Rickards: “Perfect Storm” Is Coming

rickards:-“perfect-storm”-is-coming

12-06-19 04:28:00,

Authored by James Rickards via The Daily Reckoning,

People often refer to the “perfect storm.” A perfect storm is generally understood as two or more events that are independent but converge to produce an outcome much worse than either event alone.

The term is an overused cliché, and as a writer I avoid clichés whenever possible. But though rare, perfect storms do exist. The most common example is the devastating 1991 storm popularized by the book and movie of the same name, although it was initially known as the “Halloween storm.”

In that case, three separate weather dynamics all converged in one place on one day to produce a perfect storm. The odds of all three coming together at once were less than one in 100,000. That’s less than once in 270 years. That’s a perfect storm.

Do metaphorical perfect storms happen in politics and capital markets?

The answer is yes, provided the conditions of the perfect storm definition are satisfied. The multiple events that make up the true perfect storm must be independent and rare and come to converge in an almost impossible way.

Unfortunately, a political and market perfect storm is now on the way and may strike as early as Halloween 2019, marking a new “Halloween storm.” Get ready.

Today I’ll be discussing the components making up this perfect storm, and how I see them all coming together at the same time.

In my 40-plus years in banking and capital markets, I have lived through a number of financial fiascos that arguably qualify as perfect storms. Here’s a partial list:

  • 1970: Penn Central bankruptcy, the largest in history at that time

  • 1973–74: Arab oil embargo

  • 1977–80: U.S. hyperinflation

  • 1982–85: Latin American debt crisis

  • 1987: One-day 22% stock market crash

  • 1988–92: Savings and loan (S&L) crisis

  • 1994: Mexican tequila crisis

  • 1997: Asian financial crisis

  • 1998: Russia/Long Term Capital Management (LTCM) crisis

  • 2000:Dot-com crash

  • 2007: Mortgage market collapse

  • 2008: Lehman Bros./AIG financial panic.

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Rickards: The Fed Is “Triple-Tightening” Into Crisis

rickards-the-fed-is-8220triple-tightening8221-into-crisis

14-11-18 11:21:00,

Authored by James Rickards via The Daily Reckoning,

It’s my job to continue pointing out the risks to the financial system that we still face and to try to help people prepare for the next crisis. Of course, central banks are a big part of the problem.

If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time. There’s no better example of this than the Federal Reserve.

The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system.

The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship.

The Fed uses “value at risk” modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.

As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy, only to produce the weakest recovery in history.

That’s over now. The Fed’s cycle of monetary tightening has been ongoing in various forms for over five years.

First came Bernanke’s taper warning in May 2013.

Next came the actual taper in December 2013 that ran until November 2014.

Then came the removal of forward guidance in March 2015, the liftoff in rates in December 2015, seven more rate hikes to date and the start of quantitative tightening in October 2017.

Another rate hike is already in the queue for December, which would be the ninth rate hike since liftoff.

During much of this tightening, the dollar was actually lower because markets believed the Fed would not raise in the first place or was overdoing it and would have to reverse course. Now that the Fed has shown it’s serious and will continue its tightening path (at least until they cause a recession), markets have no choice but to believe them.

And since last October, the Fed has also been reducing its balance sheet with quantitative tightening (QT).

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Jim Rickards Warns: Bursting This Bubble Could Break The World

Jim Rickards Warns: Bursting This Bubble Could Break The World

23-01-18 08:45:00,

Authored by James Rickards via The Daily Reckoning blog,

The key to bubble analysis is to look at what’s causing the bubble. If you get the hidden dynamics right, your ability to collect huge profits or avoid losses is greatly improved.

Based on data going back to the 1929 crash, this current bubble looks like a particular kind that can produce large, sudden losses for investors.

https://www.zerohedge.com/sites/default/files/inline-images/20180117_world.png

The market right now is especially susceptible to a sharp correction, or worse.

Before diving into the best way to play the current bubble dynamics to your advantage, let’s look at the evidence for whether a bubble exists in the first place…

My preferred metric is the Shiller Cyclically Adjusted PE Ratio or CAPE. This particular PE ratio was invented by Nobel Prize-winning economist Robert Shiller of Yale University.

CAPE has several design features that set it apart from the PE ratios touted on Wall Street. The first is that it uses a rolling ten-year earnings period. This smooths out fluctuations based on temporary psychological, geopolitical, and commodity-linked factors that should not bear on fundamental valuation.

The second feature is that it is backward-looking only. This eliminates the rosy scenario forward-looking earnings projections favored by Wall Street.

The third feature is that that relevant data is available back to 1870, which allows for robust historical comparisons.

The chart below shows the CAPE from 1870 to 2017. Two conclusions emerge immediately. The CAPE today is at the same level as in 1929 just before the crash that started the Great Depression. The second is that the CAPE is higher today than it was just before the Panic of 2008.

Neither data point is definitive proof of a bubble. CAPE was much higher in 2000 when the dot.com bubble burst. Neither data point means that the market will crash tomorrow.

But today’s CAPE ratio is 182% of the median ratio of the past 137-years.

Given the mean-reverting nature of stock prices, the ratio is sending up storm warnings even if we cannot be sure exactly where and when the hurricane will come ashore.

Chart

This chart shows the Shiller Cyclically Adjusted PE Ratio (CAPE) from 1880-2017.

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