The Coming Gold Breakout

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I read headlines all day and focus extensively, if not exclusively, on gold. If gold is the best form of money (it is), and if gold had unique properties as money (it does; it’s the only form of money that is not also debt), then gold is well worth the focus.

With that said, it’s hard to surprise me on the subject. After a while, you think you’ve seen it all. Yet, there are exceptions. This headline stopped me in my tracks: “Bank of Russia may consider gold-backed cryptocurrency.”

The idea itself is not exactly new. I first suggested that Russia might be acquiring gold with a view to a new gold-backed currency at a financial war game hosted by the Pentagon at a top-secret laboratory in 2009.

Jim Rickards

Your correspondent at the Homestake Mine in Lead, South Dakota. Homestake was one of the largest and most productive gold mines in U.S. history, and was the foundation of the Hearst family fortune. Global gold output has flatlined in recent years while demand for gold remains strong.

In my upcoming book, Aftermath, I describe a more sophisticated monetary arrangement among Russia, China, Iran and other nations to use a gold-backed cryptocurrency for international settlements.

Still, theory is one thing, reality is another. Here was a real central bank taking real steps toward a gold-backed cryptocurrency. Of course, the announcement came with lots of caveats about the need to stick to hard currencies. This gold initiative involves review of a report, not a live plan at this stage.

Still, it was a significant moment in the move away from the hegemony of the U.S. dollar as the dominant global reserve currency toward another system that included gold.

By itself, this announcement is not a reason to load up on gold. In fact, the spot price of gold barely budged on the news. Gold prices are far more likely to be affected by strength or weakness of the U.S. dollar, real interest rates, inflation prospects and geopolitical stress.

But, the announcement is highly significant in another way. It signals that the demand for physical gold by major central banks is here to stay. Whether a new gold-backed cryptocurrency emerges next year or five years from now does not alter the fact that you need gold to have a gold-backed currency.

Neither Russia nor China has all the gold it needs for that purpose yet. Therefore, demand for physical gold will remain strong even as supply has flatlined.

This creates an asymmetric trading pattern where gold has good potential to rise, but only limited prospects of a material fall. Those are the best kinds of markets for trading and investment. Taking into account both these fundamental and technical factors, what is the outlook for the dollar price of gold and gold mining stocks in the near term?

Right now, the evidence is telling us that the dollar price of gold is poised to breakout to the upside after a prolonged period of range-bound trading.

Chart 1 below illustrates recent price action in gold and shows why the prospects are good for near-term price appreciation.

After a rally from $1,215 per ounce in late November 2018 to $1,293 per ounce in early January 2019, gold remained in a tight trading range.

Over the past five months, gold has traded between about $1,270 and $1,345 per ounce (as of yesterday after gold’s big run over the past week).

That’s a range of about 2.8% above and below a mid-point of $1,305 per ounce. A 2.8% range is not unusual when governments try to peg two currencies to each other. In effect, gold has been pegged to the dollar at $1,305 per ounce.

Chart 1

Chart 1

However, this trading range exhibits another pattern called “lower highs.” Each spike at the high end of the range is slightly lower than the one before. Conversely, the bottom in each gyration has been more tightly bunched forming a kind of floor under gold prices.

The combination of a strong floor and declining highs results in a compression of the trading range. What this pattern presages is a breakout. Of course, the question is whether gold will breakout to the downside or the upside. This week we saw gold break higher, to $1,345.

The evidence is strong that gold is poised for a sustained upside breakout. The reason for the floor around $1,270 per ounce has to do with fundamental supply and demand. Russia and China continue to buy gold at a prodigious rate.

Russia has been buying between 15 and 25 metric tonnes per month, sometimes more, for over ten years. Russia’s gold reserves now stand at 2,183 metric tonnes, over 25% of the U.S. total with a far smaller economy. China is less transparent in its gold buying but also has over 2,000 metric tonnes, perhaps much more.

Neither Russia nor China have their targeted amount of gold yet, which would be 4,000 metric tonnes for Russia and 8,000 metric tonnes for China to achieve strategic gold parity with the U.S.

Iran and Turkey have also embarked on major gold accumulation efforts.

What all of these gold buying strategies have in common is a desire to escape from dollar hegemony and the imposition of dollar-based sanctions by the U.S. The practical implication for gold investors is a firm floor under gold prices since Russia and China can be relied upon to buy any dips.

The primary factor that has been keeping a lid on gold prices is the strong dollar. The dollar itself has been propped up by the Fed’s policy of raising interest rates and reducing money supply, so-called “quantitative tightening” or QT. These tight money policies have amplified disinflationary trends and pushed the Fed further away from its 2% inflation goal.

However, the Fed reversed course on rate hikes last December and has announced it will end QT next September. These actions will make gold more attractive to dollar investors and lead to a dollar devaluation when measured in gold.

The price of gold in euros, yen and yuan could go even higher since the ECB, Bank of Japan and People’s Bank of China will still be trying to devalue against the dollar as part of the ongoing currency wars. The only way all major currencies can devalue at the same time is against gold, since they cannot simultaneously devalue against each other.

A situation in which there is a solid floor on the dollar price of gold and a need to devalue the dollar means only one thing – higher dollar prices for gold. A breakout to the upside is the next move for gold.

Regards,

Jim Rickards
for The Daily Reckoning

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About Today’s Jobs Report…

This post About Today’s Jobs Report… appeared first on Daily Reckoning.

The May unemployment report came rolling from the United States Department of Labor this morning.

In the highly technical vernacular of the trade… it was a “miss.”

And not by a nose, not by a hair, not by a whisker.

Economists as a group divined 175,000 May jobs.

What was the actual number?

Seventy-five thousand — fully 100,000 beneath consensus — and the lousiest figure since February.

Each one of 77 Wall Street analysts — each one — heaved up a greater estimate.

But unlike February, they cannot foist blame upon winter weather or a government shutdown.

Thus our faith in experts staggers yet again… and fast approaches our faith in weathermen, crystal gazers, salesmen of pre-owned automobiles and congressmen of the United States.

But our faith in the lunacy of the existing financial system is infinitely confirmed…

Wall Street vs. Main Street

In a healthful and functioning order, the stock market is a plausible approximation of prevailing economic conditions.

A poor unemployment report should send panicked shudders through the stock market.

It indicates a wobbled economy. Rough business is likely ahead. And companies can expect a reduced profit.

Stocks should — in consequence — fall tumbling on the news.

But ours is not a healthful and functioning order. It is rather an Alice in Wonderland order.

Up is down. Down is up. Good news is bad news.

And bad news is good news…

Bad news for Main Street is good news for Wall Street, that is.

Wall Street thrives on Main Street’s bad news as doctors thrive on fractured legs… as dentists thrive on toothaches… as embalmers thrive on murders.

And this morning’s jobs report constitutes good news for Wall Street.

It merely forms additional evidence the Federal Reserve will be slashing interest rates soon.

And low interest rates are the helium that lifted stocks to such gaudy and obscene heights lo these many years.

Stocks Soar on Today’s Weak Jobs Report

The Dow Jones was so heavily floored by this morning’s jobs report it went up 300 points by 11 a.m.

The other major indexes were similarly flabbergasted.

The S&P was up 35 points and the Nasdaq up 130 by the same 11 a.m.

All three indexes composed themselves somewhat by day’s end.

