Requiesce in Pace

Cemetery

This post Requiesce in Pace appeared first on Daily Reckoning.

It is Memorial Day weekend… when we pause to honor the nation’s war dead.

Most Americans will not, of course.

It is merely a chance to lie flat on a beach… to munch frankfurters… to dream the dreams of approaching summer.

We’ll be joining them of course.

We will not be planting tiny American flags atop forgotten graves this weekend.

We will not be bugling taps.

It is unlikely we will thank a veteran for his service — not because we lack respect — but because we scarcely know any.

But we remember how we were brought up short one day… strolling the American military cemetery above Omaha Beach.

The rows and rows and rows of bleach-white crosses — and an occasional Star of David — seeming to stretch from horizon to horizon.

A haunting poem from the First World War came to us as we wandered among the dead… and listened for their ghostly counsel.

“In Flanders Fields,” the poem was called.

From which:

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place, and in the sky
The larks, still bravely singing, fly,

Scarce heard amid the guns below.
We are the Dead; short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

The American military cemetery above Omaha Beach

What fetched us was not so much the gravity of those distant events — but the soul-numbing waste of it all.

What great things may have awaited that 21-year-old second lieutenant if a German bullet hadn’t cut him down on June 6, 1944?

What did life have in store for that sergeant of the 2nd Ranger Battalion… who never made it up Pointe du Hoc?

What about this young paratrooper of the 101st Airborne Division, whose bones lie beneath a shady tree?

What might he have amounted to?

Maybe a lot.

Maybe nothing at all.

But he had a life to live. And every right to live it.

Let us also not neglect the pulverized and unidentified dead, known only to their creator.

What about the futures they never had?

“For of all sad words of tongue or pen,” lamented poet John Greenleaf Whittier, “the saddest are these:

“It might have been.”

And so before we embark on our Memorial Day weekend merriments…

Let us lower our heads in mournful reflection of America’s martial departed… and of what might have been.

Requiescant in pace.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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…read more

The “Axis of Gold” Will Drive Gold Higher by the End of 2018

Chart

This post The “Axis of Gold” Will Drive Gold Higher by the End of 2018 appeared first on Daily Reckoning.

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

This is the Axis of Gold.

This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.

Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.

Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and non-traceable (it is an element, atomic number 79), so its origin cannot be ascertained.

We have a lot of data to support the claim that the Axis of Gold exists and is gaining strength.

We know that for example, Russia has tripled its gold reserves in the last ten years. It’s gone from about 600 tons to over 1800 tons of physical gold, and is moving very quickly towards 2,000 tons. That’s an enormous amount of gold.

China is also amassing physical gold at an astounding rate. Like Russia, it has tripled its gold reserves, officially from 1,600 tons to 1,800 tons.

But we have very good reason to believe China actually has a lot more gold than that.

China might actually own up to 4,000 tons of physical gold. We don’t know the exact number because China is highly secretive about its gold acquisitions. But that’s a reasonable estimate. China is also the world’s largest gold producer with mining output of about 450 tons per year.

Iran also has an enormous amount of gold. Iran received billions of dollars in gold from the Obama administration as bribes to join in the now discredited nuclear deal (the “JCPOA” or Joint Comprehensive Plan of Action) to limit Iran’s nuclear weapons program.

Iran has also received gold imported from Europe via Turkey, but the exact amount is unknown.

We don’t have any insight into how much it has because it’s also highly nontransparent. But in the first quarter of 2018, Iranian gold bar and coin purchases more than tripled.

Turkey is also acquiring enormous amounts of gold, which should not be surprising given Turkish president Recep Erdogan’s recent comments questioning the role of the dollar in global trade.

The Turkish central bank has almost doubled its gold holdings since last May, according to the World Gold Council. And it was the second largest buyer of gold among central banks for the first quarter of 2018.

So that’s the Axis of Gold. Again, evidence for this Axis of Gold is overwhelming.

I have contacts in the national security industry community who have, in their own roundabout way, been able to confirm that to me, so it’s very clear that’s what’s happening.

