rickards’ strategic intelligence

The next time you’re watching television, count silently to yourself every time the camera “cuts” to another scene. When you see the cut, think “one, two, three…” until the next cut. What you’ll discover is that film and TV directors cut the image about every two seconds. That’s how attention spans are being conditioned.

Watch a Millennial or Gen Z member using her smart phone or other portable device. They’ll tap the screen for action or a new image about every two seconds also. That’s the equivalent of a TV director cutting the scene just as frequently.

We’re overwhelmed with information and digital input. Our financial TV channels are no different. They’ll show you ten price tickers, a scrolling headline chryon, digital swooshes, sound effects, and live interviews all at once. It’s designed to totally absorb your senses while leaving you no time to think.

The result of all this cutting, clicking, and swooshing is pure entertainment (or hyp-nosis). It’s as far removed from serious analysis and long-term thinking as you can get. Market participants suffer from what I call “the plague of the two-second attention span.” Our culture seems to have lost the ability to view markets holistically, and see powerful trends even when they’re staring us in the face.

Observers are focused on tick-by-tick action in markets, and bounce from one Fed head-line to the next without stopping to reflect on what’s really going on. Meanwhile, the long-term trends persist. These trends don’t go away just because everyone in the market place seems distracted all the time. The impact of these trends will not be denied.

The result of this short-term fixation is that a financial tsunami is about to overwhelm markets, while investors are asleep on the beach and don’t see the wall of water bearing down on them.

In this special issue of Strategic Intelligence, we’ll walk you through the long-term trends in debt, productivity, asset prices, and policy responses that make a financial crack-up inevitable. We’ll also show you one asset class that will preserve long-term wealth, while being poised for huge gains when the collapse hits.

This is not speculation. These large trends and their deleterious impact on your wealth have been studied rigorously by official institutions with the best information and most qualified technical staff. Their reports are often lengthy and crammed with technical jargon and scores of pages of appendices, and technical footnotes. It’s not easy reading but it has its rewards.

The 2 Second Attention Span vs. the 20 Year TrendWhile the Fed gives markets whiplash, three long term trends have made deflation unavoidable. Read on for the best way to play the long game…

w w w.agor afinancial .com

INSIDE THIS ISSUE

Playing the Long GameMost investors bounce from one headline to the next, ignoring long term trends. But that doesn’t mean these trends go away, and we know the one asset class that will benefit from them…

The Fed’s Telltale Sign of InsanityWe see historical indicators of insanity in the Fed’s recent moves. Here are the steps to preserve your wealth and avoid going down with the Fed’s sinking ship…

Don’t Get Caught in the U.S.-China CrossfireStrategic alliances have made China the world’s alternative to following the Fed into self-de-struction. Here’s how to keep your wealth from being collateral damage while the East and West struggle for dominance…

Jim RickardsEditor

Byron KingSenior Geology editor

Nomi PrinsContributing editor

Peter CoynePublisher

Dan Amoss, CFAAnalyst

Katelyn SiglerManaging editor

AGORAfinancial OCTOBER 2016

Making the Complex Simple

strategic intelligenceJIM RICKARDS’

rickards’ strategic intelligence

2

Many official institutions either have obsolete models or political agendas that make some of their work unreliable. But there is one institution with extensive access to infor-mation and a good track record of sounding warnings in a timely way. That institution is the Bank for International Settlements (BIS).

BIS may be part of the global financial elite of which we are rightly distrustful. Yet, they have taken it upon themselves to diverge from the happy talk coming from central banks. Their recent research output has used more advanced models that incorporate some of the complexity theory and behavioral psychology that we use at Strategic Intelligence. BIS has been unafraid to call out their central bank peers on the dangers of low rates, asset bubbles, and systemic risk.

Let’s take a look at what the BIS has to say about instabil-ity in the global financial system and the threat it poses to your wealth and net worth. Then we’ll consider strategies to preserve your wealth when the threat materializes.

Inside the Swiss StudyThe Bank for International Settlement (BIS) was established in 1930 by an inter-governmental agreement among the United States, UK, Germany, Belgium, Italy, France, Switzer-land and Japan. The owners of the BIS are the central banks of the BIS members, with voting power skewed heavily in favor of a small number of the largest central banks.

BIS is headquartered in Basel, Switzerland, but it operates un-der exemptions and immunities from the laws of Switzerland and its member countries. In practice, this means BIS is a law unto itself accountable only to its central bank members.

The original purpose of BIS was to facilitate World War I reparations payments under the 1919 Treaty of Versailles. That purpose was made obsolete after the reparations pro-cess broke down in the early 1930s. But, the BIS quickly found a new mission as a meeting venue and operations center for transactions between central banks. If effect, the BIS is a central bank for central banks, offering clearing and settlement services.

