Heading Into Negative (Real) Interest Rates

This post Heading Into Negative (Real) Interest Rates appeared first on Daily Reckoning.

Last July I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn’t just there to commemorate  the past —I was there to seek insight into the future of the monetary system.

One day I was part of a select group in a closed-door “off the record” meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward — and why.

They included a senior official from a regional Federal Reserve bank, a senior official from the Fed’s Board of Governors and a member of the ECB’s Board of Governors.

Chatham House rules apply, so I still can’t reveal the names of anyone present at this particular meeting or quote them directly.

But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. Rates were 2.25% at the time. They said they have to cut interest rates by a lot going forward.

Well, that’s already happened. The Fed cut rates last September and October (each 25 basis points), bringing rates down to 1.75%. And now, after Tuesday’s emergency 50-basis point rate cut, rates are down to 1.25%.

That’s a drop of one full percentage point. If the Fed keeps cutting (which is likely), it’ll soon be flirting with the zero bound. And if the economic effects of the coronavirus don’t dissipate (very possible), the Fed could easily hit zero.

But then what?

These officials didn’t officially announce that interest rates will go negative. But they said that when rates are back to zero, they’ll have to take a hard look at negative rates.

Reading between the lines, they will likely resort to negative rates when the time comes.

Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it’s heading. But these guys made my job incredibly easy. It’s almost like cheating!

The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.

The reason has to do with real interest rates.

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate.

That’s why the real rate is so important. If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren’t. In these examples, nominal 2% is a “high” rate and 13% is a “low” rate once inflation is factored in.

What is the real rate today?

The yield to maturity on 10-year Treasury notes is currently at a record low of under 1% (it actually fell to 0.899% today before edging slightly higher). That’s never happened before in history, which is an indication of how unusual these times are.

Meanwhile, inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.6% year over year, below the Fed’s 2% target.

Using those metrics, real interest rates are in the neighborhood of -.5%. But believe it or not, that’s actually higher than the early ’80s when nominal rates were 13%, but real rates were -2%.

That’s why it’s critical to understand the significance of real interest rates.

And real rates are important because the central banks want to drive real rates meaningfully negative. That’s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.

So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.

The Fed is very concerned about recession, for which it’s presently unprepared. And with the coronavirus, now even more so. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended in December 2018, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.

Interest rates only topped out at 2.5%, only halfway to the target. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.

The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that was still well above the $800 billion level that existed before QE1 (“QE-lite” has since taken the balance sheet up above $4 trillion, and it’s probably going higher since new cracks are forming in the repo market).

In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.

The Fed is therefore trapped in a conundrum that it can’t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It’s obviously chosen the latter option.

If a recession hit now, the Fed would cut rates by another 1.25% in stages, but then they would be at the zero bound and out of bullets.

Beyond that, the Fed’s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.

Of course, negative nominal interest rates have never worked where they’ve been tried. They only fuel asset bubbles, not economic growth. There’s no reason to believe they’ll work next time.

But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.

Now’s the time to stock up on gold and other hard assets to protect your wealth.

Regards,

Jim Rickards
for The Daily Reckoning

The post Heading Into Negative (Real) Interest Rates appeared first on Daily Reckoning.

Gold Is a Chameleon

This post Gold Is a Chameleon appeared first on Daily Reckoning.

Is gold a commodity, an investment, or money?

The answer is…

Gold is a chameleon. It changes in response to the environment. At times, gold behaves like a commodity. The gold price tracks the ups and downs of commodity indices. At other times, gold is viewed as a safe haven investment. It competes with stocks and bonds for investor attention. And on occasion, gold assumes its role as the most stable long-term form of money the world has ever known.

A real chameleon changes color based on the background on which it rests. When sitting on a dark green leaf, the chameleon appears dark green to hide from predators. When the chameleon hops from the leaf to a tree trunk, it will change from green to brown to maintain its defenses.

Gold also changes its nature depending on the background.

Let’s first look at gold a commodity…

Gold does trade on commodity exchanges, and it tends to be included in commodity industries. The common understanding here is that gold is a commodity. But I don’t think that’s correct.

The reason is that because a commodity is a generic substance. It could be agricultural or a mineral or come from various sources, but it’s a substance that’s input into something else. Copper is a commodity, we use it for pipes. Lumber is a commodity, we use it for construction. Iron ore is a commodity, we use it for making steel.

Gold actually isn’t good for anything except money. People don’t dig up gold because they want to coat space helmets on astronauts or make ultra-thin wires. Gold is used for those purposes, but that’s a very small portion of its application.

So I don’t really think of gold as a commodity. But nevertheless we have to understand that it does sometimes trade like a commodity.

As far as being an investment, that’s probably gold’s most common usage.

People say, “I’m investing in gold,” or, “I’m putting part of my investment toward bullion gold.”

But I don’t really think of gold as an investment either. I understand that it’s priced in dollars, and its dollar value can go up. That will give you some return, but to me that’s more a function of the dollar than it is a function of gold.

In other words, if the dollar gets weaker, sure the dollar price of gold is going to go up. If the dollar gets stronger, then the dollar price of gold may go down.

So if you’re using the dollar as the measure of all things, then it looks like gold is going up or down. But I think of gold by weight. An ounce of gold is an ounce of gold. If I have an ounce of gold today, and I put it in a drawer, and I come back a year from now and take it out, I still have an ounce of gold. In other words it didn’t go up or down.

The dollar price may have changed, but to me that’s the function of the dollar, not a function of gold. So again, I don’t really think of it as an investment.