This is the type of information you don’t see …read more

The “Axis of Gold” Just Got Stronger

This post The “Axis of Gold” Just Got Stronger appeared first on Daily Reckoning.

As you probably know by now, President Trump backed out of the nuclear deal with Iran and is re-imposing harsh sanctions.

And just this morning, Trump announced that he’s canceling the much-anticipated nuclear summit with North Korean leader Kim Jong Un because of Kim’s recent belligerent comments.

What does that mean, aside from the added geopolitical risk to markets?

As you’re about to see, you can now expect what I call the “Axis of Gold” to get even stronger. And it has potential to accelerate the demise of the dollar-based international system.

The Axis of Gold includes Russia, China, Iran and Turkey. I would also include North Korea in that list, although as a junior member.

These countries are forming a trading and financial network revolving around gold and are acquiring massive amounts of physical gold to support it. They are steadily moving toward a gold-based balance of payment system.

Why is this happening?

Well, if you’re on the receiving end of American sanctions like Russia, Iran or North Korea, you want a way to work around these sanctions. And gold is a powerful alternative.

Let’s first consider North Korea.

With the summit called off, there’s every reason to expect that North Korea will only intensify its nuclear program.

But how can North Korea obtain the foreign nuclear and missile technology it requires to advance its program?

By using gold.

If a rogue state wants to acquire ballistic missile components or equipment to enrich uranium, it can’t buy them through SWIFT, the international payment system. But it can use gold.

Gold can’t be hacked or traced. Unlike digital money in bank accounts, it can’t be frozen. You just put it on a plane or ship and send it to its destination.

And new U.S. sanctions will once again lock Iran outside of the international payment system. But Iran does a lot of business with Russia and China. That’s where gold comes in.

Let’s break down how a triangle trade involving Iran, Russia and China works using gold…

Russia is building a nuclear power plant in Iran. At the same time, China is building an energy pipeline for Russia.

Meanwhile, Iran sells a lot of oil to China. But Iran might not want too many yuan, because there’s a limited global market for them.

So Iran owes Russia money for the power plant, Russia owes China for the pipeline and China owes Iran money for the oil.

How does gold fit into this dynamic?

Gold allows the three parties to settle the multiple monetary transactions involved in this triangle trade.

The three parties can tabulate who owes what to whom, net it out and settle the transactions in gold. This is basically how a clearinghouse works.

When it’s all added up, for example, if it turns out that China owes Iran, China can then ship gold to Iran to square the account.

Now these three partners have a working payment system to settle trade. They’re not using the dollar payment system, or the SWIFT payment system or …read more

The Oil Story Nobody Is Telling…

Venezuela oil

Keep in mind that Venezuela is an important global oil producer. The world needs this country to keep exporting oil.

In 2016, Venezuela’s oil production was nearly 2.4 million barrels per day. Since then, production has collapsed by a shocking 1 million barrels per day and conditions keep worsening.

Analysts believe that by the end of this year, Venezuela could be down to only 1 million barrels per day of production which would take yet another 500,000 barrels per day of supply off the market.

This is a major global oil producer that is disintegrating at an incredibly rapid pace…

From Oil Crash To Oil Spike – How Quickly Things Change

In 2014, oil prices were in excess of $100 per barrel. By early 2016, we saw oil trade as low as $27 per barrel.

Is it possible that in 2018 — just another 24 months later — we could get back to $100 per barrel?

My answer is yes.

And that it could go even higher if Iranian production is hit hard by the sanctions freshly imposed by President Trump.

With Venezuelan production continuing to fall and Iranian production likely doing the same, realistically, the only man who could keep something of a lid on oil prices is the Saudi Crown Prince Mohammed bin Salman.

Saudi production is currently at 10 million barrels per day. And with the highest level that we have seen from the Saudis at 10.5 million barrels per day, hypothetically speaking, Mohammed bin Salman could probably cover what Venezuela is likely to lose over the remainder of the year.