BIS also specializes in the purchase, sale and leasing of gold bullion among central banks. The BIS balance sheet

footnotes reveal that it conducts gold transactions for its member central banks but offers no details on the par-ticular parties or amounts involved. In effect, BIS offers central banks an anonymous way to trade gold.

The modern-styled headquarters building of the Bank for International Settlements, (BIS), in Basel, Switzerland. BIS operates outside the laws of any sovereign country. Heads of major central banks including the Fed, Bank of Japan, and ECB meet there monthly. No minutes of these secret meetings are made available to the public.

Despite this secrecy and BIS’s status at the top of the food chain of the global financial elite, BIS does maintain a website where it offers excellent financial data unavailable elsewhere, and independent research on the global monetary system. It also hosts seminars and symposia with leading central bankers and economists around the world.

Proceedings of those meetings are available at the BIS website, here: www.bis.org. For an excellent history of the secrets of BIS, including its back-channel dealings in Nazi gold during World War Two, I recommend Tower of Basel, by Adam LeBor, available here.

Copyright 2016 by Agora Financial LLC. All rights reserved. This newsletter may only be used pursuant to the subscription agreement, and any reproduction, copying or redistribution (electronic or otherwise, includ-ing on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of Agora Financial LLC, 808 Saint Paul Street, Baltimore, MD 21202-2406.

The publisher forbids its writers or consultants from having a financial interest in securities recommended to readers. All other Agora Financial LLC (and its affiliate companies) employees and agents must wait 24

hours prior to following an initial recommendation published on the Internet, or 72 hours after a printed publication is mailed. The information contained herein has been obtained from sources believed to be reliable. The accuracy of this information cannot be guaranteed. Signed articles represent the opinions of the authors and not necessarily those of the editors. Neither the publisher nor the editor is a registered investment adviser. Readers should carefully review investment prospectuses and should consult investment counsel before investing.

Contact our Customer Care Center:

1-800-708-1020 or 443-268-0468 or e-mail customerservice@agorafinancial.com

Jim Rickards’ Strategic Intelligence is published monthly for US $99 per year by Agora Financial LLC, 808 St. Paul Street, Baltimore, MD 21202-2406, www.agorafinancial.com. Editor: Jim Rickards; Publisher: Peter Coyne; Managing Editor: Katelyn Sigler; Associate Editor: Lindsay Green; Graphic Designer: Andre Cawley

rickards’ strategic intelligence

3

Our interest in this issue is not the history or secrets of BIS, but rather what they are saying today about risk in the finan-cial system. Because of its broad central bank membership, BIS researchers have better insight and better data from which to form risk assessments than any research department in the world. Their work deserves special attention.

The latest reports from BIS say that the world is on the brink of another financial catastrophe worse than 2008. This is not the fever dream of some fringe website. This is the considered opinion of the most plugged-in financial institution in the world.

These fears of systemic collapse were crystalized in a report by the General Manager of BIS, Jaime Caruana, delivered on June 26, 2016, just a few months ago. This report identified three major risks and three major threats arising from those risks. Caruana called these risks the “risky trinity.” Let’s examine both the three risks and the three threats one-by-one to see how they cumulatively can wipe out your net worth unless you take specific steps now to preserve your wealth.

The three risks are excessive debt, lower productivity, and the absence of central bank policy options. The three threats to your wealth are systemic collapse, asset bubbles, and lost confidence in the ability of central banks to respond to crises.

Risk 1: Excessive DebtInvestors understand that excessive debt and leverage in the form of derivatives were a major cause of the Panic of 2008, along with banker fraud and government incom-petence. Since then we’ve heard about the remedial steps regulators have been taking to make sure such a collapse does not happen again.

The U.S. Congress passed the Volcker Rule to limit banks’ derivatives exposure and risky trading. The Dodd-Frank legislation tightened up lending standards in mortgages requiring higher down payments and better loan under-writing. Bank examiners have poured over bank books questioning any loans that were not fully collateralized or backed up by prime credits. With all of this regulation and scrutiny, one would assume that the pre-crisis mountain of debt has been whittled down to size.

Nothing could be further from the truth. In fact, debt and leverage in the system are much higher than they were in 2008, both in the U.S. and globally. Here’s a summary of increasing debt from 2007 through 2015 provided by the McKinsey Global Institute. These debt figures compare the periods 2000–07 and 2007–14, and break the debt into household, government, corporate, and financial (e.g. bank) sectors.

As the chart reveals, total debt increased by $57 trillion since 2007. Not only did the total debt increase, but the debt-to-GDP ratio increased from 269% to 286%.

Debt-to-GDP is a critical measure of debt sustainability. If you are ever going to pay back or refinance your debt, you need economic growth to pay for it. When debt-to-GDP ratios go up, it means the debt is rising faster than the ability to pay. That’s a recipe for global bankruptcy. (You can read Nomi’s detailed analysis of the U.S. debt bubbles in our previous issue of Strategic Intelligence here.)