One of the criticisms of gold is that it has no yield. You hear it from Warren Buffet, you hear it from others, and that’s true. But gold is not supposed to have a yield because it’s money. Just reach into your wallet or your purse and pull out a dollar bill and hold it up in front of you, and ask yourself what’s the yield? There is no yield. The dollar bill doesn’t have any yield. It’s just a dollar bill, the way a gold coin is a gold coin.

If you want yield, you have to take some risks. You can put that dollar in the bank, and the bank might pay you a little bit of interest, but now it’s not money anymore. People think of their money in a bank deposit as money, but it really isn’t money. It’s an unsecured liability of an occasionally insolvent financial institution. The risk may be low, but there’s some risk, and that’s why you get a return.

Of course, you can take more risk in the stock market or the bonds market and get higher returns (or losses, as the stock market is currently proving). The point is, to get a return you have to take risk. Gold doesn’t have any risk. It’s just gold, and it doesn’t have any return. But again, it’s not supposed to.

Gold’s role as money is difficult for investors to grasp because gold hasn’t been used as money for decades. But gold in recent years has been behaving more like money than a commodity or investment. It is competing with central bank fiat money for asset allocations by global investors.

That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.

When you understand that gold is money, and competes with other forms of money in a jumble of cross-rates with no anchor, you’ll know why the monetary system is going wobbly.

It’s important to take off your dollar blinders to see that the dollar is just one form of money. And not necessarily the best for all investors in all circumstances. Gold is a strong competitor in the horse race among various forms of money.

Despite the recent price action, which is far more a function of the stock market rather than gold itself, this is great news for those with price exposure to gold. The price of gold in many currencies has been going up as confidence in those other currencies goes down. Confidence in currencies is dropping because investors are losing confidence in the central banks that print them.

For the first time since 2008, it looks like central banks are losing control of the global financial system. Gold does not have a central bank. Gold always inspires confidence because it is scarce, tested by time and has no cre‌dit risk.

Lost confidence in fiat money starts slowly then builds rapidly to a crescendo. The end result is panic buying of gold and a price super-spike.

We saw this behavior in the late 1970s. Gold moved from $35 per ounce in August 1971 to $800 per ounce in January 1980.

That’s a 2,200% gain in less than nine years.

We’re in the early stages of a similar super-spike that could take gold to $10,000 per ounce or higher. When that happens there will be one important difference between the new super-spike and what happened in 1980.

Back then, you could buy gold at $100, $200, or $500 per ounce and enjoy the ride. In the new super-spike, you may not be able to get any gold at all. You’ll be watching the price go up on TV, but unable to buy any for yourself.

Gold will be in such short supply that only the central banks, giant hedge funds and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980.

The time to buy gold is now, before the price spikes and before supplies dry up. The current price decline gives you an ideal opportunity to buy gold at a bargain basement price. It won’t last long.

Regards,

Jim Rickards
for The Daily Reckoning

The post Gold Is a Chameleon appeared first on Daily Reckoning.

How Gold Is Manipulated

This post How Gold Is Manipulated appeared first on Daily Reckoning.

Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.

There is hard statistical evidence to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.

I’ve spoken to members of Congress. I’ve spoken to people in the intelligence community, in the defense community, very senior people at the IMF. I don’t believe in making strong claims without strong evidence, and the evidence is all there.

I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period.

He was dumbfounded.

He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.

He said statistically that’s impossible unless there’s manipulation occurring.

I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She has actually testified in gold manipulation cases.

She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.

How do these manipulations occur?

Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.

In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold.

The easiest way to perform paper manipulation is through COMEX futures. Rigging futures markets is child’s play. You just wait until a little bit before the close and put in a massive sell order. By doing this you scare the other side of the market into lowering their bid price; they back away.

That lower price then gets trumpeted around the world as the “price” of gold, discouraging investors and hurting sentiment. The price decline spooks hedge funds into dumping more gold as they hit “stop-loss” limits on their positions.

A self-fulfilling momentum is established where selling begets more selling and the price spirals down for no particular reason except that someone wanted it that way. Eventually a bottom is established and buyers step in, but by then the damage is done.

Futures have a huge amount of leverage that can easily reach 20 to 1. For $10 million of cash margin, I can sell $200 million of paper gold.

Hedge funds are now large players in the gold market. To a hedge fund, gold may be an interesting market in which to deploy its trading style. To them, gold is just another tradable commodity. It could just as well be coffee beans, soybeans, Treasury bonds, or any other traded good.

Hedge funds use what are called “stop-loss” limits. When they establish a trading position, they set a maximum amount they are willing to lose before they get out. Once that limit is reached, they automatically sell the position regardless of their long-term view of the metal.

Perhaps they don’t even have a long-term view, just a short-term trading perspective. If a particular hedge fund wants to manipulate the gold market from the short side, all it has to do is throw in a large sell order, push gold down a certain amount, and once it hits that amount, these stops are triggered at the funds that are long gold.

Once one hedge fund hits a stop-loss price, that hedge fund automatically sells. That drives the price down more. The next hedge fund hits its stop-loss. Then it sells too, driving the price down again. Selling gathers momentum, and soon everyone is selling.

Another way to manipulate the price is through gold leasing and “unallocated forwards.”

“Unallocated” is one of those buzzwords in the gold market. When most large gold buyers want to buy physical gold, they’ll call JPMorgan Chase, HSBC, Citibank, or one of the large gold dealers.

They’ll put in an order for, say, $5 million worth of gold. The bank will say fine, send us your money for the gold and we’ll offer you a written contract in a standard form. Yet if you read the contract, it says you own gold on an “unallocated” basis. That means you don’t have designated bars.

