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  • How the US could derail Aussie investors

    The Aussie markets have had a great start to the year.

    Our main index — the S&P/ASX 200 — is up 15% for the year to date.

    The recent federal election has helped the XJO run a little further.

    While our markets are enjoying the good times, there’s trouble ahead that we should be preparing for.

    As the US-China trade war continues, there’s also the tetchy political backdrop in the US.

    Many Democrats don’t like Trump and are still calling for an impeachment. In addition, several Democrats are throwing their hats in the ring to challenge Trump in the 2020 election.

    However, as Jim explains today, impeachment and next year’s election could have a drastic impact on the global markets.

    The way Jim sees it, there are three key events investors should look out for. If they all unravel according to his analysis, investors could be caught out in what he calls ‘the perfect storm’.

    Why is that important to us here in Australia? Remember that old saying… ‘When the US sneezes, we catch a cold.’

    Read on for more.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The post How the US could derail Aussie investors appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Russia shows its hand

    Russia continues to ditch the US dollar.

    For the first three months of this year, the former soviet state bought 55.3 tonnes of gold, bringing its total gold store to 2,186 metric tonnes.

    Meaning Russia now has almost 20% of its total foreign reserves in gold.

    That’s small fry compared to the US, where 75% of the country’s total foreign reserves are in gold.

    But according to Jim today, comparing Russia’s gold stores to its total foreign reserves misses the point…

    Avoiding the US dollar payments system

    In December last year, Russian Economic Development Minister Maxim Oreshkin said Russia should be doing more trade in euros:

    I believe we should think about switching at least to the euro as a more common currency, both for Russians and the Europeans.1

    It looks as though the wheels may already be in motion, with the European Commission for Energy Union’s Vice President recently meeting with the Russian Finance Minister.

    Both are keen to set up a bilateral trade agreement when it comes to payments for energy resources.

    Essentially, the two powers are working out how to swap rubles and euros for commodities.

    Why hoard gold?

    Russia’s heavy bullion buying means the country’s gold stores may surpass those of Italy and France (2,451 metric tonnes and 2,436 metric tonnes respectively) within two years.

    Central banks of developed economies — like the Reserve Bank of Australia and the Bank of Canada — have ignored the benefits of a large exposure to physical bullion, while Russia has spent a decade investing in hard money.

    In other words, while most central banks are making short-term moves, the Russian central bank has a multi-decade plan.

    Part of that plan involves moving away from use of the US dollar for trade and setting up bilateral trade agreements with friendly countries.

    Although, as Jim points out today, there is a next step.

    While the Russian ruble is highly unlikely to become a major global currency, creating a gold-backed currency might be the endgame.

    This is surprising.

    Russia has been anti-crypto for many years. In 2015, the country blocked websites talking about crypto, and then blocked crypto platforms in 2017.

    One Russian minister even said cryptocurrencies would never be legal in the country.

    Yet it appears Russia is interested in a form of cryptocurrency it can control.

    Read on for more.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    1 ‘’

    Russian Endgame Becomes Clear

    Jim Rickards, Strategist

    Jim Rickards

    There’s nothing new about the Russians’ accumulation of gold bullion in their reserve position.

    It began in a material way in 2009 when Russia had about 600 metric tonnes of gold.

    Today, Russia has 2,183 metric tonnes — a stunning 264% increase in less than 10 years.

    Russia is the sixth-largest gold power in the world after the US, Germany, the IMF, Italy and France.

    Russia’s gold hoard is over 25% of the US hoard, but Russia’s economy is only 8% the size of the US economy.

    This gives Russia a gold-to-GDP ratio over three times that of the US. While these developments are well-known, the question of why Russia is accumulating so much gold has never been answered.

    One reason is as a US dollar hedge.

    Russia is the second-largest energy producer in the world.

    Most of that energy is sold for US dollars.

    Russia can hedge potential US dollar inflation by buying gold.

    Another reason has to do with the avoidance of US sanctions.

    Gold is nondigital and does not move through electronic payments systems, so it is impossible for the US to freeze on interdict.

    Central bank considers gold-backed crypto

    Yet a deeper reason is that Russia has a long-term plan to subvert the US dollar’s role as the leading global reserve currency.

    The Russian ruble is not positioned to be a reserve currency, but a new cryptocurrency backed by gold would be a good candidate.

