Central Bankers Plant a 2018 Time Bomb

Posted On Jan 3, 2018 By Dave Gonigam

  • All’s well in the economy and the markets…
  • … and central banks could crash them both in 2018, says Rickards
  • How to survive “The Year of Living Dangerously”
  • Stocks, gold, bitcoin, crude all rise
  • “The year gene therapy goes mainstream,” says Blanco
  • After the “Juicero,” Doug Evans’ stupendous next act
  • Reader reactions to the “Constitution-Free Zone”

“We’re calling 2018 ‘The Year of Living Dangerously,’” says Jim Rickards.

That’s not a direct allusion to the Mel Gibson-Sigourney Weaver movie of that name, or the novel that inspired it. But from where Jim sits, it’s a fitting general theme.

Let’s jump into Jim’s 2018 outlook as we continue the Agora Financial editors’ forecasts for the year ahead…

On the surface, all’s well in the economy and the markets. The major U.S. stock indexes are at all-time highs this morning. Inflation is tame, “even too tame for the Fed’s liking,” Jim points out. The unemployment rate is at a 17-year low.

“The U.S. is not alone,” Jim goes on. “For the first time since 2007, we’re seeing strong synchronized growth in the U.S., Europe, China, Japan (the ‘big four’) as well as other developed and emerging markets.”

Technological innovation proceeds apace. And the GOP tax plan is now in effect.

The morning’s major economic numbers affirm the sunny consensus outlook.

The ISM manufacturing index for December rings in at 59.7 — higher than the highest estimate among dozens of economists polled by Bloomberg. (Any number above 50 indicates a growing factory sector.) Within the index, new orders are their highest in 14 years.

A similar manufacturing measure in Europe is even stronger — clocking in at 60.6. That’s the best reading in the 20-plus year history of the survey.

We’re in the boom phase of the boom-bust cycle, for sure. And Jim says the bust can easily come faster and harder than anyone expects…

“To understand why 2018 may unfold catastrophically, we can begin with a simple metaphor,” Jim says.

“Imagine a magnificent mansion built with the finest materials and craftsmanship and furnished with the most expensive couches and carpets and decorated with fine art.

“Now imagine this mansion is built on quicksand. It will have a brief shining moment and then sink slowly before finally collapsing under its own weight.”

As with many financial and economic crises throughout history — including the Panic of 2008 — Jim says the next one will be fueled by debt.

“Much of the good news described above was achieved not with real productivity but with mountains of debt including central bank liabilities.” By one authoritative estimate, the balance sheets of the U.S., Japanese and eurozone central banks exploded $8.3 trillion in the past decade… while GDP grew only $2.1 trillion.

The other $6.2 trillion went not into the “real economy,” but into assets — stocks, bonds, emerging-market debt, real estate.

But 2018, says Jim, “is the year the central banks stop printing and take away the punch bowl.”

Recall that last fall, the Federal Reserve began the process of selling some of the Treasury debt and mortgage-backed securities that it gobbled up between 2008–2014 — a reversal of “quantitative easing.” Europe and Japan aren’t there yet, but that’s the direction they’re moving. And they’re planning to raise interest rates, too.

“The impact of money supply reduction and higher rates will be falling asset prices in stocks, bonds and real estate,” Jim says — “the asset bubble in reverse.

“The problem with asset prices is that they do not move in a smooth, linear way. Asset prices are prone to bubbles on the upside and panics on the downside. Small moves can cascade out of control (the technical name for this is ‘hypersynchronous’) and lead to a global liquidity crisis worse than 2008.”

But unlike 2008, the Fed has precious little room to maneuver. Cut interest rates? Even after two years of increases, the fed funds rate remains near historic lows; that’s why the Fed is so keen to raise the fed funds rate a quarter point every three months. Resume quantitative easing? That was easy a decade ago when the Fed’s balance sheet totaled $800 billion; now it’s $4.4 trillion.

But it’s not just central banks trying to “unwind” their easy-money policies over the last decade. Jim points to at least four other potential catalysts for catastrophe…

  • “Student loan debt is over $1.4 trillion, and default rates are over 20%. Most of these defaults have not yet hit the federal budget deficit. They will soon
  • “The new U.S. tax bill is the greatest hoax since Orson Welles’ 1938 radio broadcast War of the Worlds. Biggest winners: corporations and billionaires. Biggest loser: the U.S. economy. I’ll have a lot more to say about this in the weeks ahead. What is certain is the tax bill will add $2 trillion or more to the deficit
  • “A catastrophic wave of emerging-market defaults is coming, with enormous spillover effects likely in developed economies. This will be worse than the Latin American defaults of the 1980s and the Asian-Russia defaults of the late 1990s
  • “A war is coming between the U.S. and North Korea, probably by this summer. The best case is that the U.S. wins but at a very high cost in lives and money. The worst case is World War III when China, Russia and Japan are drawn in due to the inevitable unforeseen consequences of war.”

Jim’s conservative strategy to get through this year of living dangerously? Gold. As he pointed out late last month in a 2018 gold-preview episode of The 5, Jim sees gold moving to $1,400 this year, maybe even $1,475, as early as this summer. And that’s if the bad things he’s described don’t happen.

Interested in a more aggressive strategy? Then you’ll want to consider Jim’s newest project — which he’s finally “declassified” 15 years after he began working with the CIA to sniff out anomalies in the financial markets that might tip off terrorist attacks. Check out the never-before-revealed details — and the off-the-charts profit potential — at this link.

As mentioned briefly above, the major U.S. stock indexes are reaching into record territory this morning.

Of special note is the Nasdaq, which crossed 7,000 yesterday for the first time. This happened hours after we pointed out the Nasdaq made a failed run a 7,000 two weeks earlier but our Alan Knuckman said it was only a matter of time. Well played, Alan.