The Dow Jones ended the day 263 points in green territory. The S&P gained 30 points, while the Nasdaq added 126.

Yet as we documented Wednesday, the economy is going backward… and recessionary warnings flash in all directions.

Meantime, all reasonable estimates place second-quarter GDP growth under 2%.

But because the Federal Reserve promises yet additional levitating gases, the stock market has record heights once again in view.

“The Disconnect Between the Economy and Stocks is at Record Highs”

Thus the gentlemen of Zero Hedge declare, “The disconnect between the economy and stocks is at record highs.”

JJ Kinahan — chief market strategist at TD Ameritrade — here affirms the “bad news is good news” theory:

The market’s got a conundrum here. That’s a bad report. Just on the report itself, I think people would want to sell the market. However, the fact that it really makes the case for a rate cut, I think is why you’re seeing the market hang in there.

Affirms Mike Loewengart — vice president of investment strategy at E-Trade:

This is the type of [jobs report] the doves will really take to as it supports the argument for cutting rates beyond politics or trade issues…

Luke Tilley, chief economist at Wilmington Trust, adds:

I think that this is a true slowdown in hiring right now… The market signals are obviously screaming for the Fed to reduce rates.

Wall Street has Jerome Powell by the ear.

When Wall Street screams for lower interest rates, lower interest rates it will have.

Odds of Rate Cuts Approach 100%

The market presently gives 84% odds that the Federal Reserve will cut rates at least 25 basis points by July. By September those odds increase to 95%.

By January, they rise to 99%… with the heaviest betting on two rate cuts.

Investors further expect at least three rate cuts by next June.

But as we have detailed at length… you can expect recession within three months of the inevitable rate cut — whenever it may fall.

Yes, the next destination is recession.

The route may twist, the route may meander, the route may even temporarily turn back on itself.

But it terminates in recession nonetheless.

The “New Normal”

The No. 2 man at the Federal Reserve would nonetheless have us put away all talk of recession.

Mr. John Williams insists diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

The United States government borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome. Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

Or to switch the figures some, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We have gotten plenty of buck, that is. But not half so much bang to go with it.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

Trillion-dollar deficits extend to the horizon.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a bleak calculus — growing debt twinned with sagging growth.

The Mills of the Gods 

As we have argued previously, time equalizes as nothing else.

Scales balance, that which goes up comes down, that which goes down comes up…

The mighty fall, mountains crumble, the meek inherit the Earth.

We suspect strongly that stock market and economy will meet again on fair ground.

We further suspect it is stock market that will fall to the level of economy. Not the other way.

The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted.

But as he warned…

They grind exceedingly fine…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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A Tour of the Future

This post A Tour of the Future appeared first on Daily Reckoning.

Sharp, bracing winds have scattered the fog. The horizon is now visible… and the future drifts into focus.

Yes, we have the future in sight.

Today we report the way ahead.

We begin where we stand — upon creaking and groaning floorboards…

Recessionary Warnings in all Directions

Manufacturing surveys indicate global manufacturing contracted in May… for an unprecedented 13th-consecutive month.

The Manufacturing PMI (Purchasing Managers’ Index) surveys indicate manufacturing crawls at its slowest rate since September 2009.

United States factory orders expanded merely 1.0% in May — the lowest rate since President Trump took the throne.

The Cass Freight Index — a broad measure of domestic shipping activity and a plausible thermometer of economic health — has dropped 3.2% since last April.

Meantime, the bond market flashes warnings of a lean season ahead.

Ten-year Treasury yields have dropped to their lowest levels in two years, to 2.12%.

And the yield curve has inverted. An inverted yield curve nearly always precedes recession.

Thus we stand upon our precarious perch, wary of the shifting, sandy foundations beneath us.

But it is the future we have in mind today…

Morgan Stanley: 60% Chance of Recession Within One Year

The professional optimists of the Federal Reserve’s Atlanta branch office expect Q2 GDP to ring in at a slender 1.3%.

J.P. Morgan has lowered its own sights from 2.25% to 1%.

It also projects 10-year Treasury yields will sink to 1.75% by year’s end… and 1.65% by next March.

JP Morgan also — incidentally — places the odds of recession in the second half of this year at 40%.

It placed those same odds at 25% one month prior.

Morgan Stanley has also revised its Q2 GDP forecast from 1.0%… to a pale and sickly 0.6%.

It further gives a 60% likelihood of recession within the next year — its highest percentage since the financial crisis.

Of course, the Federal Reserve looms large in our vision…

Rate Cuts A2re Coming

The current rate hike cycle is ended. The Federal Reserve will next slash interest rates.

Its Federal Open Market Committee gathers in two weeks’ time.

As Craig Hemke of Sprott Money News notes, two options rise before the august ladies and gentlemen of the committee.

Neither is desirable:

1. Admit defeat and immediately cut the fed funds rate by up to 50 basis points.

2. Stall. And if they do this, bonds will rally even higher as the bond market will anticipate an even more dramatic global economic collapse.

The market votes heavily for Option 1.

Federal funds futures currently give nearly 70% odds of at least one rate cut by July.

By September these odds rise to over 90%, and by next January… to over 98%.

Some crystal gazers even hazard three rate cuts by this year’s end alone.

The Trigger for Recession

But as we have noted repeatedly… the next rate cut is a phony cure.

It is fool’s gold, a snare, a desert mirage.

The past three recessions ensued within 90 days of the first rate cut that ended a hiking cycle.

Affirms Zero Hedge:

While many analysts will caution that it is the Fed’s rate hikes that ultimately catalyze the next recession… it may come as a surprise to many that the last three recessions all took place [within] three months of the first rate cut after a hiking cycle!

We have every reason to expect the trend continues uninterrupted.

We further allow the possibility that the economy has already slipped into recession.

Recessions are often only identified several months after they commence — or longer.

Early next year, the bean counters may well point to Q2 2019.

Regardless, the recessionary straws are swaying in the stiffening breeze. Even Jerome Powell spots them.

“It’s Time to Rethink Long-run Strategies”

Mr. Powell realizes the standard rate cuts will fizzle woefully… like July Fourth sparklers that fail to spark.

So he will be on hand with more potent pyrotechnics.

From comments this week:

It’s time to rethink long-run strategies… Perhaps it is time to retire the term “unconventional” when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in the future… The next time policy rates hit the lower bound and there will be a next time it will not be a surprise.

Quantitative easing. Zero interest rates. Negative interest rates.

These and more tricks he doubtless has in mind.

And did you catch this bit?

“Perhaps it is time to retire the term “unconventional” when referring to tools that were used in the crisis.”

Just so.

Central banks have inflicted these “unconventional” tools upon the world’s citizens for 10 years — to varying degrees.

But if these gaudy and flashy devices met their advertising… why is the economy plunging into recession at all?

It is true, they have lit up the stock exchanges. But they fell as duds upon Main Street.

Why should they dazzle the crowd now?

They worked one primary effect:

To drill the world trillions of dollars deeper into debt.

Global debt has doubled post-financial crisis… as has the United States national debt.

Yet we return to the future…

Prepare for the Cannons of Fiscal “Stimulus”

We observe that the Federal Reserve’s punchless old fireworks have failed.

That is when the national authorities will haul out the cannons…

They will load them full of Modern Monetary Theory (MMT) — or “QE for the people.”