The chart also reveals that government debt is growing faster than household, corporate, or financial debt. This reflects the fact that the government bailed out banks, corporations and consumers in the last panic. Total debt did not go down at all. The bail-out was simply a case of substituting government debt for other forms of debt — total debt in the system still rose. For that matter, con-sumer, corporate and financial debt rose also, just not as fast as in the pre-2007 period. Government debt increases more than picked up the slack.

These figures from McKinsey do not reflect even greater debt accumulation since 2014. Trillions of dollars of ad-ditional debt have been incurred in the fracking industry and by emerging markets corporations. Some estimates show that total debt growth since 2007 has now exceeded $70 trillion. In addition, there has been little inflation since 2007. That means that debt burden is real, not just the result of dollars being worth less.

On top of this balance sheet debt comes off-balance-sheet leverage in the form of derivatives, guarantees, and asset swaps of various kinds.

Not only is the debt higher, but it is also held in fewer hands, making the concentration of this debt much greater. The five largest banks in the United States now own a

Source: Bank for International Settlements

Global Stock of Debt Outstanding$ trillion, constant 2013 exchange rates

33

38

33

37

19262220

87

Q4 2000 Q4 2007 Q2 2014

246% 269% 286% Total debt as a share of GDP

$57 trillionincrease

142

199

40

56

58

45

Household7.38.5

5.7

5.8

9.4

5.32.8

5.9

9.3

2.9

Total2000–07 2007–14

Compound annualgrowth rate, %

Corporate

Government

Financial

rickards’ strategic intelligence

4

larger percentage of the total assets of the banking system than they did in 2008.

Everything that was too-big-to-fail in 2008 is bigger and riskier today. At the first sign of distress anywhere in the financial system, big banks will start to call in their loans from other big banks. The ability of financial institutions to rollover maturing liabilities will dry up. At that point, a financial panic bigger and more dangerous that 2008 will be underway.

In the last panic, central banks rode to the rescue by printing tens of trillions of dollars of new money and guaranteeing tens of trillions of dollars more in bank deposits, and money market funds, and by engaging in international currency swaps. But, central banks have now lost their flexibility to reliquify the system as we explain below.

The next financial panic will be much worse than the last one and will be essentially unstoppable except by the most draconian and confiscatory measures.

Risk 2: Lower ProductivityThe second risk identified in the June 2016 BIS report is declining productivity in major industrial economies. This is an extremely ominous development because it directly impacts the ability of those countries to sustain their expanding debt burdens.

Debt can be sustainable as long as the economy is growing as fast, or faster than, the debt burden. Think of it this way. Let’s say you make $100,000 per year and you have a $10,000 balance due on your credit card. One year later, your credit card balance is $15,000. That sounds bad. But if your salary increased to $200,000 then that debt is manageable.

In the first year, your “personal debt-to-GDP ratio” was 10% ($10,000 ÷ $100,000). In the second year, your “per-sonal debt-to-GDP ratio” was 7.5% ($15,000 ÷ $200,000). So, while your debt went up, your debt burden ratio went down because your income went up faster. That’s a sus-tainable situation.

It’s the same thing with countries. An increasing amount of debt is considered sustainable by markets if the debt servicing capability is going up also. This is measured by the debt-to-GDP ratio.

Markets will even tolerate an increasing debt-to-GDP ratio if they believe it is a temporary situation and that steps are being taken either to reduce debt or increase growth, or both, in such a way as to return to a sustainable path.

A sovereign debt crisis arises when debt is going up, growth is lagging, and there is no plan to address the situation. That happened in Greece between 2010 and 2015, leading to a succession of official bail-outs by the “Troika” of the EU, ECB and IMF.

The problem today is that global debt-to-GDP ratios are going up, not down (as shown in the McKinsey chart above). More importantly, growth is lagging and no major developed economy has implemented a credible package of structural changes designed to restore growth to its long-term potential path of about 3.5%. The entire world is moving in the direction of Greece toward global bank-ruptcy and global financial collapse.

Estimates are that the U.S. has a potential for growth of over 3% and that global growth could rise faster than 4.5% (global potential growth is higher than U.S. potential growth because of the ability of emerging markets to efficiently uti-lize factors of production, such as cheap labor). But actual growth in the U.S. over the past four quarters is about 1.2%. Global growth has slowed down below 3%. The difference between actual growth and potential growth is called the “output gap” and it shows no signs of closing soon.

The output gap has two causes — rising debt and slower growth. We looked at the rising debt situation above. What about growth?

The conventional definition of GDP, which is used to measure growth, includes four parts: consumption (C), investment (I), government spending (G), and the excess of exports over imports (X-M). This gives us the familiar equation: GDP = C + I + G + (X – M).

But, there’s an even easier way to understand GDP. It’s sim-ply the number of people working times the productivity of each worker. If an economy has 200,000,000 workers and, on average, each worker produces $100,000 of value added, then GDP will equal $20 trillion (that’s a very rough snapshot of the U.S. economy).

