With “Allies” Like This...

Posted On Jan 14, 2016 By Dave Gonigam

  • The rally after the rout
  • Exposing Saudi Arabia’s double cross against the dollar
  • Sickly stock action reveals Peak Gadgetry
  • The Beige Book looks dingy gray
  • More perils of running a legal marijuana business… Russia’s staying power… ham on wry… and more!

Stocks and crude appear to have arrested their free fall this morning.

After we went to virtual press yesterday with the S&P 500 down slightly, the bottom fell out. The index closed down 2.5% on the day, at 1,890, sliding back into “correction” territory — that is, down more than 10% from its May 2015 peak.

No obvious catalyst, just the usual “global growth” and “China” concerns that have hung over the market since last summer.

At last check this morning, the index had added 15 points, at 1,905.

Crude, meanwhile, is rebounding — up more nearly 2% and back at $31 on the nose.

If it’s a relief rally, the relief is misplaced… which brings us back to yesterday’s big topic in The 5.

If there’s one chart that should make you worry more than any other right now, it’s this:

Description: HowLongCanThisGoOn-2.png

We’ll explain exactly what it shows in a bit. First, a bit of background: As Jim Rickards explained here back in October, the Saudi Arabian riyal is more or less pegged to the U.S. dollar. As the dollar has grown stronger, so has the riyal.

That’s bad for Saudi Arabia’s nonoil exports (oil is priced in dollars, so that’s not affected). Bad for the tourist trade as well.

“When this local slowdown is combined with the global slowdown and the collapse in the dollar price of oil,” Jim explained, Saudi Arabia comes under economic attack from two directions: “Their budgets are in deficit, and they are drawing down foreign exchange reserves to make up the difference.”

Key point: The riyal is one of the few currencies on the planet that have not devalued against the U.S. dollar over the last four years.

The chart shows forward contracts in the riyal. They’ve soared to their highest levels in nearly 20 years. Traders don’t believe Saudi Arabia can hold out much longer without devaluing.

This is the double cross by Washington’s great “ally” we were telling you about yesterday.

“Most currency pegs break in a spectacular fashion,” Jim went on to remind us in October. “Think of George Soros’ attack on sterling, which brought the Bank of England to its knees in 1992.

But you don’t have to go back more than two decades for evidence.

One year ago tomorrow, the Swiss National Bank broke the Swiss franc’s peg to the euro. And in August, the People’s Bank of China broke the yuan’s peg to the dollar.

“In both cases, massive trading losses resulted,” Jim said. “Of course, these widespread losses produced massive gains for the few who were on the right side of the trade.”

Jim believes the third great currency shock in a year’s time is just around the corner — Saudi Arabia breaking the riyal’s peg to the dollar. Indeed, he has reason to believe the word might come as early as Friday, Jan. 22 — a week from tomorrow.

To make sure you’re on the right side of the trade, Jim is hosting a live video summit the evening of Jan. 18 — that’s next Monday — at 7:00 p.m. EST.

Access is free… but we are limiting the number of available spots for reasons Jim explains here. It’s easy to secure your spot right now — just RSVP at this link.

As the morning wears on, the safety trade continues to wear off. The S&P 500 is now up nearly 20 points on the day, at 1,910.

Treasuries are thus selling off, the 10-year yield approaching 2.09%. Gold is likewise selling off at $1,082.

Maybe we’ve reached “Peak Gadgets” — or so Greg Guenthner of our trading desk thinks.

One of 2014’s hot IPOs was GoPro (GPRO), maker of video cameras you can mount on your forehead when you go skiing or surfing or mountain biking.

Not a parody… Actual CEO endorsement.

Overnight, GPRO delivered an awful sales forecast and announced job cuts. Shares are down 17% this morning… after having sunk 85% from their late-2014 highs…

Description: GoPro Plunges

Nor is GoPro alone. “Take Fitbit (FIT),” says Greg. “For the uninitiated, these are those little vibrating bracelets people wear to tell them how many steps they’ve taken every day. Wearable tech was once an exciting idea to investors. Not anymore. Fitbit stock is now 60% off its highs.”

The rot is even spreading to nontech names like the fitness apparel giant Under Armour (UA). The company was out in force last week at the Consumer Electronics Show in Las Vegas, pushing a line of products called “Connected Fitness.”

Heh… Shares have tanked from $80 to $70 this year alone.

So now the Federal Reserve has gotten around to conceding there’s no wage growth out there.

The Fed came out late yesterday with its Beige Book — a periodic survey of economic activity from each of the Fed’s 12 districts. A few years ago in this space, our fearless leader Addison Wiggin regularly dissed it as the “Lily White Book” for its unfounded optimism.

But this latest report is more of a dingy gray. Yes, the economy is expanding, but doggone it, wages are still flat: “Labor markets continued to improve,” it says, “with employment increases evident in reports from seven districts. Districts reported little overall change in wage and price pressures, with wage increases running from flat to moderate, while price increases tended to be minimal.”

The rest of it was likewise “meh” — weak growth in consumer spending, “mixed” auto sales, farm incomes stressed, not to mention slowing manufacturing.

“This report offers far more for the doves than the hawks,” says a summary from Econoday, “and could justify, perhaps, doubts whether the Fed will implement four rate hikes this year as planned.” Well, you read it here first.

