New Rickards book!

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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 2:52 pm

https://www.financialsense.com/podcast/ ... hk.twitter

January 13, 2020 – Jim Rickards, author of a new must-read book The New Great Depression, discusses Covid vs. its policy response, the winners and losers in a post-pandemic world (the subtitle of his book), and how we need to think differently about what a depression actually is given what we see today.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 2:57 pm

https://app.hedgeye.com/insights/93947- ... hedgeye-tv

01/08/21 03:27 PM EST

WEBCAST | The New Great Depression: Winners & Losers In A Post-Pandemic World
Takeaway: This webcast aired on January 14, 2021

Hedgeye CEO Keith McCullough hosted a free webcast with bestselling author James Rickards discussing the current economic and market outlook and important implications for investors.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 2:59 pm

http://www.futureproofshow.com/2021/01/ ... mic-world/


Winners & Losers in a Post-Pandemic World (ft. author & economist Jim Rickards)

2021 is one of the years with more uncertainty than just about any other in recent memory, and one of the areas people are most unsettled is the economy. That’s why we wanted to turn to Jim (AKA James) Rickards.

He’s the Editor of Strategic Intelligence, a financial newsletter. He’s also The New York Times bestselling author of quite a few books, including Aftermath (2019), The Road to Ruin (2016), and quite a few others. He is an investment advisor, lawyer, inventor, and economist, and now he’s out with The New Great Depression, a new book on the winners and losers in a Post-Pandemic World. We wanted to have James on because we all need a bit of guidance in figuring out the direction things will be going as we exit this pandemic period.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 3:00 pm

https://www.washingtonpost.com/business ... story.html


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Analysis
Gold’s Ups and Downs
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 8:41 pm

What is the public-policy response to the New Great Depression and the pandemic that caused it? In broad terms, there has been a massive monetary-policy response in the form of guarantees, money printing, and surging liquidity where needed. There has been an unparalleled fiscal-policy response involving increased unemployment benefits, soft-money loans to support payrolls, and bailouts of afflicted airlines, hotels, resorts, and other industries badly damaged in the depression. Behind these multitrillion-dollar deficit- and debt-monetization efforts is an ersatz economic mélange called Modern Monetary Theory (MMT), which purports to alleviate concerns about debt sustainability. Until recently, MMT was a fringe view with some support on the far left. Today it is de facto the economic law of the land even if most of the legislators who enshrined MMT have never heard of it.


The need to spend money in response to the economic shock from the COVID-19 pandemic has moved Modern Monetary Theory from the fringes of economic policy to a place at center stage. Modern Monetary Theorists such as Bard College professor L. Randall Wray and investor Warren Mosler offer a curious blend of progressivism and a pre-Keynesian concept called chartalism. MMT advocates are a small but ascendant clique who offer the world what the world wants most—free money.


Modern Monetary Theory is old wine in new bottles. The old wine consists of the belief that the value of money is created by government dictate and the volume of money is unlimited because government offers citizens no choice but to use their money as payment for taxes. As long as government money is the only medium with which to pay taxes, citizens must acquire that approved form of money to avoid incarceration for tax evasion. It’s a closed system with no escape. The new bottles consist of hitching MMT to a wish list of progressive programs such as Medicare for all, free tuition, free child care, and a guaranteed basic income. In years past, these policy proposals were easily derailed by experts who said, “We can’t afford it.” Today MMT advocates reply, “Yes, we can,” with a patina of theoretical respectability. Caught in the middle are legislators who formerly had some intuitive sense that there were limits on deficit spending (even if liberals and conservatives disagreed on what those limits might be) and now see no limits at all, provided spending addresses short-term problems caused by the pandemic and economic depression. Members of Congress who voted for $3 trillion of new deficit spending between March and July 2020 might not have heard of MMT, yet that is what they espoused by their actions.

The brightest advocate for MMT is Professor Stephanie Kelton of Stony Brook University. Her views are encapsulated in her new book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy (2020).


Kelton is honest about the need for state power to make this system work. She writes, “Only the state, through its power to make and enforce tax laws, can issue promises that its constituents must accept if they are to avoid penalties.” She does not explicitly say penalties include property confiscation and imprisonment for nonpayment of taxes, yet that is the unavoidable implication. State power is the root of state money.

It is true that state power can proclaim the kind of money acceptable for payment of taxes. It is true that citizens may regard the declared form of money as money in order to pay taxes and avoid prison. It is true that a central bank and a treasury can work together in a condition called “fiscal dominance” to monetize unlimited government debt and support unlimited government spending. Finally, it is true that government spending goes into someone’s pocket and enriches that individual or company by that amount of spending, at least temporarily.

MMT fails not because of what it says but because of what it ignores. The issue is not whether there is a legal limit on money creation but whether there is a psychological limit.

The real source of money status is not state power; it’s confidence. If two parties to a transaction have confidence that their medium of exchange is money, and others regard it as such, then that medium is money in the wider society. In times past, money consisted of gold, silver, beads, feathers, paper tokens, and diverse badges of confidence.

The difficulty with confidence is that it’s fragile, easily lost, and impossible to regain. MMT’s great failing is that it takes confidence for granted. Reasons for ignoring confidence range from overreliance on quantitative models to overreliance on state power. As for the former, ignoring psychology because it does not fit neatly into quantitative equilibrium models is no less than willful ignorance. As for the latter, one need only consider the long history of failed states, which today include Venezuela, Somalia, Syria, Yemen, Lebanon, and North Korea. State power is not absolute and it is not permanent.