Gold continues to power ahead despite a bit of dollar strength today — $1,315 at last check. That’s a solid $50 higher from the day we published our aforementioned 2018 gold preview on Dec. 21. Well played, Jim Rickards.

Bitcoin jumped after the news we mentioned just before hitting the send button yesterday — about Peter Thiel’s Founders Fund taking a huge bitcoin position. Bitcoin is at $15,403 — up 10.7% from this time 24 hours ago. If you followed James Altucher’s ongoing guidance to buy bitcoin on dips, you’re probably happy.

Crude is up to $61.42 — still another high last seen in mid-2015.

“My prediction is that 2018 will be the year that gene therapy goes mainstream,” says our science-and-wealth maven Ray Blanco.

“People suffering diseases due to faulty genes will be cured by therapies that write new, working genetic code directly into their cells.

“For years, the biotechnology industry has been editing genes in organisms like bacteria to produce therapeutic drugs. But the technology has only recently matured to a point where we can rewrite a human’s DNA to fight disease.

“In 2017, the FDA approved two such treatments. Both involve removing white blood cells from a patient and modifying them in a lab. The restructured cells are reinjected into the patient, where they attack cancerous cells circulating in the body.

“The results were stunning. But they’re nothing compared to what’s coming next. In December, the FDA approved the first gene therapy designed to treat a genetic disease.”

We told you about it at the time — a treatment that corrects a mutation that leads to a rare form of blindness. It’s so revolutionary, it’s been getting mainstream attention — including today, on the news that treatment for one eye will cost $425,000.

But because that’s less than expected, shares of the company behind the treatment — Spark Therapeutics (ONCE) — are up 4.5% on the day, to $55.61. Alas, it’s beyond Ray’s buy-up-to price of $50; best wait for a pullback.

From the guy who brought us the Juicero, we now have “raw water.”

We first told you about the Juicero last April — a $400 internet-connected juicer that became the object of widespread scorn when it turned out the company’s $6 juice packs filled with fruits and vegetables could be squeezed as easily by hand as they could by the machine.

The problem was the expectations the company built up: Founder Doug Evans literally said his company would do for juicing what Steve Jobs did for computers. (And Silicon Valley venture capital types fell all over themselves to give him $120 million!)

When last we updated the saga in July, Evans was planning a $200 second-generation Juicero… but by the end of August, his company had collapsed. Around that same time, he attended the Burning Man festival (of course) and went on a 10-day cleanse, drinking nothing but “Live Water” — unfiltered water from hard-to-access springs, selling in 2.5 gallon containers for $36.99. (Refills are $14.99.)

For real. But hey, it’s got “good bacteria!”

“I haven’t tasted tap water in a long time,” he tells The New York Times — which informs us that “the off-grid water movement has become more than the fringe phenomenon it once was, with sophisticated marketing, cultural cachet, millions of dollars in funding and influential supporters from Silicon Valley.” [Emphasis ours.]

Oy. Reading something like this, Jim Rickards’ collapse can’t come soon enough.

[Ed. note: If you ever have to drink “raw water” — hey, it happens — we strongly suggest some sort of filtration. Our favorite solution — the best balance of maximum effectiveness for minimum cost — can be found right here.]

“Dave, you may have made the understatement of the millennium yesterday,” begins today’s mailbag, “regarding the federal government’s expansive definition of border.”

According to the ACLU: “Roughly two-thirds of the United States’ population lives within the 100-mile zone—that is, within 100 miles of a U.S. land or coastal border. That’s about 200 million people.”

“This zone includes most (or all) of dozens of states and nine of the 10 largest metropolitan areas in the U.S. I live in the so-called Constitution-Free Zone (Buffalo, New York). It is a disturbing thought.

“Happy new year. Love The 5!

The 5: Yes, even on the shore of Lake Erie, far from the “border” per se, you’re in the zone. A few years ago — we have no reason to believe it’s different now — Border Patrol agents in Rochester would routinely board Amtrak’s Lake Shore Limited. This route runs from Chicago to New York and never crosses the Canadian border. The agents harass the passengers about their citizenship, often shining a flashlight in their faces in the middle of the night.

But we’re the Land of the Free, and don’t you forget it…

“What’s this about a Constitution-Free Zone?” writes a reader who takes issue with us. “You show why it’s a crime to practice law without a license.

“The Fourth Amendment only proscribes unreasonable searches. If you’d bother to read the case law research on the issue, you’d see that border searches are deemed reasonable and another of the exceptions to any ‘warrant requirement’ there might be. These exceptions include searches incident to arrest, ‘Terry’ stops and frisks, consent searches and exigent circumstances.”

The 5: Not being a lawyer, your editor is less interested in case law and more interested in history. The courts have steadily redefined “reasonable” far, faraway from the common understanding of that word when the Bill of Rights was drafted in 1789. Indeed, we’re creeping closer and closer to the “general warrants” of the 1760s that launched the American Revolution. (When it comes to electronic surveillance, we’re already there.)

But if the courts say it’s all good, who are we peasants to argue?

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. By the way, we’re sure the “exigent circumstances” excuse will be trotted out to justify the raid that killed Andrew Finch in Wichita, Kansas, last week.

The clock has already run out on our 5 Mins. today, so we can’t rehash the details here; if you’re interested, they’re readily found online. It’s hard to read them without concluding that any contact you have with law enforcement nowadays could pose an imminent threat to your survival.


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New Daily Issue Posted 2 Days Ago By Dave Gonigam

While the market sorts out the latest presidential pronouncements, we’re going to spend most of today exploring some random items that crossed our desk this week. They’re all related somehow to business or finance or commerce… and they all come under a category we’ll call “You Are Not Free.”

Read This Daily Issue