silviajburke

[silviajburke]

Prepare for a Chinese Maxi-devaluation

This post Prepare for a Chinese Maxi-devaluation appeared first on Daily Reckoning.

China is a relatively open economy; therefore it is subject to the impossible trinity. China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation. This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18. President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency. China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable. China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.

China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

Regards,

Jim Rickards for The Daily Reckoning

The post Prepare for a Chinese Maxi-devaluation appeared first on Daily Reckoning.

[silviajburke]

China Will Lose This Battle

This post China Will Lose This Battle appeared first on Daily Reckoning.

There are few true “laws” in economics. Most of the so-called economic laws are highly conditional and only apply in limited circumstances and for brief periods of time.

One of the few economic theories that comes close to being an ironclad law and has stood the test of time is the “Impossible Trinity.” The key to understanding it is the word “impossible.”

Right now China is falling victim to the Impossible Trinity.

China’s inevitable failure will result in a maxi-devaluation of the Chinese yuan (CNY) in the coming months, as I explain below.

The theory of the Impossible Trinity is that an open economy (meaning one that is open to trade and capital flows) cannot pursue three specific policies simultaneously.

The three policies that cannot be pursued at the same time are: an open capital account, a fixed exchange rate and an independent monetary policy.

The first part of the Impossible Trinity is an independent monetary policy.

This simply means that your central bank can set rates where they want without regard for what other central banks are doing.

The second part of the Impossible Trinity is the open capital account.

This refers to the ability of investors to get their money in and out of a country quickly and easily.

The third part of the Impossible Trinity is a fixed exchange rate.

This simply means that the value of your currency in relation to some other currency is pegged at a fixed rate.

An economy can attempt to pursue all three policies, but it is certain to fail sooner rather than later.

The only question is the exact timing of the failure and the particular policy that must be abandoned as a result.

The reason the Impossible Trinity is impossible is because of the difference in interest rates — in this case, the difference between Chinese and foreign interest rates.

Consider the case of a country — call it Freedonia — that wants to cut its interest rate from 3% to 2% to stimulate growth. At the same time, Freedonia’s main trading partner, Sylvania, has an interest rate of 3%.

Freedonia also keeps an open capital account (to encourage direct foreign investment).

Finally, Freedonia pegs its exchange rate to Sylvania at a rate of 10-to-1. This is a “cheap” exchange rate designed to stimulate exports from Freedonia to Sylvania.

In this example, Freedonia is trying the Impossible Trinity. It wants an open capital account, a fixed exchange rate and an independent monetary policy (it has an interest rate of 2%, while Sylvania’s rate is 3%).

What happens next?

Savvy investors borrow money in Freedonia at 2% in order to invest in Sylvania at 3%. This causes the Freedonia central bank to sell its foreign exchange reserves and print local currency to meet the demand for local currency loans and outbound investment.

Printing the local currency puts downward pressure on the fixed exchange rate and causes inflation in local prices.

Eventually something breaks.

Freedonia may run out of foreign exchange, forcing it to close the capital account or break the peg (this is what happened to the U.K. in 1992 when George Soros broke the Bank of England).

Or Freedonia will print so much money that inflation will get out of control, forcing it to raise interest rates again.

The end result is that Freedonia cannot maintain the Impossible Trinity. It will have to raise interest rates, close the capital account, break the peg or all three in order to avoid losing all of its foreign exchange and going broke.

In this example, you just have to substitute China for Freedonia and the U.S. for Sylvania.

When it comes to China, the most likely outcome is a Chinese maxi-devaluation.

Investors should soon brace for a financial earthquake from China that will reverberate around the world.

Based on far smaller yuan devaluations in August 2015 and December 2015, the repercussions of a new devaluation will not be confined to China. The U.S. stock market crashed over 10% on both prior occasions.

An even larger correction could be expected when the maxi-devaluation comes. A flight to quality in gold is another predictable result.

Regards,

Jim Rickards for The Daily Reckoning

The post China Will Lose This Battle appeared first on Daily Reckoning.

[silviajburke]

Eight Things You Need to Know About Cryptocurrencies

This post Eight Things You Need to Know About Cryptocurrencies appeared first on Daily Reckoning.

In 1994, I was working for HBO at a low-level programming job.

My central task was to get HBO streaming interactively on cable lines.

I said to my boss, “The technology to do this is already done. It’s called the web. Why do I have to invent an entirely new way to stream content?”

He said, “James. Calm down. The cable guys know what they are doing. This internet thing is popular with academics but is just a fad.”

And that was that…

1. CRYPTOCURRENCIES ARE NOT A FAD

Cryptocurrencies benefit from two 5,000-year-old trends.

1) Theism → Humanism → Dataism in every industry. Two thousand years ago if you got ill, you assumed you had sinned and you would pray to get better. Twenty years ago, you’d go to a doctor. Now you get EEGs, MRIs, genetic testing, etc., to determine treatment.

Money is “In God We Trust” → Benjamin Franklin we trust → Cryptocurrencies (we trust data)

2) Barter → Physical store of value (gold, silver, etc.) → Money backed by metal → Paper money → Bank money → Pure data money (cryptos)

These trends are not going away.

2. CRYPTOCURRENCIES ARE NOT CRYPTO

I hate the word “crypto.”

“Crypto” refers to the aspect of bitcoin that makes it secure. It uses a branch of math called “public key cryptography.” But knowing this provides basically zero value in understanding cryptocurrencies.

Better to call them “data currencies” or simply “currencies.”

3. CRYPTOCURRENCIES ARE NOT CURRENCIES

A currency is two things:

1) A store of value: E.g., one can say, “I have $1 million.” That’s a number stored in the bank. It’s the value of net worth the person saying it has.

2) A transaction mechanism. E.g., with $1, I can go into a deli and buy a cup of coffee.

Bitcoin is the first but not the second (unless you want to wait 10 minutes every time you buy a cup of coffee).

Many other cryptocurrencies are the second but not necessarily the first.

Some are both and THEN… they are more.

4. CRYPTOCURRENCIES ARE CONTRACTS AND WILL EVENTUALLY REPLACE ALL CONTRACT LAW

A coin called “filecoin” has an implicit contract that whoever owns a filecoin is also allowing (by the contract embedded in the coin) that people can share files on that coin. It creates a decentralized dropbox.

Cryptocurrencies can be used now to replace escrows, wills and other types of basic contracts. The field of contract law is a $400 billion market and will be completely replaced by legitimate cryptocurrencies.

5. 95% OF CRYPTOCURRENCIES ARE SCAMS OR WILL GO TO ZERO

Like in every field of life, this will get regulated, criminals will get caught and the legitimate coins will thrive. This is exactly like the internet in the late ’90s. You didn’t want to avoid the internet then because of the enormous gains. But you did want to avoid the scams.

6. THE U.S. GOVERNMENT SECRETLY LOVES CRYPTOCURRENCIES

How else will they transport millions of dollars into war-torn countries to pay off warlords and terrorists? If you think this is conspiracy theory, think again.

7. CRYPTOCURRENCIES ARE NOT “FIAT”

There is explicit value backing a cryptocurrency, unlike a dollar bill.

A dollar bill has value because we believe it does, and we trust that the U.S. government will take care of the value of the dollar by not printing too many of them.

Cryptocurrencies actually solve enormous problems because they have a definite value associated with them.

8. JAMIE DIMON IS WRONG. HERE’S THE OBVIOUS REASON WHY

Jamie Dimon runs a bank with dollars in it. If people stopped using dollars, they would stop using Jamie Dimon’s bank. So of course he’s going to say bitcoin is a fad. He doesn’t want his bank to go out of business.

Always look for agendas, even with me.

What is my agenda? I want to make a lot of money by identifying which cryptocurrencies are legit and which are not.

I’ve built the team and network to do that. I also am happy to always be the first in trends.

Cryptocurrency is the most exciting thing I’ve seen since I first used the World Wide Web in 1992.

Now’s it’s time for you to start cashing in for big bucks!

For Tomorrow’s Trends Today,

James Altucher for The Daily Reckoning

The post Eight Things You Need to Know About Cryptocurrencies appeared first on Daily Reckoning.

[silviajburke]

Voice Wars: The Next Big Tech Battleground

This post Voice Wars: The Next Big Tech Battleground appeared first on Daily Reckoning.

Your devices are listening to your every word. Your phone, computer, television, and speakers are all gathering data and awaiting orders…

Amazon just took this concept one step further.

Alexa — the software behind its line of Echo devices — can now recognize your voice.

Amazon just released a new feature that allows you to teach your Echo device to distinguish who’s asking it questions (or who’s ordering stuff on your Prime account).

“It’s the latest development in the back-and-forth battle between Alexa and the Google Assistant, each one working to one-up the other with new features as they fight to earn a place in your home.” CNET News reports. “In this case, Google got there first, introducing voice recognition for the Google Home smart speaker this past April. Now, six months later, Alexa evens the score.”