MMT’s other blind spot is velocity or turnover of money. Velocity is scarcely discussed in MMT literature. Only by ignoring velocity can MMT champions such as Kelton and Wray wish away hyperinflation as confidence in state money erodes. The reaction to lost confidence in one form of money is to spend it as fast as possible or acquire another form. This behavioral adaptation, not money printing, is the real cause of inflation. Confidence and velocity are inversely correlated and together are the Achilles’ heel of MMT.


MMT’s intellectual failings will become apparent in the next several years. This could play out as persistent deflation (because MMT policies cannot create growth) or as inflation (as MMT policies destroy confidence in state money). Likely both will emerge: deflation first, followed by inflation.

For now, the importance of MMT is not that it works (it doesn’t) but that it provides a cloak of credibility for Congress to spend unlimited amounts and for the Federal Reserve to monetize that spending. Both monetary policy and fiscal policy are in overdrive to “stimulate” the U.S. economy in the face of the New Great Depression. Neither money printing nor spending provides stimulus, for reasons explained in the following sections. The academic lip gloss of MMT does not change that result.


The combination of real rate hikes and effective rate hikes (through QT) meant the Fed was engaged in an extreme form of monetary tightening in 2015–18 in what was still a weak economy. Of course, the Fed did not understand this due to its deficient forecasting ability.



Put simply, the world was in a dollar-liquidity crisis five months before the pandemic and new depression hit home. The pandemic was a force multiplier on what was already a financial crisis, albeit one not well understood by nonspecialists in government bond markets.


The Fed is capable of only one task—inflating stock market valuations as needed. Stock market investors have taken note and respond accordingly. Pumping up stock markets is not part of the Fed’s dual mandate (price stability and maximum employment), yet the Fed is good at it.


No doubt the Fed will create as many funds and facilities as needed to keep markets liquid and keep the banks open. The difficulty is that none of these programs provides stimulus or creates jobs. None of them will return the economy to trend growth (even the weak 2009–19 trend growth). They will keep hedge funds and banks from failing, and they will keep trading markets from freezing up in the short run. Yet these programs are not a source of jobs or growth.

The reason for this world-historic litany of failure by the Fed can be reduced to one word—“velocity”—the turnover of money.



It turns out that velocity is not constant, contrary to Friedman’s thesis. Velocity is like a joker in the deck. It’s the factor the Fed cannot control. Velocity is psychological: It depends on how an individual feels about her economic prospects. Velocity cannot be controlled by the Fed’s printing press. That’s the fatal flaw in monetarism as a policy tool. Velocity is a behavioral phenomenon, and a powerful one.


This brings us to the crux. The factors the Fed can control, such as base money, are not growing fast enough to revive the economy and decrease unemployment. The factors that the Fed needs to accelerate are bank lending and velocity in the form of spending. Spending is driven by the psychology of lenders and consumers, essentially a behavioral phenomenon. The Fed has forgotten (if it ever knew) the art of changing expectations about inflation, which is the key to changing consumer behavior and driving growth. It has almost nothing to do with money supply, contrary to the nostrums of monetarists and Austrian School economists.


There’s no doubt about the amount of deficit spending and its impact on critical debt ratios. There’s little debate about the necessity for this spending to keep the economy from spiraling into an even deeper depression than the one we are now witnessing. Yet spending is not “stimulus.” Congress is spending money as a temporary bridge until growth is revived, but such spending alone will not deliver growth.


The belief that deficit spending of any quantity at any time produces more growth than the amount spent is what lies behind the claim of “stimulus” in the congressional frenzy of trillion-dollar deficits now under way. This is a false belief.

In fact, America and the world are inching closer to what Carmen Reinhart and Ken Rogoff describe as an indeterminate yet real point where an ever-increasing debt burden triggers creditor revulsion, forcing a debtor nation into austerity, outright default, or sky-high interest rates.


Creditors grow anxious while continuing to buy more debt in a vain hope that policy makers will reverse course or growth will spontaneously emerge to lower the ratio. This doesn’t happen. Society is addicted to debt, and the addiction consumes the addict. The United States is the best credit market in the world and borrows in a currency it prints; for that reason alone, it can pursue an unsustainable debt dynamic longer than other nations. Yet history shows there is always a limit.

Those considering endgame scenarios agree a U.S. default (whether by nonpayment or inflation) is not imminent. This does not mean all is well. The salience of the Reinhart-Rogoff research is not the imminence of default but the weight of structural headwinds to growth.



Evidence is accumulating that developed economies, in particular the United States, are on dangerous ground and possibly past a point of no return.

The end point is a rapid collapse of confidence in U.S. debt and the U.S. dollar. This means higher interest rates to attract investor dollars to continue financing the deficits. Of course, higher interest rates mean larger deficits, which makes the debt situation worse. Or the Fed could monetize the debt (as the MMT followers would have it), yet that’s just another path to lost confidence. You cannot borrow your way out of a debt trap and you cannot print your way out of a liquidity trap. The result is another twenty years of slow growth, austerity, financial repression (where interest rates are held below the rate of inflation to gradually extinguish the real value of debt), and an expanding wealth gap. The next two decades of U.S. growth would look like the last three decades in Japan. Not a collapse, just a long, slow stagnation—another name for depression.