Rolling barrages of fiscal “stimulus” they will send raining down onto Main Street.

If a Democratic commander in chief is barking the orders at the time, he may load a Green New Deal into the breeches.

Free college tuition… universal Medicare… jobs for all… a $15 minimum wage.

All these and more it will promise — and save the world into the bargain.

The False Miracle of Debt

Like most crank ideas, these fevered schemes will fail in grand and spectacular style.

The false miracle of debt is their common delusion.

All debt-based consumption steals from the future to gratify the present. It is tomorrow’s consumption pulled forward.

It depletes the capital stock… and leaves the future empty.

It signs a perpetual check against an overdrawn future.

Mark Jeftovic of the Guerrilla Capitalism blog on MMT, which can extend to a Green New Deal:

Think of an MMT crisis as an economic black hole sucking all value from further and further future generations into a gravitational vortex of the present moment, where all value collapses in on itself and disappears forever.

Thus we conclude our tour of the horizon.

Mercifully, we can see no farther…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post A Tour of the Future appeared first on Daily Reckoning.

Wall Street and the New Cold War

This post Wall Street and the New Cold War appeared first on Daily Reckoning.

The stock market seems to rise or fall almost daily based on the latest news from the front lines of the trade wars.

When Trump threatens new tariffs and China threatens to retaliate in kind, stocks fall. When Trump delays the tariffs and China agrees to resume negotiations, stocks rise. And so it goes. It has been this way since January 2018 when the trade war began.

The latest dust-up came late last week when Trump threatened tariffs against Mexico if it doesn’t do more to curb illegal immigration to the U.S. Markets sold off on Friday as a result, bringing a terrible May to an end. Largely due to the trade war, the stock market had its worst May in seven years.

From the start, Wall Street underestimated the impact of the trade war. First they said Trump was bluffing. Then the analysts said that Trump and Xi would put their differences aside and make an historic deal.

All of these analyses were wrong. The trade war was problematic from the start and is growing worse today.

China will lose the trade war. The reasons are obvious. Foreign trade is a much larger percentage of Chinese GDP than it is for the U.S., so a trade war was always bound to have more impact on China than the U.S.

And if China tries to match the U.S. in tariffs dollar for dollar, they run out of headroom at $150 billion while the U.S. can keep going up to $500 billion and inflict far more pain on China.

Other forms of Chinese retaliation are mostly nonstarters. They cannot dump U.S. Treasuries without hurting their own reserve position and risking an account freeze by the U.S. China cannot turn up the pressure by stealing intellectual property because they’re already doing that to the greatest extent possible.

China’s latest threat is to ban exports of “rare earths” to the U.S. and its allies. Rare earths are essential for the production of plasma screens, fiber optics, lasers and other high-tech applications. Electric vehicles, mobile phones and telecommunications systems would be impossible to build without them. China is responsible for 90% of global production, which makes them a potent weapon in the U.S.-China trade wars.

“Rare” earths aren’t actually that rare. They are plentiful in quantity. The problem is that they are found in extremely low concentrations. This means a huge amount of ore and expensive mining processes are needed to extract even a small amount of these vital substances.

So rare earths are one weapon China possesses.

But over time, Western powers can replace rare earths purchased from China. There could be major manufacturing disruption in the meantime, it’s true. But it would not be the end of the world.

The U.S. will win the trade war and either China will open its markets and buy more U.S. goods or the Chinese economy will slow significantly.

But while the trade war is important, it’s not the main event.

The trade war is part of a much larger struggle between China and the U.S. for hegemony in Asia and the Western Pacific.

They are locked in a new cold war being fought on many fronts. These include trade; technology; rights of passage in the Taiwan Strait and the South China Sea; and alliances in South Asia, where China’s Belt and Road Initiative is promising billions of dollars for infrastructure development.

The U.S. is responding with arms deals and bilateral trade deals to counter Chinese influence. Even if a modest trade deal is worked out with China this summer, it will not put an end to the larger struggle now underway.

What are the implications?

If the Chinese view the trade war as just one step in a protracted cold war, which I believe they do, then we’re in for a long period of contracting growth that will not be confined to China but will affect the entire world.

That seems the most likely outcome for now. Get set for slower growth and perhaps stagflation. It could be like the late 1970s all over again.

Slowly, Wall Street is taking the trade wars seriously. But it is still missing its larger implications of a new cold war.

This new cold war could last for decades and it will affect the entire global economy. Let’s just hope it doesn’t turn into a shooting war.

Below, I show you why it could. Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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The True “Green Revolution”

This post The True “Green Revolution” appeared first on Daily Reckoning.

An increasing number of states that have legalized medical-use marijuana, adult-use marijuana, or some combination of the two. But many in the mainstream media, and on Wall Street, continue to believe investing in pot is about getting high.

It’s time to set the record straight because investing in cannabis has absolutely nothing to do with getting high!

Today I’ll be discussing my top three reasons why every investor should allocate at least a small portion of their investable assets to the cannabis industry.

The reasons I believe you should invest in the green revolution are as follows:

  1. The U.S. cannabis market is massive
  1. There are many known catalysts with unknown timelines (a good thing!)
  1. Positive sentiment will lead to a U.S. infrastructure buildout

So without further ado, let me show you why cannabis is where you should put your money…

According to the research firm Euromonitor – the American cannabis market will grow from an estimated $5.4 billion in 2015 to an impressive $20 billion by next year.

And Euromonitor’s optimistic views aren’t out of line with the views of other research firms.

Market research firm Cowen has gone on record with its view that the American market could reach $75 billion by 2030.

Now, while early investors will no doubt make enormous fortunes if the cannabis industry grows to $75 billion over 11 years, I believe the market could grow even larger.

You see, most industry observers are only considering the uses of cannabis that we know of today. But like the internet in the mid-1990s, it’s just too soon to know how the cannabis industry will mature and ultimately unfold.

It’s even possible that we haven’t even identified the most profitable use for cannabis.

While cannabis users may love the plant for its healing, therapeutic, or relaxing effects, investors should recognize it as an untapped gold mine!

The bottom line is we’re in the very early days of a new industry that has tens of millions of potential customers in the U.S. alone, and billions-of-dollars in sales just waiting to be scooped up.

While anyone who pays even a little attention to the stock market knows about the green revolution unfolding in the U.S, I’m laser-focused on identifying investment opportunities. That way I can share them with my readers before they’re highlighted in The Wall Street Journal or on CNBC.

You see, to maximize your investment returns, you must be adequately invested before the story is shared with the investing masses on the front-page of every newspaper in America. That means investors need to identify industry catalysts, and then put their money to work in select companies before those catalysts are made public.

Look, we know with near 100% certainty that the U.S. government will eventually decriminalize the use of cannabis. And we know that banking reform will liberalize existing rules against cannabis.

Now, when banking reform is passed, the floodgates will burst open with banks wanting to lend cannabis companies money, and institutional investors wishing to snap up stock as quickly as possible (more on this below).

The bottom line is the catalysts are coming.

Investors that wait for the dust to clear, legislation to pass, and CNBC to report on the enormous stakes that significant institutions have taken in the United States’ multistate cannabis operators will be forced to pay a sky-high price for shares.

By focusing on the most successful U.S. cannabis companies and investing ahead of the crowd that is waiting for the legislative all-clear signal, you will be pre-positioned when the masses are only beginning to invest.