There’s no group of gold bars that have your name on them or specific gold bar serial numbers that are registered to you.

In practice, unallocated gold allows the bank to sell the same physical gold ten times over to ten different buyers.

It’s no different from any other kind of fractional reserve banking. Banks never have as much cash on hand as they do deposits. Every depositor in a bank thinks he can walk in and get cash whenever he wants, but every banker knows the bank doesn’t have that much cash. The bank puts the money out on loan or buys securities; banks are highly leveraged institutions.

If everyone showed up for the cash at once, there’s no way the bank could pay it. That’s why the lender of last resort, the Federal Reserve, can just print the money if  need be. It’s no different in the physical gold market, except there is no gold lender of last resort.

Banks sell more gold than they have. If every holder of unallocated gold showed up all at once and said, “Please give me my gold,” there wouldn’t be nearly enough to go around. Yet people don’t want the physical gold for the most part.

There are risks involved, storage costs, transportation costs, and insurance costs. They’re happy to leave it in the bank. What they may not realize is that the bank doesn’t actually have it either.

Gold holders should expect these games to continue until a fundamental development drives the price to a permanently higher plateau.

How does the individual investor stand up against such forces?

In the short run, you can’t beat them, but in the long run, you always will, because these manipulations have a finite life.

Eventually the manipulators run out of physical gold, or a change in inflation expectations leads to price surges even governments cannot control. There is an endgame.

History shows manipulations can last for a long time yet always fail in the end. They failed in the 1960s London Gold Pool, with the United States dumping in the late 1970s, and the central bank dumping in the 1990s and early 2000s. The gold price went relentlessly higher from $35 per ounce in 1968 when the London Gold Pool failed to $1,900 per ounce in 2011, the all-time high.

Price manipulation always fails. And the dollar price of gold will resume its march higher. The other weakness in the manipulation schemes appears in the use of paper gold through leasing, hedge funds, and unallocated gold forwards.

These techniques are powerful. Still, any manipulation requires some physical gold. It may not be a lot, perhaps less than 1% of all the paper transactions, yet some physical gold is needed. The physical gold is also rapidly disappearing as more countries are buying it up. That puts a limit on the amount of paper gold transactions that can be implemented.

My advice to investors is that it’s important to understand the dynamics behind gold pricing. Understanding these dynamics lets you see the endgame more clearly and supports the rationale for owning gold even when short-term price movements are adverse.

Gold will win in the end.

Regards,

Jim Rickards
for The Daily Reckoning

The post How Gold Is Manipulated appeared first on Daily Reckoning.

Why Is Gold Tanking?

This post Why Is Gold Tanking? appeared first on Daily Reckoning.

The coronavirus continues to take its toll on the stock market.

If you were expecting a major recovery today after yesterday’s bloodbath, you were very disappointed.

Stocks opened higher this morning but soon fell back into red territory again, where they stayed throughout the day.

The Dow ended up losing another 879 points today after yesterday’s 1,031-point hammering.

The S&P and Nasdaq were also big losers today, down 98 and 256 points respectively.

For investors accustomed to “buying the dip,” this is quite a change. As noted macroeconomic analyst Mohamed El-Erian said earlier today:

I understand the inclination to buy on the dip. I understand that the path of least resistance in this market is to bounce up… but I stress, this is different.

Meanwhile, the all-important 10-year Treasury yield fell to a record low this morning as investors continue to pour into safe-haven assets.

The 10-year yield dropped to 1.32%, falling beneath its previous record low of 1.325%, which it set in July 2016 following Brexit.

That means the bond market is projecting a poor outlook for the global economy. And over the long haul, the bond market has an excellent track record of being right.

Gold was down big today, losing $45.20. But that’s not because of gold itself. It’s all about the falling stock market.

When you think about it, it doesn’t make sense.

After all, if investors are fleeing for safety, which we’re seeing in the Treasury market, why wouldn’t they be buying up gold as well?

Gold was up close to $30 yesterday, before the price began dropping late in the day.

Here’s the likely reason why gold is falling right now when it should be rising…

With the stock market plummeting, hedge funds and other institutional investors have had to suddenly raise cash to meet margin calls on their positions in the equity markets. And they had to get the cash from somewhere.

Gold is a very liquid asset that can quickly be traded for cash.

They can either sell the actual gold bullion they own or they can unload their positions in gold ETFs (like GLD).

So my estimate is that they dumped their gold positions to raise the money. And that’s been driving the listed gold price lower.

It has nothing to do with gold’s fundamentals, which are actually very strong. Demand is increasing, central banks are hoarding record amounts of gold and new supplies are dwindling.

That’s a recipe for skyrocketing prices, and the bull market in gold is still very much intact.

The latest selling is just a quirk of the market, in which institutions have to raise cash in order to cover their positions when the market’s dropping.

Again, it has really nothing to do with gold itself. This is just a temporary blip.

If you haven’t bought gold yet, this is an ideal opportunity to scoop up gold at a bargain-basement price. Or, if you already own gold, to stock up on more.

For gold at least, it’s an ideal opportunity to “buy the dip.”

Gold is going much, much higher.

I’m not sure how many more opportunities like this we’re going to see. I urge you to take advantage of it while you can.

Regards,

Jim Rickards
for The Daily Reckoning

The post Why Is Gold Tanking? appeared first on Daily Reckoning.

“1984” Has Come to China

This post “1984” Has Come to China appeared first on Daily Reckoning.

You’re probably familiar with George Orwell’s classic dystopian novel Nineteen Eighty-Four; (it’s often published as 1984). It was written in 1948; the title comes from reversing the last two digits in 1948.