Modern Monetary Theory is an intellectual sham that celebrates the coercive power of the state and fails to credit the importance of confidence in the operation of a monetary system. Monetary policy fails because it ignores the behavioral root of velocity, relying on money creation and not comprehending why people refuse to spend money even when it’s offered up by the truckload. Fiscal policy fails because debt is so high already that citizens adapt their behavior to a world where default, inflation, or higher taxes are the only ways out. Those three paths have one factor in common—they augur more savings and less spending in preparation for the economic endgame. Over these three sinking ships hangs the specter of deflation.

The New Great Depression will produce powerful and persistent deflation, a result the U.S. Treasury and Federal Reserve fear more than any other economic outcome. Deflation is the most feared outcome because it makes the debt burden worse, yet it’s the most likely outcome because of the self-fulfilling liquidity trap.


Why, then, is the Federal Reserve so fearful of deflation that it resorts to extraordinary policy measures intended to cause inflation? There are three reasons for this fear.

The first is deflation’s impact on government debt.


The real value of debt increases, making repayment more difficult.

The second problem with deflation is its impact on the debt-to-GDP ratio.


The impact of sky-high debt-to-GDP ratios is a loss of confidence, higher interest rates, worse deficits because of the higher interest rates, and finally an outright default on the debt through either nonpayment or inflation.

The third deflation concern has to do with the health of the banking system and systemic risk.



In summary, the Federal Reserve prefers inflation because it erases government debt, reduces the debt-to-GDP ratio, and props up the banks. Deflation may help consumers and workers, yet it hurts the Treasury and the banks and is firmly opposed by the Fed. From the Fed’s perspective, aiding the economy and reducing unemployment are incidental by-products of the drive to inflate. The consequence of these deflationary dynamics is that the government must have inflation, and the Fed must cause it. The irony is that the Fed does not know how.

The New Great Depression will be characterized by powerful deflation, at least initially. This deflation will be the result of greatly increased savings, reduced spending, and falling money velocity. Lower prices will beget more saving, which will beget lower prices, and so on, in a classic liquidity trap and deflationary spiral. Workers who have lost their jobs, businesses that have shut their doors, and others who fear they will be next to suffer the same fate will be in no mood to borrow or spend. Deflation is the immovable object that defeats the combined forces of easy money and big deficits. Neither the Fed nor Congress will achieve their stimulus goals until they defeat deflation, an enemy they have not faced in such virulent form since the 1930s.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 9:11 pm

and the outbreak of the Second World War in 1939. It’s too much to blame Hitler on the Spanish flu. Still, the evidence suggests some linkage between the virus and Wilson’s impaired mental health and at least certain outcomes that contributed to another war.

Famed psychiatrist Karl Menninger published an article in the American Journal of Psychiatry in 1924 titled “Influenza and Schizophrenia.” In his article, Menninger wrote, “Of the psychoses appearing in close conjunction with influenza, as observed during the 1918 pandemic, the schizophrenic syndrome was by far the most frequent.” Laura Spinney cites the case of heiress Nancy Cunard, “who caught the flu in early 1919, developed pneumonia, and was dogged by depression throughout her long convalescence.”

These and other sources make clear that the deleterious mental-health legacy of Spanish flu was lengthy and pervasive. In many cases that dysfunction emerged violently through murder, suicide, and domestic abuse. In other cases it persisted silently as depression, personality changes, or cognitive confusion. Even in its mildest form the flu conjured a darker more fatalistic muse expressed in writing, film, and painting, although it was not usually mentioned by name. The end of the Spanish flu, which outlasted the First World War, was a prelude to seventy years of turbulence through the Great Depression, the Second World War, the Holocaust, the advent of nuclear weapons, the Cold War, and crises in between. The legacy of the Spanish flu was a century of chaos.

Now, a century later, as we cope with COVID-19, are we facing a new legacy of anger, bitterness, and social disorder? Will the pandemic response of economic lockdown, something that was not done except in limited circumstances during the Spanish flu, cause its own trauma that impedes an economic recovery or makes one impossible? These questions have no definitive medical answer at this stage, yet as with Spanish flu, anecdotal evidence is disturbing. Any resulting dysfunction may be long lasting.

The mental-health damage from COVID-19 takes two forms, as was also true of the Spanish flu. The first is cognitive impairment caused by physical penetration of the central nervous system by the virus. The second is behavioral dysfunction caused by quarantine, isolation, and the psychosocial effects of the commercial lockdown. We consider these consequences separately.

There is preliminary clinical evidence that COVID-19 can cause serious neurological damage, in addition to the obvious damage to the lungs and other organs that has been widely reported. On March 31, 2020, the scientific journal Radiology published a study reporting the first case of “acute necrotizing hemorrhagic encephalopathy,” a rare condition, that was associated with COVID-19. This condition is a dangerous and potentially lethal inflammation of the brain characterized by seizures and cognitive



The virus has no politics; as discussed above, it’s not clear to scientists that a virus is even alive. The mental-health effects described in scientific and anecdotal evidence to date, including depression, anxiety, loss of social skills, and some tendency toward violence, apply to state agents such as politicians and police, as well as citizens, shopkeepers, and protesters alike. No one of any political persuasion is immune. That’s important because in a polarized society, the tendency is to single out bad actions of the “other side” and downplay the antisocial acts of those whom one supports. Antisocial behavior has political ramifications, yet the behavioral aftermath of COVID-19 is not political; it’s clinical and epidemic.