That would be if he wants to…

Remember this man has a vision for a new Saudi Arabia by 2030 — a country not dependent on oil export revenues. Think about how ambitious that plan is, the man wants to create an entirely new economy in just over a decade.

To have any chance of doing that the Crown Prince needs to milk the Saudi oil cash cow for every penny right now.

Sometime in the next 18 months Saudi Arabia is going to sell a piece of the national oil company (Saudi Aramco) to the public. The Crown Prince only gets one chance to do that and high oil prices would maximize the value received.

The ball is in his court. We will have to wait to see what he does with it, but I think we can all guess what his decision will be…

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1

This post The Oil Story Nobody Is Telling… appeared first on Daily Reckoning.

Just over one year ago, with oil prices hitting $43 and falling fast, I suggested that the market was making a big mistake.

My opinion at the time was that oil prices should have been rising, not falling.

I based that opinion on the fact that global oil inventory levels had been steadily declining for months and that the amount of oil being produced daily was already below the amount of oil demanded.

The global oil fundamentals were tightening which was a point that the market had completely missed (as evidenced by the falling oil price).

What had happened was that traders were focused on the wrong data point. The market had been misled by stubbornly high U.S. oil inventory data numbers that I believed were being temporarily caused by excessive Saudi oil exports.

Long story short, those excessive Saudi oil exports soon stopped, U.S. oil inventories fell quickly and now oil prices are up massively — almost 70% in less than 12 months…

So What Should We Be Looking At Today?

Today, oil investors are rightfully focused on the chaos that is taking place on multiple fronts in the Middle East and on how sanctions will impact Iran’s production.

However, something even bigger is happening closer to home…

Production from a very significant oil producing nation is imploding and the situation is only getting worse.

On Sunday, Venezuela’s Nicolas Maduro secured himself another six years as president in what was by all accounts a “sham” election.

That is terrible news for the people of Venezuela and for global oil supply.

Under Maduro, Venezuela is in the midst of a full scale humanitarian crisis. The country is faced with hyperinflation at an annualized rate of 15,000 percent, has just had a $70 billion bond default, can’t import basic medical necessities and currently has the military in charge of dispensing food.1

All of this despite Venezuela sitting on the world’s largest reserves of crude oil…

However, the Venezuelan oil industry is also in shambles. It is lacking tools, machines and money. With the country literally falling apart, the oil majors have fled. Production is in complete freefall and the situation is only going to get worse with the U.S. imposing sanctions on the country as a result of the Maduro sham election results.

Keep in mind that Venezuela is an important global oil producer. The world needs this country to keep exporting oil.

In 2016, Venezuela’s oil production was nearly 2.4 million barrels per day. Since then, production has collapsed by a shocking 1 million barrels per day and conditions keep worsening.

Analysts believe that by the end of this year, Venezuela could be down to only 1 million barrels per day of production which would take yet another 500,000 barrels per day of supply off the market.

This is a major global oil producer that is disintegrating at an incredibly rapid pace…

From Oil Crash To Oil Spike – How Quickly Things Change

In 2014, oil prices were in excess of $100 …read more

Creative Destruction: An Alternate View

This post Creative Destruction: An Alternate View appeared first on Daily Reckoning.

“Universal basic income (UBI) is so silly on its face,” begins reader Roger A, “even a middle school kid would at least know to ask, “What’s the catch?””

Yesterday’s reckoning on universal basic income drew a heavy mail… and we thank you for your participation.

Ron B said:

There are a lot of jobs that would not be done if UBI is adopted, and there will be serious problems eventually… UBI is a big, big, big mistake!

Adds Maria R:

When I first heard the term I thought it meant the lowest annual wage salary to survive on. But having read the more about it, I realize that it is just another incentive to keep people on welfare.

These comments were typical.

But not every reader stood in harsh opposition.

Dave S, for example:

Though I don’t believe UBI ‘s time has come it will in the future as automation technologies hit an inflection point…  The rapid shift in technology will leave many behind with incompatible skills so UBI will really be a social program to keep the barbarians away from the gates.