With this simple model, it’s not difficult to imagine that if population growth is static, labor force participation is declining, and productivity is declining, then your econ-omy is in serious trouble. That’s what’s happening in the U.S. and many of the developed economies of the world.

The problem today is that global debt-to-GDP ratios are going up, not down…

rickards’ strategic intelligence

5

Population is actually on the decline in major countries such as Russia and Japan, and is soon to decline in China (because of the disastrous “one child policy” launched in 1978). In other countries, primarily in Europe, populations are not growing because of declining fertility rates. In the United States, the population is growing slightly, mainly because of immigration, but labor force participation (the percentage of the population in the work force) is at 40-year lows for both economic and demographic reasons.

In short, the population part of the “population x pro-ductivity” equation is in bad shape. Economists didn’t worry about this previously because productivity was increasing smartly. An economy could still grow, even if its population was flat or declining, if the productivity of each worker was still going up.

But now productivity, the Holy Grail of growth, is on the decline also. Alarm bells are going off in central banks, finance ministries and faculty lounges around the world.

If population is flat lining and productivity is declining, then the world is headed toward the worst global depres-sion since the Great Depression of the 1930s.

Here are the latest figures on U.S. productivity. The nosedive beginning last year is clearly visible:

We now have the worst of all possible worlds — rising debt and slowing growth leading to higher debt-to-GDP ratios. A global sovereign debt crisis and financial panic of unprecedented proportions cannot be far behind.

Risk 3: No Policy OptionsEven this toxic mix of higher debt and slower growth might be manageable if central banks had policy tools they could use to cure the situation, perhaps with higher inflation that would wipe out the debt (and wipe our your savings, annuities, insurance and retirement in the process). But even that is in doubt. The third risk in the BIS “risky trinity” is the lack of central bank tools to respond to a new crisis.

In the Panic of 2008, central banks, led by the U.S. Federal Reserve, slashed interest rates, printed money (by buying bonds) and engaged in currency swaps with each other. That worked to stop the panic, although it created asset bubbles that we’re still living with.

The bigger problem is that none of the rescue efforts were reversed after the rescue. Interest rates are still at rock bottom and balance sheets are bloated. Nothing has been normalized back to pre-crisis levels.

This raises the question: If another panic or even a run-of-the-mill recession were to hit today, what would central banks do as a policy response? Where’s the dry powder?

Economists estimate that it takes about 400 basis points (4%) of interest rates cuts to reverse the impact of a recession and put the economy on a recovery path. If a recession hits when rates are 7%, you can cut them 400 basis points (to 3%) to reverse the recession. Then when the economy recovers, you can gradually raise rates again depending on the pace of the recovery.

The problem is that the Fed cut rates to zero in 2008, and they’re still close to zero eight years later (about 0.25% today). How will the Fed cut rates 400 basis points if a recession hit today? They can’t.

The Fed’s goal is to raise rates, at least to 3.25% (that’s the three-year target they articulated at the FOMC meeting in December 2015). Then they would be able to cut them in a recession.

But, the Fed has failed even to do that. They have had zero rate hikes since last December, after projecting a least two by now. The reason is that the economy is too weak to bear a rate hike.

This is the Fed’s conundrum. They need to raise rates so they can cut them in a recession, but just raising them will cause the recession the Fed is trying to avoid. It’s a conun-drum with no way out. The U.S. economy may already be in a recession. It’s certainly close to one — annualized growth has averaged just 1.2% over the past year.

Some economists (mostly the kind who work in central banks) believe that the “zero bound” is not a constraint. They say that if a recession hit now and the Fed had to cut interest rates 4% to fight a recession, they can just go from 0.25% to negative 3.75%. Only a Ph.D. thinks this way. Back in the real world, there’s good evidence that negative interest rates don’t work like normal rate cuts.

The theory of negative interest rates is that it acts like a “tax” on savings. People will be inclined to spend their

108

107

106

105

104

103

A troubling drop in productivityin eighth year of recovery

2012 2014 2016Source: U.S. Bureau of Labor Statistics

Ind

ex P

oint

s

U.S. Nonfarm Labor Productivity 2011–2016

rickards’ strategic intelligence

6

money instead of leaving it in the bank where it will gradually disappear.

In fact, people do the opposite. Once their savings start getting depleted by negative rates, people feel they have to save more in order to meet their savings goals for children’s educations or retirement.

Also, negative rates send a signal that central banks are concerned about deflation (that’s true). So individuals sensibly defer purchases and spend less in order to take advantage of cheaper prices in the future.

More savings and less spending is the opposite of what central banks want from negative interest rates. But the evidence so far (from experiments in Japan and Europe) is that’s exactly what happens. So negative rates are not the solution to the Fed’s conundrum; in fact, they may make things worse.