From defiant hairstylists to armed occupiers of a major city, the anger, frustration, and insurgence of Americans has come pouring out in a mere ninety days. The history of racism in America is centuries old and was institutionalized and embedded in American culture long after the 1865 adoption of the Thirteenth Amendment to the Constitution, which ended slavery. Yet there have been many racial injustices that did not provoke either the breadth of peaceful protest or the depth of violence seen after the killing of George Floyd. It’s too much to blame urban riots on COVID-19, just as it was too much to blame the Second World War on Woodrow Wilson’s bout with the Spanish flu. Antifa was long waiting in the wings. Yet it’s not too much to posit that fear of infection, the antisocial conditioning of quarantine and lockdown, and sheer uncertainty as to when or if the pandemic would end were contributing factors to nationwide social unrest on a scale not seen since the urban riots of 1968. Anxiety and depression are pervasive. If the Floyd killing was a match, lockdown fatigue was part of the kindling. Whether it’s a Dallas stylist defying a judge or a bat-wielding extremist defying the NYPD, Americans are suffering psychosocial effects caused by politicians who seized on the pandemic to play petty dictator.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 10:00 pm

Cognitive dissonance is the best way to describe the behavior of most market participants today. On the one hand, the United States is experiencing its worst pandemic since the Spanish flu, the worst depression since the Great Depression, and the worst rioting since 1968 at the same time. On the other hand, major U.S. stock market indices recovered most of the February–March 2020 losses by early June; the NASDAQ Composite Index reached a new all-time high of 12,056 on September 2, 2020.



This thought experiment in cognitive dissonance demonstrates several essential facts for investors. The first is that you can make money in every kind of market. The idea that in bear markets you should quickly go to cash and move to the sidelines is untrue. That move will preserve wealth, yet an investor will miss out on profit-making opportunities that exist in bear markets. Unfortunately, investors are taught that stocks, notes, and cash are the only asset classes they can consider (and 401(k) plans are structured exactly that way). Yet there are liquid markets in property, private equity, alternative investments, natural resources, gold, currencies, fine art, royalties, insurance claims, and other asset classes. These asset classes don’t just add range to tired allocations between stocks and bonds; they add true diversification, which is one of the few ways to increase returns without commensurately increasing risk.

The second lesson from cognitive dissonance is that profit opportunities are manifest if you understand that markets are not about being right or wrong; they’re about information. There’s a myth that markets are efficient venues for price discovery that smoothly process incoming information and adjust continuously to new price levels before investors can catch up and take advantage. That has never been true, and it’s less true today than ever before. This “efficient markets hypothesis” was an idea dreamed up in the faculty lounge at the University of Chicago in the 1960s that has been propagated to generations of students ever since. It has no empirical support; it just seems elegant in closed-form equations. Markets are not efficient; they freeze up at the first sign of trouble. They do not move continuously between price levels; they gap up or down in huge percentage leaps. This can produce windfall profits for longs or wipeout losses for shorts. That’s life; just don’t pretend it’s efficient. Most important, the efficient-markets hypothesis was used to herd investors into index funds, exchange-traded funds (ETFs), and passive investing based on the idea that “you can’t beat the market” so you might as well just go along for the ride. That works for Wall Street wealth managers, who simply collect fees on account balances and new products. It does not work for investors who take 30 percent losses (or worse) every ten years or so and have to start over to rebuild lost wealth. You can beat the market using good forecasts, market timing, and a perfectly legal form of inside information. That’s what pros do. That’s what robots do. And everyday investors can do it too.



The fact is markets are more likely to be wrong than right in their forecasting. When markets get the forecast wrong, the gap between perception and reality can benefit investors.



Markets did not see the crash coming in 2008. And they did not see the crash coming in 2020. That’s not what markets do. Understanding what’s coming next is up to you.


How can you beat the market? There are three steps: Get the forecast right, get the policy reaction function right, and trade ahead of both.



It is essential to stay informed and be nimble.

The Wall Street mantra of “set it and forget it” is a great way to lose money.




This technique (“stay informed and stay nimble”) is not limited to the stock market. It can be applied to every asset class, including bonds, private equity, and gold. I continually run into people who are surprised by a particular recommendation I make. They say, in effect, “Six months ago you said the opposite!” That’s right. Ideas that were perfect six months ago may have performed as expected, producing significant profits, and now the time has come to close out the position, pocket profits, and try something new. This is particularly true in currency and commodity markets, where dollar prices can be range bound and subject to predictable reversals. The EUR/USD exchange rate may move between $1.00 and $1.60, but it will not go to zero like a bankrupt company or to exorbitant heights like Apple. Reversing course around critical pivot points is an essential trading technique. Markets change, conditions change, and news changes daily. You need to switch your portfolio mix in at least some respects to outperform markets.


This is not day-trading (which I do not endorse).