When it comes to Wall Street, sentiment is enough to move markets. And while it may seem like there’s a world of difference between Wall Street and the Washington, D.C., beltway, there isn’t. Politicians, like Wall Street analysts, are heavily influenced by public sentiment.

In April, a new Hill-HarrisX poll was released showing that 84% of Americans now support some form of marijuana legalization. It doesn’t take a high-ranking political operative to figure out that when 84% of voters support something, you can bet politicians are paying attention.

The dramatic rise in public opinion surrounding cannabis also explains why virtually every serious Democratic candidate for the 2020 elections supports marijuana legalization. Many Republicans are also on board.

Yes, investing in cannabis is going to resemble the wild west over the next 1-2 years. But it’s that lack of certainty and regulation that actually provides marijuana investors with massive profit potential.

Below, I show you why you should invest in the “true” Green Revolution. And I’m not talking about green energy. Read on.

Invest in the True Green Revolution

Twenty years ago, the only people making money from marijuana were stone-cold criminals.

These guys smuggled narcotics across a national border, made deals with cartels and sold drugs on the street. And every dime they made had to be laundered through phony businesses to keep the heat off their backs.

Today, I can make quick and easy money from marijuana, sitting at my computer in my pajamas. And it’s all 100% legal. No drug mules, no police — just a click of a button.

Now, before you get the wrong idea, I’m not talking about selling pot, using it or even living in one of the growing number of pot-friendly states. You can do this from anywhere in the U.S. All you need is a laptop and access to a trading account. I’m talking about the growing sector of the stock market that’s dedicated to legal pot.

I’m talking about medical marijuana companies, legal growers and even gardening companies who are getting in on the marijuana-growing boom.

Yes, I believe cannabis — specifically U.S.-focused cannabis companies — are set to explode higher in 2019 and beyond. I don’t know if you were investing in the mid-1990s but I was and it was a magical time.

Companies like Netscape, AltaVista, CMGI, and WebMD captured the imaginations of investors, and Wall Street rewarded these companies and others like them with multi-billion-dollar valuations.

Now, there’s no denying that the internet revolution was a once-in-a-lifetime event. And when technology stocks came crashing to the ground in mid-2000, I assumed that was it. I’d never see an investment opportunity that massive ever again.

But I was wrong.

You see, we are facing the end of cannabis prohibition in the United States. And like the internet revolution, this too is a once-in-a-lifetime investment event.

Unfortunately, many investors hear the word marijuana and immediately shut down. They’ve grown up listening to how horrible cannabis is, and viewing it as a dangerous drug with no medical value. They can’t handle the idea of investing in a product that is both federally illegal and responsible for landing thousands of Americans in prison.

Simply put, many on Wall Street will miss out on this investment opportunity because they’re either incapable or unwilling to look beyond today’s federal cannabis policy which is tragically out of step with popular opinion and position their portfolio for where federal policy will be in the near future.

Now, I want you to try and wrap your head around a few numbers.

Legal U.S. recreational and medical cannabis generated $10.4 billion in 2018. However, that only represents sales made in state-legal cannabis enterprises. If we account for the estimated black market demand, that figure jumps up to an astounding number somewhere between $50 billion and $55 billion!

With bipartisan federal and state-level political support for cannabis legalization, public opinion that is already heavily in favor of reform, and support from the banking, alcohol and tobacco, professional sports, and banking industries — there’s no question that full-scale federal legalization is right around the corner.

Now, it’s no secret that the biggest challenge facing the legal U.S. cannabis industry today is access to banking services.

You see, because cannabis remains illegal under the Federal Controlled Substances Act, banks and credit unions are understandably scared to do business with or extend credit and banking services to state-licensed cannabis companies.

And without access to banking services, state-licensed cannabis companies are forced to operate on a cash-only basis.

While cannabis is illegal at the federal level, any bank providing traditional banking services to a legal cannabis company could be accused of money laundering and aiding and abetting federally-illegal operations.

The takeaway is that without a cannabis-related banking solution at the federal level, most U.S. cannabis companies will be forced to remain predominantly cash-only operations.

But that’s changing.

Senator Jeff Merkely (D-OR) and Rep. Ed Perlmutter (D-CO) introduced the Secure and Fair Enforcement (SAFE) Banking Act in May 2017 to both legitimize the burgeoning cannabis industry, and to establish a framework of banking rules for cannabis companies operating under state-legal guidelines.

Unfortunately, the 2017 version of the SAFE Banking Act failed to see the light of a committee hearing.

But on February 13, 2018, the House Financial Services’ Subcommittee on Consumer Protection and Financial Institutions held the first ever congressional hearing on the issue of cannabis banking.

And an underpublicized Congressional subcommittee held a hearing this March on providing safe harbor via the SAFE Banking Act of 2019 for banks wanting to work with legal cannabis businesses in the U.S.

A vote on the SAFE Banking Act of 2019 could happen by the end of June. The fact that it managed to get this critical piece of legislation in front of the House Financial Services subcommittee is a HUGE positive for the cannabis industry.

And with public opinion blowing heavily toward legalization at the federal level, our elected leaders in Congress finally realize they must come out from the shadows and do their job!

Just the fact that legislation is finally being discussed is a momentous step in the right direction.

Here’s what Rep. Denny Heck (D-WA) said following the hearing:

“We listened to hours of testimony today about the dangerous position we put store owners and employees in by forcing them to do all of their business in cash. We can fix this. We don’t have to force them to operate in a way that makes it difficult to secure and track their funds. Regardless of our views of marijuana use, the voters have decided in states all over this country that they want recreational and medicinal markets. To continue to do nothing to protect public safety would be negligence.”

I’ll continue to monitor any developments with the SAFE Banking Act. I’m very excited about any future developments in the legalization of cannabis at the federal level. Again, there could be a vote by the end of June.

Abraham Lincoln famously said,

“We the people are the rightful masters of both Congress and the courts.”

And I believe the day is finally coming when the views of most Americans will be heard, and the cannabis industry will be permitted to emerge from the shadows and dark alleyways and operate in full government-sponsored daylight.

The pieces are in place for cannabis to emerge as the next great growth sector. And the fact that marijuana is still illegal at the Federal level in the U.S. provides traders with a significant catalyst to invest around.

America’s budding pot market is the BEST way for an average American to get rich right now.

There is a so much momentum building, from the individual states to the halls of Washington, D.C.

Right now, most mainstream investors don’t know how to read the signals. But it won’t be long before they catch on — which is why I recommend you move on this opportunity right now.

Don’t miss out!

Regards,

James Altucher
for The Daily Reckoning

The post The True “Green Revolution” appeared first on Daily Reckoning.

Beware the “Adjusted” Yield Curve

This post Beware the “Adjusted” Yield Curve appeared first on Daily Reckoning.

Yesterday we furrowed our brow against the latest inversion of the “yield curve.”

The 10-year Treasury yield has slipped beneath the 3-month Treasury yield — to its deepest point since the financial crisis, in fact.

Inverted yield curves precede recessions nearly as reliably as days precede nights, horses precede carts… lies precede elections.

The 10-year Treasury yield has dropped beneath the 3-month Treasury yield on six occasions spanning 50 years.

Recession was the invariable consequence — a perfect 1,000% batter’s average.