    The Central Bank of Russia will consider a new study that suggests just such a gold-backed cryptocurrency to settle balance of payments among willing participants.

    Elvira Nabiullina, head of the Central Bank of Russia, said recently her plan is to review a potential cryptocurrency:

    As for mutual settlements, we will consider, of course a proposal on a cryptocurrency that is tied to gold. But, in my opinion, it is more important to development settlements in national currencies.’

    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 US dollar’s days as the leading reserve currency are numbered. Got gold?

    All the best,

    Jim Rickards Signature

    Jim Rickards,
    Strategist, The Daily Reckoning Australia

    The post Russia shows its hand appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • The currency that replaces the euro

    Back in 1719 and 1720, a Scotsman named John Law was in charge of France’s Treasury. He faced a very particular set of problems.

    Too much government debt, not enough control over monetary policy and a sputtering economy.

    In other words, the very same problems that Italy faces today.

    Law’s solution to all three challenges also happens to be exactly the same solution that Italy’s government has in mind.

    According to a recent Bloomberg article, titled ‘Italy’s Scary Parallel Currency Threat’, the idea is already gaining political traction:

    ‘…The document invited the government to consider issuing small denomination bonds to help speed up its settling of debts. All parties, including the opposition Democratic Party and Forza Italia, voted in favor – the Democrats later disavowed the decision.

    Small denomination bonds? What exactly is going on?        

    Attempting alchemy, by decree

    Italy’s government is so broke it hasn’t been paying its bills, leaving suppliers and contractors in the private sector reeling — to the tune of more than 50 billion euros…

    And the politicians are wondering why their economy is doing so badly! The government doesn’t pay its bills!

    But that could soon change, with bills paid in something other than euros.

    Here’s how the scheme works, just as it did in John Law’s day…

    Instead of paying people in money now, the government promises to pay them money in the future. These promises to pay are called mini-bots, named after normal Italian government bonds.

    This is where the remarkable thing happens. The alchemy that made John Law famous…before he became infamous.

    The mini-bot promises to pay and circulate just like money in the economy, even though they’re really just loans to the government — promises by the government to pay the bearer euros in the future.

    How can a loan be confused for real money?

    That’s the secret.

    Because the government is unlikely to ever default on a promise to pay, that promise should be as good as money anyway. A guaranteed future payment is almost the same as a payment.

    This is especially true because the mini-bots can be used to pay taxes in the meantime. So instead of sending the government your euros to pay your tax, you just send the government its own IOUs. The two cancel out and your taxes are deemed paid. It’s a bit like a transferable tax credit.

    Usually, a loan to someone must be paid back to the lender who lent it. But because mini-bot loans are payable to the bearer, they can be exchanged between anyone. And thereby used to pay everyday bills between anyone.

    You could pay your accountant and newsletter subscription fees with them, for example. Then the accountant uses them to pay his taxes.

    The government has effectively performed alchemy. It has turned a loan to the government into money circulating in the economy. Promises to pay euros are converted into pseudo euros.

    Is it money? Is it debt?

    Impressive, right?

    But what’s the net effect of these mini-bots?

    They effectively increase the money supply in the economy. It’s a form of QE. A licence to print pseudo euros. In a way the Italian government can control, and the EU and ECB can’t.

    This theoretically stimulates the economy because the government’s suppliers finally get paid. And more money is sloshing around in the economy.

    It also allows the government to borrow more money and pay its bills. But will the debt be counted as such if it looks and acts like money? Depends who you ask.

    ECB President Mario Draghi said mini-bots ‘are either money — and then they’re illegal — or they’re debt, and then that stock [of debt] goes up.

    To the Italians, mini-bots sound like a solution to the three problems the government faces. Too much debt, control over monetary policy and economic stimulus. Mini-bots allow the government to borrow more in an indirect way, issue more money and stimulate the economy.

    And that’s just what happened back in John Law’s day. An epic boom in the economy and financial markets began. He became absurdly rich in the process.

    But there’s a reason we don’t allow governments to run monetary policy. The way I see it, politicians can’t be trusted with that much power. They always abuse it. And things go sour.

    In the end, this is what happened in John Law’s day, leading to the breakdown of the financial system and a crisis in the economy.

    How to replace the euro, one step at a time

    Europeans today are worried the Italian government will do the same, with the same result.