Meantime, George B — a UBI booster — gave us a good hard slating:

Your diatribe on UBI makes many unfounded assumptions, utilizes examples that arrive at false conclusions and is short of actual facts. Under Nixon the United States was a hair’s breath [sic] from UBI. It was derailed by one of his advisors who was an Ayn Rand adherent and presented him with some very poor quality evidence later debunked.

The UBI was supported by 1,200 economists, many of them world renowned… There is abundant newer research all disproving the “people will become lazy if given free money” canard that you promulgate. If you are open minded than [sic] actually read someone who has looked at the research and covers it…

We might remind George that Finland recently had a go at UBI — and dropped it quick as a wink.

But let us recall the reason universal basic income is receiving any hearing at all:

Automation.

Some estimate artificial intelligence (AI) and robotics will replace half of all jobs in 20 years.

These are not limited to trucking, taxi-driving or manufacturing and construction.

To these we must add white-collar jobs in law, finance, medicine, accounting, etc.

What will become of the attorney-at-law, we wonder — and the human pilot of the ambulance he chases?

We are unconvinced automation will proceed at the projected gallop.

But let us suspend all assumption for the moment… and drive on to the inevitable question:

What happens when robots are brainy enough to perform all human labor?

Economist Joseph Schumpeter (1883–1950) put the term “creative destruction” into wide circulation.

For Schumpeter, capitalism was the “perennial gale” of creative destruction.

Capitalism blows away the old and inefficient. In comes the new and improved.

Because of capitalism’s perennial gale… today’s plebe lives better than yesteryear’s king.

Innovation and technology have always allowed humans to mine fresh sources of productive employment.

The 19th century farmer became the 20th century factory …read more

What Happens When Oil Hits $100?

Zach Scheidt

This post What Happens When Oil Hits $100? appeared first on Daily Reckoning.

As I filled up my family’s Suburban this week, my 9-year-old was sitting in the back seat.

Usually, we make faces at each other while the gas is pumping. But this time, she was paying more attention to the pump. When I got back in the car, she had a question for me:

“Daddy, did we really just spend $75 to fill up mom’s car with gas?”

I could see the wheels turning in her brain. She was calculating how many frozen yogurts, beanie boo toys, and arcade tokens she could buy with $75.

“Do we spend that much money EVERY time we fill up with gas?”

This was quite concerning to her. And I didn’t quite know how to answer her.

“Yes sweetie, it takes a lot of money to drive mom’s car. But don’t worry, we still have enough money to get ice cream on Friday.”

Of course, higher oil prices — and the resulting higher gas prices — raise important challenges that our economy must deal with.

But even with U.S. oil hitting new 3-year highs right now, the problem may not be as bad as you think…

What Happens When Oil Hits $100?

Strong demand for oil is driving prices steadily higher. And if you think it’s bad here in the U.S., imagine living in Europe.

Brent crude (which is the European crude oil benchmark) is trading for more than $80 per barrel. That’s about $8.00 per barrel higher than the price for oil here in the U.S.

The growing global economy is creating plenty of demand for oil. And of course, when demand is high, prices naturally rise.

Last time oil climbed above $100 per barrel, it was tough for businesses and individuals.

Higher oil prices lead to higher energy costs for businesses. So running factories, paying for delivery vehicles, even keeping the lights and air conditioning on was more expensive when oil rose last time around.

You probably remember the sticker shock the first time you had to fill up your car with gasoline that cost $4.00 or more per gallon. That was a burden that cut into family budgets and even made it difficult for some people to make ends meet.

But in 2018 things are a lot different.

For one, businesses have much more efficient equipment. Thanks to tech advancements (made necessary by the last round of $100 oil), companies are able to get more done with less energy. And that means $100 oil won’t cause nearly as much financial pain for businesses.

At the same time, U.S. autos are much more efficient. So while higher gasoline prices certainly aren’t welcome, they’re not crippling for family budgets.

