The Enforcer Strikes Again

Posted On Apr 28, 2016 By Dave Gonigam

  • Bank of Japan shocks the world (but not readers of The 5)
  • The Shanghai Accord, two months on: What’s next for the dollar?
  • Russia makes a big move on the globe’s oil chessboard
  • More Internet self-censorship, as seen in Wikipedia searches
  • The 5 reality-checks the jobs-Pollyanna crowd … death in Cupertino and the memory hole… what NOT to hold in the next stock market crash… and more!

The “Shanghai Accord” is alive and well, and so is a steadily sinking dollar. Not that you’d know it reading mainstream headlines this morning…

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Heh… If you’ve been reading The 5, it’s no shock at all.

As a reminder, the Shanghai Accord is an outlier thesis of our Jim Rickards. He believes the International Monetary Fund brokered a secret deal two months ago in Shanghai: Japan and the eurozone would move to strengthen their currencies, thus weakening the dollar. Because the Chinese yuan is loosely pegged to the dollar, the yuan would weaken as well.

Result: A yuan devaluation that helps Chinese leaders get out of a jam… but doesn’t tank the U.S. stock market, which is what happened when the Chinese devalued on their own last August and again in January.

On Monday, we told you the Shanghai Accord thesis faced its biggest test to date this week: The Bank of Japan would meet today and decide whether to venture deeper into the territory of negative interest rates and weaken the yen.

Yesterday, the Japanese government issued its consumer price index. It showed the country was slipping into deflation for the first time since 2013. The “expert consensus” figured it was a sure thing the BoJ would further “ease” policy.

But not Jim — not after he witnessed IMF chief Christine Lagarde issuing a veiled, mafioso-style threat against the BoJ earlier this month at the IMF spring conference in Washington.

These were her words: “As far as Japan is concerned, we have fairly robust criteria under which intervention is legitimate, and that clearly can happen in a case, and only in a case, where very disruptive volatility must be avoided. So we are watching carefully what is happening in the Japanese markets.”

Implicit threat to the BoJ: Weaken the yen and we’ll cut you off from any help in case of a crisis.

Thus, the “stunning” turn of events this morning… and a spike in the yen. Against the dollar, the yen is once again approaching 18-month highs…

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Meanwhile, with a strong yen relentlessly punishing Japanese exports, Japan’s benchmark stock index closed down 3.6% on the day. That’s the power of Lagarde the enforcer.

But what of the dollar, you wonder?

Yesterday afternoon, the Federal Reserve wrapped up its own meeting… surprising no one by leaving interest rates alone. This morning, the U.S. dollar index — measuring the greenback against six developed-market currencies — is retesting a six-month low.

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The Fed’s next meeting is in mid-June. “With first-quarter growth coming in weak,” Jim wrote his Currency Wars Alert readers on Tuesday, “and an election cycle looming, the Fed may not raise rates before December, and maybe not even then.”

What’s that about weak first-quarter growth? This morning, the Commerce Department is out with its initial guess at GDP for the first three months of the year.

Among dozens of economists polled by Bloomberg, the consensus guess was an anemic 0.7% annual growth rate. The actual number was even weaker — 0.5%. Indeed, that’s the weakest in two years. Consumer spending makes up roughly 70% of the GDP figure, and the mighty American consumer has been tightening the proverbial belt so far in 2016.

We love the Pollyanna mainstream take on this development: “The dismal performance in the first quarter,” says a MarketWatch story, “is unlikely to carry over in the spring, most economists contend. They view the labor market as a better indicator of where the economy is headed than the more backward-looking GDP report, and they point to strong job creation early in the year as evidence that growth is stable.”

Unless you look deeper into the jobs numbers, that is. Employers are starting to cut part-timers and temps; that’s an early warning sign of stress in the job market. Meanwhile, the Fed’s own Labor Market Conditions Index has been negative for three straight months — something that hasn’t happened since the “Great Recession” of 2007–09.

“The dollar’s path is easy to see,” says Jim — especially if you zoom way out on the chart above and examine the dollar index going back nearly 50 years…

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After Nixon cut the dollar’s last ties to gold in 1971, the dollar weakened until Federal Reserve chief Paul Volcker came in and “broke the back of inflation.” But 1985 was as good as it got for the dollar. There’ve been ups and downs since… “but the overall trend is down,” says Jim. “Each cycle is characterized by lower highs and lower lows.”

Looking ahead, “the dollar is going lower (in fact, that trend started on Feb. 26 after the secret Shanghai Accord). The new low will be lower than the previous all-time low of August 2011.

“This will not happen in a straight line, and it will not happen right away. There will be ups and downs, and the bigger trend will take a few years to play out.”

But it’s not too soon to start jumping on some juicy trades with, say, an 18-month time horizon. That’s Jim’s focus in Currency Wars Alert this spring. Only two days ago, he laid out a trade with upside of as much as 196%.

If you’re a newer reader, we should emphasize you don’t have to trade the wild-and-wooly forex markets to achieve these gains. You don’t have to stay glued to a trading screen every waking moment. Jim walks you through his simple system at this link.