But Google and Amazon aren’t the only major tech players diving deeper into the voice game. Microsoft is rolling out its own “smart speaker” it developed with Harman Kardon that will use its Cortana language recognition software, Business Insider reports.

It’s no secret that all the big tech companies are in the midst of historic bull runs. These mega-cap tech darlings took turns slaughtering the market during the first nine months of the year. Naturally, each of these tech heavy-hitters owns an important niche. Google owns search. Netflix owns streaming. Facebook dominates social media.

Then there’s Amazon.

Most folks don’t list Amazon as a tech company. That’s fair. It’s “officially” a consumer stock—I get it. But this doesn’t mean Bezos & Co. are mailing it in when it comes to groundbreaking technical innovations.

Amazon revealed at CES that there are now more than 7,000 Alexa skills, which Geek Wires explains as “third-party integrations that extend the capabilities of its voice platform.” Alexa developers are in this game to dominate voice. And as Alexa continues to “learn” new skills and integrate with additional products, she will be a force to reckon with in the tech world.

If the company continues developing its Alexa software and associated products, Amazon will indeed own the voice niche. The echo is more than a glorified wireless speaker that displays the weather. Amazon is developing a fully-integrated communications hub for your home.

But every mega-cap tech firm wants a piece of this important market. The investments Google, Microsoft, and Apple are making in voice proves the smart speaker market is about to explode. Business Insider reports it’s expected to grow 75% in just three years to more than 7 billion devices.

Right now, Amazon owns the software that’s winning over customers. Amazon will control the market of more than 70% of all voice-enabled speaker users in the U.S. this year, according to Tech Crunch. The next closest competitor is the Google Home at less than 24%. The also-rans Lenovo, LG, Harmon Kardon, and Mattel only account for about 5% of the voice market.

Amazon has already shredded brick and mortar retail. While traditional retailers are attempting to lure you into their stores with coupons and sales, Amazon is sneaking into your home and your everyday life.

Echo is the Trojan Horse. Alexa—the software—is what Amazon will use to perfect its ability to gather every shred of information about you and your family to add to its consumer database.

But while Amazon is getting most of the attention, the other guys aren’t giving up without a fight. The voice wars are going to get very interesting over the next few years as each of these competitors rolls out new projects and fine-tunes software.

If Amazon wants to stay on top, it must continue to hone Alexa and allow third parties to develop skills that will evolve the software into more than just a tool to push customers to easily place orders.

With the holiday season approaching, we’re going to see what kind of demand the Echo and its competitors can drum up. We’ll keep an eye on these developments and fine-tune our forecasts accordingly…

Sincerely,

Greg Guenthner for The Daily Reckoning

The post Voice Wars: The Next Big Tech Battleground appeared first on Daily Reckoning.

[silviajburke]

JFK Sr. Used This Simple Trick To Spot Market Bubbles… And You Can Too

This post JFK Sr. Used This Simple Trick To Spot Market Bubbles… And You Can Too appeared first on Daily Reckoning.

They don’t ring a bell at the top and tell you to get out, but I have to say that I’m pretty sure that I can hear something.

I’m not sounding the alarm on the entire market, but I think it is past the point where buying certain very popular technology companies is a good idea.

In fact, I’d go as far as to say that you do not want to own this group of companies today.

More on that in a moment. First, let’s look back at some helpful history…

JFK’s Father And The Helpful Shoeshine Boy

I mentioned that there isn’t anyone who rings a bell for us at the top to tell us that it’s time to sell.

That isn’t fully accurate, because there are always signs.

The trouble with those signs is that while they are very obvious with the benefit of hindsight, they aren’t so easy to see in real time.

In 1929, JFK’s father Joseph Kennedy Sr. picked up on one of those subtle signs and didn’t just get out at the top, he scored a massive windfall on the way down as well.

Like for virtually anyone invested in the stock market, the 1920s were good to Joseph Kennedy Sr.  How could they not be, all you had to do was buy all the stock you could and watch it go up.

After having made a bundle owning stocks in the roaring bull market of the 1920’s, Joe Kennedy Sr. found himself needing to get his shoes polished up.

While sitting in the shoeshine chair, Kennedy Sr. was alarmed to have the shoeshine boy gift him with several tips on which stocks he should own — yes, a shoeshine boy playing the stock market.

This unsolicited advice resulted in a life-changing moment for Kennedy Sr. who promptly went back to his office and started unloading his stock portfolio.

In fact, he didn’t just get out of the market, he aggressively shorted it — and got filthy rich because of it during the epic crash that soon followed.

They don’t ring bells at the top, but apparently when shoeshine boys start giving stock advice it is time to head for the exits.

The Shoeshine Boy Moment For FANG And Friends

In early March 2009, the current bull market began in the same way that most of the great bull runs in history have, at a moment when investors were terrified to own stocks.

Since then it has been nothing but good times. We are now eight and a half years into this bull market making it the second longest in history.

This party has been fun.

And for a handful of the most popular stocks, fun doesn’t do it justice. The party has been positively off the chains.

The stocks that I’m talking about are the FANG (Facebook, Amazon, Netflix and Google) stocks plus a few of their friends (Tesla, Alibaba and others). These stocks have vastly outperformed the market during this bull-run.

Now this is where I become a bit of a party-pooper.

Where Joseph Kennedy Sr. had his shoeshine boy moment for the market in 1929, I believe that a similar warning sign arrived for FANG and friends this summer. Remember, they don’t ring a bell at the top but there are signs.

This I believe is a big one…

The demand for these stocks has become so high that specific ETFs and dedicated index funds are being launched that are comprised only of FANG and friends. Not just an ETF or index fund, but multiple versions.

That latest is called the NYSE FANG+ index. It includes 10 highly liquid stocks that are considered innovators across tech and internet/media companies.

It is marketed as a benchmark of today’s tech giants. That may be true, but it is also a benchmark of some of the most expensive stocks in the entire S&P 500.

Here are its components:

On a backwards looking basis, this group of stocks has performed exceptionally well with a 28.44% annualized return from September 2014 through September 2017.

Yes, I’d love to go back in history and own this group of stocks three years ago.  But would I want to own them after an already incredible run?

No!  As a group these stocks are frighteningly expensive today.

That is generally what happens when stocks go up that fast, they become much less attractively valued.

Rather than just take my word on that, let’s look at some facts. Here are the current trailing price to earnings multiples for each of the members of the NYSE FANG+ index:

Facebook – 37 times

Apple – 17 times

Amazon – 242 times

Netflix – 215 times

Google/Alphabet – 35 times

Alibaba – 62 times

Baidu – 47 times

NVIDIA – 51 times

Tesla – Doesn’t even turn a profit

Twitter – Doesn’t even turn a profit

Individually these stocks range from expensive to absurdly expensive. On average though, I’d have to say the valuation of the group is close to the absurd.

The average price to earnings ratio of the eight companies that actually have earnings is 88 times. Yikes!

That number would be even higher if I added the market capitalizations of Tesla and Twitter to that while subtracting their losses.

Absurd would also be a word to describe the idea that owning an ETF made up exclusively of these companies.

Most of these are really good, if not great companies. And a couple of them have yet to even turn a profit, so the verdict is still out on those.

The hard truth is that even really good companies at these kinds of valuations are not good investments.

We saw this movie before in early 2000 when companies like Microsoft, Lucent, Cisco, Intel, and Oracle had a combined price to earnings ratio of 58 and lost investors gobs of money when the tech bubble collapsed.1

Shocking even to me is that the Fang+ at 88 times earnings is even more expensive today than that group of tech stocks were at the peak of the bubble in early 2000.

Are you starting to hear something that sounds like a ringing bell too?

Keep looking through the windshield,

Jody Chudley Credit analyst, The Daily Edge Facebook ❘ Email

1 Apple, Facebook and other big tech stocks tank, weigh on Wall Street, CNBC, Patti Domm

The post JFK Sr. Used This Simple Trick To Spot Market Bubbles… And You Can Too appeared first on Daily Reckoning.

[silviajburke]

Four Major Catalysts for Gold

This post Four Major Catalysts for Gold appeared first on Daily Reckoning.

The Federal Reserve would like to continue “normalizing” interest rates. But the most recent economic data simply does not justify it.

On Sept. 29, the August core PCE year-over-year (YoY) inflation figure was released. And the data came in exactly as I expected. YoY inflation for August was just 1.3%, down 0.6% from the January reading of 1.9%. That marked eight consecutive months of flat or lower readings.

Needless to say, the Fed is miles away from their 2.0% target. They’re actually moving consistently in the wrong direction.

Second, the September employment report came out the Friday before last. A Reuters survey of economists had expected the economy to add 90,000 jobs in September.

How many did it really add?

Not zero, but less than zero. The economy shed 33,000 jobs last month. This was the first time in seven years that the U.S. economy lost jobs.