    But there’s a bigger risk that is dominating the financial headlines here in Europe.

    I believe that if the mini-bot system comes into being, it will create a second monetary system that operates alongside the euro.

    A monetary system that would allow Italy to leave the euro with minimal disruption to its economy. Because the secondary system it reverts to is up and running already.

    But what about all those euro-denominated debts the Italian government has? If Italy leaves the euro, would it pay up? Unlikely. Defaulting on the debt is one of the benefits of leaving the euro at all. So Italy will default. It would be the biggest default in history.

    But that won’t happen until Italy’s alternative mini-bot monetary system is up and running.

    It’s a bit like Britain securing trade agreements with other countries before leaving the EU.

    You need something in place to transition to if you want the transition to be smooth.

    This means you still have time to prepare for Italy’s crisis. But it’s drawing near.

    Until next time,

    Nick Hubble Signature

    Nick Hubble,
    For The Daily Reckoning Australia

    The post The currency that replaces the euro appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • The Perfect Storm

    What are the three elements of the perfect political and market storm I see coming together later this year?

    The first is an effort by the Democratic House of Representatives to impeach President Trump.

    The second is the socialist-progressive tilt in the 2020 presidential election field.

    The third is the fallout from the Mueller report and the Russia collusion hoax — what I and others called ‘Spygate’.

    These components are independent of each other but are at high risk of convergence in the coming months. 

    Let’s look more closely at the individual elements of impeachment, electoral chaos and Spygate that comprise this new storm with no name.

    Impeachment for Trump?

    The first storm is impeachment.

    Impeachment of a president by the House of Representatives is just the first step in removing a president from office.

    The second step is a trial in the Senate, requiring a two-thirds majority (67 votes) to remove the president.

    Two presidents have been impeached, but neither was removed. Nixon resigned before he could be impeached.

    If the House impeaches Trump, the outcome will be the same.

    The Senate is firmly under Republican control (53 votes) and there’s no way Democrats can get 20 Republicans to defect in order to get the 67 votes needed.

    So House impeachment proceedings are just for show.

    But it can be a very damaging show and create huge uncertainty for markets.

    There are powerful progressive forces in Congress and among top Democratic donors who are fanatical about impeaching Trump and will not be satisfied with anything less.

    One poll shows that 75% of Democratic voters favour impeachment (including almost 100% of the activist progressive base).

    Speaker of the House Nancy Pelosi and House Majority Leader Steny Hoyer have both poured cold water on impeachment talk.

    They feel it’s a distraction from Democratic efforts to enact their legislative agenda.

    But some of the party’s biggest private money donors, including Tom Steyer, are also demanding impeachment.

    If Steyer does not get an impeachment process, he looks to support primary challenges to sitting Democrats who don’t join the impeachment effort.

    This could jeopardise Pelosi’s speakership in a new Congress. So Pelosi could come under heavy pressure to go along with impeachment.

    The final outcome is irrelevant; what matters is the process itself.

    Impeachment fever is not likely to last long into 2020, because at that point the election will not be far away.

    Voters will turn their backs on impeachment and insist that disputes about Donald Trump be settled at the ballot box.

    That’s why you can expect impeachment fever to come to a head by late 2019. And that will create a lot of uncertainty for markets.

    Trump to win in 2020

    The second storm is the 2020 election.

    Trump is on track to win re-election in 2020.

    My models estimate his chance of victory is 63% today and it will get higher as Election Day approaches.

    The only occurrence that will derail Trump is a recession.

    The odds of a recession before the 2020 election are below 40% in my view and will get smaller with time.

    Meanwhile, Trump will keep up the pressure on the Fed not to raise interest rates and will ensure that the US-China trade war comes in for a soft landing.

    This may sound like a rosy scenario for the economy.

    But it’s not so rosy for the Democrats.

    Every piece of good economic news will cause Democrats to dial up their political hit jobs on Trump. Each one will try to outdo the next.

    There are now 24 declared candidates for the 2020 Democratic presidential nomination.

    That’s more than the Democrats have ever had before. Currently Joe Biden and Bernie Sanders are out in front.

    Biden is considered the most moderate of the candidates.

    But I don’t expect Joe Biden to stay in front for long, and I don’t believe he’ll win the nomination.

    The only way for a Democrat to stay in the race is to stake out the most extreme progressive positions.

