A Dubious Monetary Backdrop

Doug Nolan

Now that was one eventful week. President Trump wasted not a minute in making good on a series of campaign promises. A bevy of executive orders moved to rein in Obamacare, withdraw from Trans-Pacific Partnership (TPP) trade negotiations, tighten immigration, cut regulation and advance the Keystone Pipeline. No earth-shattering surprises there. Perhaps more startling, Team Trump had yet to even unpack before broaching radical notions such as abandoning America's strong dollar policy, imposing a 20% border tax on imports from Mexico and opening direct confrontation with the media. Friday evening from the WSJ: “Trump’s First Week: Governing Without a Script.”

At least for this week, I’ll leave it to others to pontificate on the economic merits of Trump policymaking. Dow 20,000 is testament to the market’s ongoing fixation with tax reduction and reform, de-regulation and imminent fiscal stimulus. There were enough disquieting developments this week to dent confidence, though break-out bullish exuberance proved resilient. Unwavering faith in the course of central banking surely underpins the markets, confidence that I expect to be challenged in 2017.

My focus – one that the world now largely neglects – is on unsound global finance. It’s such an extraordinary backdrop – in all things monetary, in politics, geopolitics and the markets. Yet it is anything but a new experience for speculative markets to disregard latent financial fragilities. And we’ve witnessed in past episodes the capricious nature of market psychology. There’s something to glean from each one.

I think back to the summer of 1998. Markets were surging to record highs, led by monster advances in bank and financial stocks. The mantra was “the West will never allow Russia to collapse” – certainly not after the devastating Asian Tiger debacle. The simultaneous autumn implosions of Russia and LTCM not only punctured the financial Bubble, they almost brought down the global financial system.

Bolstered by “The Committee to Save the World” and all the Fed’s Y2K histrionics, powerful Bubble reflation saw Nasdaq almost double in 1999. Fear somehow just vanished as greed took full control. The U.S. was the indisputable leader of the free-world; there was an unassailable New Paradigm of technology-induced prosperity; America was the vanguard of technological revolution; and the dollar was unconditional king. With the clairvoyant Maestro leading U.S. and global central bankers, the New Millennium was destined to be the golden age of prosperity. Naysayers were tarred and feathered, yet that didn’t change the harsh reality that finance was fundamentally unsound.

These days, markets have grown convinced that Beijing will avert Chinese financial and economic crisis. The Bank of Japan will secure bond prices in Tokyo – no matter how much government debt is issued. The ECB will hold together Italy, Portugal, Spain and euro integration more generally. The Fed will not tolerate any meaningful tightening of financial conditions, ensuring the sustainability of bull markets in U.S. financial assets. The U.S. and king dollar provide a stable foundation for global finance that, along with ongoing Chinese growth, will hold EM debt crisis at bay. And, more generally, the Fed and international central bankers will continue backstopping global markets, guaranteeing ample liquidity and buoyant securities prices. Bear markets – let alone crisis – are simply intolerable.

Examining the backdrop, I think mostly deeply of 2007. For the most part, things looked pretty good at the time – at least superficially. The U.S. and global economy were generally viewed as robust, certainly strong enough to withstand some issues at the fringe of mortgage finance (subprime). Very few at the time recognized the profound financial and economic fragilities that had developed over the mortgage finance Bubble period. In general, policymakers and market participants were oblivious to how distortions in the pricing and issuance of mortgage finance had become such a critical systemic issue. Virtually everyone missed the key analysis: Perceived solid economic fundamentals were no match for deeply unstable financial and market underpinnings. It was a major Bubble, and it would burst.

I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere. Indeed, the world would be altogether different if not for the past year’s $2.0 TN or so of global central bank liquidity injections – and expectations for only somewhat less this year. It’s noteworthy that few market strategist even mention QE these days – as if it no longer matters. With the Fed having suspended QE in 2014, there’s a general perception in the U.S. that markets will transition easily away from QE. Yet global liquidity is “fungible.” How much U.S. bound liquidity has arrived – directly or indirectly – via ECB, BOJ and BOE QE operations? Surely flows have been enormous – hundreds of billions or, likely, more.

Fixated so on Trump, markets have lost focus on the crucial issue of global QE prospects. Expect this to be a short-term phenomenon. The ECB and BOJ are in the middle of colossal policy mistakes. Both grabbed the QE hot potato from Federal Reserve – and now they’re stuck. Both have been buying massive quantities of government debt at highly inflated Bubble prices. Both doubled-down in 2016. Both should be addressing exit strategies but are afraid.

Mario Draghi has been using the electronic printing press as a desperate measure to hold the euro together. The BOJ succumbed to a fool’s errand of pegging government bond yields near zero. European yields have begun rising briskly on the prospect of reduced central bank purchases. The Bank of Japan faces a choice of either massive ongoing purchases necessary to hold yields down – with negative ramifications for the yen – or admitting to a policy blunder and dealing with a spike in yields.

I view the global monetary backdrop as highly problematic. Let’s focus first on Europe. This week saw Italian yields jump 22 bps to 2.23%, the high since July 2015. Portuguese yields surged 32 bps to 4.14%, trading above 4.0% for the first time since March 2014. Greek yields rose 15 bps to 7.11%. Even French yields rose 13 bps this week to 1.03%, the high since July 2015. It’s worth noting that the spread between French and German 10-year yields widened nine bps this week (to 57bps) to the widest level since April 2014.