Now, that may be partly due to the recent hurricanes that struck Texas and Florida. But coming on top of the weak inflation data that also came out, it will certainly give the Fed more than enough reason to hit the “pause” button on a December rate hike.

But incredibly, right now markets are giving a nearly 90% chance of a rate hike in December based on CME Fed Funds futures. That rate will drop significantly by December 13 when the FOMC meets again with a press conference. (There’s another meeting on November 1, but no one expects any policy changes then).

Once the market wakes up to the real state of play, probably in late November or early December, the current trends will suddenly reverse. You’ll see the dollar down and gold, euros and bond prices up.

On that score, one of the largest and most conservative wealth managers in the world, Pictet Group, based in Geneva, Switzerland, offers a very constructive view on gold.

Pictet’s strategist, Luc Luyet, says that the Fed will be on hold for the rest of 2017 and most of 2018 because of U.S. disinflation and the failure of President Trump to deliver on his growth agenda. I agree.

With the Fed in easing mode, the dollar will weaken and the dollar price of gold will remain strong. This is a fundamental case for gold that does not take into account other positive vectors such as geopolitical shocks from North Korea or outright assaults on the dollar from Russia and China (see below for more on these).

When a conservative institution like Pictet Group has a kind word for gold, you know the rest of the institutional world will not be far behind.

This all makes the next few weeks an excellent entry point for gold and gold mining stocks. You have a chance to take advantage of weakness and position ahead of the rally to come when reality sets in.

Another tailwind for gold is the continuing nuclear standoff with North Korea, as I hinted at above.

There is no doubt that North Korea and the U.S. are on a collision course and headed for war unless North Korea relents, which seems unlikely, or the U.S. acquiesces to North Korean possession of nuclear weapons, which is also unlikely.

At this point, it’s almost certainly too late for negotiation or diplomacy.

The U.S. only has two choices now. The first is to do nothing and learn to live with nuclear blackmail from North Korea. As I said, that is unlikely. The second option is to attack, probably within the next six months, to destroy the Kim regime and its weapons programs.

Trump will go for the attack option.

You don’t even need to ask what will happen to gold prices in that scenario. They’ll skyrocket and then much higher from there as the repercussions begin.

This is just another reason to acquire physical gold and gold mining stocks if you don’t already have them is now.

Another key gold story last week was a report that China has upped its estimate of proven gold reserves to 12,100 tonnes. This report was the source of a lot of confusion among those who follow China, Russia, gold and the status of the U.S. dollar.

Some readers took the word “reserves” to refer to China’s official gold reserves held by the People’s Bank of China and its off-the-books sister entity, the State Administration of Foreign Exchange (SAFE). That’s incorrect.

China’s official gold reserves are about 1,800 tonnes, but may be as high as 5,000 tonnes once off-the-books gold is counted. Some think it’s even higher.

But the report refers to “proven reserves,” which is a geologic (and engineering) concept familiar to the mining community. Basically, it’s an estimate of how much gold is buried in the ground in China and could feasibly be mined at current prices with current technology.

12,000 tonnes is still a lot of gold, but it will take 10 years or more and billions of dollars to dig it up and refine it. Even at 1,000 tonnes per year (double China’s current rate of production), this only increases gold supply about 0.5% per year. That would happen in conjunction with a diminution of gold output from traditional sources such as South Africa.

So increased Chinese gold production may replace diminished South African production, but it does not signify a major increase in global production. It’s worth noting, but not a game changer.

Still, the timing is curious because it comes just two weeks after China launched its oil-for-yuan attack on the petrodollar, with the yuan backed up by gold available from the Shanghai Gold Exchange.

In order for the oil-yuan-gold deal to be credible, China needs to show that it could deliver physical gold to the exchange without touching official reserves. This report makes it clear that China will have ample internal gold supplies for years to come. This adds credibility to its plan to price oil in yuan convertible to gold.

If China relied exclusively on gold imports, it could be strangled by gold sanctions aimed at China by the U.S. and its allies such as Canada and Australia. Instead, China looks ready to go it alone with its own gold. That’s a very big deal and one more nail in the petrodollar’s coffin.

It’s also extremely bullish for gold. Any effort to monetize gold implies much higher gold prices in order to avoid deflation given current gold-to-money ratios.

This is just one more reason to position in gold before this horse leaves the barn.

Finally, we need to consider the difficulty of physical gold supplies to keep up with increasing demand. The global gold supply increases only about 1.6% per year, and the floating supply of gold has been disappearing into private vaults from Zurich to Shanghai.

Refiners cannot find enough “scrap” gold (your discarded jewelry) to produce fine gold to meet demand. If demand increases appreciably from here, and there’s excellent reason to believe it will, there’s only one solution to the shortage of gold supply. And that’s much higher prices.

There, four catalysts waiting to send gold much higher. The time to move into gold is now before it resumes its upward climb.

Regards,

Jim Rickards for The Daily Reckoning

The post Four Major Catalysts for Gold appeared first on Daily Reckoning.

[silviajburke]

Here’s What Happens When a Forgotten Tech Stock Breaks Out

This post Here’s What Happens When a Forgotten Tech Stock Breaks Out appeared first on Daily Reckoning.

It’s been a banner year for household-name tech stocks.

The FAANGs have captured investors’ imaginations. Facebook, Apple, Amazon, Netflix and Google are paving the way to market-beating gains. They’re the plays every investor has in their portfolio.

Frankly, I don’t blame anyone for falling under the FAANGs’ spell. Shares of Amazon are up almost 30% year to date. Apple stock is up 35%. Facebook and Netflix are each up nearly 50%.

The gains are staggering. But we’re now beginning to see signs that these stocks are cooling off. Even the big market leaders can’t keep up the breakneck pace set earlier this year. They’ll need to digest their gains before making a go at another rally.

But that doesn’t mean we have to sit on the sidelines and wait for these stocks to set up for new trades.

In fact, one of Wall Street’s oldest (and greatest) tech names is already filling the performance void left by these formerly red-hot names. This forgotten blue chip was left in the dust for most of the year. Now it’s ready to make up for lost time.

The company I’m talking about is storied chipmaker Intel Corp. (NASDAQ:INTC).

Intel is finally streaking to new highs this month. But up until recently, this household name was dead in the water. Not only was it lagging its peers in the red-hot semiconductor space, it was also unable to even keep up with its fellow Dow components.

Sometimes the market’s biggest moves happen right under your nose. While everyone was hooked on rival NVIDIA (NASDAQ:NVDA) as it tore through the semiconductor space, Intel was slowly and steadily setting the stage for a huge move.

The result is a blue-chip breakout more than 12 months in the making.

It took more than one year of choppy, sideways consolidation to set up the Intel breakout we’re seeing right now. The stock fell back from the top of its range no less than four times before finally picking up enough momentum to push to new highs. Once the stock cracked $37 two weeks ago, INTC was off to the races.

But Intel isn’t just benefiting from the rising tide of semiconductor stocks. The company is working on some impressive projects these days…

“I think the market isn’t appreciating what Intel is doing enough,” our lead tech analyst Ray Blanco says. “The company is pushing hard into A.I. and autonomous driving technology. Moreover, it’s working on Xpoint phase change memory, which has the potential to completely upend the computer memory market.”

You might also recall that Intel purchased MobilEye NV (NYSE:MBLY) back in March for $15.3 billion. MobilEye is one of the leaders in making self-driving cars a reality. Every single carmaker from Ford to Tesla is working on making autonomous vehicles a reality. The race to a fully-functioning self-driving car has sparked a buyout frenzy when it comes to the technology that will make this dream a reality. And Intel is right in the thick of it.

With competition in autonomous vehicle technology heating up, artificial intelligence making headlines and semiconductors soaring to new highs once again this week, INTC has all the fuel it needs to extend its breakout move.

Sincerely,

Greg Guenthner for The Daily Reckoning

The post Here’s What Happens When a Forgotten Tech Stock Breaks Out appeared first on Daily Reckoning.

[silviajburke]

This 96-Yr Old WWII Vet…Tells It Like It Is!

This post This 96-Yr Old WWII Vet…Tells It Like It Is! appeared first on Daily Reckoning.

“The fighter plane opened fire and I could see the muzzle flashes above, and the snowy road getting chewed up in front of me.”

“It was a German Messerschmitt on a strafing run and we were squarely in his crosshairs.”

“Private, you keep this vehicle moving forward!” the general shouted. He was one of those no-bullsh*t commanders that didn’t let bullets slow him down.

“I didn’t have a death wish! So I rolled out of the jeep onto the pavement and took cover in the left ditch. The jeep careened off into the ditch on the opposite side of the road. I could hear my commander yelling that he was going to court martial me for abandoning our vehicle.”

“But it didn’t matter when I got back to the jeep. A 30mm cannon round had passed right through the driver seat. After that, he was quiet for the rest of the drive. I never got charged with anything. We both knew if I had stayed in that jeep, I would have been shot dead!”