    This applies to reparations for slavery, free healthcare, free childcare, free tuition, higher taxes, more regulation and the Green New Deal.

    If Biden does fall away, then the choices are back to Sanders, Elizabeth Warren or maybe Kamala Harris. But one is more radical than the next.

    So, you could have a shock effect where all of a sudden it looks like the Democratic nominee is going to be a real socialist. And that would rattle markets.

    This toxic combination of infighting among candidates and bitter partisanship aimed at Trump will be another source of market uncertainty and volatility until Election Day in 2020 and perhaps beyond.

    But the biggest threat is…

    The third storm is the most dangerous and unpredictable storm of all: Spygate.

    It involves accountability for those involved in an attempted coup d’état aimed at President Trump.

    The Mueller report lays to rest any allegations of collusion, conspiracy or obstruction of justice involving Trump and the Russians.

    There is simply no evidence to support the collusion and conspiracy theories, and insufficient evidence to support an obstruction theory.

    The case against Trump is closed.

    Now Trump moves from defence to offence, and the real investigation begins.

    Who authorised a counterintelligence investigation of the Trump campaign to begin with?

    Did surveillance of the Trump campaign by the US intelligence community (CIA, NSA and FBI) begin before search warrants were obtained? On what basis? Was this surveillance legal or illegal?

    These are just a few of the many questions that will be investigated and answered in the coming months.

    These criminal referrals will be taken seriously by Attorney General William Barr along with other criminal referrals coming from Congress.

    Barr will take a hard look at possible criminal acts by John Brennan (former CIA director), James Comey (former FBI director) and James Clapper (former director of national intelligence), among many others.

    At the same time, Lindsey Graham, a Republican senator from South Carolina, will hold hearings in the Senate Judiciary Committee about the origins of spying on the Trump campaign and lies to the FISA court.

    These may be the most important hearings of their kind since Watergate.

    Trump will be running for re-election against this backdrop of revelations of wrongdoing by his political opponents in the last election.

    Actual indictments and arrests of former FBI or CIA officials will cause immense political turmoil. Such charges may be fully justified (and needed to restore credibility).

    They will certainly energise the Trump base.

    But they are just as likely to infuriate the Democratic base. Cries of ‘revenge’ and ‘witch hunt’ will be coming from the Democrats this time, instead of Republicans. Markets will be caught in the crossfire.

    How do these three storms — impeachment, the 2020 election and Spygate — converge to create the perfect storm?

    By November 2019, the impeachment process should be well underway in the form of targeted House hearings.

    The 2020 Democratic debates (starting in June 2019) will be red-hot. Trump’s counterattacks on the FBI and CIA should be reaching a fever pitch based on real revelations and actual indictments.

    The impeachment process and Trump’s revenge represent diametrically opposing views of what happened in 2016.

    The Democrats will continue to call Trump ‘unfit for office’. Trump will continue to complain that the Obama administration and the deep state conspired to derail and delegitimise him.

    The 2020 candidates will have to take a stand (even though they may prefer to discuss policy issues). There will be nowhere to hide.

    The bitterness, rancour and leaking will be out of control.

    Have a life vest handy?

    Any one of these storms would create enough uncertainty for investors to sell stocks, raise cash and move to the sidelines.

    The combination of all three will make them run for the hills. That’s my warning to investors.

    The next six months will present unprecedented challenges for investors.

    Markets will have to wrestle with fights over impeachment, election attacks and Spygate.

    Trump will be trying to improve his odds with Fed appointments and an end to the trade wars. Democrats will be trying to derail Trump with investigations, accusations and leaks.

    Some of this will be normal political crossfire, but some of it will be deadly serious, including arrests of former senior government officials and revelations of an attempted coup aimed at the president.

    A perfect storm with no name is coming.

    Investors may want to consider gold and cash. And make sure they have a life jacket handy.

    All the best,

    Jim Rickards Signature

    Jim Rickards,
    Strategist, The Daily Reckoning Australia

    The post The Perfect Storm appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • The worst financial decision in history

    Today is a journey back in time.

    To a time when teens wore their pants below their buttocks.

    When you could fill up your Commodore or Falcon for less than 74 cents a litre.[1]

    When roughly one third of adult Australians had a mobile phone…[2]

    A moment in history when connecting to the internet sounded like ET phoning home.

    The digital age was here. The new economic age was coming.