In her much anticipated (and ultimately anticlimactic) speech in Jackson Hole at the end of August, Janet Yellen reviewed the Fed’s “toolkit” for dealing with recession.

This toolkit included rate cuts (the Fed can do one 25 basis point cut before hitting zero), forward guidance (basically happy talk about not raising rates for a long time), and quantitative easing (that’s a technical name for money printing. The next round will be “QE4”).

Yellen expressed confidence that this toolkit will be enough to fight the next recession. That’s doubtful considering that the same toolkit was not enough to stimulate a return to self-sus-taining, long-term trend growth for the past eight years.

More to the point, how much more QE can the Fed do be-fore confidence in monetary policy is destroyed? The Fed took their balance sheet from $800 billion to $4.2 trillion to fight the last panic and recession. It’s still stuck at that level. How much higher can it go? $8 trillion? $12 trillion?

Some theorists don’t see a problem and believe the Fed can go that high or higher. They’re not living in the real world. At some point, consumers and politicians will blow a whis-tle on the whole money printing sham and this house of cards will collapse. That’s exactly the concern that BIS was expressing in their report. Central banks are out of options.

So, those are the three risks converging on us right now: excessive debt, lower productivity, and the absence of central bank policy options. Now, let’s consider specific threats to your wealth that emanate from these risks: sys-temic collapse, asset bubbles, and lost confidence in the ability of central banks to respond to crises. And then we’ll identify the one play that can actually allow you to profit when this perfect storm hits.

Threat 1: Systemic CollapseThe prospect of systemic collapse or economic instability is being driven by a global dollar shortage. This sounds strange at first. How can there be a dollar “shortage” when the Fed has printed trillions of fresh new dollars in the past eight years?

The answer is that dollar debt has expanded even faster than dollar printing. Every dollar printed by the Fed has been leveraged into twenty dollars of new debt by global markets. (You can take a deep dive on the dollar shortage in last months’ article, here.)

The Fed put new money printing on hold with the end of QE3 in November 2014. Since then the dollar has grown stronger partly because of the end of new money printing. But, the dollar-denominated debt is still growing in the oil patch and emerging markets, and in U.S. student loans, car loans, credit cards and other obligations. A stronger dollar and disinflation make this debt more onerous and harder to repay.

We’re already seeing periodic earthquakes resulting from this dollar shortage, including the October 2014 “flash crash” in Treasury yields, and the August 2015 shock de-valuation by China. It won’t be long before an even bigger earthquake is unleashed.

The Fed could address this with more money printing. In fact, I expect to see a program of QE4 sometime in 2017. But, of course, that just feeds the asset bubbles, which are a separate source of systemic risk.

Threat 2: Asset BubblesWhen investors ask, “Where’s the inflation after all this money printing?” my answer is, “Don’t look at the super-market shelf; look at the stock market.” In other words, we have not had much consumer price inflation, but we have had huge asset price inflation. The printed money has to go somewhere. Instead of chasing goods, investors have been chasing yield.

Part of this asset bubble inflation has to do with a flawed theory of bond/equity “parity.” The theory says that once you adjust for credit risk and term premium, bonds and stocks should yield about the same. Right now, safe

Part of this asset bubble inflation has to do with a flawed theory of

bond/equity “parity.”

rickards’ strategic intelligence

7

ten-year Treasury notes yield about 1.65%. Many stocks have dividend yields of 3% to 5%. Investors know that stocks are riskier than safe bonds, but how much riskier? Under the parity theory, investors can keep bidding up the price of stocks until their divided yields get closer to 2%, leaving a small margin over bond yields to cover “risk.”

There are many flaws in this theory (including the fact that companies go bankrupt all the time, and boards of directors can and do cut dividends in recessions). But one of the biggest flaws is the complete disconnect between what’s driving bond yields in the first place.

If bond yields are falling because deflation is ruining the Fed’s plans to reflate the economy, is that a reason for stocks to go up? If bond yields are signaling recession, should you really be bidding up stock prices to extreme levels based on a theory of yield “parity?” This behavior defies common sense and economic history, but it’s exactly what we’re seeing in the markets today.

At some point, probably sooner than later, the reality of central bank impotence and looming recession will sink in and stock valuations will collapse. The drop will be violent, perhaps 30% or more in a few months. You don’t want to be over-allocated to stocks when that happens.

This analysis applies to more than just stocks. It applies to a long list of risky assets including residential real estate, commercial real estate, emerging markets securities, junk bonds and more. It only takes a crash in one market to spread contagion to all of the others.

Threat 3: Lost ConfidenceFinally we come to the greatest threat of all — the inability of central banks to deal with crisis and the complete loss of confidence by investors in the efficacy of central bank policy.

The last two global liquidity panics were 1998 (caused by emerging markets currencies, Russia, and Long-Term Capital Management) and 2008 (caused by sub-prime mortgages, Lehman Brothers and AIG). Another smaller liquidity panic arose in 2010 due to problems in Middle Eastern and European sovereign debt (caused by Dubai, Greece, Cyprus and the European periphery). In all three cases, central bank money printing combined with gov-ernment and IMF bail-outs were enough to restore calm.

