Two Choices, Neither Good

Posted On Mar 10, 2016 By Dave Gonigam

  • Europe unleashes big stimulus, market yawns
  • Four scenarios for the next week now only two
  • If the Fed “pauses” next week, will it make any difference?
  • Saudi Arabia: Buddy, can you spare $8 billion?
  • Legal pot does what the war on drugs couldn’t
  • Yes, the elites are clueless… debating the “zero-sum game” of Uber and the like… wishful thinking about the GRA… and more!

OK, that’s one bullet dodged.

Yesterday, Jim Rickards told us about two major decisions coming in the space of a week, from Mario Draghi at the European Central Bank and Janet Yellen at the Federal Reserve.

This morning, the ECB delivered on market expectations, and then some…

  • The ECB’s benchmark interest rate has been cut from 0.05% to 0%
  • The interest rate on banks’ deposits at the ECB has been pushed further into negative territory — from minus 0.3% to minus 0.4%
  • Quantitative easing/money printing is being ramped up from 60 billion euros a month to 80 billion — about $88.4 billion.

Slashing the benchmark rate to zero was a surprise. So was the announcement that under the expanded QE, the ECB will buy not only government bonds, but corporate bonds.

The market impact has been largely muted: If anything, tumbling oil prices are having a bigger impact today.

  • Perhaps counterintuitively, the euro has surged more than 1% against the dollar; at last check, it’s at $1.117
  • European stock indexes tumbled in the final hour of trading, Germany’s DAX closing down 2%
  • The major U.S. indexes are also in the red. Early in the day, the S&P 500 tried again to push past 2,000, but as we write, it’s back to 1,981
  • Gold priced in dollars has rallied nearly 1%, to $1,265. Priced in euros, the Midas metal is down a third of a percent. Hmmm…
  • Crude is off more than 2.5%, a barrel of West Texas Intermediate fetching $37.28.

So the four scenarios Jim described for us yesterday, surveying the landscape for the week ahead, have been whittled down to two.

To recap, these are…

  1. Draghi cuts rates and expands “quantitative easing”… while Yellen leaves rates alone, which is as good as a rate cut in light of the increase last December. “The euro/dollar cross-rate would be relatively unchanged (at about $1.09),” says Jim, “since both central banks are easing and playing to expectations.”
  1. Draghi cuts rates and expands “quantitative easing”… while Yellen raises rates and shocks markets. “In this scenario,” Jim says, “U.S. equities will see a sharp sell-off as they quickly reprice from expectations of no rate hike to an actual hike. The dollar will strengthen relative to the euro, which may retest its 2015 lows of $1.05.”

What’s it gonna be?

“The argument for a rate hike is straightforward,” says Jim. “Job creation remains strong, and labor force participation has begun to rise.”

The GDP figures are weak, but no weaker than the post-2008 norm. And as we’ve pointed out regularly in recent weeks, inflation measures are moving up meaningfully after lying flat on their back during 2015.

In short, the numbers meet the criteria for a rate increase that Yellen laid out in a big speech she delivered last May in Providence, Rhode Island. “That speech,” says Jim, “was her road map to liftoff, which occurred last December. It is still a good guide to how Yellen thinks about the need to normalize interest rates.

“The case for doing nothing at the March FOMC meeting is equally neat,” Jim says.

“Stock markets were in turmoil from Jan. 1, 2016, to Feb. 11, 2016, as a direct consequence of the Fed’s rate hike in December and the prospect of a strong dollar hurting exports and overseas corporate earnings.

“A host of other indicators point to a likely recession. World trade is contracting (a highly unusual circumstance almost always associated with recession or depression). Manufacturing indexes in the U.S. are showing contraction.”

That said, “the Fed has never accurately forecast a recession,” Jim reminds us. “It’s not even clear that Fed models are capable of forecasting recessions.”

Here’s the investing takeaway: “Most of the benefit of not raising rates in March is already priced in,” says Jim.

“The reality of no rate hike in March will not produce higher stock prices or a weaker dollar, because those market moves have already happened in anticipation of no hike. We’ve had our ease already.

“Of course, if Yellen does raise rates in March, that will produce a shock that will send stocks down, bonds up and the dollar higher. In effect, stocks, bonds and currencies will rapidly reprice based on an unexpected policy move by the Fed.”

As we mentioned yesterday, Jim’s indicators triggered a new “Kissinger Cross” trade this week that stands to benefit no matter what the Fed (or, for that matter, the ECB) does. It’s already up 15% in two days, but as we write this morning, it’s still a buy — with up to 500% profit potential over the next six months.

But to capture that profit potential, it pays to act now. Look here for access to all of Jim’s Kissinger Cross trades.

Are the Saudi princes getting desperate? Byron King passes along a story from the U.K. Independent that says the kingdom is shopping for a five-year bank loan of up to $8 billion.

That would be “the first significant borrowing by the kingdom’s government for more than a decade,” says the paper.

As we’ve chronicled all year, low oil prices are straining the kingdom’s finances to the breaking point. Gasoline subsidies have been slashed, effectively raising the price by 40%. That’s a desperate move, considering the government’s usual MO is to buy off the population with subsidies and other goodies. The kingdom’s foreign exchange reserves are plummeting, and the riyal might soon be devalued against the dollar.

It was Byron who forecast at the start of the year that 2016 would be the year war and revolution come to Saudi Arabia. This morning, he muses, “I suppose some people loaned money to Louis XVI right up until mobs stormed the Bastille.”

From our ongoing legal marijuana chronicles, we see the Mexican cartels are in trouble.