The novel describes a world of three global empires, Oceania, Eurasia and Eastasia, in a constant state of war.

Orwell created an original vocabulary for his book, much of which is in common, if sardonic, usage today. Terms such as Thought Police, Big Brother, doublethink, Newspeak and memory hole all come from Nineteen Eight-Four.

Orwell intended it as a warning about how certain countries might evolve in the aftermath of World War II and the beginning of the Cold War. He was certainly concerned about Stalinism, but his warnings applied to Western democracies also.

When the calendar year 1984 came and went, many breathed a sigh of relief that Orwell’s prophesy had not come true. But that sigh of relief was premature. Orwell’s nightmare society is here today in the form of Communist China…

China has most of the apparatus of the totalitarian societies described in Orwell’s book. China uses facial recognition software and ubiquitous digital surveillance to keep track of its citizens. The internet is censored and monitored. Real-life thought police will arrest you for expressing opinions opposed to the government or its policies.

Millions of Chinese have been arrested and sent to “reeducation” camps for brainwashing (the lucky ones) or involuntary organ removal without anesthetic (the unlucky ones who die in excruciating pain and are swiftly cremated as a result).

While these atrocities are not going to happen in the U.S. or what passes for the West these days, the less extreme aspects of China’s surveillance state could well be. And while you might not be arrested for expressing unpopular opinions or challenging prevailing dogmas (at least not yet), you could face other sanctions. You could even lose your job and find it nearly impossible to find another.

You can certainly be banned from social media…

Anything seems to go on social media (primarily Facebook, Twitter, Instagram, Snapchat, YouTube and a few other platforms) — unless you’re a conservative personality or politico. That’s where the censorship begins.

Many conservative social media participants have had their acco‌unts closed or suspended, not for threats or vulgarity but for criticism of “progressive” views (albeit criticism with some sharp edges).

Meanwhile, those with progressive views can say almost anything on social media, including the implicit endorsement of violence. But nothing happens.

Other conservatives report being the targets of “shadow banning.” That’s where your acco‌unt is open and seems to operate normally, but unbeknownst to you, much of the network is being blocked from seeing your posts and popular features such as “likes” and “retweets” are being truncated and not distributed.

It’s like being a pro athlete who finds out the stadium is empty and no tickets are being sold. That’s bad enough. But Twitter took the war on conservatives a step further.

Well, one of the most widely followed acco‌unts on Twitter is none other than Donald J. Trump’s, with 68 million followers. President Trump uses Twitter to announce policy initiatives and personnel changes and to offer pointed criticism of political opponents. It’s a major platform for him.

Last month Trump issued a tweet that identified the so-called “whistleblower” of the Ukraine phone call that led to his impeachment. That’s not as big a deal as it sounds because everyone in Washington knew who the whistleblower was (you can look his name up on the web), and he wasn’t even a real whistleblower because he didn’t meet statutory requirements.

Still, Twitter blocked Trump’s tweet. Twitter blamed a temporary system “outage,” but that claim was highly suspicious. Later, Trump’s tweet was restored, but the original acco‌unt that Trump linked to had been deleted. No one ever said that politics was fair.

But Twitter’s blatant interference in the election could have adverse consequences for the company in Trump’s second term.

And a few social media companies are now de facto censors, taking over the job from the government. Given their massive media footprint, they wield extraordinary influence over the American public.

They’re in essence becoming propaganda outfits.

It’s not just here of course. Canada, for example, is actively pursuing digital surveillance to track the activities of law-abiding citizens.

A report for the Bank of Canada says that financial information gathered from digital transaction records could be used for “sharing information with police and tax authorities.”

If all transactions are digital (including credit and debit cards), authorities can track your whereabouts, buying habits, restaurant choices and much more. They could also reveal your political orientation and personal associations.

It’s not difficult to imagine the police and tax authorities using that power to make life extremely difficult for those who criticize the government or sacred ideologies like “climate change.” If you think that sounds extreme, some have actually advocated jailing climate change “deniers.”

Do you think I’m making that up?

Well, the executive director of an outfit called Climate Hawks Vote said “Put officials who reject science in jail.”

The Nation also ran an article called, “Climate Denialism Is Literally Killing Us: The victims of Hurricane Harvey have a murderer — and it’s not the storm.”

“How long,” its author asked, “before we hold the ultimate authors of such climate catastrophes accountable for the miseries they inflict?”

And Robert F. Kennedy Jr. said the Koch brothers “should be in jail,” “with all the other war criminals.”

Well, David Koch has since died, so he’ll escape Kennedy’s justice.

But their “war crimes” consisted of funding organizations that question the climate change alarmism the media  is constantly feeding us.

But guess what? There’s plenty of hard scientific evidence that refutes the alarmist view. This article isn’t the venue to get into it, but the scientific case against climate alarmism is much stronger than the case for it.

But if you dissent against the official view, today’s tech censors will silence or marginalize you, no matter how valid your point.

The problem is, the trend is moving very quickly in this direction and it’s difficult to stop. And sophisticated surveillance technology to monitor citizens is already in place…

For example, cameras with the latest surveillance technology can spot and match millions of faces in real time with an accuracy rate of over 99%. They’re touted as anti-terrorism and anti-crime tools, which they certainly are.

But as Stalin’s ruthless secret police chief Lavrentiy Beria said, “Show me the man and I’ll show you the crime.” It’s easy to see that power being abused to target everyday citizens.

(By the way, Beria would ultimately prove his own point, as he was later arrested and executed for treason).

And actually, many people welcome intrusive surveillance technology on the grounds of convenience. As an example, look at microchipping, where people are injected with a small microchips beneath their skin. Microchipping has been associated with an Orwellian nightmare in which Big Brother constantly monitors your every move.