Stories From WWII Seem All the More Relevant Today

The story above is just one of the many memories from WWII that my grandpa has shared.

At 96 years old, he’s still incredibly sharp, independent (he lives by himself with his dog Trooper), and he has a creative sense of humor.

Growing up, I never knew when he was serious and when he was just joking. And he plays the same tricks on my kids — his great-grandkids — whenever we go see him.

Apparently, he had the same weird sense of humor as a private in the Army during the war as well.

Grandpa still laughs when he tells us about driving “General Cliff” through the European Alps. (It was Grandpa’s job to chauffeur his superiors between command posts and the front lines.)

This particular commander didn’t have much respect among the rank and file. It seemed the closer his division got to Berlin, the more General Cliff focused on collecting souvenirs instead of actually fighting the Germans. Every time the division liberated a city or town, General Cliff would fill a crate with Nazi guns, icons or other valuables and ship them back to the U.S.

“It was the only thing he really cared about,” Grandpa told me. “That’s why no one really liked General Cliff and we all tried to make life tough on him whenever we could.”

“So one day, I had to drive him through the mountains to a forward command post. The road was totally exposed to German guns, but by the time they saw our jeep, they couldn’t actually catch up to us with their shells — as long as we drove fast enough.”

“I had been on the road plenty of times before and I knew exactly how far behind the German shells would be. So instead of flooring it, I eased off the gas a little bit.

“Boooyyy you should have seen him jump when that first shell exploded behind us! He completely panicked and started yelling ’Faster, Faster, FASTER!!!’

“The lookout at the forward post saw what was going on and gave me a big smile when we pulled in. I think General Cliff had to go change his trousers after that!” Grandpa laughed.

The Serious Side of Grandpa

Although my Grandpa is about the most jovial guy you’ll ever meet, the somber reality of war was not lost on him.

I still see tears in his eyes when he talks about some of his friends that didn’t make it home.

And he braved some horrible conditions along the way.

“It was so cold in Switzerland, you just couldn’t believe it!” Grandpa said.

He told me that he and his buddies would take the tops off their jeeps at night to make a sort of tent to sleep under.

“When the snow piled up, it added insulation. It was just about the only time I felt warm that winter.

“But you had to make sure to put the top between two trees. Otherwise, when the snow piled up, friendly tanks wouldn’t see you. They could roll over you and crush you in your sleep!”

Perhaps my favorite story Grandpa told me was about a day when he was marching towards the front line, and his platoon passed a line of German POW’s marching towards the rear.

Grandpa happened to look up and lock eyes with a German soldier with “Scheidt” written on his helmet. (My Grandpa is Herschel C. Scheidt).

The two relatives paused and shared a moment. Grandpa didn’t speak German. The POW didn’t speak English. But both knew that this war had divided family lines, changing history forever.

“I still wonder what happened to him that day,” said my Grandpa quietly…

The Threat of War is Real

Grandpa is on my mind this fall as we wade through a tumultuous time on the world’s political theater.

The threat of war is certainly a very real possibility that we as investors need to be aware of. Like him or hate him, you have to recognize that Trump is stirring the pot when it comes to a number of different tense international relationships.

And while Kim Jong-Un hasn’t fired off a rocket in the last two weeks, I certainly don’t think we can assume that the tension has eased between him and President Trump.

While I hope I’m wrong, I think the chances are pretty high that we’ll wind up in a “live-fire” conflict with North Korea. And the conflict could easily spread to other countries as lines are drawn between allies and foes.

Investors in defense contractors like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) are all three hitting new highs consistently. An investment in these stocks is a vote of confidence that the U.S. military will continue to spend heavily on defense systems. And this is a trend that I don’t expect to end any time soon.

All three of these stocks are wise choices for investors who want to insulate their portfolios from the threat of war. The only problem is that the prices have moved to very high levels.

Instead of buying large stock positions outright today, I’d recommend buying shares gradually. You could spread some capital out over the next six to twelve months and slowly add to your position over time.

That way, if shares pull back, you’ll get a discount on a portion of your investment. But if shares keep moving higher, you’ll at least get a portion of your shares bought now (so you can profit from the advance).

If you’re working with a large account size, you could also consider selling put contracts for these stocks. This allows you to lock in instant income from these defense contractors, while agreeing to purchase shares at a discount. Just remember that each contract represents 100 shares. So you need to have enough capital set aside to buy 100 shares if the stocks pull back.

(This is the strategy we use in my Income on Demand service — a program designed to help you pull instant cash from the stock market every Tuesday morning. You can find out more about this program here.)

One more thing…

If you know a veteran — or just see one in a store or coffee shop — I hope you’ll stop them and thank them for their service. Regardless of your political perspective, these brave men and women put their lives at risk to defend our freedom and protect many around the world who cannot protect themselves. We owe them our respect and gratitude.

Here’s to growing and protecting your wealth!

Zach Scheidt Editor, The Daily Edge Twitter ❘ Facebook ❘ Email

The post This 96-Yr Old WWII Vet…Tells It Like It Is! appeared first on Daily Reckoning.

[silviajburke]

Where the S&P Will Be on March 31, 2018

This post Where the S&P Will Be on March 31, 2018 appeared first on Daily Reckoning.

Where will the S&P be in six months?

Today we don the prophet’s motley… snatch a glimpse of the future… and reveal exactly where the S&P will close on March 31, 2018.

Sam Eisenstadt was the director of research at leading investment research firm Value Line.

He retired in 2009 after 63 years with the firm.

But Eisenstadt still toils over a complex forecasting model that spits out six-month economic predictions.

Now… we trust most forecasting tools precisely as much as we’d trust a dog with our dinner.

But MarketWatch’s Mark Hulbert says Eisenstadt’s model ranked first in risk-adjusted performance over the three decades Hulbert tracked competing models.

Between the scale of zero and one — dead wrong and dead on — it scores 0.31.

We admit, 0.31 is not nearly as certain as death… much less taxes.

But note how closely Eisenstadt’s model tracks the S&P’s actual record since 1957:

You’ll notice two significant warts on the record. But perfection is not to be found on this side of eternity.

And of all forecasting models, few come closer to the Kingdom of Heaven.

Hulbert:

Though you might be disappointed that [it] isn’t higher, you should know that most of the models that get attention on Wall Street and in the financial press have [records] that are far lower — if they’re not actually zero.

Eisenstadt’s model shows that low interest rates and positive market momentum indicate the most promising futures.

What do today’s conditions portend for the next six months?

Despite the Federal Reserve’s recent hikes, interest rates remain historically low.

And market momentum?

The Dow has notched 63 record highs since Trump’s November election.

The S&P tallied its sixth consecutive record close last Thursday — its longest streak in over 20 years.

All in all… it’s clear, sun-drenched skies as far as eyes can see.

So where exactly will the S&P end trading on March 31, 2018?

Perhaps here you suspect we’re luring you into an ambush (it’s just like us to do it too).

After all, is not war with North Korea a live possibility?

Trump’s tax cuts may well perish in the crib.

Janet Yellen’s term expires in February. Will her successor toss markets a screwball?

All these in mind, again, where will the S&P close on March 31, 2018?

Eisenstadt’s crystal ball shows that on March 31, 2018, the S&P will close…

Somewhere between 2,620 and 2,640.

That is, 2.7–3.5% higher than today.

Will it happen?

The answer is on the knees of the gods… far beyond our slender understanding.

But we’ve recently discussed the possibility of a market “melt-up.”

In this melt-up, stocks reach fever-heat during the glorious terminal phase of bull markets.

Some of history’s worst collapses have been preceded by melt-ups…

In the 18 months prior to the Crash of ’29, for example, the stock market nearly doubled.

The Nasdaq spiked 200% in the 18 months before the dot-com mania peaked in 2000.

Is the market in the larval stages of its own melt-up?

Jeffrey Saut, chief investment strategist at Raymond James, says yes. The S&P “now appears to be involved in a melt-up.”

“Right now, it feels like the early stages of a melt-up,” adds Ed Yardeni, president of Yardeni Research.

“We’re on the verge of being in a melt-up stage,” affirms Jeffrey deGraaf, chairman of Renaissance Macro Research.

Veteran trader Alan Knuckman says the “melt-up” could melt higher and longer than you imagine:

The fact is real bull markets can last 12–15 years, producing overall returns of 815–935%… Today’s “historic run” is just over eight years old — and we’re sitting on overall returns of just 246%. In other words, this market is nowhere near its maximum potential.

But how can this “historic run” extend another four–seven years?

Reason staggers under the weight of the possibility… logic reels… and economic law teeters on its throne.

Are not stocks as expensive as ever?

Meantime, the “recovery” is eight years old… the third-longest since 1945.

Is not recession — and maybe a lulu of a recession — nearly assured?

Keynes supposedly said that markets can stay irrational longer than a fellow can stay solvent.