Instead it’s a medium-term outlook (six months forward) with continual updating. This does not mean a position can’t be profitable for five to ten years. It can. Nonetheless, you should be evaluating positions on a rolling six-month-forward basis to provide time to get out of the way of an oncoming train if needed. Markets don’t do this well; they tend to get run over by the train and take investors down with them. Yet individual investors can execute this strategy with the right models and the right forward-looking trades.



A word on diversification: It works. Diversification is a sure way to improve returns without adding commensurate risk. The problem is most investors don’t understand what diversification is, and neither do their wealth managers.



When you make investment decisions, remember you’re not competing with other investors; you’re competing with robots.

That’s good news because robots are dumb. They do exactly what they’re told. When you hear the phrase “artificial intelligence,” you should discount the word “intelligence” and focus on the word “artificial.” Robots are programmed with code developed by engineers in Silicon Valley, many of whom have never set foot on Wall Street. They use large data sets, correlations, and regressions, and they read headlines and content for key words. When certain key words are encountered, or when price action deviates from a predetermined baseline, the robot is triggered and executes a buy or sell. That’s about it.



That’s why we have history. Robots assume that the people who utter the key words know what they’re doing, but they don’t. The Fed has the worst forecasting record of any major economic institution; the IMF is no better. Official forecasts should always be listened to and never relied upon. The officials in charge have no idea what they are doing. The robots’ massive databases may have a huge volume of data, but they don’t go back very far in time. Twenty or thirty years is not enough to form a good baseline. Ninety years is better. Two hundred years is better still. Robots routinely “buy the dips,” chase momentum, and believe the Fed. When you know that robots are leading markets over a cliff, you can front-run the inevitable correction and profit from the robots’ blind spots. Once again, you profit from the gap between reality and perception.

A word on insider trading: It’s legal (most of the time). Insider trading involves using material, nonpublic information to trade ahead of big moves and beat the market. It’s illegal only if you steal the information or receive it from someone who breached a trusted relationship



output is always changing based on updated information and conditional correlations.

To summarize:

Use models that work (as described below).

Update continually (with a rolling six-month horizon).

Diversify (across asset classes, not within one asset class).

Acquire proprietary inside information (legally).

Use market timing (to beat the crowd).

Front-run the robots (they’re not that smart).

Own the perception gap (reality always wins in the end).

Be nimble.




The prior section described the defective models used by policy makers and Wall Street wealth managers. So what forecasting models actually work?

Our model-construction technique uses four branches of science that are consistent with reality and can also solve for uncertainty. The first branch is complexity theory.



The second branch in model construction is Bayes’ theorem, a formula from applied mathematics.




The third branch is history. Academic economists and Wall Street analysts despise history or simply ignore it because it can’t be quantified and used in equations.



The fourth branch is behavioral psychology.



The fusion of complexity + Bayes’ + history + psychology in the new models is just a beginning. From there one can construct cognitive maps consisting of nodes (individual cells that represent critical factors or tradable results) and edges (lines connecting the nodes in a dense network). Separate maps are created for each market or asset class (interest rates, stock indices, currencies, commodities, etc.). These maps are constructed under the guidance of subject-matter experts who have the best grasp of relevant factors. The edges are given a direction (A —> B) and assigned a weight. Some edges are omnidirectional due to recursive functions (A <—> B). The nodes contain coded instructions based on a new branch of applied mathematics. Finally, the nodal processing is populated with both market data and plain-language reading ability from massive news feeds more sophisticated than mere headline readers. Edge weights and nodes are updated continually to reflect market and political conditions. The tradable output node is typically geared to a six-month horizon, which can be lengthened or shortened as needed.

This is our predictive analytic system. It’s not for day traders. The new models can’t tell you what will happen tomorrow. They can tell you what will happen in six months. That allows an investor to trade ahead of markets, which is the key to consistent risk-adjusted profits and excess returns. And it’s the key to avoiding meltdowns.
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 10:01 pm

WHAT ARE THE MODELS TELLING US?
Here’s a summary of our predictive analytic views for the postpandemic world of 2021 and 2022:

Deflation (or strong disinflation) will prevail.

Stocks have not hit bottom.

Interest rates will fall further.

Bonds will continue to rally.

Gold will go significantly higher.

The COVID-19 recovery will be slow and weak.

Unemployment will remain near 10 percent.

Commercial real estate will fall further.

Residential real estate is an attractive opportunity.

The dollar will be strong in the short run, weaker by 2022.

Oil will surprise to the upside based on output reductions and sanctions.



As fourth-quarter 2020 data emerges, and as the reality of slow growth, rising bankruptcies, nonperforming loans, persistent high unemployment, and deflation are taken into account, stocks will fall back to earth and the perception/reality gap will close. The improved models project the Dow at 16,000 and the S&P 500 at 1,750 by late 2021, with some outperformance in the defense, natural resource, and technology sectors.




Why gold?

That’s a question I’m asked frequently. I sympathize with the interlocutors. The fact that people don’t understand gold today is not their fault. Economic elites, policy makers, academics, and central bankers have closed ranks around the idea that gold is taboo. It’s taught in mining colleges, but don’t dare teach it in economics departments. If you have a kind word for gold in a monetary context, you are labeled a “gold nut,” a “Neanderthal,” or worse. You are excluded from the conversation.



