| December 15, 2014 | Archives | Unsubscribe | | | | |  | | | The Mick Jagger Theory of Economics | | | - From cab rides and hot dog stands… to the deepest, most secretive intelligence agencies in the world of finance...
- The pall of an epic global market meltdown hangs over our holiday cheer…
- Then Jim Rickards discusses the "Mick Jagger theory of economics" and the impact of the latest currency war battle phase on your portfolio...
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| | | | | | | You won't believe what we caught these five ordinary people doing on camera. | | | | | | | | | Baltimore, Maryland
December 15, 2014  Dear Reader, "So... they'd broadcast a job for some far-off place, like the Inner Harbor, and I'd respond right away." We hosted the annual Agora holiday party on Friday night at the Maryland Club in Baltimore, less than half a block from our offices at 808 St. Paul Street. At the party, Jim Rickards was recounting the kind of story you only hear, well, at cocktail parties. He'd been a cab driver in Baltimore while he was studying at Johns Hopkins. Before LTCM, before the CIA. Apparently, once the dispatcher put out a call, you couldn't hear the other cabbies respond. "As soon as I heard the call," Jim continued, "I was on it. I'd fly at 80-90 mph to get there. I'd do that most of the night, talking with passengers to earn tips." That was Jim's main source of income at the time. | "[Rickards had] been a cab driver in Baltimore while he was studying at Johns Hopkins." | Then, he'd finish the night late by stopping at McDonald's for a Big Mac... and go home to spend the rest of the night studying Turkish war history. He continued with a few more anecdotes of his time in Baltimore… setting up a hot dog stand at lacrosse games… another time he refused to join a supermarket union. Friday was an ominous time to hold a holiday party. If you saw "Warning: Global Elite Prepares for Market Collapse" over the weekend, you'll know our concerns. In a follow-up media alert to its December issue, the Bank for International Settlements (BIS) warns, "The financial market scene was far from uneventful during recent months." Claudio Boro, the update's author, writes, "Volatility spiked in mid-October. Stock prices fell sharply and credit spreads soared. U.S. Treasuries were exceptionally volatile, at least intraday -- even more than at the height of the Lehman crisis." Boro then seeks to explain: "To my mind, these events underline the fragility -- dare I say growing fragility? -- hidden beneath the markets' buoyancy. Small pieces of news can generate outsized effects. This, in turn, can amplify mood swings. And it would be imprudent to ignore that markets did not fully stabilize by themselves.
"Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalization in light of evolving macroeconomic conditions.
"Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: The markets' buoyancy hinges on central banks' every word and deed." [Emphasis added.] "Don't think for a moment central bankers know what they are doing," Jim Rickards himself warns during an interview we posted to The Daily Reckoning website over the weekend. "They don't. And that's my own view, but I've heard that recently from a couple central bankers. I recently had spent some time with one member of the FOMC, the Federal Open Market Committee, and another member of the Monetary Policy Committee of the Bank of England, which is the equivalent of their FOMC. Both policymakers, both central bankers.
"And they said the same thing, 'We don't know what we're doing. This is a massive experiment. We've never done this before. We try something. If it works, maybe we do a little more; if it doesn't work, we pull it away and we'll try something else.' And the evidence of this -- again, I've heard this firsthand, and it's my view -- but the evidence for this is that there have been 15 separate fed policies in the last five years.
"If you think about it, they started with forward guidance, which was, 'We will keep rates low for an extended period of time.' And then they said, 'Oh, extended means all the way to 2013.' And then they said, 'All the way to 2014.' And they were kind of getting around to 'All the way to 2015,' and they said, 'Wait a second. The dates don't work. Let's use some numeric concepts.'
"So they started nominal GDP targeting, where they said, 'We have this threshold of 2.5% inflation,' but not based on actual inflation, based on projected inflation, as projected by the Fed, which means it could be whatever they want it. And then 6.5% unemployment, but when we got down to 6.5%, they said, 'Oh, just kidding. We're not gonna apply that.'
