Photo: How Jim does it

  • Ice Nine
  • First, or last?
  • Breakaways
  • Where and when you least expect it

We’re here at the Hotel Adlon in Berlin, Germany. We’re here to discuss big picture macroeconomic issues with strategist Jim Rickards, and a host of colleagues from our network of international partners.

There are representatives here from Germany, France, the US, UK, China, Argentina, Brazil, Spain, and of course, us from Australia.

Naturally, the star of the show is Jim. Here he is in full flow, presenting on the background to how he formulates his analyses.



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Source: Your editor
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Jim had some fascinating takes on where things have been, where there are now, and where they’re going. Exactly what did Jim say? Details below…

Markets

Overnight, the Dow Jones Industrial Average closed up/down X points, or X%.

The S&P 500 was up 114.78 points, or 0.58%.

In Europe, the Euro Stoxx 50 gained 37.6 points, or 1.18%. Meanwhile, the FTSE 100 gained 1.13%, while Germany’s DAX index gained 0.84%.

In Asian markets, Japan’s Nikkei 225 is up 21.27 points, or 0.08%. China’s CSI 300 is down 0.13%.

In Australia, the S&P/ASX 200 is up 38.8 points, or 0.7%.

On the commodities market, West Texas Intermediate crude oil is US$52.35 per barrel. Brent crude is US$55.21 per barrel.

Gold is US$1,162.80 (AU$1,550.99) per troy ounce. Silver is US$16.99 (AU$22.79) per troy ounce.

The Aussie dollar is worth 75 US cents.

Ice Nine

Jim had a lot to say, as he always does. But there were two ‘drop the mic’ statements that stole the show.

Both were on the subject of the next financial crisis:

The next financial crisis, which is coming, will be worse than 2008.

And:

In 1998 Wall Street bailed out a hedge fund. In 2008, the central bank bailed out Wall Street. Each crisis is bigger than the last. The next one will be much bigger than the 2008 crash.

Every time we hear Jim speak, we feel the same way. We go into the meeting thinking there can’t possibly be anything new to hear, and yet, we sit there mesmerised as Jim casually steps the audience through the process of how the next collapse will play out.

There’s only one thing Jim doesn’t know — and he freely admits his ignorance. He doesn’t know the timing. He doesn’t know exactly when the crash will happen; only that it will happen.

According to Jim, it’s inevitable.

But why should Australians care about this? Isn’t this mainly a US thing, or a European Union thing, or a UK thing…? Anywhere except Australia.

Jim has a phrase for it, ‘Ice Nine’. We’ve referenced this before. The term comes from Kurt Vonnegut’s book, Cat’s Cradle.

The concept is the existence of an element named ‘Ice Nine’. According to the story, Ice Nine is a water-like element, which freezes at room temperature. So far so good. But here’s the thing, when Ice Nine comes into contact with water, the water molecules convert into Ice Nine molecules.

Those molecules then come into contact with other water molecules, which then also convert into Ice Nine molecules.

You can see what this means. One drop of Ice Nine into a stream, would quickly result in the almost instantaneous freezing of the stream, other streams, rivers, lakes, oceans…and any other body of water.

When the novel was written, it was a metaphor for the threat of nuclear annihilation in the Cold War. But Jim relates this concept to the global financial system. It’s the idea that when the next collapse happens, it will begin a complete freeze of the system. As one part of the financial system collapses, it will cause the collapse of another, and another, and so on.

It’s a fascinating analogy, and a fascinating theory on how it will all play out in the months ahead.

Even more interesting is the role that Australia has played in the Ice Nine scenario. And it’s not an inconsequential role either. Details soon.

First, or last?

By the way, the formula we showed in the photo at the top of this letter, was how Jim came to the conclusion that there is a 70% probability of the US Federal Reserve raising interest rates next March.

Here’s the formula again. In this photo, are James Woodburn (co-host with your editor of the Financial Anarchists podcast) on the right, and one of our key marketing folks, Dan, on the left:



chart image

Source: Your editor
Click to enlarge


At this point in his presentation, Jim was explaining how 120 out of 120 analysts surveyed, have forecast the Fed to raise interest rates tonight, Australian time. However, when it comes to the timing of interest rate rises next year, the markets aren’t as sure about the timing.

There’s probably a simple reason for that. As Jim pointed out, after the Fed raised rates last December, the S&P 500 index fell nearly 11%. You can see that in the chart below:



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Source: Bloomberg
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Of course, things have changed since then. What if the market suddenly takes a dim view of higher interest rates? Realising that higher rates means higher costs for businesses, governments, and individuals.

If that happens, maybe you’ll see a repeat of last year, when the Fed raised rates, and then immediately talked down the prospect of a further rate rise — in the short term anyway.

The Fed meets overnight. We’ll know tomorrow morning what decision it has made at this meeting. We’ll also get an early inkling on how the market views the expected interest rate rise.

Breakaways

Most Federal Reserve interest rate watchers have gotten the Fed’s movements (and non-movements) just about right.