We take no formal position on this melt-up business…

But if it has the juice Knuckman thinks, “irrational” may ultimately require an entirely new definition…

Regards,

Brian Maher Managing editor, The Daily Reckoning

The post Where the S&P Will Be on March 31, 2018 appeared first on Daily Reckoning.

[silviajburke]

Constructive Interference: Ride These Waves to Huge Profits!

This post Constructive Interference: Ride These Waves to Huge Profits! appeared first on Daily Reckoning.

Tech investing is a little like surfing.

You want to catch a wave at just the right time… so you can enjoy a glorious ride to shore.

Investing in a wave of technology at the right time can also be a wonderful thing.

We don’t want to waste time on a barely discernible swell… We want to wait patiently and get on the board and push ahead when we see one start to shift into a steep-cresting wave beneath us.

Then we ride that wave of profit all the way to shore.

What we’re seeing with Nvidia is the perfect example, but it isn’t the result of a single wave.

A Tidal Wave of Success

It’s the result of multiple waves interfering with one another.

When waves are in phase, they constructively interfere, amplifying each other, making bigger, stronger waves.

Every time I see Nvidia’s CEO Jensen Huang walk out on the stage in a leather jacket with a hot new chip in his hand, I see a surfer-in-chief expertly guiding his company to keep it perfectly positioned on a huge wave on its way to a high crest.

Right now, NVDA is riding a rogue wave of success:

The company is capitalizing on its superior graphics technology to maintain market and technological leadership of the large and growing computer gaming industry.

These same GPUs are positioned for a perfect storm of demand as virtual reality, with its more stringent graphics requirements, takes off.

Nvidia graphics processing units, originally the first of their kind, have become the foundation for a tsunami of artificial intelligence and deep-learning applications.

Nvidia’s Drive PX platform shows that they are becoming the semiconductor brains of the self-driving car of the future.

Lastly, out of the blue, Nvidia was in the right place at the right time to make bank on the cryptocurrency craze.

Nvidia GPUs have been flying out of production and will never see the inside of a tricked-out gaming PC.

They are being drafted for turning clock cycles into crypto cash as Wall Street hedgies decide there’s no time to waste in turning bits into billions.

Nvidia keeps beating the Street, growing revenues from these multiple emerging technological waves… and returning higher gains for us.

The Self-Driving Wave Pushing Other Tech Stocks to Big Gains

While Nvidia is the year’s best example of a tech company profitably riding a wave of innovation, it isn’t the only one.

Other chipmakers are just as eager to jump into the autonomous tech space. But even if other chipmakers are just runners-up to Nvidia, it doesn’t mean they can’t benefit.

These waves are big enough to lift many boards. Take a look at six major chip maker’s share value over the last four months:

Opportunities for new partnerships are springing up everywhere, giving us a strong indication that there is more than enough space for multiple success stories.

For example, high-tech electric car company Tesla is desperate to stay in the autonomous car race.

The rest of the auto industry is playing catch-up to the innovative automaker in many areas, but the gap is closing quickly. For Tesla to remain a leading premium brand, it has to maintain its edge or risk looking like everyone else.

This need is fueling its recent push to develop its own artificial intelligence chips for self-driving cars.

Tesla developing its own AI chips creates a need for both CPUs and GPUs. Nvidia, however, specializes in GPUs specifically. Reports indicate Tesla will not turn to Nvidia for their chip needs and in fact will rely on another manufacturer to meet its elevating needs.

The moral of the story is that Nvidia, while still the undisputed “King of Chipmakers,” is not going to be the only success story in this space.

The need for more processing power and ever-increasing versatility is going to open up huge windows of opportunity for many chipmakers. The ones able to carve out their own slice of the autonomous tech market stand to pay off significant gains.

For Tomorrow’s Trends Today,

Ray Blanco for The Daily Reckoning

The post Constructive Interference: Ride These Waves to Huge Profits! appeared first on Daily Reckoning.

[silviajburke]

Game Over: This Trump Trade Will End in Disaster

This post Game Over: This Trump Trade Will End in Disaster appeared first on Daily Reckoning.

The Trump trade is back on track!

At least that’s what the so-called smart money is saying…

While the White House can’t boast about any major political wins related to tax cuts or infrastructure spending yet, investors are once again bidding up the stocks and sectors that follow Trump’s growth-focused agenda.

The materials and finance sectors are both resting near year-to-date highs after enjoying strong September rallies. But another one of these rising Trump trades is headed for disaster in the years ahead. Regulation rollbacks, subsidies or other hair-baked political schemes can’t save it from a painful demise.

But that doesn’t mean we can’t book short-term gains as a dead cat bounce lifts the coal industry from its lows.

“The EPA and no federal agency should ever use its authority to say to you we are going to declare war on any sector of our economy,” EPA head Scott Pruitt told a crowd in Kentucky yesterday.

The war on coal is over, Pruitt said. But if this administration thinks it can permanently revive the dying coal industry by cutting some regulations, they’re in for a surprise.

Even in developing nations, coal is losing its appeal as a cheap power source. In fact, world coal production just endured its biggest drop of all time earlier this year. Coal demand in the U.S. dropped by more than 33 million tons last year, Bloomberg reports, while global coal consumption dropped 1.7%, falling in every continent except Africa.

Across the globe, the coal industry is dying. The industry is teetering on the brink as most of the developed world moves on to cleaner energy sources. And in an age of cheap and plentiful natural gas, coal would have trouble staying in play even if we tossed every regulation out the window.

But Trump is still trying to flip the script.

In late March, Trump signed an executive order aimed at rolling back Obama-era rules curbing carbon emissions. Specifically, Trump’s order requires the EPA to repeal the Clean Power Plan, a hefty set of rules imposed on coal power plants.

The White House framed the executive order as a move to bolster the country’s energy independence and restore coal mining jobs. The news even provided a temporary boost to coal mining shares.

Trump has helped juice the VanEck Vectors Coal ETF (NYSE:KOL) not once but twice on so-called bullish news. The first peak materialized when Trump was elected. And the most recent climax materialized after the Clean Power Plant repeal back in April. The coal ETF’s spring slide gave even produced a quick 15% correction.

But coal started sneaking higher once again over the summer. By August, KOL had pushed to prices not seen since late 2014. After consolidating these gains over the past several weeks, coal looks ready to make and fourth-quarter run.

The stock market’s biggest moves rarely play out as perfectly as the stories we read in the finance pages.

Remember, the day of Trump’s victory was the exact top of coal’s 2016 rally.

That’s right — coal made its big move before Trump took the White House. The big energy winner of 2016 wasn’t oil, gas, or solar. It was coal. The sooty stuff finished the year with a gain of 98%. That’s almost a clean double from one of the world’s dirtiest energy sources. And the rally started months before anyone was seriously talking about Trump winning the White House.

Once again, counterintuitive market moves stump traders who think they can trade political headlines. Investors knew Trump campaigned in favor of coal jobs and deregulation. But that didn’t change the fact that the coal rally needed a break.

Coal has badly burned the headline traders over the past 12 months. But if you follow price, you stand a fighting chance at walking away with substantial gains.

We’ve enjoyed some success playing coal’s crazy moves recently. We took profits on a short-term coal play back in December 2016 for a 40% gain. Then we attempted to play the March breakout to new highs (the market immediately stopped us out when it reversed).

Now coal is setting up for a big move again. We want to take another run at this play and grab the gains while we still can.

In the grand scheme of the markets, coal’s comeback move is probably nothing more than a dead cat bounce. But we’re more than happy to take the ride if it can hand us double-digit gains. That’s a distinct possibility if KOL can push above its September highs.

Trump can’t save coal. No one can. But that doesn’t mean we can’t profit from a quick trade…

Sincerely,

Greg Guenthner for The Daily Reckoning

The post Game Over: This Trump Trade Will End in Disaster appeared first on Daily Reckoning.

[silviajburke]

The Market’s Got It Wrong

This post The Market’s Got It Wrong appeared first on Daily Reckoning.

Janet Yellen’s mantra is, “It’s transitory!”

That’s Yellen’s typical response to a long litany of data that shows the U.S. is in the grip of a powerful disinflationary trend that may lead to outright deflation — a central banker’s worst nightmare.

The Fed has a publicly announced 2% inflation goal, which they consider to be price stability. In fact, 2% inflation cuts the purchasing power of the dollar by 75% in the course of an average lifetime. The Fed would tell you to ignore that.

Why 2% inflation is considered “price stability” is a subject for another day. For now, let’s just accept the Fed’s definition and see how the Fed responds from a policy perspective.

The Fed carves out food and energy prices from inflation. That gets to something called “core” inflation.

The Fed’s preferred metric is calculated monthly by the U.S. Commerce Department as the personal consumption expenditure (PCE) deflator. The Fed’s preferred interval is monthly data compared to the same month one year earlier, or “year-over-year,” YOY.

