their expectations. A more thoughtful group would say, “Well, he’s different, so why don’t we try to understand the differences and analyze the new model?”

Really, these people need to get out of Washington, New York and Hollywood more and get away from their screens. If they knew more everyday Americans, they would come a lot closer to understanding how Trump gets things done.

It’s not chaos; it’s just a little different and more down to earth.

This is because of Trump’s “art of the deal” style described in his best-selling book by that name. Bush 43 and Obama were totally process-driven. You could see events coming a mile away as they wound their way through the West Wing and Capitol Hill deliberative processes.

All you had to do was understand the process and you could forecast big developments in a relatively straightforward way.

With Trump, there is a process, but it does not adhere to a timeline or existing template. Trump seems to be the only process participant most of the time.

Here’s the Trump process:

1. Identify a big goal (tax cuts, balanced trade, the wall, etc.).

2. Identify your leverage points versus anyone who stands in your way (elections, tariffs, jobs, etc.).

3. Announce some extreme threat against your opponent that uses your leverage.

4. If the opponent backs down, mitigate the threat, declare victory and go home with a win.

5. If the opponent fires back, double down. If Trump declares tariffs on $50 billion of good from China,and China shoots back with tariffs on $50 billion of goods from the U.S., Trump doubles down with tariffs on $100 billion of goods, etc. Trump will keep escalating until he wins.

6. Eventually, the escalation process can lead to negotiations with at least the perception of a victory for Trump (North Korea) — even if the victory is more visual than real.

No one else in Washington thinks this way. Washington insiders try to avoid confrontation, avoid escalation, compromise from the beginning and finesse their way through any policy process.

Trump is in a league of his own. What amazes me is that the media still do not understand his style and keep taking the bait when he announces something crazy, as in Step 3 above.

Here’s a list of big issues that are now in play from Trump’s perspective and may lead to dramatic results with important implications for investors:

1. Tariffs and penalties on China for theft of intellectual property.

2. Trump’s threat to withdraw the U.S. from the World Trade Organization (WTO).

3. Trump’s threat to quit NATO. Trump will not actually do this, but he could withdraw U.S. troops from Germany. This would drive Germany closer to Russia.

4. The U.S. and China can find no middle ground in disputes over rights in the South China Sea

5. North Korea seems to be cheating on its commitment to Trump to denuclearize the Korean Peninsula.

All of these developments and more have the potential to reach crisis proportions. The problem from an investor’s perspective is they are “slow burn” crises and can linger for a long time before producing anything dramatic such as a shooting war or market collapse. They are not date-driven or date-specific in the short run.

One story that’s under the radar and could blow up soon is Chinese currency devaluation.

If Trump puts a 25% tariff on Chinese imports but China then devalues its currency 25%, then the net effect is zero. The impact of the devaluation offsets the impact of the tariff and then you’re back where you started.

This new currency war seems to be happening.

Once Trump focuses on this, he’s likely to be infuriated and retaliate against China in the currency war and take steps to penalize China for currency manipulation over and above the existing tariffs and penalties for theft of intellectual property. This has a hard date of Oct. 15, 2018.

That’s the date of the U.S. Treasury’s semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.

That report is the formal mechanism for labeling a trading partner such as China a “currency manipulator” with severe consequences. Oct. 15, 2018, is just three weeks before the midterm elections, so it could be a highly popular political move in addition to being economically important.

All of this and more is on Trump’s policy plate right now. Just don’t expect him to handle it the way politicos usually do. Investors should expect dramatic policy shifts and extreme threats. But don’t overreact like the Washington pundits.

Remember, it’s all the art of the deal.

Regards,

Jim Rickards
for The Daily Reckoning

The post Trump Haters Don’t Get the “Art of the Deal” appeared first on Daily Reckoning.

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From:: Daily Reckoning

By Brian Maher

This post “I Don’t Know About You, but I’m Worried” appeared first on Daily Reckoning.