It also helps that jobs are plentiful, wages are rising, and the overall economy is very strong.

So today, higher oil prices aren’t nearly the challenge that they would have been several years ago. And even with oil edging closer to $100 every day, I don’t expect the stock market to back off as a result …read more

Welfare by Another Name

This post Welfare by Another Name appeared first on Daily Reckoning.

One of the first things I learned as a registered Washington lobbyist, (yes, I admit it, I was a lobbyist in the 1990s), is “you can’t beat something with nothing.”

That’s a Washington insider’s way of saying that if you don’t like an opponent’s policies, it’s not enough to moan and complain about them and throw insults. You have to come up with a policy of your own that appeals to voters and can be offered to the public as an alternative.

This has been a problem for Democrats lately.

They can’t stand Donald Trump and insult him all day long, but they won’t prevail in major elections scheduled in 2018 and 2020 unless they offer the voters something other than constant ridicule of Trump.

A few smart Democrats, including Bernie Sanders and Cory Booker, have figured this out. Their alternative to Trump’s policies is a government guaranteed job for every American who wants one. The jobs will be low or negative productivity government jobs requiring few or no skills and offering no advancement.

This proposal may sound odd coming at a time when the official unemployment rate is 3.9%, the lowest in almost twenty years. Unemployment is 3.7% for adult white men and 3.5% for adult white women, while African-American unemployment is approaching historic lows.

Why roll out a jobs program now?

The answer is that the official unemployment statistics are highly misleading. They do not count approximately 10 million able-bodied working age adults who have simply given up on work.

Adjusted for those “missing workers,” the real unemployment rate is about 10%, a depression level figure.

Interest in the guaranteed jobs program is high. Critics say the program will destroy incentives and undermine the traditional work ethic. Supporters say it will help to raise wages because private employees will have to match the wages being offered by the program itself in order to compete with the government jobs.

In that sense, this is really a backdoor way to raise the Federal minimum wage and increase benefits. Whichever side you’re on, get used to hearing about this debate in the years ahead.

Who knows, maybe Trump will end up supporting it. Trump is not a traditional conservative, but he is a shrewd politician who may just steal his opponent’s best idea. You can’t beat something with nothing.

There is also a parallel idea beginning to gain traction in important circles…

I’ve been writing lately about something called “GBI,” which stands for guaranteed basic income. GBI is the new buzz phrase that’s the talk of academia, Silicon Valley and the elites on both coasts.

GBI goes by other names including universal basic income, UBI, or just basic income, but the policy is the same regardless of the name. The idea is that governments will guarantee every citizen a certain basic income as a matter of right. Everyone making below a certain amount of money gets a check.

It’s really just welfare by another name, but it would apply to a much …read more

The Next Welfare Program

This post The Next Welfare Program appeared first on Daily Reckoning.

Alice in Wonderland’s White Queen believed six impossible things before breakfast.

Today’s guardians of opinion demand we believe a six more… and another dozen by lunch.

That the mainstream news is precisely and invariably accurate, for example.

That deficits do not matter.

Or that a man offered $15 an hour to loaf will decline it for a job that only pays him $10.

Thus we arrive at the glittering gem of universal basic income, or “UBI.”

UBI is an idea gaining traction among those given to believing impossible things — college professors.

And politicians.

The fellow with stars in his eyes… is often the fellow with rocks in his head.

Under UBI, the government would guarantee every working-age American a basic standard of living.

No string would come attached to this pretty peach… no proof of want… no questions whatsoever.

Assume, for example, that a strong-backed fellow can find employment moving furniture.

But the job demands an early rise… and he finds that dozing until noon better suits him.

Would this layabout receive a check?

Yes he would.

A gal has services to offer her local Walmart, which maintains an advertised need for these services.

But she concludes the job would make impossible demands of her leisure.

So she lets it pass by.

Would she receive her universal basic income?

She would.

And who could blame her?

If Walmart offers her $9 per hour to stock its shelves — while the government offers $10 to gawk soap operas from her lazy couch— where is her incentive to stock shelves?