All 78 of the economists surveyed by Bloomberg believe the Fed will raise rates tomorrow. And after tomorrow’s rise, most economists believe the Fed Funds Rate will still be 0.75% after the March 2017 meeting.

But there are a couple of analysts who have broken away from the consensus. They too have gotten it right for the past couple of years, but now they’re going out on a limb. According to Bloomberg, Santiago Liboreiro of Cemex USA, and Joel Naroff of Naroff Economic Advisers, both figure the Fed Funds Rate will be at 1% following the March meeting.

We’re always on the lookout for contrarian views. Of course, the real contrarian view would be if an analyst predicted a rate cut. But heck, we can’t have everything, can we?

Where and when you least expect it

The original Hotel Adlon was mostly destroyed in 1945. What remained of it was situated on the East Berlin side of the Berlin Wall. It was completely razed to the ground in 1984.

The current Hotel Adlon is a modern take on the original building. The new building was completed in 1997.

Its location next to the Brandenburg Gate is a fascinating one. As you look from the Adlon, through the Brandenburg Gate, you can get a rough image of where US president Ronald Reagan made his ‘Tear down this wall’ speech in 1987.

Some folks consider that speech to be the beginning of the end of the Berlin Wall and the subsequent collapse of the Soviet empire. Others credit Pope John Paul II for ending the Cold War and communism in Eastern Europe.

We won’t dispute that both Reagan and the Holy Father likely did have an impact in some way. The magnitude of their impact, is however, debatable.

What you often find, in events of enormous magnitude, is that it’s a seemingly inconsequential event that has the biggest impact of all. As an article in the Los Angeles Times from 2009 relates of the fall of communism and the Berlin Wall:

Twenty years ago, on Sept. 11, 1989, the plug was pulled on the bathtub of Soviet empire.

At the stroke of midnight, tiny communist Hungary threw open the gates to freedom and the West. Tens of thousands of people surged across the suddenly unguarded border. Scenes of jubilation, of families reunited after decades of captivity in Eastern Europe, flashed around the world. Newsweek’s cover dubbed it the “Great Escape.” From one day to the next, Americans awoke to a startling new reality. Suddenly, it was possible to imagine the unimaginable: the fall of the Iron Curtain and an end to the Cold War…

Every great event has its hidden turning points. Victory in World War II, some say, hinged on Operation Fortitude, Britain’s legendary gambit to fool Hitler into thinking the Allied invasion of 1944 would come near Calais rather than the beaches of Normandy. Similarly, the collapse of the Berlin Wall and the end of the Cold War had their roots, in part, in a bold gamble that unfolded, all but invisibly, one fine summer day in 1989 on the Austrian-Hungarian frontier.

The date was Aug. 19. The place: Sopron, a sleepy provincial town in western Hungary. Even in such a backwater, the winds of change were blowing. In Moscow, Mikhail Gorbachev was at work, shaking up the old Soviet sphere. In Poland, the famous trade union known as Solidarity faced off against its communist masters.

Closer to home, in Hungary itself, a new generation of reform-minded communists had taken charge. Almost overnight, they wrote a U.S.-style constitution and began speaking openly of a free press, free markets and free elections. Emboldened, a small group of local Sopron activists decided to celebrate the new spirit. Their modest aim: put up some tents, hire a brass band and let the beer and good vibes flow. One of the organizers came up with an especially inspired idea — to briefly open a gate through the barbed-wire frontier to Austria, allowing people to casually stroll back and forth across the border for the first time in four decades. They called it the Pan-European Picnic…

Behind the scenes, buses were arranged to transport would-be escapees. Hungarian border guards were ordered to withdraw. As this new D-day dawned, the official organizers expected a few hundred people. Imagine their shock when the same scene played and replayed throughout the afternoon. Buses would arrive. East German tourists would get off, blink in confusion at the bizarre spectacle — then dash toward the open border gate to Austria.

Fewer than 700 East Germans left that day, but it was enough. In the days after the Pan-European Picnic, what had been a fearful trickle quickly became a flood. As for Nemeth, he was proved a prophet. Within weeks, Honecker was ousted in a Politburo putsch. Within three months, the Berlin Wall fell. East Germany collapsed, revolution swept Eastern Europe and the Soviet empire was no more.

The full story is in the LA Times archive. The reason for bringing this up is that often folks look for big, seemingly game-changing events as the catalyst. But it’s just as likely that a major game-changing event will be the result of a small, but significant, event.

Remember the ‘Ice Nine’ analogy. In the story, it didn’t require a shipping tanker full of the element in order to have a drastic effect on the world. All it required was a small vial containing a few drops of ‘Ice Nine’.

From there, the contagion spread, and quickly.

Communism in Eastern Europe and the Soviet Union may well have ended in a similar way. Not through the pressure of the only other Superpower, and not through the sermons from the Pope’s pulpit, but perhaps rather from the spontaneous and opportunistic actions of a minor Hungarian political leader who no-one remembers.

As Jim says, the next crash is inevitable. Unfortunately, most people are looking for it in the wrong place. Jim is helping his subscribers look for it in the right place.

Cheers,
Kris