Nixon’s announcement was a big deal. Still, he intended the suspension to be temporary, and he said so in his announcement. The idea was to call a time-out on redemptions, hold a new international monetary conference similar to Bretton Woods, devalue the dollar against gold and other currencies, then return to the gold standard at new exchange rates. I confirmed this plan with two of Nixon’s advisers who were with him at Camp David in 1971 when he made the announcement.



Now, with gold trading freely, we saw the beginning of bull and bear markets; these don’t happen on a gold standard because the price is fixed.

The two great bull markets were 1971–80 (gold up 2,200 percent) and 1999–2011 (gold up 760 percent). Between these bull markets were two bear markets (1981–98 and 2011–15). Yet the long-term trend is undeniable. Since 1971, gold is up over 5,000 percent despite two bear-market episodes. Investors worried about day-to-day volatility in gold prices and occasional drawdowns are likely to miss this powerful long-term dynamic.

The third great bull market began on December 16, 2015, when gold bottomed at $1,050 per ounce after the prior bear market. Since then, gold’s dollar value has gained over 90 percent. That’s significant, but still a modest gain compared with the 2,200 percent and 760 percent gains in the last two bull markets. This pattern suggests the biggest gains in gold prices are yet to come.




Where does gold go from here?

The price of gold is driven by three principal factors. The first is safe-haven buying, the so-called fear factor. This is actuated by geopolitical developments, financial warfare, market collapse, and the new pandemic. The second factor is the level of real interest rates, itself a function of nominal rates and inflation. Gold has no yield and competes with cash equivalents for investor dollars. When real rates are higher, cash becomes more attractive. That’s a headwind for the dollar price of gold. The third factor consists of fundamental supply and demand. Gold is no different from other commodities in this regard. If supply is abundant and demand is weak because of poor sentiment, that’s a headwind for the dollar price of gold. At any point in time, these three factors can align or not. All three might push for a higher gold price, all three might push gold lower, or the vectors may be mixed, with one or two factors acting as headwinds while a third gives gold a boost.



What will drive gold out of its recent pandemic consolidation pattern and push it firmly over $2,000 per ounce and headed higher? There are three drivers.

The first is a loss of confidence in the U.S. dollar in response to massive money printing to bail out investors in the pandemic. If central banks need to use gold as a reference point to restore confidence, the price will have to be $10,000 per ounce or higher. A lower price would force central banks to reduce their money supplies to maintain parity, which is highly deflationary.

The second driver is a simple continuation of the gold bull market. Using the prior two bull markets as reference points, an average of those gains and durations would put gold at $14,000 per ounce by 2025. There is no necessary connection between the prior bull markets and the current one, but their history does offer a useful baseline for forecasting.

The third driver is panic buying in response to a new disaster. This could take the form of a second wave of infections from SARS-CoV-2, failure of a gold ETF or the Commodity Exchange to honor physical delivery requirements, or an unexpected geopolitical flare-up. The gold market is not priced for any of these outcomes right now. It won’t take all three events to drive gold higher. Any one will suffice. None of the three can be ruled out. These events or others would push gold well past $2,000 per ounce, on the way to $3,000 per ounce and ultimately higher for the reasons described above.



Physical gold bullion will move from $2,000 per ounce past $2,500 per ounce by early 2021. From there, further gains to $14,000 per ounce by 2025 are likely. That will produce 700 percent gains over the next four years. Shares of well-run gold-mining firms are likely to produce 2,000 percent gains over the same time period, with a six-month lag to advances in the bullion price.




Unlike physical gold, which is an element (atomic number 79) the same in all times and places, no two real estate parcels are alike. This makes real estate valuation more art than science.


Commercial real estate will rebound, but not soon. Whatever the long-term prospects are, there’s no point in investing until the bottom is in sight. No one can call an exact bottom. Still, we have enough information to know the bottom won’t be before late 2021 at the earliest. It will take time for rent renegotiations, relocations, bankruptcies, evictions, and the work-from-home revolution to emerge in the form of lower prices. This is a sector to keep an eye on and for which to keep some dry powder in terms of cash and leverage available for opportunities. Patience will be rewarded compared with jumping in too soon.


In summary, commercial real estate that has not hit bottom yet will present attractive investment opportunities on a selective basis in late 2021. Residential real estate is attractive today, subject to seasoned talent in the offering management companies and desirable locations away from older cities and toward low-tax, low-cost regions.


Cash is the most underrated asset class in the mix. This is a mistake by investors, because cash will be among the best-performing asset classes for the next two to three years.

The reason cash is disparaged is because it has a low yield. That’s true; the yield is close to zero. Yet that truism misses several points. The nominal yield may be zero, yet the real yield can be quite high in a deflationary environment.


Another underrated advantage of cash is optionality.


In contrast, cash has no exit fee. If you have it, you can be the nimble investor who can respond on short notice to an investment opportunity others may have overlooked or not seen coming. Cash is your call option on every asset class in the world. Optionality has value that most investors don’t understand. Still, it’s real and adds to the value of your cash hoard.

Finally, cash reduces your overall portfolio volatility. The nominal value of cash is unchanged in all states of the world (although the real value can fluctuate, as explained above). A diversified portfolio contains volatile assets, including stocks, gold, and bonds. Cash reduces portfolio volatility compared with the volatility of those separate asset classes. Functionally, it’s the opposite of leverage, which increases portfolio volatility. There’s enough volatility in the world today. Cash smooths out portfolio returns and helps investors sleep at night.