New figures from the U.S. Border Patrol reveal the number of pot seizures during 2015 was the fewest in a decade.

“Mexican manufacturers of illegal marijuana bricks have driven down prices,” says a San Francisco Chronicle story, “as residents in California, Colorado and Washington state now have safe access to reasonably affordable medical marijuana and/or recreational cannabis.”

In late 2014, a Mexican weed grower told NPR he was getting $30–40 per kilo, or 2.2 pounds — down from $60–90 in 2011–12. “It’s a big difference,” he said. “If the U.S. continues to legalize pot, they’ll run us into the ground.”

Hmmm… We’re still wary of legal marijuana as an investment vehicle.

Only last month, Facebook suspended or deleted the accounts held by dozens of pot businesses. Many of them had been online for years and didn’t try to sell anything over the Web, which would violate Facebook’s terms of service.

Facebook subsidiary Instagram is even more hard-core. From a story at The Guardian: “Stash Tagz, an apparel company that sells cannabis-themed T-shirts, said its Instagram account was deleted after it posted a meme featuring a Rastafarian Santa Claus, which did not contain any marijuana use or products…

“Several theories about why accounts are being shut down are being discussed in the industry. Some say Facebook is afraid of racketeering charges from the federal government (the same reason most banks won’t touch pot money), while others believe it is people within the industry flagging their competition’s posts and getting them shut down.”

Whatever the story, we figure there are better places to invest. The industry poster child Medbox (MDBX) — which soared from $4 to $100 in late 2012, only to come crashing back to Earth — recently changed its name to Notis Global. It’s been flooding the market with new shares of late, which trade this morning for less than a penny each. No, thanks…

“I’m struggling with the idea that central bankers don’t know what they’re doing,” a reader writes after Jim Rickards’ musings in yesterday’s episode.

“It’s true that they all sound like buffoons with warped ideas based on faulty models. But that’s got to be by design.

“The evidence consistently fits the theory that global banks are a cartel and central planning is the means by which they’re purposefully fleecing us. Fedspeak is just a smoke screen being used to rationalize their tactics and secrecy — as well as to misdirect us.

“Central bankers are following the same game plan they have pursued throughout history. With so much wealth at stake, it’s doubtful this is the result of ignorance or coincidence. It’s more likely that the ‘chair’ and ‘governors’ are really middle managers who answer to a shadowy board of directors with a clear agenda.

“Not a pleasant thought, but it’s a tenable one!

“Great stuff, as always. Jim Rickards’ views are very insightful.”

The 5: Even if there are people pulling strings behind the scenes, what guarantee do we have that they’re any smarter than the people with a more public profile?

Yes, there are powerful elites. But they’re not like Smoking Man on the X-Files, manipulating all manner of events, down to ensuring the Jim Kelly-era Buffalo Bills never won the Super Bowl.

Jim Rickards tells of the time he spoke to a Bilderberg gathering at Rockefeller Center in 2012. The assembled worthies were freaked out by the prospect of Greece leaving the eurozone.

Jim told them what he wrote a year earlier in Currency Wars, and what he’s reiterated ever since: The euro is first and foremost a political project, not an economic one. Thus, Greece would stay in the eurozone and the euro would remain a leading global currency.

“When the briefing was over,” Jim recalls, “the head of Bilderberg said he was quite relieved to hear my conclusions. He thanked me and graciously presented me with a dark-blue handmade glass bowl (with a vortex swirl pattern on the inside) that I still keep near my writing desk.

“Every person in that room was far richer and more powerful than I. Yet they had bought into conventional wisdom about the euro and missed the real story until I explained it to them.

“It was a good lesson for me also. Being rich, powerful and well connected does not mean you’re a good forecaster or analyst. Forecasting requires special skills and a state-of-the-art analytic tool kit” — of the sort that Jim puts to work on your behalf.

“It is NOT a zero-sum game,” a reader writes emphatically — getting back to the debate over our hypothetical this week of a $10 Uber ride that would have been $25 in a taxi, yielding $15 more to spend elsewhere.

“That extra $15 to spend may not go to a taxi driver, but it WILL go back into the economy, supporting the maintenance and creation of other jobs.

“It is always to society’s best interest to deliver the best value to the customer. We could keep far more people employed by digging ditches with a spoon; but the money that we are paying them for digging those ditches would not be available for the many other amenities we enjoy.”

“I have no problem with a GRA program…” a reader writes of the “guaranteed retirement account” idea.

“… as long as the government has no say as to where the money is invested, they cannot touch it and it uses the current unconstitutional confiscation of the money I have to pay into Social Security. As a small-business owner, I am required to pay 15.3% of my income into it.”

The 5: Dream on.

Oh, as a small-business owner, you’d be responsible for the full 3% of GRA “contributions” — both the employer and employee portions.

In this regard, the GRA would be one more nail in the coffin of startups and entrepreneurship — as if existing self-employment taxes and health insurance costs aren’t bad enough.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. We just checked the futures market for the Federal Reserve’s benchmark interest rate. As was the case when we checked last Friday, the market indicates a 0% probability of a rate increase next week.

“If the Fed does hike rates,” says Jim Rickards, “stocks will violently reprice to the downside in a repeat of the January action (and last August).”

It’s at a time like this Jim says you should hedge your bets — and take on a trade that will perform no matter what the Fed does. That’s the idea behind his latest “Kissinger Cross” recommendation — with 500% profit potential by September. The trade is only two days old, and it’s still a buy. For access to this one-of-a-kind trading tool, look here.


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