January 25 – Wall Street Journal (Tom Fairless): “A top European Central Bank official signaled… that the ECB should soon start to wind down its €2.3 trillion bond-purchase program, a much anticipated move that is expected to trigger volatility in financial markets. ‘I am...optimistic that we can soon turn to the question of an exit’ from easy-money policies, said Sabine Lautenschläger, who sits on the ECB’s six-member executive board… The ECB ‘must get ready for better times,’ Ms. Lautenschläger said.”January 26 – Financial Times (Claire Jones): “Mario Draghi will be disappointed. It has taken just a week after the European Central Bank’s latest policy vote for the governing council’s two most hawkish members to cast doubt on his plans to buy €780bn-worth of bonds under the landmark quantitative easing programme this year. Jens Weidmann, the Bundesbank president, has echoed the remarks his fellow German Sabine Lautenschläger, a member of the ECB’s executive board, made Tuesday and indicated the debate on trimming QE should begin soon. ‘The economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching the ECB’s definition of price stability. If this price development is sustainable, the requirements for the withdrawal from the loose monetary policy are met,’ Mr Weidmann said…”
German central bankers appear increasingly anxious - and less willing to maintain a low profile. Germany’s CPI jumped to a (non-deflationary) 1.7% y-o-y rise in December, the strongest pace since July 2013. December Import Prices were up 3.5% y-o-y, the strongest since early 2012. There are important German elections this fall. The ECB is scheduled to reduce monthly purchases from 80 billion euros to 60 billion in April. Expect the more hawkish contingent at the ECB to begin pushing for a 2017 end to QE operations.

While the issue garners little attention these days, it appears increasingly likely that euro zone central banks will sustain large losses on their bond portfolios. Perhaps it doesn’t matter. Or perhaps it will embolden the “hawks” – and even, at some point, unnerve the markets. It’s important uncharted territory for policymakers and the markets. After early-2016 policy moves, markets turned fully persuaded that central banks were willing and able to unleash unlimited resources to support market liquidity and securities prices. This assumption is now deeply embedded in securities prices – across asset classes and around the globe.

Much has changed in a year. Brexit, Trump, crude and commodities prices, equities markets, bond yields and inflationary dynamics more generally – to name only a few. A strong case can be made that desperate central bank measures pushed the global bond Bubble to speculative “blow off” extremes – just as inflationary forces garnered some momentum. While yields have for the most part reversed sharply, a possible major market (burst Bubble) adjustment has been held at bay by ongoing massive QE.

On the political front, President Trump’s America First – anti-globalization, anti-establishment – agenda also complicates what had become a rather predictable central banking environment (“whatever it takes” in the name of robust global securities markets). Sure, Federal Reserve officials can continue to lecture as if their purpose in life is wholly dictated by the “dual mandate.” Yet Yellen – following in the footsteps of predecessors Bernanke and Greenspan – is an activist promoter of globalization and global securities markets. It’s interesting to hear even some of the most dovish Obama Fed appointees take on an almost hawkish tone when it comes to potential Trump fiscal stimulus. Might the Fed choose to adopt a less activist stance down the road when markets respond negatively to aspects of the Trump agenda?

Throughout the financial crisis until now, global central bankers have been a united and unifying force. Can this dynamic be maintained in a backdrop of rising animosity within societies/political ideologies and between governments and nations? In the event of a U.S. initiated trade war, should we expect, for example, such close cooperation between the Fed, the Bank of Mexico and the People’s Bank of China?

And what are the ramifications for the Trump Administration ditching the so-called “strong dollar policy”? Might we see Tweets attacking ECB and BOJ QE on grounds they’re part of a currency devaluation strategy? Trump has been critical of the Fed. He’s surely no proponent of the euro experiment and the ECB’s approach to “whatever it takes” monetary management. There’s great global uncertainty with regards to future trade relations, inflation, fiscal deficits and monetary policy. Past market performance may not be all that relevant to a quite divergent future.

January 24 – New York Times (Alan Rappeport): “After seven years of fitful declines, the federal budget deficit is projected to swell again, adding nearly $10 trillion to the federal debt over the next 10 years, according to projections from the nonpartisan Congressional Budget Office… Statutory caps imposed in 2011 on domestic and military spending have helped temper the deficit. But those controls are likely to be swamped by health care and Social Security spending that will rise with an aging population.”
Going back to the nineties, aggressive GSE market intervention played a profound roll in backstopping and reflating markets after repeated de-risking/de-leveraging episodes. The (late-2004) revelation of accounting scandals constrained their ability to aggressively provide marketplace liquidity. Yet the loss of this key backstop mechanism didn’t slow markets that had by then developed powerful inflationary momentum. The view was that Washington – the Treasury, Fed and GSEs – would never tolerate a housing bust. And this view was integral to an historic financial and economic Bubble – and deeply embedded in securities markets (equities and fixed-income, at home and abroad).

The scope of today’s global Bubble goes so far beyond 2007. The prevailing view holds that global central banks will indefinitely do “whatever it takes” to ensure abundant marketplace liquidity, while backstopping global markets in the event of tumult. And it is precisely this perception that has sustained a prolonged Credit and asset inflation and resulting epic financial Bubble.