But an inverted yield curve is no immediate menace.

It may invert one year or more before uncaging its furies.

But today we revise our initial projections — as we account for the “adjusted” yield curve.

The “adjusted” yield curve indicates recession may be far closer to hand than we suggested yesterday.

When then might you expect the blow to land?

Now… you realize we cannot spill the jar of jelly beans straight away. You must first suffer through today’s market update…

Markets plugged the leaking today.

The Dow Jones gained 43 points on the day. The S&P scratched out six. The Nasdaq, meantime, added 20 points.

Gold — safe haven gold — gained nearly $7 today.

But to return to the “adjusted” yield curve… and the onset of the next recession.

The Nominal vs. the Real

We must first recognize the contrast between the nominal and the real.

The world of appearance, that is — and the deeper reality within.

For example… nominal interest rates may differ substantially from real interest rates.

Nominal rates do not account for inflation.

Real interest rates (the nominal rate minus inflation) do.

That is why a nominal rate near zero may in fact exceed a nominal rate of 12.5%…

Nominal interest rates averaged 12.5% in 1979. Yet inflation ran to 13.3%.

To arrive at the real interest rate…

We take 1979’s average nominal interest rate (12.5%) and subtract the inflation rate (13.3%).

We then come to the arresting conclusion that the real interest rate was not 12.5%… but negative 0.8% (12.5 – 13.3 = -0.8).

Today’s nominal rate is between 2.25% and 2.50%. Meantime, (official) consumer price inflation goes at about 2%.

Thus we find that today’s real interest rate lies somewhere between 0.25% and 0.50%.

That is, despite today’s vastly lower nominal rate (12.5% versus 2.50%)… today’s real interest rate is actually higher than 1979’s negative 0.8%.

The Standard Yield Curve vs. The “Adjusted” Yield Curve

After this fashion, the standard yield curve may differ substantially from the “adjusted” yield curve.

Michael Wilson is chief investment officer for Morgan Stanley.

He has applied a similar treatment to distinguish the adjusted yield curve from the standard yield curve.

The standard yield curve — Wilson insists — does not take in enough territory.

It fails to account for the effects of quantitative easing (QE) and subsequent quantitative tightening (QT).

The adjusted yield curve does.

It reveals that QE loosened financial conditions far more than standard models indicated.

It further reveals that QT tightened conditions vastly more than officially recognized.

The adjusted curve takes aboard the Federal Reserve’s estimate that every $200 billion of QT equals an additional rate hike… for example.

The standard yield curve does not.

Thus the adjusted yield curve reveals a sharply more negative yield curve than the standard.

Here, in graphic detail, the adjusted yield curve plotted against the standard yield curve:

Image

The red line represents the standard 10-year/3-month yield curve.

The dark-blue line represents the adjusted yield curve — that is, adjusted for QE and QT.

The adjusted yield curve rose steepest in 2013, when QE was in full roar.

But then it began a flattening process…

QT Drastically Flattened the Adjusted Curve

The Federal Reserve announced the end of quantitative easing in late 2014.

And Ms. Yellen began jawboning rates higher with “forward guidance” — insinuating that higher rates were on the way in 2015.

Thus financial conditions began to bite… and the adjusted yield curve began to even out.

By the time QT was in full swing, the adjusted curve flattened drastically. The standard curve — which did not account for QT’s constraining effects — failed to match its intensity.

Explains Zero Hedge:

The adjusted curve shows record steepness in 2013 as the QE program peaked, which makes sense as it took record monetary support to get the economy going again after the great recession. The amount of flattening thereafter is commensurate with a significant amount of monetary tightening that is perhaps underappreciated by the average investor.

Now our tale acquires pace — and mercifully — its point.

The Adjusted Yield Curve Inverted Long Before the Standard

After years of flattening out, the standard yield curve finally inverted in March.

Prior to March, it last inverted since 2007 — when it presented an omen of crisis.

But since March, the standard curve bounced in and out of negative territory.

The recession warning it flashed was therefore dimmed and faint — until veering steeply negative this week.

But the adjusted yield curve did not invert in March…

It inverted last November — four months prior. And it has remained negative to this day.

Wilson:

Adjusting the yield curve for QE and QT shows an inversion began at the end of last year and persisted ever since.

Thus it gives no false or fleeting alarm — as the standard March inversion may have represented.

We refer you once again to the above chart.

Note how deeply the adjusted yield curve runs beneath the standard curve.

A “Far More Immediate Menace”

Meantime, evidence reveals recession ensues 311 days — on average — after the 3-month/10-year yield curve inverts.

But if the adjusted curve inverted last November… we are presented with a far more immediate menace.

Here Wilson sharpens the business to a painful point, sharp as any thorn:

Economic risk is greater than most investors may think… The adjusted yield curve inverted last November and has remained in negative territory ever since, surpassing the minimum time required for a valid meaningful economic slowdown signal. It also suggests the “shot clock” started six months ago, putting us “in the zone” for a recession watch.

If recession commences 311 days after the curve inverts — on average — some 180 days have already lapsed.

And so the countdown calendar must be rolled forward.

Perhaps four–five months remain… until the fearful threshold is crossed.

If the present expansion can peg along until July, it will become the longest expansion on record.

But if the adjusted yield curve tells an accurate tale, celebration will be brief…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Beware the “Adjusted” Yield Curve appeared first on Daily Reckoning.

Has Recession Already Started?

This post Has Recession Already Started? appeared first on Daily Reckoning.

“Sit down before fact like a little child,” Thomas Huxley instructed, and “follow humbly wherever and to whatever abyss Nature leads…”

Today we sit down before facts, childlike… and follow humbly wherever and to whatever abyss they lead.

But what if the facts lead straight to the abyss of recession?

Facts 1: April orders for core nondefense capital goods slipped 0.9%.

Facts 2: April orders for durable goods — items expected to endure three years or more — sank 2.1%. Durable goods shipments overall dropped 1.6%… the most since December 2015.

Facts 3: April orders for transportation equipment plunged 5.9%.

Facts 4: April retail sales slipped 0.2%.

Facts 5: The “yield curve” has inverted good and hard — a nearly perfect omen of recession.

Has Recession Already Arrived?

Stack facts 1–5 one atop the other. What can we conclude?

“U.S. recession probably started in the current quarter.”

This is the considered judgment of A. Gary Shilling. Mr. Shilling is a noted economist and financial analyst.

And he gazes into a crystal ball less murky than most.

Wikipedia:

In the spring of 1969, he was one of only a few analysts who correctly envisioned the recession at year’s end and was almost a lone voice in 1973… the first significant recession since the Great Depression.

But is not the economy still expanding?

Q1 GDP rang in at a hale and hearty 3.2% — after all.

But peer behind the numbers…

Much Less than Meets the Eye

Much of the jauntiness was owing to transitory factors such as inventory accumulation.

Firms squirreled away acorns to jump out ahead of looming tariffs, giving Q1 GDP a good jolt.

But that jolt has come. And that jolt has gone.

Meantime, Q2 GDP figures will come rising from the bureaucratic depths tomorrow morning.

What can you expect from them?

A severe letting down, it appears…

Q2 GDP Estimates Revised Downward

Morgan Stanley has lowered its Q2 GDP forecast from 1.0%… to a sickly 0.6%.

J.P. Morgan has lowered its own sights from 2.25% to 1%.