Well, over 4,000 Swedes have already happily volunteered to have it done.

In addition to acco‌unt information that negates the need to carry cash or credit cards to pay for goods, these chips can contain personal information. It’s all happened fairly quickly. Just a few years ago, the very idea of it would have sent chills down the spines of most people.

But that’s how fast Big Brother can go from nightmare to reality, and appear benign or even beneficial.

Big Brother’s on full display in China right now, but he could be on his way here before too long.

Regards,

Jim Rickards
for The Daily Reckoning

The post “1984” Has Come to China appeared first on Daily Reckoning.

Coronavirus Slams Chinese Economy

This post Coronavirus Slams Chinese Economy appeared first on Daily Reckoning.

How bad is the coronavirus pandemic in China? It’s worse than the Chinese government knows and worse than the world believes.

Here are the official statistics on the coronavirus (technically COVID-19) as of today: There are 75,685 confirmed infections worldwide, with 98% of that total in China alone. Of those cases, 82.5% are in the single province of Hubei, mostly centered in the city of Wuhan, with 11 million residents.

Of the over 75,000 worldwide cases, there have been 2,236 deaths; that’s a mortality rate of roughly 2.5%. If a 2.5% mortality rate sounds low, it’s not. That’s roughly comparable to the Spanish flu pandemic of 1919–20 that killed 50 million people by some estimates.

IMG 1

Coronavirus has reached pandemic proportions in China. Over 60 million people are locked down, which means they cannot leave their homes except once every three days to buy groceries. Streets are empty, stores are closed, trains and planes are not operating. The Chinese economy is slowly grinding to a halt.

While the disease has been predominately centered in China, and Wuhan in particular, there have been significant outbreaks in Singapore (58 cases), Hong Kong (56 cases), Thailand (33 cases) and Japan (29 cases including one fatality). Approximately 218 cases have been identified among those trapped on cruise ships where all passengers are under quarantine. Fifteen cases have been identified in the United States.

These statistics barely scratch the surface of what is happening with coronavirus in China. There is good reason to believe that the actual incidence of the virus may be five–10 times the official numbers.

Tencent (a popular internet search and social media platform in China) reported on Feb. 1, 2020, that actual infections were 154,000 and deaths from the disease were 24,589. (A screenshot of the Tencent release is shown below; source: Taiwan News).

The infection figure was approximately 10 times what the official figure was on the same date.

The death toll was more than 300 times the official figure. Applying this death toll to total infections gives a fatality rate of 16%, which is over seven times the official fatality rate.

IMG 2

There is no reason for a high-profile platform such as Tencent either to fabricate data or incite panic. It is reasonable to conclude that these figures are close to actual data. The Tencent posting was suppressed by the Chinese government within minutes of what may have been an accidental release of accurate data.

The preeminent U.K. medical journal The Lancet also published an article on Jan. 31, 2020, using hard data (city populations, incidence of travel, estimated transmissibility, etc.) and a reliable SEIR model (susceptible, exposed, infected, resistant).

That article estimated total infections of 75,815 in Wuhan as of Jan. 25. That figure is 17 times the official figure of 4,400 available on Jan. 27. The multiple of the estimate by The Lancet to the official figure is roughly in line with the multiple of the Tencent release to official data five days later.

Using either The Lancet or Tencent as a baseline suggests that the official infection and death rates are grossly understated.

Anecdotal evidence is consistent with the view that official data are materially understated.

Many bodies have been picked up off the streets and sent for cremation without blood samples or autopsies. It is highly likely that these victims died from coronavirus but are not included in official counts because no tests were performed.

Authorities are running out of body bags and refrigerated trucks, so bodies are simply being wrapped in plastic sheets and hauled away in ordinary vans.

A shortage of face masks, latex gloves and testing kits has also emerged. This means that doctors and medical personnel are highly susceptible to infection. It also means that patients who complain of fever and difficulty breathing are sent away because officials have no way to test them for coronavirus.

These developments simultaneously inflate the number of infected and deflate the official count.

The story gets worse. Wuhan, the city that is ground zero for coronavirus infections, is also the location of the sole bioweapons laboratory for the Chinese military and Chinese Communist Party.

One of the scientists at the laboratory is Zhengli Shi, a virologist. Shi formerly worked at a laboratory at the University of North Carolina, where he engineered a hypervirulent bat-based coronavirus that bears a striking resemblance to the COVID-19 coronavirus, including gene sequences not found in nature.

These linkages at least suggest that the outbreak of the coronavirus in Wuhan may be linked to an accidental release of the virus from the biological weapons laboratory located there.

If this thesis is correct, the coronavirus may be difficult to contain with vaccines or drug therapies since it would have been engineered to be highly resistant to such treatments.

What impact will the coronavirus pandemic have on the Chinese economy and global supply chains, especially in the technology sector?

Right now my models are telling me that the impact of coronavirus on the Chinese economy is orders of magnitude greater than most analysts estimate. In fact, the Chinese economy, second largest in the world, may be grinding to a halt.

The following excerpt from an article by Ambrose Evans-Pritchard in The Telegraph on Feb. 12, 2020, tells the tale:

Property sales in 30 big cities released every day… have collapsed to zero and have yet to show a flicker of life.

Property is a slow-burn issue compared to ruptured manufacturing supply chains, but by March it will start to bite for developers with dollar debts on Hong Kong’s funding market. Companies deemed “stressed” (borrowing costs above 15%) have to repay $2.1 billion of offshore dollar notes next month. Standard & Poor’s says they rely on a constant flow of sales to cover past debts.