January 27 – Wall Street Journal (Kane Wu and Julie Steinberg): “The pace of big Chinese takeovers abroad is slowing as buyers contend with rules tightening the flow of money out of the country and increased government scrutiny at home and overseas. Bankers say many of the record-breaking $225 billion in overseas acquisitions Chinese companies announced last year are stalled by financial or regulatory hurdles—including the country’s biggest-ever deal, China National Chemical Corp.’s $43 billion bid for Syngenta AG, a Swiss seed and pesticide maker… More Chinese acquirers are backing out of deals.”

January 26 – Bloomberg: “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world. In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments. In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point. ‘Everything changed’ as it became more difficult to send money offshore, said Coco Tan, a broker at Keller Williams in Cupertino, California.”
While the markets still have a number of weeks prior to any global QE reduction, the effects of less liquidity emanating from China are already being felt. There were this week indications of further tightening of capital controls. Officials also appeared to ratchet up efforts to restrain Credit growth (See “China Bubble Watch” below).

January 26 – Bloomberg: “China’s central bank has ordered the nation’s lenders to strictly control new loans in the first quarter of the year, people familiar with the matter said, in another move to curb excess leverage in the financial system. The new guidance from the People’s Bank of China puts a particular emphasis on mortgage lending, …as authorities grapple to contain runaway property prices. And while the PBOC regularly seeks to guide banks’ credit decisions, this time it may also make errant lenders pay more for deposit insurance, one of the people said… ‘This is a continuation of the tightening trend we’ve seen since the second half of last year and extends from shadow banking to on-balance sheet loans,’ said Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein…”
January 27 – Wall Street Journal (James T. Areddy): “A Chinese phone maker’s failure to repay around $166 million in bonds has rippled through the world’s largest internet investment marketplace, hitting investors who hadn’t even bought the securities. The default, by phone maker Cosun Group, is one of the most high-profile failures to hit China’s sprawling network of Internet-based financial firms. It is an embarrassment to Alibaba Group Holding Ltd. because its affiliate Ant Financial Services Group owns the investment marketplace where the bonds were sold, and illustrates a rising risk in China, where hundreds of millions of people seeking higher returns on their savings have used their mobile phones to buy risky, unregulated investments.”
In a world of unsound finance, China remains a major weak link. And while the United States’ relationship with our southern neighbor received most of the attention during the first week of the Trump Administration, I’ll be surprised if China escapes Trump Tweets for long. Prospects for growth in GDP and U.S. corporate profits seem enticing to most these days. I would counter that global financial and economic stability cannot be taken for granted if the U.S. and China come to loggerheads. Latent fragilities will spring to life.

Even if calm prevails, markets have grown way too complacent regarding the global monetary backdrop. So many unknowns. So many things that could go wrong. Whenever it unfolds, the next de-risking/de-leveraging episode should be quite captivating.

Trump Deficits Will Be Huge

By: Peter Schiff

There is much we don't know about how the Trump presidency will play out. Will the Wall get built?

Who will pay for it? Will it have at least some fencing? Will repeal and replace happen at exactly the same time? Will Trump throw a ceremonial switch? Will there be a Trump National Golf Course in Sochi? It's anyone's guess. But of one thing we can be fairly certain. President Trump is very likely to preside over the largest expansion of Federal budget deficits in our history. Trump has built his companies with debt and I'm sure he thinks he can do the same with the country. His annual budget deficits are likely going to be huge. This development will make a greater impact on the investment landscape than most on Wall Street can imagine.

In the past half-century, Republican presidents have been the going away winners at the deficit derby, a fact that should make any true conservative blush. The sad truth is that annual deficits exploded under Ronald Reagan and George W. Bush, and generally contracted under Bill Clinton and Barack Obama. Some of the explanation is just luck of the draw, some walked into office in the midst of recessions they didn't create. But the better part of the explanation is baked into the political dynamics.

Democrats want to raise spending and taxes. Republicans want to cut spending and taxes. But whereas Democrats have generally succeeded on both of their missions, Republicans have just succeeded in one. (Actual spending cuts require politically difficult choices that are much harder to vote for than perennially popular tax cuts). This puts a giant thumb on the Republicans' budgetary scale.

Like prior Republicans, Trump has promised to cut taxes, on both corporations and individual taxpayers...even the wealthy. But unlike prior Republicans, he has not paid a word of lip service to spending cuts. He has promised to spend now, and spend big. Trump just doesn't do the austerity thing. It's for losers.

In addition to fronting the cost of building the 2,000 mile Wall (accounts receivable has a reliable address in Mexico), Trump plans big increases in military spending, both on active military and on our veterans. His reboot of Obamacare has yet to be presented, but as he has promised that no one will lose coverage, not even those with pre-existing conditions, we can be sure that Trumpcare won't be cheap. But his big project will likely be his promised $1 trillion plus infrastructure spending plan. Most importantly, he diverges from most Republicans by promising no structural changes in Social Security and Medicare, the entitlement leviathans that are the sources of the vast majority of Federal red ink.

To aid him in these budget-busting efforts, Trump will have the benefit of a compliant Congress in which his own party controls both Houses. Most Republican senators and representatives now seem eager to jump aboard the Trump train and will likely pass anything he sends to the Hill. Those who resist should prepare for the kind of political hardball that we have rarely seen in this country (I'm talking to you Lindsay Graham). If Republicans couldn't hold the line on Obama, how will they do so with Trump and, politically, why would they even want to? Grandstanding against Obama's big deficits, even to the point of forcing a government shutdown, did not play well politically. Standing up against Trump will involve considerably more risk with Republican primary voters.