Meantime, the professional optimists of the Federal Reserve’s Atlanta command ring in at a slender 1.4%.

Miles and miles — all of them — from the first quarter’s 3.2%.

Might these experts botch the actual figure?

They may at that… and it would not be the first instance.

But the weight of evidence here assembled loads the scales in the other direction.

Besides, recessions first appear in the rearview mirror. They are only identified several months to one year post factum… if not longer.

Perhaps the economy has already started going backward, as Mr. A. Gary Shilling suggests.

Or perhaps he has spotted a phantom menace, a shadow, a false bugaboo.

What does the “yield curve” have to say?

The Message of the Yield Curve

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

Long-term rates normally run higher than short-term rates. This happy condition reflects the structure of time in a healthy market.

The 10-year yield, for example, should run substantially higher than the 3-month yield.

The reason is close by…

The 10-year Treasury yield rises when markets anticipate higher growth — and higher inflation.

Inflation eats away at money tied up in bonds… as a moth eats away at a cardigan.

Bond investors therefore demand greater compensation to hold a 10-year Treasury over a 3-month Treasury.

And the further out in the future, the greater the uncertainty. Thus the greater compensation investors demand for taking the long view.

Compensated, that is, for laying off the sparrow at hand… in exchange for the promise of two in the distant bush.

Time Itself Inverts

But when the 3-month yield and the 10-year yield begin to converge, the yield curve flattens… and time compresses.

When the 10-year yield falls beneath the 3-month yield, the yield curve is said to invert. And in this sense time itself inverts.

The signs that point to the future lead to the past. And vice versa.

In the careening confusion, future and past run right past one another… and end up switching places.

Thus, an inverted yield curve wrecks the market structure of time.

It rewards pursuit of the bird at hand greater than two in the future.

That is, the short-term bondholder is compensated more than the long-term bondholder.

That is, the short-term bondholder is paid more to sacrifice less… and the long-term bondholder paid less to sacrifice more.

That is, something is dreadfully off.

“A Nearly Perfect Omen of Lean Days Ahead”

An inverted yield curve is a nearly perfect omen of lean days ahead. It suggests an economic winter is coming… when investors expect little growth.

Explains Campbell Harvey, partner and senior adviser at Research Affiliates:

When the yield curve inverts, it’s not the time to borrow money to take a vacation to Orlando. It is the time to save, to build a cushion.

An inverted yield curve has accurately forecast all nine U.S. recessions since 1955.

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

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

The yield curve last inverted in 2007. Prior to 2007, the yield curve last inverted in 1998.

Violent shakings followed each inversion.

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

And now, in 2019… the doomy portent drifts once again into view.

The Bond Market’s Strongest Signal Since the Financial Crisis

The 3-month and 10-year yield curve inverted in March. It has since straddled the zero line, leaning with the daily headlines.

But this week the inversion has gone steeply negative.

We are informed — reliably — that the yield curve has presently inverted to its deepest point since the financial crisis.

Why is the 3-month versus the 10-year yield curve so all-fired important?

Because that is the section of the yield curve the Federal Reserve tracks closest. It believes this portion gives the truest reading of economic health.

Others give the 10-year versus the 2-year curve a heavier weighting.

But it is the Federal Reserve that sets policy… not others.

Federal fund futures presently offer 86% odds that Mr. Powell will lower interest rates by December… and 60% odds by September.

If recession is not currently underway, we are confident the Federal Reserve’s next rate cut will start the countdown watch.

Specifically:

Come the next rate cut, recession will be three months off — or less.

Why do we crawl so far out upon this tree limb?

President Trump Should Demand Jerome Powell Not Raise Interest Rates

The next rate cut will be the first after a hiking cycle (which commenced in December 2015).

And the past three recessions each followed within 90 days of the first rate cut that ended a hike cycle.

Assume for now the pattern holds.

Assume further the Federal Reserve lowers interest rates later this year.

Add 90 days.

Thus the economy may drop into recession by early next year.

Allow several months for the bean counters at Washington to formally identify and announce it.

You may have just lobbed recession onto the unwanting lap of President Donald John Trump… in time for the furious 2020 election season.

Could the timing be worse for the presidential incumbent?

Mr. Trump has previously attempted to blackjack Jerome Powell into lowering rates.

But if our analysis holds together…

The president should fall upon both knees… and beg Mr. Powell to keep rates right where they are…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Has Recession Already Started? appeared first on Daily Reckoning.

Get Ready for Bitcoin Mania 2.0

This post Get Ready for Bitcoin Mania 2.0 appeared first on Daily Reckoning.

Right now bitcoin (BTC) is back above $8,000 after suffering a substantial “flash crash” last week. This is a major milestone that I’ve spoken about quite a few times this year.

It signifies that the bottom is over and that we’re now in the beginnings of a choppy bull market.

Of course, we will continue to see dips in the market. But the highs will get higher and higher.

Fortunately for investors in bitcoin, while that’s up all the other cryptos are down. Any dips in prices create opportunity for those looking to accumulate.

To top off bitcoin’s news, it looks like Fidelity will enter crypto trading within a few weeks.

Add this to TD Ameritrade and E-Trade’s recent move into crypto and suddenly you have almost 100 million brokerage accounts with access to crypto.

And this doesn’t even take into account all the on-ramps that are being built for institutional money to enter the space

This is an exciting time for anyone invested in crypto. And with bitcoin skyrocketing higher, I want to address some of the most frequent questions I get asked about it:

FAQ:

(Q) What is backing bitcoin? Gold, for example, is REAL.

Gold is a rock. It doesn’t have any real intrinsic value. All money is money because people agree to use it. Same with gold. It’s only “real” because many people agree that it is.

(Q) What if the government hates bitcoin?

Doesn’t matter. Bitcoin is already a worldwide resource owned in every country, $150 billion worth.

And by the way, my extensive networks in the Intelligence Community of the U.S. government show MASSIVE interest in bitcoin to get cash overseas undetected. One of the biggest owners of bitcoin is Uncle Sam.

(Q) What about all of these hacks stealing bitcoin?

The exchanges we’ve recommended for bitcoin have never been seriously hacked. And those that have (like Binance recently) have responded quickly and resolved the issue.

Plus, the NYSE, Microsoft and Starbucks are building their own exchange (which will be unhackable and backed by their insurance), along with Fidelity.

(Q) Don’t all the best investors hate bitcoin?

Not true. Marc Andreessen, Peter Thiel, Tim Draper, etc.

(Q) Will companies use bitcoin?

Every Fortune 500 company from Walmart to FedEx to JPMorgan to Goldman Sachs is already using bitcoin and/or blockchain in one form or other.

(Q) But still, what is BACKING bitcoin? The dollar has the faith of the U.S. government.

  • 10,000 years of math and computer science that have won Nobel-level awards
  • The full power of contract law

The fact that hundreds of billions of dollars are already invested by top investors who are trusting bitcoin over any country’s fiat money.

(Q) Why did bitcoin fall?

Like any financial innovation, there are booms and busts. Prior examples of booms and busts in financial innovation:

  • Junk bonds in the ’80s
  • S&L institutions in the early ’90s
  • Massive leverage in currencies in the mid-’90s
  • The internet IPO boom of the late ’90s and early ’00s
  • The securitization of energy in 2000–01 (Enron, etc.)
  • The mega-securitization of housing derivatives in the mid-’00s
  • EVEN the South Sea Co. bounced back to become bigger than it was in its bubble in the 1700s (see my book Trade Like a Hedge Fund).