“What trade war?” asked an Op-Ed writer in Tuesday’s Washington Post, triumphantly.

“Investors on Monday continued shrugging off fears that President Trump’s escalation of trade hostilities will put a dent in share prices.”

We almost pity the poor fellow — all that egg he had scrape from his face.

The Dow Jones tumbled 219 trade-warring points yesterday — and once again turned negative on the year.

Damage spread far… and wide… like a virus unleashed in a busy airport:

S&P — down.

Nasdaq — down.

Global stock markets — down.

Oil, gold, commodities in general — down.

Copper, which many consider a true barometer of global growth, plunged as much as 4% yesterday.

The one major exception?

The dollar — the dollar was up — which partly explains the commodities shellacking.

But the central reason for yesterday’s far-flung panic is trade…

The president threatened additional tariffs on another $200 billion of imported Chinese goods.

This, coming days after the U.S. and China imposed $34 billion of tariffs on the other’s goods.

This, coming as Trump harrumphs he may seek tariffs on over $450 billion of Chinese wares.

Markets made good many of yesterday’s losses today.

They nonetheless remain, to cadge a hackneyed phrase, “on edge.”

“We view the White House’s announcement of an additional $200 billion round of tariffs as significant in escalating the tensions closer to a full-blown tit-for-tat trade war,” warns Bart Melek of TD Securities.

Commerzbank analysts affirm:

“There is growing concern among market participants that the trade war will affect the real economy and put the brakes on global economic growth.”

The way ahead is a gauntlet… and arrows come zinging from every direction…

To trade wars we must add rate hikes. Quantitative tightening. Inverting yield curves. Overvalued stocks. Sky-shooting deficits. More.

“I don’t know about you, but I’m worried,” confesses Kevin Muir, market strategist at East West Investment Management, listing a parade of horribles:

The economic cycle is long in the tooth. Equity valuations are stretched. The yield curve is flattening. Emerging markets and other liquidity-sensitive markets are sagging. The Federal Reserve is raising rates while also attempting the never-before-accomplished feat of reversing a decade of quantitative easing — seemingly oblivious to the hornet’s nest they are walking into. And President Trump seems determined to antagonize as many trading partners as possible before the summer holidays begin in earnest.

Sell everything is the message — include the sink in the kitchen, the floorboards, the wife, the children.

But is that the message?

“Although every bone in my body wants to sell this market,” Muir anguishes, “I am petrified this trade is so obvious, it can’t be right.”

It can’t be right?

What about the economic cycle you mentioned… equity valuations… the yield curve… emerging markets… the Federal Reserve… Donald Trump’s antagonizings?

I know all the reasons why the stock market should go down. The investor in me agrees 100% with the skeptics who worry we are late-cycle and that risks are rising. But the trader in me is even more concerned that everyone is already positioned for this outcome… I don’t think the Market Gods will allow this many to catch the top. Markets don’t roll over with the vast majority of market participants calling for a correction. No, they top with buyers being absolutely convinced the only way is up.

The consensus-busting conclusion?

“That path is higher — not lower.”

A contrarian we have here.

Many boastful types bellow contrarian gloats and gurgles — “I never follow the crowd. I always do the opposite. I’m my own man.”

In reality… few can summon the courage to stray from the herd’s comforting embrace.

The pull proves irresistible for most.

Do you have the nerve?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post “I Don’t Know About You, but I’m Worried” appeared first on Daily Reckoning.

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From:: Daily Reckoning

By Brian Maher

This post “Remarkably Accurate” Market Indicator Predicts “Devastating Losses” appeared first on Daily Reckoning.

MarketWatch gives the warning:

“Investors face ‘devastating losses’ if this ‘remarkably accurate’ indicator flashes.”

What “remarkably accurate” indicator is this?

When can you expect it to flash?

And how devastating the losses?

Today we square our shoulders… set our jaw against the wind… and light out for the uncertain horizon.