Even if none of Trump's taxing and spending plans come to fruition, the United States would still be on the threshold of a sobering era of debt expansion. The age of trillion dollar plus annual deficits began in 2009 when the financial crisis tripled a very large $458 billion deficit in 2008 into a record smashing $1.4 trillion in 2009. Three more trillion-dollar deficits followed.

But since 2009, excluding a small increase from 2010 to 2011, the deficits have declined steadily.

By 2015, they had decreased to $438 billion, slightly below where they were before the crisis began. (Of course these smaller deficits exclude hundreds of billions of additional debt that is borrowed off budget.) These developments have caused many to conclude that budgetary issues are no longer at the top of the agenda.

But, as a result of the failure of Republicans and Democrats to achieve any kind of agreement on long-term budgetary reform, the six-year run of declining deficits has come to an end. The 2016 deficit was more than $100 billion wider than 2015. This marks the first year since 2009 that the deficit increased from the prior year (except for a minimal .001% expansion in 2011 over 2010). This is just a down payment on things to come.

The Congressional Budget Office (CBO) - the closest Washington comes to actual objectivity - issues long-term budget assumptions. Except for a relatively small dip from 2017 to 2018, the CBO sees continuous deficit expansions every year through the end of the next decade, culminating in continual $1 trillion deficits every year starting in 2024. (8/23/16 CBO report) That's the good news. The bad news is that in making these projections, the CBO has to make some very rosy assumptions. The most egregious of these is that the U.S. economy will avoid recession for the entirety of the next decade.

Over the past century we have seen a recession, on average, every 60 months (based on data from National Bureau of Economic Research and Bureau of Labor Statistics). According to current figures, the economy has been in expansion for 92 consecutive months. This means that the current expansion is already 50% longer than average. Expecting it to last for nearly 18 years is completely without precedent. I believe it will be sooner rather than later that we will have another recession, which will greatly enlarge the deficits. History is clear on that point.

The Great Recession caused the deficit to triple. Even the mild recession of 2001 turned a $236 billion surplus into a $157 billion deficit in just two years. The next recession I expect to work similar magic. But, in addition to being blind to recessions, the CBO was also blind to Donald Trump.

In making its projections, the CBO simply assumed that the taxing and spending laws currently on the books would remain unchanged. The projections do not account for any tax cuts or spending increases. As mentioned previously, Trump has virtually promised to do both in the first year of his presidency. If he is successful, we could return to trillion dollar deficits much sooner than the CBO thinks. A recession could push the red ink well into record territory.

The graphs below chart the prices of gold and the dollar versus annual budget deficits since 1990.

The data shows clearly that after a few months of lag time, the price of gold has followed the long-term expansion and contraction of deficits, while the dollar has moved in the opposite direction.

Gold Trending Up with Expanding Deficits
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Dollar Trending Down with Expanding Deficits
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Of course, who on Wall Street has picked up on these macro trends. In fact, one of the biggest issues currently being discussed is how the U.S. economy will deal with a perennially strengthening dollar.

They are assuming that the Federal Reserve will be raising rates and that the economy will be expanding under the Trump stimulus thereby strengthening the dollar and attracting flows from abroad. This type of "trees grow to the sky" thinking is similar to Clinton-era assumptions that the national debt would be repaid by perpetual budget surpluses, or the feeling earlier in this century that real estate prices could never decline.

To make these assumptions, Wall Street must ignore the obvious ramifications of big deficits, in particular the need for the Federal Reserve to step up and buy all the new debt that the Trump administration will have to issue. The last time the government had to find buyers for more than a trillion dollars per year of debt, it relied on foreign central banks. Eight years ago, the vast majority of Treasury debt was purchased by China and Japan (and, to a lesser extent, Saudi Arabia, Russia and other emerging nations in Asia and Latin America). But as the debt surge persisted, the real heavy hitter became the Federal Reserve itself which, through its Quantitative Easing (QE) Program, bought more than half a trillion dollars of Treasury debt per year from 2009 to 2014.

But there can be little expectation that the foreign buyers will be returning for a repeat performance.

Currently, both China and Japan are looking to draw down foreign exchange and are engaged in active selling of U.S. Treasuries in order to keep their currencies from declining against the dollar (Scott Lanman, 10/18/16, Bloomberg). What's more, Donald Trump is likely to engage in aggressive trade wars that may certainly discourage other foreign central banks from supporting our debt issuance.

Also, bond analysts are now convinced that the 35-year plus bond bull market, which began in 1980, finally topped out in July of 2016, when European and Japanese yields sank deeply into negative territory and yields on the 10-year Treasury hit 1.36% (Peter Boockvar, 9/19/16, CNBC). Since then bond prices are down significantly across the board. If this trend continues, it will discourage private buyers from making the jump into Treasuries. In other words, the Fed may be the only game in town when it comes to financing future deficits in a new bond bear market.

This would mean that the QE programs that many had assumed to be a thing of the past can return with a vengeance, becoming the signature program of the Trump era. When this reality sinks in, you may witness the dollar begin a long and steady decline from its current decades-high strength. At the same time, gold, gold stocks, commodities and foreign stocks could finally enter a turnaround.

