Dollar Demolition Summit

Posted On Jun 6, 2019 By Dave Gonigam

  • Trump and Macron — awkward
  • Xi and Putin — best buds
  • The next step toward “de-dollarization”
  • Oil in a bear market — what’s next?
  • Pentagon makes rare-earth contingencies
  • Epic media malpractice (and how it happened)
  • Stocks, bonds, gold all rise… Starbucks sets up near BYU… confrontation in an “American lake”… and more!

After the ceremonies in France today marking the 75th anniversary of D-Day, President Trump and French President Macron held a press briefing.

The body language was — well, you know what they say about a picture and a thousand words…

Trump and Macron

Sorta belies Trump’s description of the relationship between two enduring allies as “outstanding,” no?

In contrast, Chinese President Xi Jinping is in Russia this week — hailing Vladimir Putin as his “best friend and colleague.”

Trump and Chinese President

Xi is the guest of honor for the St. Petersburg International Economic Forum — an annual event Putin envisions as an alternative to Western elites’ yearly shindig in Davos, Switzerland.

If U.S. media are paying any attention at all to this story today, it’s sickeningly superficial — to wit, Xi giving two pandas to the Moscow Zoo.

The business press is at least reporting a little news — a deal for China’s tech giant Huawei to build out Russia’s 5G wireless network. No surprise, given how Washington has effectively shut Huawei out of the U.S. market.

The Financial Times, fumbling in the dark, gets a little closer to the real story: “With both Moscow and Beijing under fire from the U.S. — whether through sanctions or President Donald Trump’s trade war — Mr. Putin and Mr. Xi have struck up a warm friendship that defies decades of mistrust between their countries…

“Led by the close personal bond between the two leaders, Russia and China have united in the face of the Trump administration’s bellicose policy.”

Nice try, no cigar. For the real story you have to get closer to the source — and turn to Chinese and Russian media.

“Russia and China took another step away from the U.S. dollar after the two countries agreed to develop bilateral trade using the ruble and the yuan,” says a report from the website of RT — Russia’s state-run English-language TV channel.

“Russia and China intend to develop the practice of settlements in national currencies,” Putin said after talks yesterday.

If you’ve been reading The 5 for longer than a few months, you know Russia and China have been taking incremental steps in this direction for five years now. “De-dollarization,” they call it.

In Hong Kong’s major English-language paper, the South China Morning Post, we see a familiar name elaborating on the theme.

“If we want to avoid dollar hegemony, the first thing we need to do is to avoid using dollars, because the foundation of the U.S. economy is based on the dollar reserves owned by other countries and this has given it the ability and confidence to press other countries to play by its rules,” says economist and Putin adviser Sergey Glazyev.

Glazyev described the endgame in the spring of 2014. We cited it here — “the end of the domination of the United States in the global financial system.”

Granted, that’s still a steep climb: The South China Morning Post article says at least 70% of China-Russia trade is still conducted in dollars. It also describes “three failed attempts this week during the St. Petersburg International Economic Forum to exchange Chinese yuan for Russian rubles. Three major Russian banks refused to process the transaction, saying they would only sell rubles for U.S. dollars.”

But Russia and China are playing the long game.

Which brings us to an intriguing nugget about a “gold-backed cryptocurrency.”

The head of Russia’s central bank, Elvira Nabiullina, has ordered a study into such a currency to settle balances of payments among anyone who’s willing.

The move fits right in with Russia’s relentless gold accumulation. We ran this chart barely two weeks ago, and it’s worth another look…

Russia First Line of Defense

 

As a percentage of its overall economy, Russia’s gold stash is the biggest in the world — 5.6% of the country’s GDP.

“The Russian ruble is not positioned to be a reserve currency, but a new cryptocurrency backed by gold would be a good candidate,” says our Jim Rickards.

It makes sense on several levels, he explains: “Russia is the second-largest energy producer in the world. Most of that energy is sold for dollars. Russia can hedge potential dollar inflation by buying gold. Another reason has to do with the avoidance of U.S. sanctions. Gold is nondigital and does not move through electronic payments systems, so it is impossible for the U.S. to freeze on interdict.

“This plan is in its preliminary stages and is a long way from reality at this point. Still, the Russian endgame has now been revealed. The dollar’s days as the leading reserve currency are numbered. Got gold?”

[Ed. note: As promised yesterday, Jim has taken the wraps off his latest and most ambitious — and maybe his craziest — project in the five years we’ve been working with him.

Is he committing career suicide with this dramatic step? Really, he nearly sets fire to the office of his publisher Peter Coyne. Watch here and decide for yourself.]

It’s another odd day for the markets in which nearly every asset class is on the rise.

The S&P 500 is up another eight points, to 2,834; that’s a 90-point bounce since the close on Monday.

Treasury prices keep rising, pushing yields down further. At last check, the 10-year note is a hair over 2.1%. That’s a 19-month low.

And gold has added another seven bucks to $1,336. Next target — the 2019 high of $1,340 reached in February.

Not sharing in the joy, however, is crude oil — a barrel of West Texas Intermediate nearly unchanged from yesterday’s levels at $51.72.

Oil is now in a “bear market” in the sense of a 20% drop from its most recent peak at $66 only six weeks ago.

Say this much — crude has seen nearly unprecedented volatility, both up and down, over the last eight months.

West Texas Crudge Oil Chart

“How long can we expect the pain to last?” asks our chart hound Greg Guenthner. “According to Dow Jones Market Data, the average oil bear market lasts 60 trading days — and we don’t have to travel too far back in time to get numbers on the last one. Oil broke free from its last bear market on Jan. 9. That bear lasted 40 trading days, per Dow Jones.”