Since 1955, claims the San Francisco branch of the Federal Reserve, this indicator has accurately forecast all nine U.S. recessions.

All nine.

Only once did it cry wolf — in the mid-1960s.

It has also soothsaid every major stock market calamity for the past 40 years.

This indicator last went off in early 2006.

It had previously flashed in 2000.

On both occasions, mischief and havoc were soon at hand.

And now, in 2018…

This signal of recession is beginning to flicker and spark.

What is this ominous indicator of which we write?

The yield curve.

The yield curve is simply the difference between short-term and long-term interest rates.

Long-term rates are normally higher than short-term rates.

For the reasons, we needn’t look far…

The further out in the future… the greater the uncertainty.

Investors, for example, demand greater compensation to hold a 10-year Treasury than a 2-year Treasury.

And the 10-year Treasury yield rises when markets anticipate higher growth… higher inflation… higher animal spirits.

The 10-year yield should therefore run substantially higher than the 2-year yield.

But when the 2-year yield and the 10-year yield begin to converge… the yield curve flattens.

And a flattening yield curve is a possible omen of lean times.

Bob Johnson, director of economic analysis at Morningstar:

A flatter yield curve is viewed as a sign of upcoming weakness… If long-term and short-term rates are close, markets must be expecting little growth…

The Federal Reserve controls directly neither the 10-year yield nor the 2-year yield.

That business falls to what many still wistfully call the “free market.”

But being shorter term, the Fed exerts greater influence over the 2-year yield.

And its current rate hike cycle has worked upward pressure on this key rate.

Financial analyst Daniel Amerman:

Yield curve inversions generally occur when the Federal Reserve has been boosting interest rates. Because the interest rates that the Federal Reserve raises are short term, this tends to push the short term up relative to the long term, which is exactly what has been happening.

Last September the 2-year yield was 1.25%.

And today… it sits at 2.58%.

Meantime, since topping 3% in late February, the 10-year yield has fallen… to 2.85%.

The yield curve, therefore, is flattening (2.85% – 2.58% = 0.27%).

And the Fed is doing the flattening.

We note — in passing of course — that the yield curve has not been this “flat” since 2007.

As the calendar confirms… 2007 preceded 2008.

The flattening yield curve thus indicates recession may be gathering in the distance.

Research and investment consultant 720 Global:

Currently, the 2s/10s yield curve spread has been flattening at a rapid pace and, at only [0.27%] from inversion, raises concerns that a recession might be on the horizon…

While there are many explanations for why the curve is flattening rapidly, the consensus seems to be that inflation and the long-term economic growth outlook for the future are benign despite a recent spurt in economic activity.

Evidently the market believes the tax cuts will run their course soon enough… and lose their oomph.

And that inflation will stay in its cage.

But is a flattening yield curve an immediate menace, a thundercloud overhead?

Not necessarily, say the experts. Not yet.

The yield curve can stay good and flat for a while — with no ill effects.

Bloomberg’s Tim Duy:

The [yield] curve was extremely flat during the second half of the 1990s, a stretch of high growth. Only late in that period did the yield curve invert, finally foreshadowing the 2000 recession.

Here this fellow points out the true bugaboo — the inverted yield curve — when short-term rates actually overtake long-term rates.

It is only when the yield curve inverts that trouble follows.

The graphic evidence, stretching to 1980:

Right now the yield curve is flattening — but at 0.27%, it has not inverted.

All is peace, therefore.

But when can you expect the lethal inversion?

The Fed currently projects two additional 0.25% rate hikes this year — in September and December.

The first rate hike should further flatten the curve as it pressures the 2-year Treasury.

The second — in December — may just invert the slope.

The aforesaid Daniel Amerman:

So all it potentially takes is the Fed following its publicly stated game plan of increasing rates by another 0.50% before the end of 2018, with that continuing to have a larger impact on short-term than long-term rates, and that could be enough to produce an inverted yield curve by the end of 2018.