Ultimately, I expect years of dollar decline to culminate in a crisis, with the dollar plunging in value, as the world abandons it as its primary reserve currency. The last time the dollar was on the brink of collapse it was saved by the financial crisis of 2008. Next time we will not be so lucky!

Davos Elites See an ‘Abyss’: The Populist Surge Upending the Status Quo


Many investors at the gathering in Davos, Switzerland, have struggled to make sense of recent political upheavals. Credit Gian Ehrenzeller/European Pressphoto Agency        

DAVOS, Switzerland — For the investors and market-movers at the annual World Economic Forum here, a threat lurks.

At cocktail parties where the Champagne flows, financiers have expressed bewilderment over the rise of populist groups that are feeding a backlash against globalization. In the halls of the Davos Congress Center, where many of the meetings this week are taking place, investors have tried to make sense of the political upheaval.

The world order has been upended. As the United States retreats from the promise of free trade, China is taking up the mantle. The stark shift leaves investors trying to assess the new risk and opportunities in the global economy.

“This is the first time there is absolutely no consensus,” said William F. Browder, a co-founder of Hermitage Capital Management who has been coming to Davos for 21 years. “Everyone is looking into the abyss.”

Fear of the Populist ‘Threat’

The religion of the global elite — free trade and open markets — is under attack, and there has been a lot of hand-wringing over what Christine Lagarde of the International Monetary Fund has declared a “middle-class crisis.”

But while all attendees in Davos have a view on the state of the world, there is little agreement on how to deal with it.

The biggest concern? Finding a way to make the people who are driving populist movements feel like they are part of the global economic pie that Davos participants have created and largely own.

In a Twitter post from the Swiss resort, Ian Bremmer, the president of Eurasia Group, a political-research firm, offered his advice: “Elites won’t be able to manage populism until they stop seeing it as a threat and start seeing it as a symptom.”

If that is the case, Davos has, so far, made little progress.

“I want to be loud and clear: Populism scares me,” Ray Dalio, the billionaire hedge fund manager, said during a panel on how to fix the middle-class crisis. “The No. 1 issue economically as a market participant is how populism manifests itself over the next year or two.” But Mr. Dalio offered little by way of a solution, beyond opining on the positive aspects of loosening regulation and lowering taxes.

On the subject of rising populism, Mr. Dalio, who runs the $150 billion investment firm Bridgewater Associates, added: “It’s an anti-Davos way of operating.”

Jack Ma, the founder of Alibaba in China, offered his view of the problem in the United States. Americans, he said, “do not distribute the money properly.”

Deciphering the Trump Effect

If there was one thing that Davos attendees agreed on last year, it was that Donald J. Trump would not win the United States presidential election.

And so this year, with Mr. Trump’s inauguration on Friday coinciding with the end of the World Economic Forum, every conversation has drifted to one question: What will the Trump presidency look like, and what will it mean for business?

To many American financiers who once opposed Mr. Trump’s candidacy, the prospect of fewer regulations and a blank slate with a new leader has assuaged some of the fear about uncertainties. At the forum, some attendees have been thrust into a role of interpreting the president-elect to a befuddled global elite.

Americans “do not distribute the money properly,” Jack Ma, the founder and executive chairman of the Alibaba Group, said in Davos. Credit Laurence Gillieron/European Pressphoto Agency        

“He’s not necessarily communicating in a way that the people in this community would love,” said Anthony Scaramucci, a hedge fund regular at Davos and onetime critic of Mr. Trump who is now set to join the administration as a public liaison and adviser. “But he is communicating very, very effectively to a very large group of the population in Europe and the U.S. that are feeling a common struggle right now.”

Mr. Scaramucci promised that Mr. Trump had “the utmost respect for Angela Merkel,” the German chancellor who was the subject of an attack by the president-elect this week; that he was in fact a champion of free trade; and that he wanted to have a “phenomenal relationship with the Chinese,” despite his fiery anti-China language.

Soon after his appearance on a panel, Mr. Scaramucci was on a plane heading to Washington to attend Mr. Trump’s inauguration. But his words still resonated, mainly because they were being broadcast on a giant screen behind a coffee bar where World Economic Forum participants congregated between meetings.

One Davos regular, the billionaire investor Paul Singer, did not attend this year. Mr. Singer, a vociferous critic of Mr. Trump for most of the election campaign, was instead making his way to Washington for the inauguration, having recently donated $1 million to the event.

One major investor has not changed his views about Mr. Trump, however.

George Soros, the investor and philanthropist who has called Mr. Trump “a con man,” hosted a dinner on Thursday evening in Davos, during which he said that Mr. Trump “would be a dictator if he could get away with it.” This was unlikely to happen, he added, because of strong democratic institutions in the United States.

For those who have been puzzled over market euphoria since Mr. Trump’s election, Mr. Soros put it this way: “Markets see Trump dismantling regulations and reducing taxes — and that has been their dream.”

But Mr. Soros, who became known as the man who broke the Bank of England with a bet against the British pound in 1992, added that he was convinced that Mr. Trump would fail. “I don’t think the markets are going to do very well,” he said.