But these bailouts came at a high cost. Central banks have no room to cut rates or print money in a future crisis. Tax-payers are in full revolt against more bailouts. Governments are experiencing political polarization and there’s political gridlock around the world. There is simply no will and no ability to deal with the next panic or recession when it hits.

This loss of confidence is plainly revealed in the following chart. It shows that consumer inflation expectations have fallen to the lowest level since late 2010 (not long after the last crisis) and the trend is clearly down, toward levels not seen since the depths of the panic in 2008:

With central banks around the world doing everything possible to cause inflation (QE, ZIRP, NIRP, helicopter money, currency wars, forward guidance, etc.), what does it say about confidence in central banks that inflation expectations are falling, not rising?

Play the Long Game The systemic dangers are clear, as laid out in the BIS report and this article. The world is moving toward a sovereign debt crisis because of too much debt and not enough growth. Declining productivity is the last nail in the coffin in terms of countries’ ability to deal with the debt.

Inflation would help diminish the real value of the debt, but central banks have proved impotent at generating inflation. Now central banks face the prospect of recession and more deflation without any policy options to fight it.

The impact of deflation and the strong dollar have caused a shortage of liquidity around the world. Since private debt has expanded faster than central bank balance sheets, a dollar shortage has arisen as debtors scramble for dollars to pay back debts. This raises the prospect of a new liquidity crisis and financial panic worse than 2008.

Persistent low rates have not caused inflation, but they have caused asset bubbles, which threaten to pop and unleash a financial panic on their own — independent of tight financial conditions.

When this new panic hits (either from a liquidity shortage or bursting asset bubbles), investors will have no confi-dence in the ability of central banks to truncate the panic. Unlike 1998 and 2008, the next panic will be unstoppable without extreme measures — including IMF money printing,

5.85

5.35

485

4.35

3.85

3.35

2.85

2.35

1.85

1.35Jan Jun Oct Mar Jun Dec Apr Sep’06 ’07 ’08 ’10 ’11 ’12 ’14 ’15

Source: The Daily Shot

UMich Consumer Inflation Expections (1yr)

rickards’ strategic intelligence

8

lock-downs of banks and money market funds, and possible martial law in response to money riots.

You should have some gold, land, and other hard assets to weather this storm. But, even with those hard assets, there’s still room for a diversified portfolio. You should never go “all in” on any one asset class including gold, which is why I recommend putting only 10% of your investable assets in gold.

One asset class we recommend right now is exposure to long-term U.S. Treasury bonds. These guarantee principal (because they’re U.S. government obligations) and offer excellent liquidity (in case you need to reallocate at some point).

Before the panic hits, Treasury bonds should perform well in a climate of disinflation, deflation and falling interest rates. (Rates have backed-up recently on one inflation blip, but it’s just a blip. The overall global financial dynamic is still deflationary and the ongoing liquidity shortage will just make that worse).

Nearly two years ago, we recommended the Wasatch Hoisington U.S. Treasury Fund. It’s a strategic recommen-dation, and we’ve done quite well, with a total return of 20%. Today we recommend a tactical trade in the largest

Treasury bond ETF, the iShares 20+ Year Treasury Bond ETF (TLT: NYSE).

TLT tracks an index of U.S. Treasury bonds with remaining maturities greater than 20 years. TLT is sensitive to changes in long-term Treasury yields. If Treasury yields rise, TLT falls, and if yields fall, TLT rises. The combination of deflation and a global liquidity shortfall could push yields on TLT’s portfo-lio of long-term Treasuries as low as 1%. If yields fall to 1%, TLT could rally above $160.

A 1% yield on long-term Treasuries would still be far above comparable yields in countries like Switzerland and Japan. In those countries, bonds of similar maturity have yields near (or even below) zero.

Long-term Treasury notes definitely have a place in a well-diversified “all weather” portfolio alongside, gold, sil-ver, cash, land, fine art and other wealth preserving assets.

Action to Take: Buy the iShares 20+ Year Treasury Bond ETF (TLT: NYSE) up to $140 per share.

Jim Rickards, Editor

The Fed’s Telltale Sign of InsanityWe see historical indicators of insanity in the Fed’s recent moves. Here are steps to preserve your wealth and avoid going down with the Fed’s sinking ship…By Byron King, Senior Geologist

“Exceptional fighting was shown by all forces and all ships participating in this operation,” states the dry prose of a Japanese after-action combat report, captured in Tokyo in 1945 and translated by the U.S. Strategic Bombing Survey. “Because of it,” the Japanese report continued, “severe damages (sic) were inflicted on the enemy.”