The Perils of Marijuana Investing, Continued: Here’s another court case to add to the one we mentioned yesterday, in which a credit union serving Colorado’s legal pot industry has been shut out of the Federal Reserve’s payment system.

Last summer, we told you about a pot merchant called Medical Marijuana of the Rockies that planned to open up shop in the town of Frisco. The owners of a nearby hotel sued, citing the federal Racketeer Influenced and Corrupt Organizations Act, or RICO — the 1970 law that started out as a tool against mobsters.

Also sued were the firm’s landlord, accountant and the bond company that guaranteed its tax payments. The legal logic: Under RICO, you’re subject to penalties for profiting from a criminal enterprise… and pot is still a crime under federal law. As soon as those being sued cut ties with Medical Marijuana of the Rockies, they were dropped as defendants in the suit.

Now comes word that MMR — which never did open for business — has now settled the suit for the sum of $70,000.

“Although modest, the settlement does not bode well for marijuana merchants and the companies that do business with them,” writes Jacob Sullum at Reason. “The threat of civil liability — or, more precisely, the threat of having to pay off plaintiffs to avoid the expense of drawn-out litigation — will only compound the legal fears that already discourage banks and other businesses from serving state-licensed marijuana suppliers.”

“At my age of 65,” a reader writes after our discussion of Saudi Arabia yesterday, “I have said since high school that peace in the Middle East is a lofty idea at best.

“They can’t even get along with each other! War and invasion and plundering is all they have ever known! Will they evolve as a civilization past this? Who knows, but I do know it won’t be in this century! China is slow evolving as a civilization as well. There is no such thing as a perfect world!

“All you can do is stay calm, watch, make sure you take care of your needs and, if you have time, reach out to others! But don’t try changing those who simply are not ready for change!”

The 5: Who knows? Arab civilization flourished during Islam’s first couple of centuries, at a time Europe was feeling its way through the Dark Ages.

Might be time for your editor to reread Rose Wilder Lane’s The Discovery of Freedom — which has a chapter on that…

“Dave, per your commentary on the game of chicken between Saudi Arabia and Russia vis-à-vis oil, consider also which country has the military might — and especially the more resilient and sustainable culture — to prevail over the long haul.

“The case for the critical importance of sustainable cultures in an increasingly chaotic global environment has been made by Gregory R. Copley in his book UnCivilization: Urban Geopolitics in a Time of Chaos.

“Mr. Copley was a guest on one of John Batchelor’s recent radio programs, and he reiterated the importance of having viable, widely shared, sustainable beliefs about common goals and purposes — as opposed to the situation in the United States, where we seem to believe that a multicultural, every-man-for-himself mishmash of conflicting (if not contradictory) ideas is just as good as our indigenous American culture — in difficult circumstances such as these.

“Long story short, I would put my money on Russia’s ability to persevere at whatever cost, and I will be curious to see what they will do after the well-deserved fall of the treacherous, back-stabbing bastards in Saudi Arabia.”

The 5: We’re not quite sure what you mean by “indigenous American culture,” but yes — Russians have endured a lot over a long stretch of time, a point we made last year on the 70th anniversary of V-E Day.

“Hey everybody at Agora Financial, Happy New Year!” reads a cheery note.

“I just wanted to say thanks for the fun reads throughout the year in The 5 Min. Forecast. I’m still learning tons from you folks and enjoying the great insights and occasional gut-busting laughter (that could be revved up a bit).

“I’m also enjoying the brilliant Stephen Petranek’s Breakthrough Technology Alert and the equally brilliant Ray Blanco’s Technology Profits Confidential and FDA Trader. They find amazing companies, both for great investment opportunities and for those working on things way outside of any box. Totally fun stuff to know. Every single one of your newsletter writers is top-notch, in my opinion.

“To the fabulous reader who objected to ‘putting Hillary Clinton, Susan Rice and Samantha Power into the same sentence as Thomas Jefferson’ (ordinarily, I would completely agree), I would suggest that you guys were trying your hand at irony, or at least indulging in the art of wryness. Kudos! It’s good to stretch!

“Have a wonderful year, and thanks again for the fantastic prose and always-deep research.”

The 5: You’re welcome!

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. The mainstream is waking up to the fact there’s big trouble in Saudi Arabia — just as we said in this space 10 days ago.

CNBC yesterday: “Four years after the Arab Spring, the lynchpin of OPEC faces more social unrest as Saudis digest unaccustomed austerity amid plummeting oil prices, costly military intervention in Yemen and increased tension with Iran.”

The article cites someone from the Brookings Institution who says, “Saudi Arabia needs to increase public-private-sector cooperation to absorb millions of unemployed youth and avoid rendering them to the abyss of terrorism or civil unrest.”

Or as we said earlier during today’s episode, it can just de-peg its currency from the dollar.

CNBC and the Brookings Institution definitely don’t see that coming.

Will you be ready when it happens? Jim Rickards wants to help you brace for what he calls “The Great Currency Shock of 2016.” Learn how during a live event he’s hosting next Monday at 7:00 p.m. EST. It doesn’t cost a thing to listen in. Just drop us your email address here and we’ll reserve your spot.


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