Anthony Scaramucci said at Davos that Donald J. Trump was “communicating very, very effectively to a very large group of the population in Europe and the U.S. that are feeling a common struggle right now.” Credit Laurent Gillieron/European Pressphoto Agency     

China’s Leaders Take Center Stage

When President Xi Jinping addressed the Davos forum, becoming the first Chinese head of state to do so, his message was clear: China is ready for the world stage. He championed free trade and open markets, setting the tone for the week.

On the sidelines, the country’s business leaders echoed that sentiment.

Among the delegation that arrived in Davos with Mr. Xi were some of China’s biggest business leaders including Mr. Ma, Wang Jianlin of Dalian Wanda, and top executives from Baidu, Huawei Technologies and China Telecom. Through the week, they have been meeting with investors and talking deals with erstwhile partners.

With Mr. Xi’s help, China has fashioned itself here as a new leader of the free-market world.

“I wasn’t sure if it was President Xi or Ronald Reagan,” joked Thomas W. Farley, president of the New York Stock Exchange. At a lunch with Mr. Ma of Alibaba, Mr. Xi was quoting Abraham Lincoln, Mr. Ma told a small group of participants on Wednesday.

It was a message somewhat at odds with the roots of China’s ruling Communist Party. And back in Washington, Wilbur Ross, Mr. Trump’s nominee for commerce secretary, did not mince words, calling China “the most protectionist” major economy, setting the stage for a possible trade war.

But in Davos, there was a sense that change in the economic order was afoot.

Alicia Bárcena Ibarra, who heads the United Nations Economic Commission for Latin America and the Caribbean, told a small group that China could soon overtake the United States when it comes to importance in Latin America.

She described how on the same day last year that Mr. Trump told the world he would not sign the Trans-Pacific Partnership, Mr. Xi arrived for a summit meeting in Chile.

“So can you imagine the impact when he came talking about free trade as he did this morning?” she said, referring to Mr. Xi’s address on Tuesday in Davos. “China now is the second-most important trade partner of Latin America after the U.S.”

“Maybe this is going to change,” she added. “Very soon.”

Atlantic era under threat with Donald Trump in White House
Faced with hostility from Washington, London and Moscow, the EU looks towards Beijing

by: Gideon Rachman

 Outgoing US vice-president Joe Biden: 'The defence of free nations in Europe has always been America’s fight' © AP

Listen to the speeches and the corridor conversations in Davos and it is hard to avoid the impression that the west — as a political concept — is on the point of collapse.

Nobody puts it quite like that. On the contrary, Joe Biden, the outgoing US vice-president, argued that “the defence of free nations in Europe has always been America’s fight”. Anthony Scaramucci, who is Donald Trump’s appointed emissary to the World Economic Forum, also battled to convince his audience that the incoming US president understands the importance of both Nato and the EU.

But both Mr Biden and Mr Scaramucci protested a little too much. Neither man could erase the impact of comments made by Mr Trump himself. In an interview given to two European newspapers, shortly before Davos, Mr Trump had reiterated his view that the Nato alliance is “obsolete” and praised Britain’s decision to leave the EU, adding — “If you ask me, more countries will leave.”

If the Trump administration follows through on the new president’s disdain for both Nato and the EU, the US would be pulling back from the two key institutions underpinning the Atlantic alliance.

Mr Biden observed correctly that support for European integration has been a consistent principle of US foreign policy since the 1950s. But Mr Trump’s closest political friends in Europe are politicians that are deeply hostile to the EU. The incoming president’s claim, in his recent interview, that the EU is “a vehicle for the Germans” and his predictions of further disintegration of the EU, perfectly channel the political views of his pal, Nigel Farage — the leader of the UK Independence party. Marine Le Pen, the leader of France’s National Front, was recently photographed in Trump Tower in New York — and has hailed Mr Trump’s victory as the beginning of a new world.
All of this is causing understandable anxiety in Europe. As one senior EU official in Davos puts it — “I try to be as forward-looking and optimistic as I can, but the threats are large.”

The biggest immediate threat to the EU comes from Brexit. Speaking first in London and then in Davos, Theresa May, the British prime minister, confirmed that Britain intends to press ahead with its divorce from the EU — and that it will also leave the EU’s single market, and probably the customs union as well.

Mrs May’s speech was greeted in Davos with a mixture of sadness, bafflement and apprehension.

There was sadness among continental Europeans because few want to see Britain leave the EU. There was bafflement at the confident tone of Mrs May, since it is widely believed that Brexit will cause Britain significant economic harm. But there was also apprehension because it is obvious that a bruising and massively complex negotiation lies ahead.

Mrs May was at pains in Davos to assure her audience that Britain wants a strong EU. But if and when negotiations between the UK and the EU sour, British attitudes are likely to change.

At that point, the EU could face hostility from Moscow, Washington and London — all of whom could be encouraging populist anti-EU movements inside continental Europe.

This threat considerably raises the significance of a series of elections in Europe this year. The Davos consensus is that Euro-hostile parties are unlikely to win the elections in the Netherlands, France and Germany. But everybody is aware that the chances of a Trump presidency and of Brexit were also confidently dismissed in Davos last year — so there is palpable nervousness about what lies ahead in 2017.

There is also a continuing sense of incredulity that Mr Trump is indeed about to be sworn in as president of the US. Many Europeans are still inclined to clutch at straws — whether in the form of rising stock markets, or the solid credentials of some Trump appointees. There is also a sensible disinclination, on the part of senior Europeans, to make matters worse with florid denunciations of the incoming president.