AND the internet came back and is now worth trillions. Local banks are bigger than ever. Currency trading is larger than ever. All of the energy companies are bigger than ever. Housing is higher than ever.

Bitcoin will bounce back and be higher than ever. There’s never been an asset that had this much money invested that went to zero.

(Q) What about all the s***coins?

I estimated on CNBC that 95% of alt-coins were scams. Since then, 80%-plus of all coins have gone to zero, with more to come. I was the ONLY one predicting this. NONE of the coins I follow has been a scam. I do the research.

(Q) Where is bitcoin going?

Just like gold replaced barter, paper money replaced gold and fiat money replaced paper money (backed by gold), digital currencies will replace all fiat money in the world. Why?

EVOLUTION IS AN UNSTOPPABLE FORCE AND HAS WORKED IN EVERY INDUSTRY.

Bitcoin solves all the problems of paper money: privacy, forgery, human error, excess fees, intermediaries, lack of trust, trade finance, etc.

There is $15 trillion worth of fiat money in the world. There is $150 billion worth of bitcoin.

One day, ALL fiat money will be replaced by bitcoin.

And since the supply of bitcoin is FIXED and demand is going to go up 10,000% (the difference between $15 trillion and $150 billion), then bitcoin’s price will be $7,800 (current price) times 100 = $780,000.

Bottom line: If you’ve been on the sidelines up until now waiting for the next bull run to start, now’s the time to jump on board!

Regards,

James Altucher
for The Daily Reckoning

The post Get Ready for Bitcoin Mania 2.0 appeared first on Daily Reckoning.

America’s True Patriots

This post America’s True Patriots appeared first on Daily Reckoning.

Here is the trouble with America’s jingos, warhawks, drum-beaters, glory hounds and idealists:

They are not patriotic.

Come again, you say?

Do they not cry tears red, white and blue?

Do they not howl about American “greatness”… American “exceptionalism”… the shining city atop the hill?

That and more they do, yes.

Yet they are not patriotic.

That is the surprising case we haul before the jury today.

Yes, we are stepping away from our normal beat… and reflecting upon the virtue of patriotism.

This at a time when war shouts are rising against Iran, Venezuela, Russia — or whichever hellcat presently menaces the happiness of the United States.

(We first bow before the shade of late writer Joseph Sobran, upon whose insights we rely today.)

Country or Empire

Famed English writer G.K. Chesterton once denounced Rudyard Kipling’s “lack of patriotism.”

Lack of patriotism?

Kipling was chief rah-rah man for the British Empire, its loudest bugler.

English civilization overtopped all rival powers, he bellowed — as Everest overtops all rival peaks.

And as it should… Great Britain gave the law in all four corners of Earth.

From Kipling’s story Regulus, citing Virgil’s Aeneid:

“Roman! let this be your care, this your art; to rule over the nations and impose the ways
of peace…”

Substitute Britain for Rome and you have Kipling.

Why then did Chesterton deny his patriotism?

The reason is subtle. Yet vital.

“He Admires England, but He Does Not Love Her”

Chesterton argued that Kipling admired England because of her power. He did not love her for who she was:

He admires England, but he does not love her; for we admire things with reasons, but love them without reasons. He admires England because she is strong, not because she is English.

In contrast, Chesterton loved England as England — its customs, its eccentricities, its people — even its food.

A man loves his mother.

It is a wordless love, wide and deep.

He requires no reason. He need offer no explanation.

And as he loves his mother… so he loves his country.

His country is simply his country — be it China, Russia, Chile, Romania.

And so it is worthy of his love.

Sobran:

Of course Chesterton was right. You love your country as you love your mother — simply because it is yours, not because of its superiority to others, particularly superiority of power.

A Spacious Patriotism

Does the other fellow believe his own mother towers 900 feet over all others?

Well, friends, maybe he does.

But that in no way irritates, annoys or undoes the genuine patriot.

No harm flows from it. After all…

Adults allow children to cherish the fiction that reindeer fly and round men descend chimney chutes.

A man allows his wife to cherish the fiction that she is a superior cook and automobile driver… as she allows her husband to cherish the fiction that he is a skillful and formidable lover.

These are harmless fictions conducive to the domestic peace and happiness.

In that spirit, the patriot’s attitude toward foreigners is relaxed. It is accommodative. And spacious.

But a Kipling does not love his country as a man loves his mother.

His country must show all others its dust. It must outrace them all… else he feels diminished.

The Patriot Loves His Country Regardless

The United States of America stables many such fellows.

They are dizzied, wobbled, staggered by a higher American vision. Their eyes roll perpetually heavenward.

To these fellows, America must always be up to something big in this world.

She must be forever charging up San Juan Hill, going over the top, storming Normandy beach, bearing any burden, paying any price…

She must be beating the Russians to the moon, beating the world at basketball, beating democracy into somebody’s head.

Tall deeds, many of these. And sources of authentic pride.

But would the patriot love America any less if she fell short of the glory… if she left a gaping hole in the history books?

He would not.

It is — after all — his country.

And he loves it as he loves his mother.

But to the professional American, America must dazzle and strut upon the world’s stage.

She must be the “indispensable nation.”

If not indispensable… then dispensable.

If dispensable, then unworthy of his deep affections.

Hence his lack of patriotism.

The Difference Between the Patriot and the Nationalist

Sobran takes their measure:

Many Americans admire America for being strong, not for being American. For them America has to be “the greatest country on Earth” in order to be worthy of their devotion. If it were only the second greatest, or the 19th greatest, or, heaven forbid, “a third-rate power,” it would be virtually worthless… Maybe the poor Finns or Peruvians love their countries too, but heaven knows why — they have so little to be proud of, so few “reasons.”

And so Sobran peels away the patriot from his photographic negative — the nationalist ideologue:

The nationalist, who identifies America with abstractions like freedom and democracy, may think it’s precisely America’s mission to spread those abstractions around the world — to impose them by force, if necessary. In his mind, those abstractions are universal ideals… the world must be made “safe for democracy” by “a war to end all wars”… Any country that refuses to Americanize is “anti-American” — or a “rogue nation.” For the nationalist, war is a welcome opportunity to change the world.

We might list some offending names — but our legal counsel has just whispered into our ear.

But the patriot and the thunder-thumper babble the same American tongue. The one is therefore mistaken for the other.

Yet listen closer. They in fact speak alien languages:

Because the patriot and the nationalist often use the same words, they may not realize that they use those words in very different senses. The American patriot assumes that the nationalist loves this country with an affection like his own, failing to perceive that what the nationalist really loves is an abstraction — “national greatness,” or something like that. The American nationalist, on the other hand, is apt to be suspicious of the patriot, accusing him of insufficient zeal, or even “anti-Americanism.”

A Patriotism of the Heart

The patriotism Sobran hymns is a relaxed, healthful patriotism.

It is a patriotism of the heart.

This patriotism flies no ideological flags, hauls no metaphysical cargo, steers by no heavenly star.

It is the patriotism of the prairie, of the plain, of the lonely jackrabbit crossroad, of the greasy spoon, of the truckstop, of the front porch, of the pool hall… of Main Street.