Seems the Pentagon is taking China’s rare-earth threat seriously.

Days before the mainstream caught on, we were telling you last month about China’s control over 90% of so-called rare earth elements — obscure metals that while not exactly “rare” are difficult to produce. And they’re critical to everything from your mobile phone to state-of-the-art Pentagon weapons systems. Imagine if China cut off the flow of rare earths if the trade war spirals out of control.

Now the Reuters newswire reports the Pentagon is reaching out to non-Chinese producers around the globe, specifically naming two African firms — Mkango Resources in Malawi and Rainbow Rare Earths in Burundi.

Still, weaning the military off Chinese rare earths would be a lengthy process akin to — well, turning around an aircraft carrier.

And now a revolting episode in the annals of Establishment news media.

A week ago today, Bloomberg published a story claiming a top North Korean official named Kim Yong-chol had been sent off to do “hard labor” as part of a larger and deadly “purge” — punishment, it was said, for the failure of the summit last February between Kim Jong Un and Donald Trump.

Bloomberg cited a right-wing newspaper in South Korea that has a lengthy history of stories about the North that turn out to be false. And that newspaper cited a single unidentified source.

And yet the rest of the “respectable” media picked up the ball and ran with it — The New York Times, The Wall Street Journal, ABC News. So did right-wing media The Washington Times and left-wing media like Democracy Now!

And then on Sunday, Kim Yong-chol showed up in North Korean state media — sitting only a few seats away from Kim Jong Un at a concert.

North Korea Meeting

Uhhh… Doesn’t look much like a labor camp [photo from North Korea’s Korean Central News Agency, circle added by the BBC]

Why did such a poorly sourced story from such a questionable news outlet get so much traction? Because, as journalist Ben Norton writes at The Grayzone Project, it served the purpose of “embarrassing Donald Trump for embarking on a historic peace process with the DPRK.”

Mr. Norton, we’ll point out, is a man of the left — an honorable one. He cares more about peace on the Korean Peninsula than about who gets the credit.

Key point: Frequently with inflammatory stories like this, the initial “scoop” gets far more attention than the subsequent correction.

What’s the financial angle, you ask? None — except to the extent that the hypersensitized and partisan media environment these days is altering the flows of money. You ignore these shifts at the peril of your portfolio. (Same deal, really, with U.S. media blowing off the Xi-Putin summit.)

We’ll have some more illustrative examples — and begin discussing a strategy to profit — in the days and weeks ahead. Stay tuned…

Our daily quest for “quirk” from the financial world takes us to the heart of Mormon country, which will soon be home to… a Starbucks.

Provo, Utah, is home to Brigham Young University. The new location will open next year right in front of campus.

“Students at the school, owned and operated by The Church of Jesus Christ of Latter-Day Saints, are taught as part of the faith’s health code to abstain from coffee and tea,” the Salt Lake Tribune reminds us.

The paper points out that according to reliable surveys, “Younger Latter-Day Saints are different than their parents and are less likely to say that it is ‘essential’ to avoid coffee and tea to be a good church member.”

Starbucks made inroads years ago into surrounding communities like Lehi and Springville. But not Provo, aside from a tiny one in the Marriott that caters to visitors.

Maybe it shouldn’t be such a surprise; as we mentioned last year, Utahns approved medical marijuana in a referendum…

To the mailbag: “Dave, what is this ‘much larger struggle between China and the U.S. for hegemony in Asia and the Western Pacific’ that Jim Rickards refers to?

“Shouldn’t the struggle be between China and Japan, South Korea, Taiwan, Vietnam and assorted tertiary countries (most notably Indonesia and Australia)? And, in southcentral Asia, between China and India?”

The 5: If we understand your question correctly, yes, China and its neighbors ought to work out their disputes among themselves.

But there’s a decades-long conceit in Washington that the Pacific Ocean constitutes an “American lake” — really ever since the United States seized the Philippines in 1898 during the Spanish-American War.

In recent years, Beijing has tried to assert its influence in its own backyard by building artificial islands in disputed waters of the South China Sea. So now, every few weeks the U.S. Navy “shows the flag” by sending a missile-armed destroyer into the South China Sea.

“Just about every time it happens,” writes Hampshire College professor Michael Klare, “the Chinese authorities warn off those ships or send out their own vessels to shadow and harass them…

“This deadly game of chicken could, of course, go on for years without shots being fired or a major crisis erupting. The odds of avoiding such an incident are bound to drop over time, especially as, in the age of Trump, U.S.-China tensions over other matters —including trade, technology and human rights —continue to grow.”

“Correction needed,” reads the subject line of a reader email. Well, that’s sure to get our attention.

“Federal congressional districts for 50,000 people? You mean 700,000-plus, right? Remember there are 435 districts for 300 million people.”

The 5: That’s our point. The Founders’ vision was for congressional districts of no more than 50,000 people and maybe as few as 30,000.

But the House has been frozen at 435 members since 1911 and the country’s population has more than tripled since. As you point out, the typical representative now “represents” more than 700,000 people — as vivid an example as any of how the federal government has become ever more remote from the populace.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. “I could lose some friends… and some would even consider this a career suicide,” says Jim Rickards.

But what he’s revealing for the first time today could help you get ahead of massive single-day market moves no one else sees coming.

For reasons you’ll see at this link he promised to keep a lid on it… but he can’t anymore. See here for yourself.


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