But — behind the scenes and between the lines of statements — there is a dawning realisation that the age of Atlanticism may be drawing to a close. Under these circumstances, EU officials are now looking with increasing interest towards Beijing. The defence of globalisation offered in Davos by the Chinese president, Xi Jinping, was warmly received. One senior EU official says that, with Mr Trump threatening to renege on the Paris climate accords: “It will be up to the EU and China to take the lead on climate change.” The same official also suggests that the EU must now be “much more proactive” in working with China on a range of other issues, including international trade and investment.

When it comes to security, there is a grudging recognition among EU officials that Mr Trump is right to argue that European nations do not spend enough on defence. But there is little confidence that the broader political understandings that underpin the Nato alliance will necessarily survive the Trump presidency. Angela Merkel, the German chancellor (who is not in Davos), captured the new mood, when she remarked recently: “Europe needs to look after itself.” After all, Uncle Sam has changed beyond recognition.

Trump and a New Gold-Backed Dollar

by Nick Giambruno

On August 15, 1971, President Nixon killed the last remnants of the gold standard.

Since then, the dollar has been a pure fiat currency, allowing the Fed to print as many dollars as it pleases.

Removing the US dollar’s last link to gold eliminated the main motivation for foreign countries to store large dollar reserves and to use the dollar for international trade.

At this point, demand for dollars was set to fall… along with the dollar’s purchasing power. So the US government concocted a new arrangement to give foreign countries another compelling reason to hold and use the dollar.

The new arrangement, called the petrodollar system, preserved the dollar’s special status as the world’s reserve currency.

In short, the US government made a series of agreements with Saudi Arabia between 1972 and 1974, which created the petrodollar.

The Saudis would use their dominant position in OPEC to ensure that all oil transactions would only happen in US dollars. And the US would guarantee the House of Saud’s survival.

It worked… for a while.

The petrodollar filled the void after the US severed the dollar’s last link to gold as the main prop to the dollar’s status as the world’ premier reserve currency.

So far, the petrodollar has lasted over 40 years. However, the glue is losing its stick.

I think we’re on the cusp of another paradigm shift in the international financial system, a change at least as fundamental as what happened in 1971 when Nixon severed the dollar’s last link to gold.

The relationship between Saudi Arabia and the US hit historic lows in 2016. I only expect it to get worse. Trump is the first president since the petrodollar system was enacted to be openly hostile toward the Saudis.

The death of the petrodollar system is my No. 1 black swan event for 2017.

It raises the question: What will fill the void when the petrodollar inevitably dies?

When that happens—and it may be imminent—something has to replace it. I think there are only two options.

Naturally, the global elite want to centralize more power into global institutions. In this case, that means the International Monetary Fund (IMF).

The IMF issues a type of international currency called the “Special Drawing Right,” or SDR.

The SDR is nothing new. The globalists have been slowly building it up since 1969. In the near future, it could be used as the premier international currency—the role the dollar has played since the end of World War 2.

The SDR is simply a basket of other fiat currencies. The US dollar makes up 42%, the euro 31%, the Chinese renminbi 11%, the Japanese yen 8%, and the British pound 8%.

It’s a fiat currency based on other fiat currencies… a floating abstraction based on other floating abstractions.

The SDR is not based on sound economics or the interests of the common man. It’s just another cockamamie invention of the economic witch doctors in academia and government.

The SDR is dangerous. It gives the government—in this case, a global government—more power. It’s a bridge to a powerful global monetary authority, and eventually a global currency.

Most decent people would consider this a bad thing. That’s why the global elite cloud their scheme with dull and opaque names like “Special Drawing Right.”

It’s an old trick. Governments have used it for eons.

The Federal Reserve is an excellent example. After two failed central banking experiments in the 1800s, anything associated with a central bank became deeply unpopular with the American public. So, central bank advocates tried a fresh branding strategy.

Rather than call their new central bank the Third Bank of the United States (the previous two were the First and Second Banks of the United States), they gave it a vague and boring name. They called it “the Federal Reserve” and managed to hide it in plain sight from the average person.

Nearly 100 years later, most Americans don’t have the slightest clue what the Federal Reserve is, what it does, or how it has eroded their standard of living.

I think the same dynamic is at work with the IMF’s “Special Drawing Right.”

The breakdown of the petrodollar is the perfect excuse for the globalists to usher in their SDR solution.

So that’s the first option. It’s the global elites’ preferred outcome. It would be a very bad thing for personal and economic freedom. It means more fiat currency, more centralization, and less freedom for the individual.

The second option is to simply return to gold as the premier international money. Here’s how it could happen…

Trump might play along with the globalists’ schemes, but I doubt it. He’s the first president who’s openly and sincerely hostile toward globalism. He’s denounced it repeatedly.

Trump recently said, “We will no longer surrender this country, or its people, to the false song of globalism.”

In my view, there’s only one way Trump could fight the global elites and their SDR plan: return the dollar to some sort of gold backing.

Trump has said favorable things about gold in the past. So have some of his advisers.

It wouldn’t be easy. He’d face one hell of a struggle with the globalists. And winning would be far from certain.