Some 25 provinces and municipalities were supposed to go back to work this week but this clashed head on with virus control measures. Companies may not reopen plants unless they can track the exact movements and medical data of each worker and comply with a 14-day quarantine period where necessary (we now learn the incubation may in fact be 24 days). Officials dare not be lenient after Xi Jinping’s latest tirade.

The Guangzhou authorities have ordered plants to remain closed until early March in large parts of the city with warnings of ferocious penalties. Apple supplier Foxconn has yet to restart its core iPhone plants in Zhengzhou and Shenzhen. Just 10% of its workers have turned up. Caixin reports that Foxconn may wait until March before restarting.

Meanwhile the near complete shutdown of Shanghai’s manufacturing hub in Songjiang belied early claims that 70% of plants were going back to work.

This article contains valuable vignettes of what is happening in China, but they barely scratch the surface. An even bigger story is the extent to which the disruption in China from coronavirus is not only slowing the Chinese economy but is also disrupting global supply chains and slowing output around the world.

IMG 3

This chart prepared by the Johns Hopkins University based on official data provided by China and other nations shows the total number of confirmed cases of coronavirus infection as of Feb. 14, 2020 (orange line). Wall Street was encouraged by a prior update that showed 44,700 confirmed cases. Then cases increased by over 15,000 in a single update. The resulting near-vertical slope of the graph blew up Wall Street wishful thinking and triggered a downdraft in stock markets worldwide. As of Feb. 15, confirmed cases had increased to 64,447. The pandemic is far from under control and spreading quickly.

Production shutdowns in China are reducing exports of high-tech inputs from South Korea, Japan and Germany. Likewise, the extreme reductions in exports from China (due to plant closures) are hurting sales by European and U.S. distributors and retail outlets.

Independent of production and sales bottlenecks, there are massive transportation bottlenecks as vessels and crews are quarantined or refuse to enter Chinese ports at all.

The tech sector may be the hardest hit of all. In addition to coronavirus disruption, the U.S. Department of Justice last week indicted China’s largest telecommunications device and network provider, Huawei, on racketeering charges.

The Pentagon also reversed a prior determination and agreed that the Commerce Department can put Huawei on an export control list, which prohibits sales of processors and other high-tech components to Huawei by U.S. firms.

These measures are certain to invite retaliation by China against U.S. firms in the tech supply chain.

This story isn’t going away anytime soon.

Regards,

Jim Rickards
for The Daily Reckoning

The post Coronavirus Slams Chinese Economy appeared first on Daily Reckoning.

Not Over by a Long Shot

This post Not Over by a Long Shot appeared first on Daily Reckoning.

Are you tired of hearing about the coronavirus? Well, you shouldn’t be because it’s a serious situation with global consequences.

Markets have been following the spread of the coronavirus (COVID-19) closely for good reason.

The Chinese economy, second largest in the world, is shutting down in stages. In affected areas, streets are empty, stores are closed, planes and trains are not running.

Over 60 million people are “locked down,” which means they are confined to their homes and can only leave once every three days to buy groceries (if they can find any due to hoarding).

The effects go far beyond China because of global supply chains. If Chinese factories are closed, they are not buying components from South Korea, Japan and Germany. Likewise, if Chinese factories are closed, they cannot supply finished goods to U.S. buyers.

The result is that factories and sales are also slowing in developed economies.

Still, markets are taking a measured view. Some epidemic models showed the disease would peak in April 2020 and tail off quickly from there.

The other assumption was that any dip in the Chinese economy would be made up later in the year so that the total impact would be minimal when viewed on an annual basis.

All of those assumptions were blown-up in a matter of minutes in the late evening of Wednesday, Feb. 12.

In a single update, 14,840 new infections were reported, moving the total from 45,000 to about 60,000 cases.

This did not mean that 14,840 people were infected in one day.

It meant that China suddenly became more transparent and decided to include existing cases using more valid diagnostic criteria.

But the change did move the official statistics closer to the amount shown in a leak on Tencent (that showed about 150,000 infections) and a Lancet (a preeminent medical journal) model-based input that also estimated about 150,000 cases.

Officially, China has reported 118 new deaths, bringing the number of (official) deaths nationwide to at 2,236.

China has also reported 1,109 new confirmed cases, dramatically up from 349 cases the previous day.

And now, for the third time in eight days and the second time in 24 hours, Chinese officials made changes to how they count coronavirus cases.

When asked if he thought the virus will be contained, World Health Organization director Tedros Adhanom Ghebreyesus said, “The window of opportunity is narrowing, so we need to act quickly before it closes completely.”

The bottom line is that the disease is worse than Wall Street believed, the economic damage is greater and it will take longer to get the disease under control. Stock prices fell after the news was reported.

As more bad news dribbles out, that stock price adjustment has further to fall.

Regards,

Jim Rickards
for The Daily Reckoning

The post Not Over by a Long Shot appeared first on Daily Reckoning.

2020 Forecast for Markets & Elections

This post 2020 Forecast for Markets & Elections appeared first on Daily Reckoning.

Just because impeachment is almost over and it’s an election year does not mean that Congress won’t be the scene of anti-Trump activity. Congress is set to keep up the pressure on Trump on a daily basis, and the attacks will continue.

Investors should not be shocked if the House impeaches Trump a second time.

There’s no legal limit on the number of times a president can be impeached or the number of articles of impeachment that can move forward. The House impeached Trump in 2019 on bogus claims that aren’t even crimes. If they did it once, they can do it again.