Between 1968 and 1980, six U.S. states test-ran various UBI schemes.

The results, according to The Heritage Foundation and economist Gary Burtless:

… the comparable policy was shown to reduce yearly hours worked among recipients significantly.

For each $1,000 in added benefits, there was an average $660 reduction in earnings, meaning that $3,000 in government benefits was required for a net increase of $1,000 in family income.

Ah, but we misplace the facts, say UBI’s drummers.

A new reality has fallen over the American economy…

Globalization has removed millions of American jobs.

And these jobs are not coming back, despite Trump’s contrary gloats.

Besides, we are on the verge of dramatic breakthroughs in automation and artificial intelligence (AI).

Many experts estimate these great thieves of human labor will rob 20–40 million American jobs by 2030.

How will these millions of displaced Americans keep body and soul together… if not for the dole?

They further argue that a universal basic income will force the Walmarts of the world to increase their slave-level wages.

Turn to our previous example…

If they paid our couch-bound General Hospital enthusiast $15 per hour instead of $9… she might rise to the bait.

Maybe she would.

But what if her labor is only worth $9?

Will Walmart willingly absorb the loss?

And what about the more productive employee whose labor Walmart previously valued at $15 per hour?

If the bottom rung of the ladder now fetches $15… this worker will demand a commensurate jump to, say, $20.

Then the $20 employee must demand $25 to keep ahead — or $30.

On it goes.

And …read more

3 American Companies Saying “Thank You!” To OPEC

Zach Scheidt

This post 3 American Companies Saying “Thank You!” To OPEC appeared first on Daily Reckoning.

We’ve talked a lot recently about how oil prices are now above $70/barrel in the United States.

That’s up over 150% from the lows back in early 2016.

The cause of this uptick has been a “perfect storm” type scenario for oil investors. The supply of oil is low due in most part to OPEC’s policy restricting production, while the demand for oil is still extremely high, due in most part to the booming world economy that now relies on more oil to continue churning.

But this is only half of the oil story (not even!). Which is why today I want to complete the picture and give you three stocks that should benefit most from the new trend I’m seeing in today’s oil market…

Up until this point I’ve only talked about oil prices in the U.S., but have you noticed how oil prices abroad are looking?

They are even higher!

Brent crude, which serves as a major benchmark for global oil prices, is now above $78/barrel.

That’s the widest spread between U.S. oil (measured by WTI crude) and Brent crude that we’ve seen since U.S. lawmakers permitted the export of U.S. crude in 2015.

This divergence shows just how stretched global oil prices really are!

Even with U.S. drillers producing a record 10.7 million barrels/day, we still can’t produce enough to change the supply and demand fundamentals in the global oil market. And that great news for U.S. pipeline companies!

Let me explain…

The difference between U.S. and global oil prices is a key factor in determining whether it is worthwhile to ship oil abroad or sell it domestically. A wider price spread makes longer, more costly journeys to markets abroad more profitable.

And with the current spread being the largest in three years, oil producers cannot get their product to the coasts fast enough!

According to The Wall Street Journal, oil is already backing up in West Texas where there aren’t enough pipelines to get all the oil to market.1

That’s great news for pipeline companies like Kinder Morgan (KMI), Energy Transfer Partners (ETP) and The Williams Companies (WMB), whose pipelines will be working around the clock (and charging higher prices) to meet the growing demand.

And the best part, these companies currently pay great dividends to income investors like us that should only grow as profits increase.

Kinder Morgan (KMI) Dividend — 5.00%

Energy Transfer Partners (ETP) Dividend — 12.00%

The Williams Companies (WMB) Dividend — 5.32%

The “Great American Oil Boom” is underway and these companies are great “pickaxe and shovel” investments to take advantage of this emerging trend.

Be sure to stick with The Daily Edge over the next few days as we continue to outline stocks set to benefit the most!