With a 2% target for PCE core YOY, what’s the actual time series of data? Here it is:

December 2016: 1.9%

January 2017: 1.9%

February 2017: 1.9%

March 2017: 1.6%

April 2017: 1.6%

May 2017: 1.5%

June 2017: 1.5%

July 2017: 1.4%

August 2017: 1.3%

An objective analyst would give the Fed credit for coming close to their target in late 2016. This is precisely why the Fed embarked on a path of rate hikes. The Fed raised interest rates in December 2016, March 2017 and June 2017.

The chart below is taken from a presentation given by Janet Yellen on September 26, 2017. The black horizontal line is the Fed’s 2% inflation target. The blue line represents actual PCE inflation; the red line represents PCE “core” inflation with food and energy prices removed, (the Fed’s preferred method). The downward trajectory of the red line should be disturbing to the Fed, but is routinely dismissed as “transitory.”

What happened next?

To answer that question, bear in mind that monetary policy works with a lag. That insight is one of Milton Friedman’s few economic contributions that has stood the test of time.

The Fed has been tightening in fits and starts since Bernanke’s “taper talk” in May 2013. This has resulted a consistent pattern in which Fed tightening slows the economy, then the Fed flips to ease, and the economy picks up steam, which leads to another round of tightening, and another slowdown.

Wash, rinse, repeat.

The Fed’s late 2016, early 2017 tightening cycle has now come home to roost. In the latest nine-month time series, shown above in the table and chart, inflation was flat or down in every month, and dropped a total of 0.6%.

That’s huge. The Fed’s range for this purpose is 0% to 2%. The floor is 0% because the Fed must avoid deflation. The ceiling is 2% because that’s the Fed’s announced target. A 0.6% drop covers 30% of the target range. It’s a quite significant move, and all in the wrong direction.

What’s Yellen’s reaction to this in-your-face data? In effect, she says. “It’s transitory!”

First Yellen blamed a price war among cell phone service providers. Then she blamed the strong dollar, which tends to lower import prices (with a strong dollar you get more for your money abroad so unit costs decline).

Then she blamed health care costs because they’re government administered and not responsive to Fed monetary policy. Then she blamed hurricane damage from Harvey, Irma and Maria.

It’s always something.

Why are Yellen and her colleagues in denial about the persistence of disinflation? Why are they insisting that an obvious trend is merely “transitory?”

The first analytic flaw is Yellen’s belief in the Phillips Curve. This model presents an inverse relationship between unemployment and inflation. As unemployment goes down, labor scarcity leads to wage increases above growth potential. This leads to inflation.

The Fed assumes that because of low unemployment today, inflation must be right around the corner.

The only problem with the Phillips Curve is that it does not exist. It has no empirical support. In the late 1970s and early 1980s we had high unemployment and high inflation. Today we have low unemployment and low inflation. Both results are the exact opposite of what the Phillips Curve would predict.

Yellen also believes that monetary ease, acting with a lag, feeds inflation. Therefore it is necessary to tighten policy before inflation arrives in order to avoid getting behind the curve.

Monetary policy does act with a lag, but it does not directly cause inflation. It may add fuel to a fire, but it’s not the catalyst. The Fed has created $3.5 trillion of new money since 2008, yet there has been no appreciable amount of inflation for nine years.

The cause of inflation is not money supply but psychology. It is expressed as velocity — the speed at which money is turned over through lending and spending. Velocity depends on behavioral psychology, or what Keynes called “animal spirits,” regardless of the amount of money around.

Yellen sees inflation under every rock despite the lack of empirical evidence. In fact, the evidence as revealed in the time series of PCE data above points toward disinflation and deflation.

Reality is catching up with the Fed. They will respond by taking a “pause” on an interest rate hike in December. This is the opposite of current market expectations.

What about the prospects for disinflation and Fed easing?

The most important development is recent strength in the U.S. dollar. This has the effect of lowering import prices, which feeds into the U.S. manufacturing supply chain. Cheaper imports also put a lid on the ability of competing U.S. producers to raise their own prices.

Second, the September employment report came out last Friday. A Reuters survey of economists had expected the economy to add 90,000 jobs in September.

How many did it really add?

Zero. Less than zero, actually. The economy shed 33,000 jobs. This was the first time in seven years that the U.S. economy lost jobs.

This may be due to the hurricanes, but coming on top of the weak inflation data that came out recently, it will certainly give the Fed more than enough reason to hit the “pause” button on a December rate hike.

Finally, Yellen’s term as Chair expires at the end of January 2018, just a few months away. It appears she will not be reappointed by Trump. The current favorite to replace her is Kevin Warsh, as I told readers my earlier this year.

The December 2017 FOMC meeting will be Yellen’s last. She does not want her legacy to be that of the Fed Chair who caused a recession by tightening into weakness. That would repeat the classic Fed blunder of 1937.

Yellen’s legacy is secure because she was able to begin rate hikes and balance sheet normalization, both of which reversed the easy money policies of Ben Bernanke. She will rest on those laurels and not take a risky rate decision on her way out the door.

Eventually the markets will figure this out. Right now markets are giving a nearly 90% chance of a rate hike in December based on CME Fed Funds futures. That rate will drop significantly by December 13 when the FOMC meets again with a press conference. (There’s another meeting on November 1, but no one expects any policy changes then).

As market probabilities catch up with reality, the dollar will sink, the euro and gold will rally, and interest rates will resume their long downward slide.

Regards,

Jim Rickards for The Daily Reckoning

The post The Market’s Got It Wrong appeared first on Daily Reckoning.

[silviajburke]

What a Famous Bill Murray Movie Says About Today’s Market

This post What a Famous Bill Murray Movie Says About Today’s Market appeared first on Daily Reckoning.

Markets have lately had a certain Groundhog Day quality to them, as in the Bill Murray movie: each day is like the one before.

Gold, the euro and Treasuries were all weak, while stocks and the U.S. dollar kept going higher and higher. It has been this way for several weeks now, ever since the market formed the view that the Fed would raise rates in December.

That conclusion was based on Janet Yellen’s Sept. 20 press conference following the FOMC meeting and her Sept. 26 speech in Cleveland.

I studied Yellen’s remarks closely and read her speech twice. Using my proprietary Fed model, her remarks can only be interpreted as dovish, and the data strongly support the view that the Fed will not raise rates in December.

The market disagrees with this analysis. As of today, the market is showing an almost 90% chance of a December hike. That’s OK. The easiest way to make money is to be out of consensus when the consensus is incorrect. You just place your bets and wait for the market to come to you.

Well, the data came in exactly as I expected. PCE core year-over-year (YoY) inflation for August was 1.3%, down 0.6% from the January reading of 1.9%. That’s eight months in a row of flat or down readings. The Fed is a far cry from their 2.0% target and moving persistently in the wrong direction.

That’s a tribute to the predictive analytic models I use. However, the market continues to cling to what I called its “false belief system.” A shock reversal of the reflation trade is coming, but not yet. For now, complacency and consensus thinking still reign. The strong-dollar, weak-euro, weak-gold story persists.

But not for long. A weak reading in Friday’s employment report added to the pile of evidence that the economy cannot bear another rate hike in the near future, especially with balance sheet normalization, or “QT,” now underway. This quantitative tightening reduces money supply and results in a tightening of monetary conditions even in the absence of a rate hike.

Given the weak economic backdrop and the existing tightening from QT, plus the lagged effect of prior rate hikes, the Fed will take a pause in December. When that reality sinks in, the dollar will weaken and the euro and gold will resume their slow, steady climb that began at the end of 2016.

On top of that, it is now clear that Kevin Warsh will be the next Fed chair — something I first told readers about last winter. The early read on Warsh was that he is a hawk and will raise rates in accordance with the Taylor rule. But I also told my readers that Warsh is a pragmatist, not an ideologue.

He’s a lawyer, not an economist. He works for a hedge fund, not a university economics department. Warsh will do what makes sense under the circumstances, not cling to some obsolete rule such as the Phillips curve like Janet Yellen.

Warsh sees the Trump tax cut as producing real growth. When the capacity for real growth expands, the likelihood of inflation is reduced. In effect, real growth substitutes for nominal growth in terms of capacity constraints in labor markets.

This means Warsh is less concerned about inflation than Yellen and therefore less likely to raise rates. So the rise of Warsh is one more dovish factor in addition to disinflation and weaker job creation.

This may still take a few weeks to play out but when it does, the reversal from current trends in the dollar, the euro, gold and bonds could be violent. That will favor those who set up the trade now. It looks like a good entry point for euros, gold and Treasury notes.

You can place your bets and then just sit back and enjoy the show.

Regards,

Jim Rickards for The Daily Reckoning

The post What a Famous Bill Murray Movie Says About Today’s Market appeared first on Daily Reckoning.

[silviajburke]

The Upside for This Biotech Sector Could Be Explosive

This post The Upside for This Biotech Sector Could Be Explosive appeared first on Daily Reckoning.