In summary, cash is not a sterile asset. It has real yields in deflation, it offers holders the ability to be nimble, and it reduces portfolio volatility. That’s an attractive trifecta.

U.S. Treasury Notes


Maturities of five to ten years are a sweet spot offering good liquidity, slightly higher yields, and significant capital-gains potential.

The criticism of Treasury bonds, which we’ve heard with increasing shrillness for the past ten years, is that rates are so low they have nowhere to go but up. The bears recite the fact that we are at the end of the greatest bond bull market in history and are on the brink of a new superbear market. They advise you to dump bonds, go short, buy equities, and enjoy the ride.

At least, that’s what they did until March 2020. In fact, bond bears, including famous names such as Bill Gross, Jeff Gundlach, and Dan Ivascyn, have proved to be completely wrong. Interest rates are near all-time lows, while capital gains on Treasury notes have been historically large. Some of the lesser-known bond bears have been carried off the field feetfirst as their funds failed and investors fled.

What did the bond bears miss? They failed to grasp the critical distinction between nominal yields and real yields. It’s true that nominal yields have hit progressively lower levels for almost forty years. We’ve seen one of the greatest bond bull markets in history. As yields approached zero, it seemed as if the party must end. Yet real yields are not low at all; in fact, they’re quite high, which is one reason the stock market crashed in the fourth quarter of 2018 and again in the first quarter of 2020.


That said, can rates go even lower than they are today? The answer is they can, and they will. Lower rates bring the concept of negative rates into play.


In other words, the bull market in bonds has far to run, as long as deflation is a threat and real yields are too high to stimulate a recovery. Both conditions prevail today. The bull market in bonds is not dead. Long may she run.



The forgoing overview of market conditions, rigorous modeling, and accurate forecasting and the survey of asset classes provide visibility on an optimal portfolio asset allocation that is robust to deflation, is robust to inflation, preserves wealth in a continuing crisis, and provides attractive risk-adjusted returns in both the fast- and slow-recovery scenarios. It appears as follows:



Cash

30 percent of investible assets

Gold

10 percent of investible assets

Residential real estate

20 percent of investible assets

Treasury notes

20 percent of investible assets

Equities

10 percent of investible assets

Alternatives

10 percent of investible assets


Some caveats are in order. To start, the cash allocation may be temporary. It’s designed to offer optionality, yet the time may come in late 2022 when the investor will have greater visibility and wish to pivot to equities (if the recovery exceeds expectations), gold (if inflation emerges sooner than expected), or commercial real estate. Gold and Treasury notes come closest to the “buy and hold” category. Gains in gold will play out over five years, so there’s no need to change the allocation based on short-term volatility. Likewise, Treasury notes are a classic asymmetric trade. Rates may go down (as I expect), yet they almost certainly will not go up (as the Fed has promised), so you will either make money or retain wealth; the chances of losing are low. The equity allocation should be weighted to natural resources, mining, commodities, energy, water, agriculture, and defense. These are the true countercyclicals that will do well in bear markets and will outperform in bull markets. Real estate and gold are the inflation hedges. Treasury notes and cash are the deflation hedges. This portfolio offers true diversification, preserves wealth, is robust to shocks, and offers material upside potential. In an age of pandemic, depression, riots, and global threats, that’s as good as it gets.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: New Rickards book!

Post by vnatale » Thu Jan 14, 2021 10:18 pm

The COVID-19 pandemic and the New Great Depression, which are densely entwined, are more than just another episode in a long-running series of panics and crashes. One can easily make a list, starting with the 1929 stock market crash and first Great Depression, running through the October 1987 flash crash, the 1994 Tequila Crisis, the 1998 Russia-LTCM crisis, the 2000 dot-com crash, and the 2008 global financial crisis. Along the way the world suffered through the 1957 Asian flu, the 1968 Hong Kong flu, and the 2009 swine flu. The jaded observer might say there’s nothing new about market crashes or pandemics, what we’re going through has been seen before, and it’s not different. This too shall pass.

That’s a mistake. This convergence of viral and economic crises is different and worse. The first and most obvious difference is these crises are concurrent; in fact, one caused the other, with help from the misguided lockdown. There was no pandemic during the Great Depression. There was no market crash during the Asian flu. Those crises came sequentially, not concurrently. Now we have both a pandemic and a depression and are verging on social disorder as well. This is not mere coincidence. Complex system turbulence has a way of catalyzing turbulence in other complex systems. We saw a contained version of this in March 2011 in Fukushima, Japan, when an earthquake caused a tsunami, which caused a nuclear reactor meltdown, which caused a stock market crash. Four complex systems crashed into one another in a cascade of failures. A similar phenomenon is happening now with the pandemic, depression, and social unrest, except the scale is larger and it is not contained. This difference in scope and scale is not merely cumulative; it is exponential.



The 2020 pandemic-and-depression is a turning point because our lives will never be the same. It will take years for the full implications to play out, yet we will not return to business as usual. Depressions truly are different.