And his fellow countrymen, the patriot takes them as he finds them.

Might they sometimes forget to wash behind the ears?

Sometimes they may. But it makes no nevermind.

They are his countrymen… and that is enough.

The patriot allows himself to laugh. Not at his fellow Americans — but with them.

The nationalist, meantime, does not laugh.

He scolds.

“Patriotism Is Relaxed. Nationalism Is Rigid.”

“Patriotism is relaxed,” as Sobran concludes. “Nationalism is rigid.”

We in turn conclude, paraphrasing Chesterton:

The relaxed patriot, the average American, the American who tends to his own business and sweeps his own stoop, the American who loves his country as he loves his mother — the fellow is all right.

But the rigid American, the 100% American, the thunder-thumping American, the American determined to put the world to rights — the American who admires America for her strength — but fails to love her as herself?

This fellow, he’s all wrong…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post America’s True Patriots appeared first on Daily Reckoning.

Crypto Is Here to Stay. Bitcoin Isn’t

This post Crypto Is Here to Stay. Bitcoin Isn’t appeared first on Daily Reckoning.

Bitcoin is back! So say the true believers, even with Friday’s flash crash. But there less there than meets the eye.

Bitcoin has staged a notable comeback from its 2018 crash. From a level of about $4,000 through the month of March, 2019, bitcoin had a two-day 23% spike from $4,135 on April 1, 2019 to $5,102 on April 3, 2019.

Bitcoin then moved sideways in the $5,000 to $6,000 range until May 8, 2019 when it staged another three-day spike from $5,932 on May 8 to $7,255 on May 11, a 22% surge.

Combining the April 1 and May 8 spikes, the bitcoin price moved from $4,135 to $7,255 for a spectacular 75% price rally in six weeks.

By last Thursday morning, it soared even higher, to over $8,300.

This rally was bitcoin’s best price performance since its 83% collapse from $20,000 in late December 2017 to $3,300 in December 2018. That crash marked the collapse of the greatest asset price bubble in history, larger even than the Tulipmania of 1637.

The questions for crypto investors are what caused the recent rebound in the price of bitcoin and will it last? Is this the start of a new mega-rally or just another price ramp and manipulation? Has anything fundamental changed?

If you’re beginning to suspect these are leading questions, you’re right.

Of course, bitcoin technical analysts are out in force explaining how the 100-day moving average crossed the 200-day moving average, a bullish sign. They are also quick to add that the 30-day moving average is gaining strength, another bullish sign.

My view is that technical analysis applied to bitcoin is nonsense. There are two reasons for this. The first is that there is nothing to analyze except the price itself. When you look at technical analysis applied to stocks, bonds, commodities, foreign exchange or other tradeable goods, there is an underlying asset or story embedded in the price.

Oil prices might move on geopolitical fears related to Iran. Bond prices might move on disinflation fears related to demographics. In both cases (and many others), the price reflects real-world factors. Technical analysis is simply an effort to digest price movements into comprehensible predictive analytics.

With bitcoin (to paraphrase Gertrude Stein) “there is no there, there.” Bitcoin is a digital record. Some argue it’s money; (I’m highly skeptical it meets the basic definition of money).

Either way, bitcoin does not reflect corporate assets, national economic strength, terms of trade, energy demand or any of the myriad factors by which other asset prices are judged. Technical analysis is meaningless when the price itself is meaningless in relation to any goods, services, assets or other claims.

My other reason for rejecting the utility of technical analysis is that it has low predictive value when applied to substantial assets and no predictive value at all when applied to bitcoin.

If you follow technical analysis, you’ll see that every “incorrect” prediction is followed immediately by a new analysis in which a “double top” merely presages a “triple top” and so on.

Technical analysis can help clarify where the price has been and help with relative value analysis, but its predictive analytic value is low (except to the extent the technical analysis itself produces self-fulfilling prophesies through herd behavior).

That said, what can we take away from the recent bitcoin price rally, putting aside its flash crash for the moment?

The first relevant fact is that no one knows why it happened. There was no new technological breakthrough in bitcoin mining. None of the scalability and sustainability challenges have been solved. Frauds and hacks continue to be revealed on an almost daily basis. In short, it’s business as usual in the bitcoin space with no new reasons for optimism or pessimism.

The second relevant fact is that the bitcoin price has been the target of rampant manipulation by miners in recent years. Bitcoin miners have rising costs of production due to the increasing complexity of the math problems that must be solved to validate a new block on the blockchain.

Bitcoin miners also have large inventories of coins mined in the past that have not been released on the market through exchanges or otherwise.

As a result, miners have huge incentives to pump-up prices, both to cover costs of production and to create demand for undistributed coins. These price ramps are conducted through wash sales, “painting the tape,” joint action, low volume price pumps, and other classic manipulations.

The evidence is strong that this kind of activity has taken place in the past and there is no reason to believe it is not taking place now. As mentioned above, JP Morgan & Chase have estimated bitcoin’s intrinsic value at about $2,400.

The last potential contributor to the bitcoin price spike is simple speculation. Bitcoin buyers who missed their chance to reap fortunes when the price went to $20,000 may see another chance to ride a wave of much higher prices.

Since nothing fundamental has changed about bitcoin for better or worse, some combination of miner manipulation and naive speculation is the most likely explanation for the price action we’ve seen lately. This means the price could just as well crash as rally further.

Nothing has changed in the bitcoin blockchain technology. A use case for bitcoin has yet to emerge (and probably never will). Bitcoin is still unsuitable as an investment although it may work fine for those who just like to roll the dice. Count me out.

A second wave or new generation of cryptocurrencies is now emerging with better governance models, more security, and vastly improved ease of use. These new wave coins represent the future of the cryptocurrency technology. These cryptos have much greater potential to disrupt and disintermediate established payments systems, and financial intermediaries such as banks, brokers and exchanges.

On the one hand, mature cryptocurrencies such as bitcoin, ripple and ethereum are showing their inherent limitations and non-sustainability. These cryptocurrencies all have major flaws in terms of investor safety and ease of use.

The solutions proposed invariably involve backing away from the original promise of safe, anonymous transactions. Government authorities are converging from all sides looking for tax evasion, securities fraud, evasion of capital controls and other improprieties.

Second-generation cryptocurrencies have a much greater chance of competing successfully with existing payment channels such as Visa, MasterCard, PayPal and the traditional banking system.

The potential value of these new wave cryptos can be measured by the current franchise value of the institutions that will be disrupted. If these cryptocurrencies can disintermediate centralized financial behemoths like Citibank and the New York Stock Exchange, their value can be measured in the trillions of dollars.

If bitcoin is still unsuitable (despite a recent price rally), where do the opportunities lie in the cryptocurrency space? The answer is that the blockchain is growing up and new tokens and use cases are emerging all the time.

These new opportunities are in permissioned distributed ledgers such as JPMorgan’s payment token and synthetic world money proposed by the IMF. This means that the companies who will benefit most from the rise of new cryptocurrencies are not garage band start-ups, but technology giants such as IBM, Intel and Nvidia as well as financial giants such as JPMorgan and Citi.

Crypto has a bright future. But bitcoin doesn’t.

Regards,

Jim Rickards
for The Daily Reckoning

The post Crypto Is Here to Stay. Bitcoin Isn’t appeared first on Daily Reckoning.