But first, let’s get to the 5 Must Knows for Monday, May 21st…

5 Must Knows For Monday, May 21st

Trade War On Hold — On Sunday, Treasury Secretary Steven Mnuchin stated “Right now, we have agreed to put the tariffs on hold while we execute the …read more

A Central Banker’s Plan for Your Money

This post A Central Banker’s Plan for Your Money appeared first on Daily Reckoning.

Jim Rickards calls them “silent dog whistles.”

Through these signals, in the frequencies beyond normal human hearing… elites communicate with each other.

Their communications are public.

But their language can be so thick, so technical — so innocuous — not one in a hundred can crack it open.

Only the intended audience can penetrate the deeper message within… and that audience is their fellow elites.

Hold this information close when you consider the recent “speech” by a certain Benoît Coeuré…

This Coeuré fellow is a grandee of the European Central Bank (ECB).

He dispatched the following message this week at a monetary conference in Geneva, (and we doff our cap to the folks at Phoenix Capital for alerting us to it):

I would like to share some more general thoughts on the role of the central bank’s balance sheet in the economy. My focus will be on central bank liabilities – that is, money created by central banks to be used as a means of payment and store of value…

What distinguishes the discussion today from previous discussions… are three new facts:

The first is that we are seeing a dramatic decline in the demand for cash in some countries, in particular Sweden and Norway.

Let us interrupt briefly to translate this “fact”:

Cash limits our options as central bankers. Private citizens should not be allowed so large a voice in monetary affairs. Besides, no one wants it anyway. The time has come to discard cash altogether, as we previously discarded the “barbarous relic,” gold.

Pardon our manners, Monsieur Coeuré. Please continue.

The second is that central banks today could make use of new technologies that would enable the introduction of what is widely referred to as a “token-based” currency – one based on a distributed ledger technology (DLT) or comparable cryptographic technology.

Once again, we must break in. The unvarnished message:

Cryptocurrencies are a threat to our control of the monetary system. Unacceptable. We cannot stop the technology, so we must co-opt it. We must ensure that the masses can only use authorized cryptocurrency — ours, that is. We must ban all rival cryptocurrencies.

Please… proceed, sir.

And the third “new” fact, at least from a long-term perspective, relates to the role of central banks in setting monetary policy, and more recently to the emergence of negative rates as a policy instrument and the consequences for the transmission of monetary policy.

The problem comes back to cash. No one will pay the bank to hold their cash, so the masses would withdraw their money from the banking system. Cash therefore prevents us from employing truly negative interest rates. In consequence, cash must go. Once all money is digital, we’ll completely capture the monetary system and can make negative interest rates a reality.

Out of kindness… we spare you the remainder.

Perhaps you think we overweigh an obscure talk by some two-bit corporal of a banker.

But this Coeuré is no understrapper.

There are only six members on the ECB’s …read more

$100 Oil Is One Explosion Away

rocket launch

This post $100 Oil Is One Explosion Away appeared first on Daily Reckoning.

If you wake up tomorrow and oil prices have spiked to $100 per barrel, here is what will have happened.

You will find out that a long range Burkhan – 2H missile will have directly hit the Saudi Royal Palace in Riyadh. The reaction to this missile will be swift and severe.

Within the hour Saudi Arabia will have declared war on Iran. And within 24 hours the Saudis will have retaliated through a direct attack on Iran.

Once that happens, all bets are off as to how high oil prices go…

The initial spike to $100 per barrel would just be the beginning. Between them, Iran and Saudi Arabia produce roughly 14 million barrels of oil per day.

There is no way to compensate for any significant percentage of that production being wiped out.

The spiking oil price will decimate the global economy.

Even more concerning will be how the rest of the world gets pulled into this conflict. Israel is already on the brink of war with Iran and will be raring to go. It gets even bigger with Russia (supporting Iran) and the United States on the opposite side of the fence in this region.

I’m disturbed by how quickly this scenario could get out of control. I am far more disturbed by how very realistic the sequence of events are that I’ve just laid out.

The actual firing of the missile won’t be done by an Iranian.