This is how Japanese commanders described the Battle of Midway, fought at sea northwest of Hawaii, June 4–7, 1942. On the third day, the U.S. Navy sank four aircraft carriers of the Imperial Japanese Navy (IJN) in one after-noon. In addition to the large ships, Japan lost hundreds of aircraft and thousands of sailors. It was an epic defeat, by which American combat power broke the back of Japanese naval power in the Pacific.

However, after the battle, Japanese leaders denied the reality of their predicament, and conducted a thorough effort to mask the scope of defeat.

Official Japanese deception involved the civilian pop-ulation, as well as Japanese authorities. For example, commanders isolated many Midway survivors for several months, and then reassigned these personnel to distant posts around the fleet and across the South Pacific. Japan kept one of its sunken aircraft carriers, Akagi, on its naval registry for well over a year, despite the ship lying on the deep seafloor.

Japanese admirals didn’t even inform the Emperor of the losses.

In summarizing the losses at Midway in their after-action report, Japanese commanders engaged in a near-ritualistic aspect of their culture, using the concepts of honne and tatemae. These two Japanese words describe the contrast between a person’s true sentiments and understanding (本音 hon’ne, “true sound”) and the behavior and opin-ions one displays in public (建前 tatemae, “built in front” or “façade”).

rickards’ strategic intelligence

9

IJN carrier Hiryu abandoned, burning before sinking at Midway.

Tatemae is what is expected or required according to one’s position and circumstances. After Midway, Japanese com-manders avoided admitting that the destiny of their empire was about to change radically. Culturally, they were simply unable to say the truth and describe the obvious scope of their military disaster.

In this quick retelling of the Battle of Midway, it’s ap-parent that, post battle, Japanese leadership drew a dark curtain over their shattering loss. Rooted in hon’ne and tatemae, the IJN — a critical institution within a mighty nation — convinced themselves (and large sections of the population) to ignore the facts of a major defeat during war.

Today, Western culture commonly uses the term “denial.” How else can we describe a situation where a person or group simply will not accept reality?

This Midway story illustrates an important lesson of na-tional governance and stewardship. It’s one thing to mask events, issue propaganda and work to sway public opin-ion, in peace or in wartime; but past some point — like a defeat on the scale of the Battle of Midway — self-delu-sion on behalf of a major national effort is insane.

The Fed’s Descent to MadnessThis piece of history illustrates the problem we see now with the Federal Reserve (Fed), and its long-term refusal to face reality.

One of the topics at the recent Jackson Hole meeting was “designing resilient monetary policy frameworks for the future.” This title is tatemae, the behavior and sounds bites the Fed supplies because it is expected to. The hon’ne, the truth of the matter, is that the Fed doesn’t have any monetary policy frameworks that will be effective at present or in the future. It’s all a charade.

Under Fed stewardship of monetary policy, we’ve suffered through near-zero interest rates for over seven years. This

has robbed people and businesses that subscribe to quaint old virtues like frugality and thrift of nearly all return on savings. It’s bad economics, and bad social policy.

In addition, for over two decades we’ve watched serial bubbles inflated by the Fed, such as tech (a few times), housing (ditto), stock market, and even assets like art (to include bad art). More recently, we’ve seen waves of quantitative easing (QE).

All along, Fed policy is in thrall to a stable of high strung, monetarist stallions, such as Harvard professor Kenneth Rogoff, who recently published a book entitled The Curse of Cash. In essence, per Rogoff, if you hold cash, you must be a terrorist, drug dealer, tax dodger or some other species of desperado.

Rogoff wants to eliminate cash and channel all funds through electronic accounts — as if we’ve never had an electric grid failure or electromagnetic pulse (EMP). His new tome is the latest salvo of a long-term, trans-national, bankers’ effort to shepherd all forms of exchange into the corral of government oversight.

Somehow, this tight control will better enable central planning of the economy, and keep the business cycle tame, despite the mispricing of credit and collateral that has unfolded during the past decade.

Looking back, central banks bailed out private bankers in 2008 and 2009. Now, most central banks across the world are over-extended, none more so than the Fed. The Fed is out of ideas, and headed full-speed towards needing its own bailout.

As my colleague Nomi Prins writes in this issue, “The Fed remains in denial about the true state of the domestic and global economies. In its realm of hubris, it has no idea of the steps other central banks are taking, or want to take, to reduce their exposure and reliance on not just the U.S. dollar, but on U.S. political, monetary, financial and regu-latory policy in general.”

Nomi’s description exactly reflects an organization that is under the influence of hon’ne and tatemae. Its failures are obvious, and the way forward isn’t visible, yet the Fed monetarists boldly sail into the storms of disaster.

Prepare for RealityAs the Fed increasingly loses room to act, as Jim outlines, as well as its credibility and international respect, as Nomi explains, what options are left for us?