"They had currency wars. They had Operation Twist, QE1, QE2, QE3 -- except QE3 came in two flavors, $45 billion a month and $85 billion a month. Except now they're tapering, but the taper isn't even the first taper, because at the end of QE1, that was 100% taper, and at the end of QE2, that was 100% taper, so we have two data points to say tapering doesn't work. It fails, and I expect this will fail as well." We invite you to see the rest of Jim's interview here:  Mr. Rickards is, as you probably already know, the latest member of our forecasting team. His credentials are impeccable… and precise. Jim's been at the epicenter of the financial system for over 40 years. First as a powerhouse attorney, advising and sitting on the management teams of some of Wall Street's largest and most effective hedge funds. Then later as an adviser to the Department of Defense and the U.S. intelligence community on the threat posed by financial instability and economic crises around the world. His most recent "call to action" prompted him to return from a conference in Australia to attend a high-level meeting on dismantling the financial infrastructure built to sustain ISIS in the Middle East. Indeed, he's come a long way from racing to grab cab fares in the Inner Harbor in Baltimore. We're glad to have him aboard. And… Very soon, we will launch two new trading services that will help Jim achieve his goal in joining our team -- to help who he calls "everyday Americans" not only understand how markets really work but also protect themselves when crises arise… and make profitable trades when volatility strikes. The first of his two new services will "harness the power of the CIA's system for solving the world's most complex problems… in an effort to predict the precise points to strike in the stock market for potential fortunes." The second will show you how to "leverage the seesawing currency movements for quick gains in the stock market." As far as I know, there are no services like these in the entire publishing industry. That's because only Agora Financial has full access to Jim. As a reader of The Daily Reckoning, you'll be getting a special invitation to be first in line to receive Jim's two latest powerful investing tools later today. Watch your inbox. Cheers, Addison Wiggin The Daily Reckoning P.S. In the meantime, please review Jim's most recent report. In it, he details how six of the world's most powerful financial intelligence agencies are flashing warning signs of an imminent market meltdown. "What's coming," Jim has told us on a number of occasions, "will make the LTCM collapse of the late '90s… the tech wreck of the early 2000s… and the housing bubble meltdown of 2008… look like child's play." We urge you to read Jim's report and consider the solutions he's proposing so you and your family can be prepared. More from Jim on how central bank manipulation has catapulted the currency wars into a new phase in 2014, below. | | | | | | | | | The middle class is dropping further behind in the "wealth race." And it isn't because the 1% is smarter or luckier... They simply invest differently. | | | | | | | | | The Daily Reckoning Presents... Jim Rickards stops by with an update on the currency war thesis he first launched in 2010.
****************************** | | | | Same Currency War, New Battle Phase | | | | by Jim Rickards | | |  The current global currency war started in 2010. My book, Currency Wars, came out a little bit after that. One of the points that I made in the book is that the world is not always in a currency war. But when we are, they can last for a very long time. They can last for five, 10 or 15 years, sometimes longer. And so it's really not a surprise that here we are in 2014 talking about currency wars because it's the same on that's been going on. A lot of what you read or see on the TV is after some policy move by, let's say, Japan to weaken the yen. And reporters will say: "Hey, there's a currency war going on," or "There's a new currency war." I roll my eyes a little bit and go: "No, this is the same one, the same currency war; it's just a new phase or new battle." So yes, it is going on. And it does have a lot of explanatory power. It's one of the most important things going on in economics today. I think a year from now, I'll be writing to you and we'll still be talking about it. What is a currency war, in a nutshell? They typically happen when there's not enough growth in the world to go around for all the debt obligations. In other words, when growth is too low relative to debt burdens. | "No, this is the same one, the same currency war; it's just a new phase or new battle." | When there's enough growth to go around does the United States really care if some country somewhere around the world tries to cheapen its exchange rate a little bit to encourage a little foreign investment? Not really. It's almost too small to bother with, in the scheme of things. But when there's not enough growth to go around, all of a sudden it's like a bunch of starving people fighting over the crumbs. Now everybody cares about currency cross rates because it's a way to either import inflation in the form of higher import prices. Remember, when you lower your exchange rate, people in your country have to pay more for imported goods -- and the United States is a net importer. We buy more from overseas than we sell. The immediate impact of a cheaper dollar is to increase our costs -- importing inflation -- which is exactly what the Fed wants. How many times have you heard the Fed say they want 2% inflation? They analyze it over and over and over. We don't have 2% inflation right now. It's not even close. But they need to get there. One of the ways they do it is to cheapen the dollar. The effect, of course, is it promotes exports. In the case of the United States, something like Boeing Aircraft, which are big ticket items, are competing with AirBus in France or Embraer in Brazil or Bombardier in Canada. There are a few aircraft manufacturers around the world. Not that many, but we compete with them. And so a cheaper dollar, in theory, helps Boeing sell a few more planes. But from the US point of view, that could be jobs and growth in the US. So there are perceived to be benefits. Now, a lot of those benefits are illusory. But it's very, very appealing to politicians because he or she can stand up and give the speech that I just recited. Namely, "Hey, it's good to have a cheap dollar because we promote jobs." But the reality is, it doesn't promote jobs. It just promotes inflation.  