Some of the new charges being floated include whether it was legal for Trump to order the killing of mastermind terrorist Maj. Gen. Qasem Soleimani. The killing was clearly legal since Soleimani had officially been declared a “terrorist” under the Authorization for Use of Military Force Act (AUMF) and Iran had been declared a state sponsor of terrorism.

Both designations allowed the U.S. legally to kill a terrorist on foreign soil who was planning terrorist acts against the U.S. Obama had used the same legal rationale to kill hundreds of terrorists in Pakistan, Afghanistan and Yemen.

Still, Democrats are claiming that this was an “assassination,” which is illegal under U.S. law. You can expect congressional hearings and possible impeachment charges along these lines this spring.

Another potential impeachable offensive consists of violations of the Emoluments Clause of the U.S. Constitution alleging that Trump profits when foreign diplomats stay in his hotels. He doesn’t; Trump returns any revenues to the U.S. Treasury.

The House of Representatives can also be expected to hold hearings on alleged Trump “money laundering” in connection with property development in Russia. There’s no evidence of this, but that won’t stop Democrats from making the allegation.

Trump’s relationship with Deutsche Bank and its financing of his hotels and other properties including the identities of third-party investors will also come under scrutiny.

Other anti-Trump efforts will include hearings to get testimony from Secretary of State Mike Pompeo related to the Soleimani killing and testimony from former National Security Adviser John Bolton related to the Ukrainian military aid that triggered the first impeachment.

New matters related to Ukraine are also emerging in connection with reported Russian hacking of Burisma, the Ukrainian company that paid Hunter Biden (Joe Biden’s son) millions of dollars for a no-show job for which he was unqualified.

Somehow Democrat critics of Trump can’t get enough of the Russian collusion allegations, even though the Mueller investigation showed no connection at all between Russia and Trump.

All of these matters (Soleimani, property finance, Ukraine and War Powers in Iran) may form the basis for new articles of impeachment against Trump.

This could play out over the course of the spring and summer just as the campaign season is heating up. This may be designed to stir up the Democrat base, but it will probably have the opposite effect of increasing turnout of Trump supporters.

With or without new articles of impeachment, the congressional hearings, bogus claims and anti-Trump rhetoric will continue without relief. Trump will stay on track, but markets may weary of the uncertainty and be worn down by the hyperbolic rhetoric.

Alongside the drama of impeachment and the scandals yet to be revealed, we still have the economy and stock market for investors to focus on. And right now they’re looking good for Trump.

There is almost zero risk of a recession in the next three months and less than a 20% chance of a recession before November. That’s good news for Trump because a recession (or lack of one) is the single strongest indicator of whether an incumbent president will be reelected.

The probability of Trump’s reelection is roughly the inverse of the probability of a recession before the election. If recession odds are 20%, then Trump’s reelection odds are roughly 80% (with adjustment for various factors).

Each month that goes by reduces the odds of a preelection recession even further, which means that Trump’s reelection odds go up. Trump should have a 90% chance of winning by Election Day absent extreme and unexpected economic shocks in the next nine months.

Trump’s chances are also helped by the weakness of his opponents. Americans have shown no appetite for the kind of socialism being touted by Bernie Sanders and Elizabeth Warren. Pete Buttigieg lacks African-American support, which is indispensable for a Democrat. Joe Biden lacks energy and is exhibiting some cognitive problems that will raise serious doubts among voters and hurt his debate performance.

What about the Fed?

The Fed will cut interest rates at least once before the election. This rate cut will not happen at the March or April FOMC meetings because that’s too soon after the Fed told markets it was hitting the “pause” button last December.

The rate cut will not happen in the July or September FOMC meetings because that’s too close to the election and the Fed does not want to appear to be tipping the scales in favor of one party or the other. The Fed will be on hold from July until after the election.

Through a simple process of elimination, the Fed will cut rates in June.

The Fed’s reasons for the rate cut (which markets do not expect) will not be explicitly to help Trump’s reelection (although that will be one consequence). The reason will be to provide an insurance policy against disinflation and recession. The Fed knows its hands will be tied until December, so it will provide a rate cut just to be on the safe side.

A June rate cut will give another boost to stocks, which should continue to perform well. As the election approaches and Trump’s victory becomes more apparent, stocks will gather momentum in expectation of four more years of lower taxes, less regulation and a pro-business environment.

Gold will also get a boost from another rate cut. This comes on top of continued strong buying from Russia, China and Iran and flat output by miners. Geopolitics play a big role in gold prices as a “flight to quality” trend emerges during each overseas crisis. The coronavirus has been a major factor that has taken gold past $1,600 an ounce. The next crisis will send gold even further.

But how might this November’s election affect the political balance in Congress?

As things stand today, not only will Trump be reelected but Republicans should hang onto control of the Senate and possibly retake the House of Representatives. Control of the White House and the Senate alone gives Republicans control of judicial appointments (including one or two more Supreme Court Justice seats) and control of treaties.

Retaking the House will be more difficult but not at all impossible. Presidents typically lose seats in the House in their first midterm election after winning the White House. Trump’s losses in 2018 were actually fewer than Clinton’s in 1994 (when Newt Gingrich led Republicans to the majority for the first time since 1955) and Obama’s in 2010 (when the tea party arose to reject Obama’s policies).

There were 31 Democrats elected in 2018 in districts that Trump had won by five or more points in 2016. All but two of those Democrats voted in favor of impeachment. One of those two has since switched to the Republican Party.

Today, the Republican Party holds 197 seats in the House. Control of the House requires 218 seats. The Republicans need a net gain of 21 seats to take control of the House. With 30 highly vulnerable Democrats (because of impeachment) and demonstrated coattails on the part of President Trump, picking up 21 of those 30 seats (while holding all existing seats) seems well within reach.