No matter what, the death of the petrodollar, just like the end of the dollar’s link to gold, will be very good for the dollar price of gold and gold mining stocks.

When Nixon took the dollar off gold in 1971, gold skyrocketed over 2,300%. It shot from $35 per ounce to a high of $850 in 1980. Gold mining stocks did even better.

Gold is still bouncing around its lows. Gold mining stocks are still very cheap. I expect returns to be at least as great as they were during that paradigm shift in the international monetary system.

All this is why what happens after Trump’s inauguration could change everything… in sudden, unexpected ways.

Pension Funds Need Gold before It's Too Late

By: Jp Cortez

Tens of millions of Americans and their employers pour money into pension plans each month, counting those funds to grow and to be there when needed at retirement.

But a time bomb awaits. The bulk of U.S. pension funds are dangerously underfunded, and the assets are often invested in securities that have bleak prospects for providing income that keeps up with a general decline in purchasing power.

A pension plan requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. In 1875, when the American Express Company established the first private pension plan in the United States, the face of retirement was fundamentally changed. Before that time, private-sector pension plans did not exist, as most employers were small "mom-and-pop" businesses.

The innovation at American Express caught on. By 1929, 397 private sector pension funds were in operation throughout the United States and Canada. As of 2011, according to the Bureau of Labor Statistics, 18% of private sector workers are covered by pension plans. At the end of 2015, the value of U.S. pension funds was $21.7 trillion.

Savings Avenue and Retirement Street
Millions of Americans will rely on pensions once they've reached the age of retirement.  Pension fund managers have a fiduciary duty to safeguard funds against foreseeable risk. With the practices of today's Federal Reserve, there is no risk more foreseeable than inflation, but these fiduciaries are not fulfilling their duty to protect against this significant risk by investing in assets which are specifically suited to defend against the perpetual loss of the dollar's purchasing power. Chief among these assets are physical gold and silver, the most reliable inflation hedges from time inmemorial.

  Nothing Is Certain, Except Death, Taxes, and Dollar Devaluation

In today's uncertain times, few things are as certain as the devaluation of the dollar. Having lost more than 95% of its value since the creation of the Federal Reserve in 1913, America's unbacked fiat currency has a 100-year track record of declining value year after year. There is no reason to expect this trend to reverse, and the possibility of a total collapse of the dollar at some point cannot be ruled out. This is important because of the dollar's inverse relationship to the price of gold.

Bubble Currrency
As the unbacked Federal Reserve Note continues to be abused and devalued, it becomes clearer every day that pension funds should increase their precious metals holdings. According to the Asset Allocation Survey by the U.S. Council of Institutional Investors, only 1.8% of pension fund investments are in the broad commodities category, which includes monetary metals.

That means only a fraction of 1% in pension assets are held in gold and silver. Instead, pension funds today focus their investments in U.S. Treasury securities, investment-grade bonds, stocks, real estate, and other interest-rate sensitive assets.

  Gold Counter-Balances Other Investments

Whether it is an individual investing $100 or a fund manager in charge of investing millions of dollars, risk management is crucial.

Fund managers typically will not invest in extremely risky investments for fear of losing their investment, and potentially, their jobs. Conventional wisdom is that government bonds are paramount in safety and security.

These bonds, as well as the Federal Reserve Note "dollar" itself, are backed by nothing more than the full faith and credit of an insolvent U.S. government. Washington D.C. has accumulated astronomical debts of more than $20 trillion and total long-term entitlement obligations now top $100 trillion.

Officials will only be able to "meet" these long-term commitments by inflating them away. That is why money creation at the Federal Reserve has become standard operating procedure. Gold, on the other hand, appreciates as the dollar's value falls, not to mention offering resilience to financial and political crises.

The financial establishment remains hostile to gold, but influential people are making the case for larger gold holdings. Alistair Hewitt, head of market intelligence at the World Gold Council, said, "Unless investors are willing to accept a loss-making investment strategy, they may need to consider increasing their holdings of gold. We believe this should resonate especially well with pension funds and foreign managers whose investment guidelines are typically stricter and who hold a large portion of bonds in their portfolios."

Getting fund managers to include physical gold in pensions is a difficult challenge. While they have a fiduciary responsibility to protect and grow their clients' investment, most prefer to stick with the conventional wisdom and avoid bucking the system. Guy Christopher writes, "Precious metals in your possession have no counterparties and no continuing fees and commissions, unlike the thousands of investments brokers sell. Once you own gold, that part of your wealth and your future is out of Wall Street's hands."

  Look to Texas for the Blueprint on Gold-Invested Pension Funds

The Texas Teacher Retirement Fund and the University of Texas own nearly $1 billion in physical gold, which will soon be transferred from Wall Street vaults to a brand-new depository in the Lone Star State thanks to the recently passed Texas Bullion Depository legislation.

Shayne McGuire, portfolio manager of the Gold Fund for the Teacher Retirement Fund of Texas said that "one of the main reasons we considered gold was the diversification benefits it provides to portfolios dominated by equities, as most pension funds are."

While most pension fund managers shy away from gold, they do so at their own risk and the risk of their pensioners. As a non-correlated asset to bonds, stocks, and other paper-based investments, precious metals are key to true diversification. It's time for pension fund managers to break out of their Wall Street groupthink and include a meaningful allocation to physical gold and silver bullion for protection against inflation and financial turmoil.