The $750 Billion Threat From an American “Ally”: An Update
- Ignore tomorrow’s OPEC summit… Here’s what really matters
- What is Uncle Sam covering up about Saudi Arabia’s Treasury holdings?
- Mainstream agrees with Rickards: Saudi princes aren’t bluffing with their threats
- Corporations’ legal theft from their investors, and what to do about it
- Good news: Congress passing fewer laws. Wait till you hear the bad news
- Taking the pulse of U.S. manufacturing… another confused reader commiserates with the one from yesterday… the “length of The 5” question rears its head again… and more!
The business press, as usual, has its focus fixed on the wrong thing. This morning, it’s the twice-yearly summit of OPEC nations starting tomorrow in Vienna.
“New Saudi Energy Minister Shows He Takes OPEC Seriously,” was the headline on a Reuters article yesterday. “OPEC Future at Stake Amid Saudi Oil Shift,” said a front-page Wall Street Journal story.
Some elements within the mainstream are acknowledging the obvious. CNBC gave airtime yesterday to an analyst who said, “I see nothing of consequence that will be discussed at this meeting.”
Saudi Arabia’s government is hosting a much more consequential meeting next week. Indeed, the future of the U.S. dollar might be riding on it.
As Jim Rickards explained here last fall, the Saudi princes consider crude prices of $50–60 a barrel to be their sweet spot — low enough to wreck U.S. frackers, high enough to generate revenue to continue buying off the kingdom’s restive masses with subsidized gasoline, cushy government jobs and so on.
But those $50–60 levels were last seen nearly a year ago. As we write this morning, crude is off more than a buck, at $48 on the nose. As we’ve chronicled here regularly, the government is strapped for cash.
So the Saudi princes have invited global bankers to the capital, Riyadh, next Monday and Tuesday. On the agenda — the government’s first dollar-denominated bond. The first round could be issued as early as next month, worth $15 billion.
Meanwhile, a deal that resulted from a secret round of meetings between U.S. and Saudi leaders more than 40 years ago is steadily falling apart.
Much of it has to do with a growing recognition in Washington that certain people and groups in Saudi Arabia bankrolled the Sept. 11 attacks. 60 Minutes did a big story about it in April. Two weeks ago, the Senate passed a bill allowing 9/11 families and survivors to sue the Saudi government.
The action in Congress comes despite a threat by Saudi Arabia’s foreign minister that the kingdom might dump $750 billion in U.S. Treasuries and other U.S. assets, lest they be frozen by U.S. courts to settle up any 9/11 litigation.
“For over 40 years, the U.S. Treasury has misled the American people about the amount of U.S. Treasury debt held by the kingdom of Saudi Arabia,” says Jim Rickards.
The amount was a well-guarded secret, never revealed in the Treasury Department’s monthly report disclosing which foreigners hold Treasury debt, and how much. Saudi Arabia was lumped in with other “oil producers.”
That secrecy was key to the “petrodollar” arrangement between the United States and Saudi Arabia going back to 1974. Saudi Arabia would price oil in U.S. dollars and use its clout to get other OPEC nations to do the same. In return, the U.S. government agreed to protect Saudi Arabia and its allies against foreign invaders and domestic rebellions.
Ever since, anyone who’s wanted to buy oil needed dollars to do so. The petrodollar greases the wheels of world commerce and allows Americans to live in the debt-soaked style to which they’ve become accustomed.
As we documented in real-time, the Treasury made a nod toward transparency last month — disclosing Saudi Arabia’s holdings total $117 billion, a far cry from the $750 billion supposedly threatened by the kingdom’s foreign minister.
“This number is still a sham,” says Jim Rickards. “Countries often hold U.S. debt through accounts in other places, such as Belgium and the Cayman Islands.”
Jim thinks the real total might well be closer to that $750 billion. If the kingdom were to dump such a substantial amount of Treasury debt, “it would send interest rates sky-high, sink stock markets, crush property markets and blow a hole in the U.S. deficit.”
But how real is that threat? “Let’s not assume they’re bluffing,” says Marc Chandler, chief of currency strategy at Brown Brothers Harriman. “The Saudis are under a lot of pressure,” he tells Bloomberg. “I’d say that we don’t do ourselves justice if we underestimate our liabilities” to big holders of Treasury debt.
Understand Mr. Chandler is a very mainstream figure. He sees the dollar strengthening over the next year or two — a view diametrically opposed to Jim’s.
But when it comes to the Saudi threats, they agree. Jim’s bottom line: “The threat of retaliation is real despite the Treasury’s efforts at damage control. Get ready for volatile and disorderly markets if the 9/11 legislation is passed.”
[Ed. note: Yes, there’s a way to play such an event for big profits. Even if the 9/11 legislation doesn’t pass, Jim expects America’s vaunted “ally” to double-cross Washington sooner or later as the petrodollar arrangement falls apart.
If you’re positioned properly, the move could mean gains of 530%… 848%… even 2,196%. Check out Jim’s recommended strategy at this link.]
Major U.S. stock indexes are a mixed bag as we check our screens: The Nasdaq is up a skootch, but everything else is in the red, the S&P 500 off a little over a point at 2,096.
Gold’s modest rally of yesterday couldn’t hold; at last check, the bid was $1,209. And you can’t chalk that up to dollar strength. The dollar index is off a third of a percent at 95.5.