Does that mean you can expect recession later this year?

It does not.

History reveals the catastrophic effects of an inverted yield curve do not manifest for an average 18 months after the inversion.

Let us assume the pattern holds.

Let us further assume the yield curve inverts this December.

We conclude the economy may hum and the stock market may purr for the 18 months following.

Then comes trouble… sometime in mid-2020.

Two years from today.

Given the extreme duration of the current recovery and the super-inflated stock market, the thumping could assume historic grandeur.

“The cost of every pleasure,” as Buddha probably never said, “is the pain that succeeds it.”

And the stock market could be severed in half.

But the comeuppance nonetheless remains two years distant — if the foregoing holds together.

Of course… we cannot guarentee it does…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post “Remarkably Accurate” Market Indicator Predicts “Devastating Losses” appeared first on Daily Reckoning.

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From:: Daily Reckoning

By James Rickards

This post Trump’s Devastating Trade War Weapons appeared first on Daily Reckoning.

The news last week was dominated by breathless headlines about the new trade war between the U.S. and China. But this trade war has been brewing for years and came as no surprise to readers of my newsletter, Project Prophesy. In fact, the new trade war is simply a continuation of the currency wars that began in 2010.

I’ve warned for over a year that President Trump’s threats of tariffs should be taken seriously, while most of Wall Street discounted Trump’s talk as mere bluster. Now the trade wars are here as we expected, and they will get much worse before they are resolved.

The most powerful analytic frame today for understanding political and macroeconomic developments is the sequence from currency wars to trade wars and then ultimately shooting wars.

Currency wars arise in a condition of too much debt and too little growth. Economic powers try to steal growth from their trading partners by devaluing their currencies to promote exports and import inflation.

This can work in the short run, but the benefits are strictly temporary because trading partners retaliate by devaluing their own currencies. The tit-for-tat devaluations leave everyone worse off because of the uncertainty and transaction costs imposed.

Once it becomes clear that currency wars are a failure, nations resort to trade wars. These begin with tariffs imposed by one nation on another to protect domestic industry and reduce trade deficits. As with currency wars, the problem is retaliation. Victims of tariffs impose their own tariffs and the world is worse off.

We’ve seen this pattern before in the 1920s and 1930s. It began with currency wars (1921–-1936), then trade wars (1930–-1939) and finally a shooting war in the Second World War that began in Asia in 1936, spread to Europe in 1939 and subsumed the U.S. in 1941.

The present currency war began in 2010. The new trade war began in 2018. Let’s hope a new shooting war or even a third world war does not follow in sequence.

Trump is like a five-star general in the currency and trade wars. It’s important to understand his weapons and tactics. Trump likes to threaten to get results but often does not follow through on his threats.

Recently he threatened to withdraw the U.S. from the World Trade Organization (WTO), the primary multilateral body for settling trade disputes and a successor to one of the original Bretton Woods institutions (along with the IMF and World Bank) established in 1944.

But Trump’s threat to withdraw from the WTO will not be carried out. It’s in the bluff category, strictly for show.

The fact is Trump is turning trade policy upside down without withdrawing from WTO by using other tools at his disposal.

There has always been an exemption from the application of WTO rules where national security is involved. It’s just that past presidents have never used the authority because they are globalists (Republicans and Democrats).

Trump’s method is to weaponize national security considerations in the context of trade disputes. The U.S. has always had ways to stop trade flows and restrict direct foreign investment based on national security considerations.

Trump’s three main “weapons,” mostly unknown to everyday Americans, are IEEPA, CFIUS and Section 301 of the Trade Act of 1974.

IEEPA stands for the International Emergency Economic Powers Act. Enacted in 1977, it allows the President to regulate commerce after declaring a national emergency. He can declare this emergency “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”

CFIUS stands for the Committee on Foreign Investment in the United States. It began under President Ford in 1975. CFIUS gives the Executive Branch power to monitor the impact of foreign investment in the United States, and determine if it jeopardizes national security. It can block acquisitions of U.S. firms by Chinese companies, for example.