There are few endeavors fraught with more risk than the development of a newly discovered therapeutic compound.

Like newly hatched sea turtles, many don’t make it to the sea. They dig out of the sand only to get snatched up by crabs and seagulls.

In fact, like the baby sea turtle, only a fraction of a percentage of potential new drugs ever survive their early trials and move on to the next stage of life.

The few that do are submitted to the FDA for clinical approval… If the FDA agrees the drug is safe enough, it goes into Phase 1 testing.

These are the turtles that have made it to the surf… to face new dangers from sharks and big fish.

Fewer than 10% of Phase 1 drugs ever make it to approval. The ones that do are like mature sea turtles — relatively safe to thrive and grow.

One of the best times to turn a fast profit on a drug-developing biotech is when it has a drug that has survived all the way through Phase 3… but hasn’t yet been submitted to the FDA for final marketing approval.

During that period, it’s common to see the developer’s stock start to run up as investors claim a stake ahead of commercialization. This is a period of volatility… but also big profit potential.

One of the most highly profitable opportunities in biotech right now is in pain management.

The pain management market in the United States is huge — but also fraught with problems.

The race to develop new pain drugs is more important than ever. The opioid crisis is crippling families and communities, leaving health care officials scrambling to find an answer.

Our mainstay pain drugs are highly addictive and dangerous. They kill tens of thousands of people every year.

It’s a big business for any drug developers working on a solution. Companies that can produce a viable drug designed to provide the analgesic effects of conventional opioids without the adverse side effects stand to make millions, potentially even billions.

Companies successfully completing Phase 3 trials then move into the final stage, filing for New Drug Applications with the FDA.

Filing an NDA is a big deal — and for you, it’s a key indicator that a company’s value could skyrocket very soon.

FDA approval of any new pain management drug could be huge for a company’s stock value. The growing need for suitable replacements is on everyone’s radars. Be on the lookout for early stage biotech plays in this space.

Stay tuned — some very big things are on the horizon!

For Tomorrow’s Trends Today,

Ray Blanco for The Daily Reckoning

The post The Upside for This Biotech Sector Could Be Explosive appeared first on Daily Reckoning.

[silviajburke]

Airlines To Surge — Once Faux Stats Stop Getting In The Way…

This post Airlines To Surge — Once Faux Stats Stop Getting In The Way… appeared first on Daily Reckoning.

“Dad, did you know there are 12% more orange skittles than any other color?”

That’s how the conversation started this weekend with my 8th grade daughter Rebekah.

“We did an experiment in class. Everyone got a bag of skittles and we poured them all out in a pile and measured different things. There’s also 13.1 skittles in each fun sized bag.”

Poor Rebekah… She had no idea that she had just opened a “teachable moment” on one of my favorite subjects — statistics!

Over the next few minutes, we talked about different methods for gathering statistics, the different meanings (and non-meanings) that averages and percentages can give you, and how statistics can be important in life decisions.

Today, I want to share a couple of key statistics that are affecting the market right now. And more importantly, I’m going to show you one area that will pad your brokerage account with some unexpected gains.

So let’s get started!

Lies, Damned Lies and Skittles

Mark Twain popularized the concept that there are three types of untruths: “lies, damned lies, and statistics.” That’s because so often, statistics are manipulated to only give us a distorted picture of what is going on.

“Do you like orange skittles?” I asked Rebekah.

“No Dad, they’re gross! None of my friends like the orange ones either.” she said.

“Is there any chance your friends were snacking on a few skittles before the experiment?”

Rebekah smiled… “Well, I did eat a couple of purple ones before we started counting. They’re my favorite.”

We talked about how if a few students ate some non-orange skittles, it would distort the statistics. There would naturally be more orange skittles because Rebekah and her friends weren’t eating that color. Plus, the average of 13.1 skittles per bag wasn’t accurate if students were eating a few before counting.

Plus, we talked about how with just a few students in the class, the numbers could be off just because of random chance. It could be that the skittles factory randomly spit out a few extra oranges in the bags that these kids opened, but over time, the factory made just as many of each color. If you measured 100 bags — or 1,000 bags — chances are that the colors would be much closer to an even percentage of each.

So what does all of this have to do with protecting and growing your wealth?

Let’s take a look at some of the recent statistics in the market and see how they may or may not tie to our investment opportunities.

Jobs, Wages and Traffic

Each month, we’re treated to a host of economic data from the previous month. This data helps us discern whether the economy is growing or shrinking. And it helps us determine what industries and sectors are likely to be good investments.

One of the most important pieces of information I look at each month is the jobs report.

Unfortunately, for the month of September, the U.S. economy actually lost 33,000 jobs.1 This was the first time since 2010 that the economy failed to add new jobs.

So does this mean that the recovery is over? And that you should sell all your stocks and go to cash?

Hold on a minute, and let’s look a bit more closely.

As it turns out, hurricanes Harvey and Irma are largely to blame for the jobs lost in September. Many food service and other retail workers were out of work in September because restaurants, stores and other businesses had to shut down for the storms.

But this loss of jobs is actually just a temporary issue (not a negative data point for the economy).

After all, many new jobs will be created in the construction industry as homes are rebuilt and businesses get back on line. Plus, restaurants and stores in the affected areas will see an increase in business this fall as construction workers come to the affected towns and need places to eat, sleep, shop and so forth.

So while on the surface, the jobs data appears to reflect a weakening economy, that’s not actually what is happening. The underlying strength of the U.S. economy is continuing its trend, and we should see the statistical numbers jump back over the next few months.

So if statistics like these are so unreliable, why even bother following them?

Statistics are still very helpful when you understand how they are compiled, and you take into account any issues that may distort the data.

Consider the recent data coming from the airline industry…

Delta Statistics Show Underlying Strength

Last week, Delta Airlines (NYSE:DAL) reported traffic statistics for the month of September. According to the data, the company announced a decline in revenue per available seat mile (a common statistic that airlines track). Delta also said that it total traffic rose 0.3% from last year.2

On the surface this is a fairly bland report. After all, if the global economy is growing, you would think that Delta would have a big increase in traffic and be able to charge more for every mile its passengers travel.

A growing economy makes it easier for consumers to afford vacation travel. And business are usually more willing to spend on tickets for their workers to fly to conferences or meetings.

So was this bland report from Delta a death sentence for the stock? Hardly!!

As you can see in the chart above, shares of Delta rose sharply after the September traffic report was released. Shares of other airlines such as JetBlue Airways (NASDAQ:JBLU) and American Airlines (NASDAQ:AAL) also moved sharply higher on similar reports.

So what drove these stocks higher?

The details behind the statistics were actually much stronger.

Remember, during the month of September, hurricane Harvey and Irma ravaged key cities such as Houston and Miami. Even Delta’s hub in Atlanta was forced to shut down operations as high winds made takeoffs and landings unsafe.

Yet, despite these challenges, the airlines were still able to report respectable growth. Imagine what kind of growth these airlines could have generated if September had not included two of the most devastating storms in recent history.

You see, statistics can at times be very misleading when it comes to what they tell us about markets and individual stocks. But if you’re willing to look behind the headline numbers and see what is actually affecting the statistical numbers, you’re likely to uncover some excellent opportunities that may be temporarily overlooked by Wall Street.

Today, I’m very excited about the prospect of U.S. airlines. Not only was September a “stealth positive” for these companies, the coming months should make the underlying strength even more clear.

A month from now when these companies report October traffic details, I expect the strength to be even more apparent. And if you invest in these stocks before those details emerge, you’ll be in a great position to capture big profits as these stocks continue their bullish advance.

So if you’re not yet invested in airline stocks, now is a great time to buy some shares.

And next time you see a market or economic statistic that seems to be skewed in one direction, make sure you understand the underlying factors behind the headline data.

Here’s to growing and protecting your wealth!

Zach Scheidt Editor, The Daily Edge Twitter ❘ Facebook ❘ Email

1 The September Jobs Report in 9 Charts, WSJ, Josh Zumbrun 2 Delta reports September traffic, financial performance, Delta, Kate Modolo

The post Airlines To Surge — Once Faux Stats Stop Getting In The Way… appeared first on Daily Reckoning.

[silviajburke]

Congress Holds Hearings, You Grab Profits

This post Congress Holds Hearings, You Grab Profits appeared first on Daily Reckoning.

As the stock market melt-up continues, another political sideshow is setting up one of our favorite sectors for explosive fourth-quarter gains.

Congress kicked off the fourth quarter by trotting out the victim of one of the biggest corporate hacks in recent memory.

Equifax is in the political hot seat this month as Congress forced its former CEO to explain the failures that led to massive data breaches. Now that sensitive customer data are in the hands of cybercriminals, grandstanding politicians demand answers!

The story of this high-profile hack changes almost every week. When Equifax first revealed the details of its hack in September, management claimed 140 million customers were potentially affected. Now they’re saying more than 145 million people were caught up in the hack.