    And we made sure we ditched all old assets to ready ourselves for the future.

    Swapping hard money for paper money

    In November 1997, then Treasurer Peter Costello announced to the Australian public that he was about to sell two thirds of our gold. He told us gold ‘no longer plays a significant role in the international financial system.

    In one day, our government sold 167 tonnes of the yellow metal, netting about $400 per ounce.

    Overall, the sale scored Australia about $2.4 billion, which was used to pay off some debts.[3]

    The move effectively suppressed the gold price. Hundreds of tonnes of gold for sale drove the price down over the next few months.

    Incidentally, it seems China decided to buy up our sloppy seconds. It’s rumoured the Chinese picked up some of the gold we so carelessly sold to the lowest bidder.[4]

    The thing is, we weren’t the only ones selling our gold.

    A new industrial age was taking over the US.

    Tech stocks were hot. Precious metals were not. The euro was confirmed and would start circulating in a few more years.

    Plus, there was Greenspan.

    A belief coursed through the monetary system that US Federal Reserve Chairman Alan Greenspan, along with the US dollar, was the backbone of modern money practices.

    So much so that The New York Times ran a piece titled ‘Who Needs Gold When We Have Greenspan?’:

    Is gold on its way to becoming just another commodity? The people who run the world’s financial system are doing their best to secure that fate for the metal that once was viewed as the only “real” money.

    ‘…The argument against retaining gold is that its day is past. Once it was useful as a hedge against inflation that would hold its value when paper currencies did not. Now financial markets have their own sophisticated ways, using exotic derivative securities, to hedge against inflation.[5]

    Globally, central banks were dumping gold.

    Germany, France, Austria, Sweden and Argentina all sold their gold into the late 90s.[6]

    Switzerland held a contentious referendum about selling its gold. It went ahead, and some 1,300 tonnes of its total 2,590-tonne gold hoard were dumped.

    Belgium, Canada and the Netherlands sold a collective 1,590 tonnes in the late 90s. By 2002, Canada didn’t have an ounce of gold in its vaults.

    The future was here, and gold was nothing more than an attachment to old-world money.

    And then came the most famous of all gold sales…

    Brown’s Bottom

    This May marked 20 years since Brown’s Bottom.

    A time when the UK decided to sell 401 tonnes of its total 715-tonne gold stash.

    History now considers it the worst investment decision the UK ever made…

    On 7 May 1999, the UK Chancellor of the Exchequer, Gordon Brown, announced that he would sell half of the UK’s gold.

    Why on Earth would the world’s gold centre opt to sell more than half of its supply of the precious metal?

    The official line is that Brown sold the gold to move into securities that would actually pay interest to the UK’s Treasury.

    Gold, which pays no yearly return and costs money to store, was a financial drain on the country at the time.

    The yellow metal was nothing more than a legacy asset from a bygone era.

    Another argument put forward is that the new millennium was approaching, and there was excitement about the future. As stated earlier, a new currency — the euro — would begin circulating in a little over a year.

    Plus, there was Greenspan at the top of the Fed — and an unwavering belief that Greenspan could do no wrong.

    There are also rumours that Brown sold all the gold to bail out the UK banks.

    There is a persistent whisper that a major US bank was short selling gold, and, had someone tried to redeem it, it would technically make the bank insolvent.[7]

    As the tale goes, Brown was faced with either a global collapse in the banking system, or selling the gold to drive the price down just enough to allow this major bank to buy back the gold at lower prices.

    Whether the rumour is true or not doesn’t matter.

    The point is, while Brown’s decision to sell some 401 tonnes of gold was ill-fated, he wasn’t the only one.

    By the time Brown sold more than half of his country’s gold, most of the other central banks had already done it.

    The difference? Brown just happened to be selling into the bottom of the gold price.

    No Greenspan and no gold

    Two decades later, there is no Greenspan running the Fed.

    The US dollar gold price per ounce is now four and a half times higher than it was in the late 90s.

    Western central banks — in their rush to dump assets and support paper money — essentially cost their countries billions in foreign reserve assets.

    Only a handful of central banks in that time have been increasing their gold stores.

    The big buyers of gold now are the central banks in India, Russia, Poland and China.

    These central banks are paying billions of dollars to secure gold, despite the perceived high prices.

    That tells us they understand the importance of the yellow metal.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The post The worst financial decision in history appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

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