It will be done by a Houthi Rebel based in Yemen who will have been supplied the Burkhan – 2H by Iran. This is not my theory, we know that the Houthis have these missiles and we also know that they are willing to use them.

Yemen is located directly south of Saudi Arabia. The Saudis are involved there because they want to stop the rising power of Iranian supported Houthis in the region, which already escalated into direct conflict once before in 2015.

The Houthis have already fired Iranian supplied missiles at Riyadh and are now openly targeting key Saudi oil infrastructure (refineries, pipelines, tankers). The graphic below shows the range of the missiles that the Houthis have and it clearly shows that all key Saudi oil infrastructure can be reached.

The Houthis claim to have already hit some of that Saudi oil infrastructure (a refinery) in the summer of 2017. Whether they have or not is impossible to prove since the Saudi Kingdom is very tight lipped about such things.

If the Houthis were to hit something really important, like for example the 5 million barrel per day east-west Saudi pipeline, it would obviously roil the oil market. After all, even the Saudis can’t hide that much supply being taken offline.

The real big picture concern though is what the Saudi response would be. The young, aggressive Saudi Crown Prince Mohammed bin Salman has already threatened to move the “battle” to Iran, in response to previous missile attacks.

And given his previous bold actions both …read more

Blundering Into Recession

This post Blundering Into Recession appeared first on Daily Reckoning.

June 12 is just three weeks away.

That’s when the Federal Open Market Committee, FOMC, the Fed’s interest rate policy arm, will in all likelihood raise interest rates another 0.25%, the seventh such rate increase since the “liftoff” in interest rates in December 2015.

The market is currently putting the odds of a rate hike at 95%.

This is the most aggressive tempo of rate hikes of any major central bank and puts U.S. policy rates significantly higher than those in the U.K., Japan or eurozone.

The issue for investors is whether the Fed is raising rates too aggressively considering the strength of the U.S. economy. Higher rates imply a stronger dollar, imported deflation and head winds to growth.

If the U.S. economy is on a firm footing, then the rate hikes may be appropriate, even necessary to head off inflation.

But if the U.S. economy is vulnerable, then the Fed’s actions could trigger a recession and stock market sell-off unless the Fed reverses course quickly.

My view is that the latter is more likely.

The Fed is tightening into weakness and will reverse course by pausing rate hikes later this year.

When that happens, important trends in stocks, bonds, currencies and gold will be thrown into reverse.

Outwardly, the Fed is sanguine about the prospects for monetary normalization. Both Janet Yellen and new Fed chair Jay Powell have said that interest rate hikes will be steady and gradual.

In practice, this means four rate hikes per year, 0.25% each, every March, June, September and December, with occasional pauses prompted by strong signs of disinflation, disorderly markets or diminution in job creation.

Lately job creation has been strong. And inflation has picked up. But it’s been spotty. The Fed still faces head winds in achieving its inflation goal.

The Fed is targeting a 2% annual inflation rate as measured by an index called PCE core year over year, reported monthly (with a one-month lag) by the Commerce Department.

That inflation index has not cooperated with the Fed’s wishes, and despite recent gains, hasn’t been able to hold consistently above 2%.

This has been a persistent trend and should be troubling to the Fed as it contemplates its next policy move at the FOMC meeting on June 12-13.

I’ve warned repeatedly that the Fed is tightening into weakness. The Atlanta Fed is projecting a 4.1% growth rate for the second quarter. But it’s known for its rosy projections that are almost always revised downwards once the data come in,

It had to lower its estimate of first quarter growth from over 5% to 1.8%. You can pretty much bet they’ll have to significantly reduce this projection as well.

The economy has been trapped in this low-growth cycle for years. The current economic recovery shows none of the 3% to 4% growth that previous recoveries have shown.

Meanwhile, the Fed is plowing ahead with its policy of quantitative tightening (QT), or cutting into its balance sheet.

Balance sheet normalization is even more on autopilot than rate hikes. Now, the …read more