Former CEO Richard Smith told the House committee that the hack was the result of human error and technological error.

What resulted was exposing nearly half of Americans to the perils of identity theft.

These events are a grim reminder of just how vulnerable our information is in the digital age. Cybercriminals are everywhere. And they’re becoming more savvy by the day.

Individuals and corporations are scrambling to protect their most sensitive information. But as we see almost every week, they’re woefully behind the curve.

The consequences are clear. Hundreds of millions of people are getting their personal data swiped. No information is as secure as it seems, and most corporations simply aren’t doing enough when it comes to protecting your data. That’s the reality of the digital world in which we now live.

That’s terrible news for the millions affected by the data breaches we’ve witnessed over the past few years.

But there are a few select companies trying to do something about it. What we’re witnessing right now is a generational opportunity for the companies that make their money protecting our identities.

From the very beginning, I told you cybersecurity will become one of the most lucrative plays of the decade. Now, the market’s finally waking up this powerful trend.

Unlike the broad market, cybersecurity plays haven’t offered investors a low volatility melt-up. We’ve had to work hard for our gains in this sector. Over the summer, the PureFunds ISE Cyber Security ETF (NYSE:HACK) quickly approached correction territory as the fund dropped nearly 10% in just two months.

But as we noted last month, the sector bottomed out in August and is once again shaking off recent weakness and moving higher. It’s now quietly outperforming the S&P 500 over the past six weeks.

As always, price leads the news. Even before the Equifax story broke, cybersecurity stocks had already demonstrated that a change in trend was in its early stages. Many of these stocks failed to keep pace with the major averages during the first half of the year. In fact, some of the most recognizable names in the industry were trapped in nasty downtrends when the market was weak in 2015 and early 2016.

But change is in the air. The cybersecurity revolution is here. There’s plenty of money to be made as the market wakes up to this powerful trend…

Sincerely,

Greg Guenthner for The Daily Reckoning

The post Congress Holds Hearings, You Grab Profits appeared first on Daily Reckoning.

[silviajburke]

Russia’s on the Way Back

This post Russia’s on the Way Back appeared first on Daily Reckoning.

Russia is poised to break out of its oil-related slump and become one of the best performing emerging markets economies in the years ahead. This sleeping giant is breaking its dependence on oil prices and embraces diversified growth.

When you hear the name “Russia” you probably run for cover. Russia has been the subject of nearly continuous media coverage bordering on frenzy since the election of Donald Trump last November.

Russia allegedly hacked U.S. computer systems and email servers, rigged the election in favor of Trump, and colluded with the Trump campaign to defeat Hillary Clinton. Trump campaign officials met with Russian operatives and spies to coordinate all of this nefarious activity. Or so the story goes.

The truth is more complex. Russia certainly does run an around-the-clock hacking and spying operation aimed at any U.S. system they can penetrate. We do the same to Russia. It’s what national intelligence agencies do. No news there.

There may have been some “weaponization” of the hacked data through selective leaks to publishing outlets like Wikileaks. That allegation is less clear. Wikileaks has always insisted that their leaks did not come from Russia. There is some evidence to support the claim that the Hillary Clinton related leaks came from disaffected Bernie Sanders supporters. That truth may emerge later.

Trump campaign efforts to reach out to Russia between November 2016 and January 2017 did not have to do with “collusion.” They were a smart geopolitical move to align U.S. interests with Russia in advance of a confrontation with China about trade, currency, and North Korea.

Unfortunately, the Trump team consisted of amateurs like Jared Kushner who bungled the job. They played into the hands of Democrats who were waiting to pounce on the smallest sign of so-called collusion. This sequence combined with media bias has now poisoned the U.S.-Russia relationship.

Now, the confrontation with China is arriving right on schedule but the U.S. has no relationship with Russia to help back up our position. It’s two-against-one, and the U.S. is the odd man out — thanks to U.S. political dysfunction and the media.

The point in reciting this history is that it’s difficult for investors to separate the economic fundamentals of Russia from the media circus and political noise. If Russia were named “Volgastan,” and not involved in U.S. politics, its economic position would be one of the most attractive emerging markets stories in the world.

Let’s begin our independent analysis by reviewing the fundamentals.

Russia is the 12th largest economy in the world with about $1.3 trillion in GDP. That is slightly larger than Australia or Spain, and significantly larger than well-liked emerging markets economies such as Mexico, Indonesia, and Taiwan.

Russia’s sovereign debt-to-GDP ratio is a microscopic 17%. Compare that to the U.S. debt-to-GDP ratio of 106%, more than six times larger. Other debt-to-GDP zombies are Japan (240%), France (96%) and the UK (89%).

The fact is, in the next liquidity crisis, you won’t be hearing about Russian default. The U.S. and China are more likely to be in the eye of the storm.

Russia is the world’s second largest oil exporter (after Saudi Arabia) and the world’s largest exporter of natural gas. Russia is also the world’s third largest gold producer after China and Australia, and ahead of the United States.

From a geopolitical perspective, Russia is one of only three genuinely powerful countries in the world (along with the U.S. and China) despite media efforts to portray it as an inefficient economic backwater.

Still, there’s much more to the Russian economic analysis than the familiar story of an export and geopolitical powerhouse. In particular, Russia has engaged in one of the most aggressive gold accumulation operations since the U.S. in the 1920s.

Russian reserves are managed by the Central Bank of Russia, CBR. The CBR Chair since 2013 has been Elvira Nabiullina. Think of her as the “Janet Yellen of Russia,” but with a much different pedigree.

Nabiullina did not graduate from one of the Keynesian-monetarist hotbeds such as MIT or the University of Chicago. She graduated from Moscow State University and worked her way up through the Russian Ministry for Economic Development and Trade.

With that background, she has a much better feel for the dynamics of Russian growth and the Russian people than the so-called Western experts who rushed in to “fix” the Russian economy in the 1990s. Those experts ruined Russia and paved the way for the more authoritarian politics of Vladimir Putin.

To his credit, Putin has given Nabiullina independence and allowed her to manage reserves, interest rates, and capital outflows with a minimum of political interference. In 2017, The Banker, a British publication, named Nabiullina “Central Banker of the Year, Europe.”

Nabiullina’s greatest accomplishment is to increase Russia’s gold reserves by 700 tonnes since taking office. This gold has a market value of $32 billion at today’s prices. This is on top of the approximately 1,000 tonens of gold that Russia already had when Nabiullina became CBR Chair in 2013.

This is an extraordinary accomplishment considering that Russian reserves collapsed from about $525 billion to $350 billion during the oil price crash of 2014-2015. Today, Russia’s reserves are back up to a healthy $425 billion, recovering over 40% of the reserves lost in the oil price collapse.

Despite the roller-coaster ride in the overall reserve position, Russia never stopped buying gold. If it needed hard currency, Russia would sell U.S. Treasury securities and keep buying gold.

Russia now has a gold-to-GDP ratio of almost 6% — more than three times the comparable ratio for the U.S. Russia is preparing for the day when a full-blown crisis of confidence in the U.S. dollar emerges. At that point, a new international monetary conference similar to Bretton Woods will be convened.

In such a scenario, gold will be a major determinant of the power of each participant in reshaping the international monetary system. Russia will have a prime seat at the table, while gold weaklings such as the UK, Canada, and Australia sit along the sidelines.

Oil prices have stabilized above $40 per barrel, which puts a floor under the Russian economy. If oil prices rally, the Russian economy, stocks and currency will rally together.

But, Russia is not solely dependent on oil for economic growth. The Russian economy is poised for strong growth from a diversified combination of exports, agriculture, and direct foreign investment.

The combined prospect of strong growth independent of oil prices, and a possible windfall if oil prices spike on geopolitical fears, makes the Russian economy attractive right now.

What indicators am I using to support this positive fundamental analysis of the Russian economy?

The most important development is the diversification of the Russian economy to avoid exclusive reliance on energy exports.

Russia has revved up its export economy. These exports include arms sales to cash customers such as Iran and Turkey.

Russia is also a major exporter of nuclear power plants. Russia recently signed several major deals with Turkey on the expansion of Turkey’s nuclear power generating capacity, for example.

Russia is also harvesting a bumper crop of wheat both from Russia itself and parts of eastern Ukraine effectively dominated by Russia. These crops will be in high demand due to drought conditions in major Russian competitors such as Australia, Canada and the U.S.

Improvement in Russia’s trade surplus and reserve position will make it a magnet for direct foreign investment and global capital flows.

This combination of diversified export revenues and capable central bank reserve management has left Russia less vulnerable to economic sanctions and oil prices than most Western analysts expected.

Having weathered the storm, Russia will be the main beneficiary as sanctions are gradually eased and as oil prices gradually recover.

And did I mention that Russia’s acquiring gold?

Regards,

Jim Rickards for The Daily Reckoning

The post Russia’s on the Way Back appeared first on Daily Reckoning.