A Republican clean sweep of the White House, the Senate and the House with ongoing control of the Supreme Court and other judicial appointments is the most likely outcome for November 2020.

But, there will be a lot of land mines exploding between now and then. Call it another year of living dangerously.

Regards,

Jim Rickards
for The Daily Reckoning

The post 2020 Forecast for Markets & Elections appeared first on Daily Reckoning.

Are They Going to Impeach Trump Again?

This post Are They Going to Impeach Trump Again? appeared first on Daily Reckoning.

The Democratic candidates held another debate last night. Michael Bloomberg took a lot of heat from the others, and he did not handle it well. He showed real weakness for the first time.

Joe Biden, meanwhile, put in a strong performance last night. We’ll have to see if he can generate any momentum from it. After Iowa and New Hampshire, his campaign is in serious trouble.

Speaking of Iowa, they still haven’t resolved that mess…

The Iowa caucus was officially over on Feb. 3. But it’s not over yet and may never be over.

The conduct of the caucus was one of the biggest fiascos in modern political history and the repercussions are still being felt. You probably know the story by now.

A caucus is not a primary election. It’s a physical gathering of voters at about 1,600 precinct locations such as school gyms and similar venues around the state.

That’s a limiting factor right away because many voters don’t have the flexibility to show up at an appointed time and place. Voters organize in groups backing a certain candidate.

An initial count of support for each candidate is taken. Candidates’ groups who have less than 15% of the total are then told they can either go home or switch sides (with less than 15% support you get zero delegates).

Voters then reorganize — for example, a Biden supporter can switch to Liz Warren — and a second count is taken.

That second count is then used in a mathematical formula to assign delegates for the Democratic convention.

The number of delegates for each candidate is not proportional to votes in the second count because some precincts are overweighted. Got it?

Don’t worry; neither does anyone else. That system is nuts. But it gets worse…

A new mobile phone app was created to send in results. The app had never been used in actual voting and it crashed.

Precinct organizers were told to phone in results. The phone lines were jammed and organizers couldn’t get through. That didn’t matter because party officials in the central locations were told to leave their mobile phones outside.

Others could not get online. Some did not know how to use spreadsheets. TV network anchor desks were on the air with nothing to report.

Candidates were robbed of bragging rights, both on caucus night and in the days leading up to the New Hampshire primary on Feb. 11. Iowa results dribbled out over days in a way that seemed intentionally designed to hurt Bernie Sanders.

Finally, the chair of the Iowa Democratic Party resigned in disgrace.

As of now, it is reported that Bernie Sanders won the most votes in the first and second alignments, but Pete Buttigieg got the most delegates because of the quirky math formula.

But even that reported result is not final because a “re-canvass” recount is underway.

The biggest loser was not among the candidates. The biggest loser was the Democratic Party itself.

Commentators were quick to ask how Democrats can run the economy if they can’t even count votes in Iowa. Good question.

But could they be so dumb as to actually try to impeach Trump again?

If the Democrat effort to impeach Trump was grounded in political hatred rather than constitutional law, why would the Democrats not do it again?

The answer is that the impeachment efforts are not stopping.

House Democrats are already planning hearings on Trump’s reassignment of Lt. Col. Alexander Vindman and his firing of Ambassador Gordon Sondland, both of whom provided anti-Trump (but incompetent, irrelevant and immaterial) testimony during Adam Schiff’s unconstitutional impeachment show trial.

Trump also reassigned Vindman’s twin brother, Yevgeny, for subversive activities in the National Security Council.

Other avenues of anti-Trump inquiry include an expected appeals court ruling that may require testimony from former Trump White House counsel Don McGahn, further inquiry into Russian collusion allegations (the hoax that won’t die), possible violations of the Emoluments Clause (despite court rulings dismissing partisan lawsuits against Trump) and pursuit of testimony from John Bolton that was not part of the Senate trial.

In short, there is no shortage of fake allegations on which to base a new impeachment.

We can’t be certain there will be another impeachment this year, but it cannot be ruled out. Impeachment hearings could begin again this spring ahead of a new impeachment vote this summer and a trial in August just in time for the Republican convention.

Another possibility is Trump wins a second term (likely, in my view) and the Democrats keep control of the House, in which case another impeachment in 2021 is a high probability.

This is bad for the country and is actually bad for Democrats, as shown in the polls. Yet the Democrats seem to be the last to know.

Regards,

Jim Rickards
for The Daily Reckoning

P.S. It’s the Democrats’ worst nightmare.

The post Are They Going to Impeach Trump Again? appeared first on Daily Reckoning.

“Mandate of Heaven” in Jeopardy

This post “Mandate of Heaven” in Jeopardy appeared first on Daily Reckoning.

The U.S. markets are closed today for Presidents Day. If you have the day off, I hope you’re enjoying your long weekend.

But one event is taking center stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.

Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.

China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall. This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the “middle-income trap.”

Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).

The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.

This powers growth and the accumulation of hard currency reserves from export earnings.

The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products.

Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations).

This explains why China has been so focused on stealing U.S. intellectual property.

Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.

The story gets worse for China.

As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.

Those figures are official statistics released by China and other countries around the world where the virus has spread.

However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be ten to twenty times higher than those official statistics.

Over 60 million Chinese in several major cities are under “lock-down” where individuals are confined to their homes and may only leave once every three days to buy groceries.

Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.

This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.

And it will have a rippling effect on the U.S. economy also. This story has a long way to run.

Regards,

Jim Rickards
for The Daily Reckoning

The post “Mandate of Heaven” in Jeopardy appeared first on Daily Reckoning.