Section 301 of the Trade Act of 1974 is the “nuclear option” when it comes to trade wars. I don’t want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. It gives the president a free hand to impose billions of dollars of damages if not more on China.

So Trump has the best of both worlds. He can threaten the WTO, but doesn’t actually have to withdraw because he can get everything he wants anyway using IEEPA, CFIUS and Section 301. The globalists are freaking out but can’t stop him.

Unlike previous globalist presidents, Trump is a nationalist. And he’s using these powers like crazy to push his agenda. The Congress can’t stop him because all of these weapons are statutory; they were already passed by Congress in the 1970s and 1980s. These statutes delegate expansive powers to the president.

What’s new is not the law but the way the law is being used.

During the Weimar Republic hyperinflation in 1922–23, paper money became worthless and was swept down sewers (left, below) or fed into furnaces as fuel (right, below). The currency wars continued with French devaluation (1925), U.K. devaluation (1931) and U.S. devaluation (1933). When the currency wars failed to produce growth, the trade wars erupted with the Smoot-Hawley tariffs (1930) and similar tariffs from U.S. trading partners. After currency wars and trade wars failed came shooting wars in Asia (1936) and Europe (1939). The same pattern is repeating today with a new currency war (2010) and trade war (2018).

There is legislation pending in Congress right now to amend CFIUS. The name of the bill is the Foreign Investment Risk Review Modernization Act, or FIRRMA. This amendment to CFIUS will give CFIUS greatly expanded powers to stop Chinese takeovers of U.S. crown jewels in technology, telecommunications and the defense sector.

This new law shuts the Chinese (and anyone else Trump doesn’t like) out of the market to acquire U.S. tech and defense stocks. Once you remove the biggest buyers from the market, prices will …read more

From:: Daily Reckoning

By James Rickards

This post Rickards: Here’s Where the Next Crisis Starts appeared first on Daily Reckoning.

So many credit crises are brewing, it’s hard to keep track without a scorecard.

The mother of all credit crises is coming to China with over a quarter-trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects.

Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies.

Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%.

Now we’re facing a devastating wave of junk bond defaults. The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.

Let’s unpack this…

Since the great financial crisis, extremely low interest rates allowed the total number of highly speculative corporate bonds, or “junk bonds,” to rise 58% — a record high.

Many businesses became highly leveraged as a result. There’s currently a total of about $3.7 trillion of junk bonds outstanding.

And when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.

This is from a report by Mariarosa Verde, Moody’s senior credit officer:

This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default… A number of very weak issuers are living on borrowed time while benign conditions last… These companies are poised to default when credit conditions eventually become more difficult… The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.

Many investors will be caught completely unprepared.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector.

Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not.

Meanwhile the Fed is raising interest. It’s undertaking QE in reverse by reducing its balance sheet and contracting the base money supply. This is called quantitative tightening, or QT.

Credit conditions are already starting to affect the real economy. New cracks are appearing in emerging markets, as I mentioned. I also mentioned that student loan losses are skyrocketing. That stands in the way of household formation and geographic mobility for recent graduates.

Losses are also soaring on subprime auto loans, which has put a lid on new car sales. As these losses ripple through the economy, mortgages and credit cards will be the next to feel the pinch.

It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

The stock market is going to correct in the face of rising credit losses and tightening credit conditions.

No one knows exactly when it’ll happen, but the time to prepare is now. Once the market corrects, it’ll be too late to act.

That’s why the time to buy gold is now, while it’s cheap. When you need it most, once the crisis hits, it’ll cost a fortune.

Regards,

Jim Rickards
for The Daily Reckoning

The post Rickards: Here’s Where the Next Crisis Starts appeared first on Daily Reckoning.

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From:: Daily Reckoning