You're actually better off with a strong currency because that attracts capital from overseas. People want to invest in the strong currency area, and it's that investment and those capital inflows that actually creates the jobs. So as usual, the politicians and the central bankers have it completely wrong. But they're not listening to me or necessarily reading my newsletter, Strategic Intelligence. They think this is a cheap fix. All around the world you're seeing countries cheapen their currencies. They do this basically by cutting interest rates or intervening in markets. They do it ostensibly to help growth. But it doesn't really help growth, it just causes inflation. Think of a bunch of starving people fighting over a few crumbs. That's what happens when there's too much debt in the world and not enough growth. That's what a currency war is. It's going on now. It will continue to go on. It has enormous explanatory power. You're trying to figure out growth… or interest rate policy… or you're trying to figure out what sectors to invest in… are we going to get inflation or deflation; all those big questions that you wrestle with. You can get some clarity and visibility on all of them just by understanding this dynamic of the currency wars. This is the Mick Jagger theory of economics. Mick Jagger and the Rolling Stones had a song called "You Can't Always Get What you Want." And the point is, the Fed wants inflation, but that doesn't mean they automatically get it because there are other forces at work. You can understand Fed policy as an effort to cheapen the currency and get inflation. But the dollar is very strong. It's the strongest it's been in about eight years. A lot of people think this is the all-time high for the dollar. It's not. | | | | | | |
| Warning! Disturbing Pictures Below Take a look at these rats… They were fed a particular type of food that has been banned in 26 countries. But this dangerous food is legal in the U.S. | | | | | | | | The all-time high for the dollar was in the early '80s, in the early part of the Reagan administration. You go back and look at the dollar index in mid-1980s -- '84, '85, right in there -- that was the all-time high for the dollar. From '83 to '86 was a pretty good economic period. GDP, in real terms, grew 16% in three years. That's over 5% a year -- much stronger growth than we're experiencing today. So that's a good example of the point I made above, that a strong dollar can actually lead to strong growth because you're growing with investment and productivity gain. It's not just cheap goods and inflation. Having said that, yes, the dollar is the strongest it's been in about seven years, right now. And the reason for that is very simple. Markets expect US rates to go up in 2015. They expect our trading partners to continue to print money; namely the Japanese and the Europeans. So, the Japanese are printing money. They're going to run out of ink, they're printing so much money. The Europeans, not so much but the expectation is there. Everyone's expecting Mario Draghi to engage in some kind of quantitative easing. I don't think he's actually going to do very much -- mainly because of the German influence. That's my view and my analysis of how the ECB works. But so what? The market expects him to. And the market expects US interest rates to go up in 2015.  I don't think that's going to happen, either. My view of how things are going to play out is the opposite of what the market expects. But let's talk about the market because that's where you trade and invest, and it has the last word. Right now, markets are expecting US rates to go up next year, and for Europe and Japan to keep rates low -- even negative -- and to print money. If you're an investor, you're probably thinking: 'Well, I'd rather invest in the place that is going to give me a return. If I invest in Japan or Europe, I might get a negative return because the currency is going down, the rates are low -- maybe even negative. If I invest in the US, I'll get a positive return because the Fed's going to raise rates and give me something on my money. Therefore, investors are flocking to the United States and that's why the dollar is strong. People always look at cross rates, like the US-euro rate or the US-yen rate or whatever, in terms of trade surplus and deficit, and things like purchasing power. Those are interesting concepts but those are not what determine exchange rates. Cross rates are determined by capital flows, pure and simple. Now, capital flows have their own dynamic, but right now capital is flowing into the United States, away from these other areas, partly because the expectation of stronger growth and stronger rates. That's why the dollar is stronger. That explains what's going on. Now, the question is, 'Okay, got it, but how much of that is gonna play out?' In other words, will US rates actually go up in 2015? Will Draghi actually do the quantitative easing people expect? If the answer to those questions is no, then for other reasons you're not going to see rate increases and you're not going to see Draghi do very much, then this dollar strength and euro weakness could turn on a dime. Regards, Jim Rickards for The Daily Reckoning Ed. note: A rapid turnaround in the whole dollar-euro exchange rate could be very unsettling for traders already looking for reasons to hit the "sell" button. And just one of the reasons six of the world's most powerful financial intelligence agencies are getting nervous. For ways to prepare, please read this report. | | | | | | | | |  James G. Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestseller Currency Wars, published in 2011. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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