The only major asset class that’s rallying is Treasuries; rising prices are pushing down the yield on a 10-year note to a two-week low, below 1.83%.
The big economic number of the day is the monthly ISM manufacturing index. Numbers above 50 indicate a growing factory sector; below 50, a shrinking one. The May number is 51.3 — anemic, but it’s three consecutive readings above 50 coming after five sub-50 readings.
“Did you know that corporate executives around the U.S. are literally stealing from investors at near-record levels this year?” asks our income maven Zach Scheidt.
This sort of theft is legal. “But that doesn’t make it right,” says Zach. “They’re cutting dividends that would normally be paid to investors, and keeping the cash in-house. This is just another way that savers — individuals who rely on income from their investment accounts — are under attack.
“In the first quarter of 2016, 189 companies cut their dividends. That’s the highest level of dividend cuts since the first quarter of 2009 — when the market was still struggling with a major financial crisis.”
And contrary to what you might expect, only about half of these companies are in the oil industry. “The rest were in more ‘normal’ areas of the economy,” says Zach — “such as finance, real estate, technology and mining.
“And many of these dividend cuts are completely unnecessary! The companies have cash available to pay dividends. But the executives have decided to keep the cash in-house for their pet projects (or to buy back shares and temporarily juice the stock price) instead.”
What can you do? “The answer is to have a comprehensive strategy to generate investment income from multiple different sources,” Zach tells us. That includes quality dividend-paying stocks with management that treat shareholders right… but also his “perpetual income strategy,” explained here.
We knew there had to be a downside to the fact Congress is passing fewer laws these days.
Once in a while, we like to poke fun at the world improvers who are outraged at Congress’ lack of “productivity” as measured by the number of laws they pass. Here at The 5, our limited-government mindset is such that we figure the fewer the better. And Congress is obliging, passing fewer than 300 laws during the 113th Congress of 2013–15. That compares with 800 passed by the 95th Congress of 1977–79.
But here’s the rub: More of the laws being passed nowadays are loaded with secret provisions, according to research by Ohio State professor Dakota Rudesill, a veteran of both the Senate Budget Committee and the Office of the Director of National Intelligence.
Many sweeping bills like the annual Pentagon budget bill fund classified programs, so there are provisions that “can be reasonably read to give a classified addendum” to U.S. law, says Rudesill.
What do these provisions say? How do we know whether we’re obeying or violating these laws? We don’t know. They’re secret, after all.
And not one of those provisions has leaked in the 36 years Rudesill researched. “It’s kind of remarkable in this age when everything leaks,” he tells Voactiv.
“I’m in the admittedly confused club too,” a reader writes after the lead item in yesterday’s episode. “Perplexed and whipsawed,” he adds.
“Sideways markets are always dicey — but even so, stocks, currencies, gold and yields are all behaving really strangely.
“I agree that none of this refutes Jim Rickards’ ‘Shanghai Accord’ thesis. There’s no reason to expect that to progress in a linear way. If anything, it validates the fact that central bank policies have fouled things up beyond all recognition.
“Perhaps the markets will normalize again after the next blowup. Heaven only knows what’s even holding them together anymore. With so many wrenches in the machine, random noise may be the ‘new abnormal’ for now!
“Welcome back, Dave, and thanks for the great info, as always.”
The 5: “The Shanghai Accord is alive and well,” Jim Rickards elaborates, “but it’s not a day trade. It’s intended to guide currency policy among the major economies for at least a year, possibly two.
“You don’t reach an agreement of that importance in February and tear it up in May. The Shanghai Accord will be a good guide to portfolio allocation for the foreseeable future. We always expected volatility along the way.”
“Warren Buffett and Berkshire Hathaway can afford to make a mistake — they have billions,” a reader writes after we mentioned Warren Buffett relies in part on the instant income strategy advocated by our Zach Scheidt.
“Most of your potential subscribers can’t with just $20,000. They have virtually no margin for error.”
Says another reader: “You remarked Zach’s perpetual income strategy works best investing $20,000, but could it still work with a smaller amount? If so, what would that amount be?
“By the way, thanks for The 5!”
The 5: In no way is this strategy for everyone. That said, Zach has racked up a 98.44% success rate with these recommendations.
“You can get started with any amount of money,” says our publisher Joe Schriefer, who’s used this approach in his own investment account for years. “And how much you put into each of Zach’s individual recommendations is entirely up to you. You could even paper trade for the first month to prove to yourself this works.
“However, to generate the maximum amount of instant income, we recommend you have at least $20,000 available to get started.”
There are three other qualifications you should also meet before jumping in. Joe describes them at this link.
“Why,” reads a short email, “does it take 15 minutes to read The 5 Min. Forecast?”
The 5: Wow, it’s like clockwork! Every six months or so, someone stirs the pot in our virtual mailbag with an inquiry to this effect.
Not that we’re complaining. It just means we’re picking up new readers all the time…
The 5 Min. Forecast
P.S. “Love your publication in general,” says one more email from a reader…
[Of course, we know there’s a “but” coming…]
“But just so you know, it disturbs me a video with potentially offensive sexual content was inserted, even though it came with a warning.”
Hmmm… Seems the key word there is “potentially.” As we’ve said before, the video clip is not graphic. But it is suggestive.
If you wish to learn about an industry with 81,000% growth potential in a way that won’t expose you to anything “potentially” offensive, you can click here instead.