There is both good and bad in this new turning point. The bad is all around us. America was deeply polarized before the twin crises; she is more so now. Issues such as using masks to prevent the spread of the virus should have been confined to scientific quarters, with clear information provided to the American public. Instead, wearing a mask became a progressive conceit because it signaled respect for “science” and government control, while not wearing a mask became a conservative conceit because it signaled rejection of the nanny state and the embrace of “freedom.” This division carried over into the broader debate on the lockdown, the reopening, and the public-policy response of massive monetary and fiscal stimulus. Emerging disorder, from Seattle to Atlanta, is as much a symptom of the social disconnectedness that arose during the lockdown as it is a new cause for concern. There has been no shortage of irony. Those who favored open borders with Mexico suddenly applauded when the governor of Rhode Island ordered state police to detain drivers with New York license plates. Perhaps Rhode Island should build a wall. Of course, the virus didn’t care.

The good news is that the situation is so grave and the challenge so daunting that this may be a time for Americans to work together for the good of America rather than the good of an ideology. There were many contributors to Allied victory in the Second World War,



There was time enough for politics after the war. This cooperative approach requires leaders on both sides to put acrimony and bitterness aside. There’s no sign of this yet. Still, the crisis will linger and the needed comity may emerge in the fullness of time.


Before settling on a solution to the U.S. and global depression, one must first identify the specific source of the problem. America’s greatest economic problem today is debt.



To be clear, this is not about “paying off the national debt.” That’s completely unnecessary; the last time the United States was debt free was 1837. What is necessary is to make the national debt sustainable. The debt can grow in nominal terms as long as the real value of the debt is shrinking and the debt-to-GDP ratio is declining. Real growth can do this. Where real growth is not in reach, inflation and nominal growth work just fine.

So the problem is debt compounded by deflation. What is not clear is a way out of the wilderness, a solution to the new depression. Two presidents have found this solution—Franklin Delano Roosevelt and Richard Nixon—and the solution is there for the asking today. The solution is a dollar devaluation, not against another currency but against gold.


Deflation was the enemy; inflation was FDR’s friend, and FDR achieved inflation over the objection of banks and the Fed by raising the dollar price of gold. FDR ended his successful experiment in monetary policy in January 1934 with legislation that fixed the dollar price of gold at $35 per ounce, where it remained until 1971. The dollar price of gold rose 69.3 percent between March and December 1933. Measured by weight of gold, the dollar was devalued by 41 percent over the same period. A powerful inflationary wave had been created in just nine months.


FDR’s gold exercise was controlled and successful. Nixon’s gold exercise was ad hoc and a massive failure. FDR stimulated growth and helped the United States find its way out of depression. Nixon created chaos, including borderline hyperinflation and three recessions from 1973 to 1981. This history shows that intervening in the dollar-gold relationship is like working the control rods on a nuclear reactor. If you do everything right, the reactor is a useful energy source. If you make one mistake, you can cause a meltdown.


Besides, an increase in the dollar price of gold today does not require a new gold standard. The Fed could simply buy gold at progressively higher prices after making its intentions known in advance. This is a straightforward open-market operation using gold instead of Treasury notes. As the gold price increased, the dollar would be devalued (as would other currencies) and inflation would arrive like clockwork. The inflation would melt the debt, the depression would end, and real growth would resume. Don’t hold your breath waiting for this program. It’s beyond the comprehension of U.S. central bankers (although Russian and Chinese central bankers are hard at work buying all the gold they can source). You don’t need to wait for the central banks. You can buy gold yourself today. If the United States decides to raise the price of gold, you win. If the United States does not raise the price of gold, it will go up anyway because of debt and lost confidence in the dollar. Again, you win.

The pandemic will fade, perhaps not as quickly as some expect. A more lethal second wave is a possibility. Let’s pray it doesn’t happen. The depression will fade, but not anytime soon. Growth will be persistently weak; unemployment will be persistently high. Social life will resume, but it will not be the same. We’ll get used to it, but it won’t be the same. Social disorder will grow worse, at which point America will face hard choices about getting it under control. The one certainty is that the longer America waits, the harder those choices will be. The factor that will not fade freely is the debt burden. Debt leads to deflation, which worsens the burden. The answer is to use inflation to break the back of deflation. FDR showed us how to achieve that. His solution was gold. Our solution today is the same.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: New Rickards book!

Post by Hal » Tue Feb 02, 2021 1:31 am

Hi Vinny,

Just received Rickards book in the mail. :D
And yes, I did sneak a look in the conclusion.

All comments welcome

PS: Also included a snippet from Rickards newsletter which I actually find is worth the fee.
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Re: New Rickards book!

Post by Hal » Thu Feb 18, 2021 5:10 pm

And this is the addendum for the Australian edition. Must say I was a little surprised to read this :o

1. Consider leaving the country
2. Your retirement fund will be taxed at a MUCH higher rate.

Not sure how the recommendation to hold gold/wine/cryptos would obviate the taxation risk. Would still have to pay capital gains tax upon its sale ???
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Re: New Rickards book!

Post by vnatale » Tue Mar 30, 2021 9:26 pm

Hal wrote:
Tue Feb 02, 2021 1:31 am

Hi Vinny,

Just received Rickards book in the mail. :D
And yes, I did sneak a look in the conclusion.

All comments welcome

PS: Also included a snippet from Rickards newsletter which I actually find is worth the fee.


Are you going to inform "Lux Second" that "Lux Second" will NOT be the first Australian to read it??!!

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Re: New Rickards book!

Post by vnatale » Tue Oct 25, 2022 10:34 pm

New one on its way!


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Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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