Between the “stunning” BoJ nonmove and the lame GDP numbers, the markets so far today are shaking out like so…

  • The major U.S. stock indexes are flat after a mild pop following the Fed’s nonmove yesterday. The S&P 500 sits three points below 2,100
  • Treasury rates are likewise flat, the 10-year at 1.86%
  • Gold rose steadily after the BoJ announcement and is accelerating as we write; at last check, the bid was $1,263
  • Crude is steady near its year-to-date highs at $45.45.

There’s a bit of merger-and-acquisition news, with Comcast’s NBCUniversal unit buying the DreamWorks movie studio. Otherwise, trader chatter is focused on Facebook, which is up 9% after a killer earnings report. We wonder how long it can last…

Hmmm… Looks as if the Russians are making inroads getting oil repriced to their advantage.

Byron King tipped us off to this possibility last summer, telling us “Brent” crude from the North Sea would not remain the international benchmark forever. At a conference in London, Byron watched as someone from Russia’s state-owned oil firm Rosneft tore into the credibility of Brent pricing — which has the effect of dragging down the price of Russian-produced oil.

Now comes news that Russia’s in a position to do something about it: “The nation’s largest commodity exchange,” Bloomberg reports, “is courting international oil traders to join its emerging futures market.” Naturally, it would use Russian “Urals” crude as the benchmark price. “Another aim,” says the Bloomberg story, “is to move away from quoting petroleum in U.S. dollars.”

You don’t say?

“Brent is a blend of a few tens of thousands of barrels from a smattering of rusty old North Sea platforms,” Byron reminds us by email today. “Yet this one quote controls global price for upward of 90 million barrels per day. Meanwhile, Russia moves 3–4 million barrels per day via export.

“If (when) Russ breaks down the Brent quote, we may see new price levels for oil.”

Here comes more research indicating that people are censoring themselves online after the Edward Snowden-NSA revelations three years ago.

A study in the Berkeley Technology Law Journal finds that traffic on Wikipedia articles on topics including “car bomb,” “jihad” and “Taliban” plummeted nearly 30% after the Edward Snowden-NSA revelations three years ago.

“The results of this case study suggest that the harm produced by chilling effects is not a ‘stretch of the imagination’ at all,” says the study’s author, Jonathon Penney. “The June 2013 surveillance revelations, extensively covered by media, appear to have had a salient and observable chilling effect on Wikipedia users accessing certain Wikipedia articles.”

Here on our finance beat, we find all this relevant because Wikipedia sued the NSA and the Justice Department last year with the help of the ACLU — claiming harm by the government’s surveillance schemes.

And now the head-scratcher of the day: What’s up with the death of an employee yesterday at Apple headquarters in Cupertino, California?

“The Santa Clara County Coroner’s Office is handling the case and has not yet identified the man or released a cause or manner of death,” says the San Jose Mercury News this morning.

What about the early reports of a gun at the scene? We see nothing now.

“After further investigation, it appeared there was no foul play and no other individuals were involved,” Sheriff’s Sgt. Andrea Urena tells the Los Angeles Times via email. “This appeared to be an isolated incident, and no employees or members of the public are at risk.”

The gossip-mongers at TMZ got their hands on police-dispatch audio indicating a female employee was involved in an argument and might’ve had a head wound and was escorted by security from the building. But all TMZ can say now is, “It’s still unclear why officers said there was a female with a head wound in the dispatch audio.” Uhhh… did anyone ask?

Don’t get us wrong. We’re not implying any sort of coverup. (We even checked to see if any conspiracy/doom message boards had glommed onto this story. They’ve not.) It’s just passing strange.

Years ago when your editor worked in conventional news media, consultants would tell us one of the most common complaints of news consumers was the lack of follow-up. How comforting that some things never change…

“I am curious that with all the doom and gloom around us,” a reader writes, “do you believe there is any portfolio that can withstand a potential correction of the Dow of, say, 50%?

“For instance, a portfolio of AA municipal tax-free bonds?”

The 5: If the Dow collapses 50% — we’re not saying it will, we’re just playing along with your suggestion here — chances are the economy will have also collapsed, and so too municipal tax receipts.

No, we wouldn’t want to be in munis under those circumstances.

A world in which the Dow collapses 50% is a highly deflationary world. As Jim Rickards has long said, that’s advantageous for gold. The gold price might well fall… but relative to other asset classes and the things you buy for everyday living, gold will appreciate.

Besides, the Fed will move heaven and earth under those circumstances to move up the gold price — as happened with FDR devaluing the dollar in 1933 from $20.67 an ounce to $35.

All else being equal, we still like Jim’s suggestion of a 10% gold allocation to cover you for both deflation and inflation.

“Thanks to Gannett,” a reader writes after yesterday’s episode, The Indianapolis Star morphed from a really nice local newspaper into a ‘cookie-cutter crappy newspaper.’

“The local food section is OK. Everything else is blaaahhh!”

The 5: A couple of other readers wrote in to point out Gannett’s offer to buy out Tribune Publishing is for $815 million, not billion as we said. Hey, we got it right when we first mentioned it in Monday — does that count?

Best regards,

Dave Gonigam
The 5 Min. Forecast

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