For most mere mortals, the key to preserving wealth is owning gold and gold miners, as well as silver assets.

rickards’ strategic intelligence

10

“When you play the Game of Thrones, you win or you die.” – Cersei Lannister

I was late to Season 6 of Game of Thrones (while buried in writing my next book Artisans of Money.) If you have never watched Game of Thrones, a) do so immediately and b) here’s the nutshell. The show, based on the book series, de-picts a land in which several kingdoms are duking it out for the Iron Throne, the symbol of absolute power. Think the board game “Risk” except with dragons, magic, an army of the dead, and lots of blood.

While I was watching the show, I couldn’t help realizing that this backdrop is a dead ringer for central banks’ strategy. The

Fed clings to status quo. Other central banks are vying to knock it down. But the Fed behaves as if it has no idea there are other powerful central banks in the world that want to grab and harness its power. It carries on refusing to acknowledge that there may come a time, sooner rather than later, where its power is attacked.

The ramifications of such an attack will impact the standing of the U.S. in the world and your investments. The Fed can carry on being oblivious, but you need to be prepared. Game of Thrones is the perfect illustration for the struggles we see playing out right now.

In the Game of Thrones world, an emerging queen, Daen-erys Targaryen is biding her time and building and army.

Gold-silver are real assets, and when you own physical metal, it’s no one else’s liability. Own gold, own silver; take delivery. It’ll retain value as central banks fail and curren-cies reset across the globe in months and years to come.

Right now, we’re coming off a late summer downswing in share prices for precious metals, as well as for many mining shares. We saw a gold share price run-up in late June and July, post-Brexit. Then a steady erosion through August and early September, as the Fed banged its drums about the possibility of raising interest rates.

Out of the large miners, I like Agnico Eagle (AEM: NYSE). Founded in 1953 and headquartered in Toronto, Agnico has extensive operations in Canada, as well as in the U.S., Europe and Latin America.

Agnico’s share price is in the $55 range, down from a recent high of $60. The market cap is about $12.2 bil-lion. Price-earnings is at the nosebleed level, but earnings are growing and will grow even faster as precious metal prices rise.

Aside from market metrics, the thing that impresses me about Agnico is its management teams — a collection of professionals who are among the best in the entire mining industry. I’ve been watching Agnico people make silk purses out of sows’ ears for many years, even during the last mining downturn. Looking ahead, I see strong new expansions and projects coming down the line.

In this environment for rising gold and silver prices, Agnico Eagle is among the major players that will benefit the most. Its size gives you downside protection, and rising precious metal prices offer blue sky upside.

Action to take: Buy Agnico Eagle (AEM: NYSE) up to $58.

And one final shot of the Battle of Midway. This is hon’ne and tatemae at work:

Fed maneuvers to dodge bombs before sinking; oh wait… sorry…

Japanese aircraft carrier Akagi dodges bombs before sinking in

Battle of Midway.

Don’t Get Caught in the U.S.-China Crossfire Strategic alliances have made China the world’s alternative to following the Fed into self-destruction. Here’s how to keep your wealth from being collateral damage while the East and West struggle for dominance…By Nomi Prins, Contributing editor

rickards’ strategic intelligence

11

She is creating alliances in Meereen, an ancient powerful country in the East (her awesome fire-breathing dragons in tow). She’s figured out how to play the long game and is strategically planning when to elevate the fight against the ruling power in the West, Cersei Lannister.

The most important part of Daenerys’ story is not that she is determined to rule the seven kingdoms and take pos-session of the Iron Throne. It’s that she knows she can’t do it alone. So she aligns reinforcements, smaller power bases.

These smaller partners may or may not have allegiance to her based on the legitimacy of her claim to power — but they have all been wronged by the Lannister’s. This family, currently led by Cersei Lannister, is extremely wealthy and powerful, but hasn’t managed to lead the western kingdom, Westeros, to wealth and power. In fact, the people in Wes-teros are becoming increasingly frustrated and scared of their rulers. (You see the similarities?)

Not only has Cersei managed to create enemies out of the smaller families that surround her, she recently massacred a large portion of the city she rules to protect her own in-terests. She is losing her power domestically and globally, but continues to think and act as if she will rule forever. We’ll see what happens next season.

The Fed’s StateObviously in this situation, the Lannisters are representing the U.S. and the Fed specifically. The Fed remains in denial about the true state of the domestic and global economies. In its realm of hubris, it has no idea of the steps other central banks are taking, or want to take, to reduce their exposure and reliance on not just the U.S. dollar, but on U.S. political, monetary, financial and regulatory policy in general.

Case in point. The Dow dropped 250 points on September 9th. On September 12th, Asian markets nose-dived on the possibility that the Fed might raise rates (though it said

nothing of the sort — the “rate tease” is a manifestation of deliberate Fed obfuscation and media boredom). This is a pattern that plays out every month, with varying degrees of intensity, or volatility.

Enter three of the Fed’s giants, led by Lael Brainnard. Dur-ing her speech at the Chicago Council on Global Affairs, she backtracked on any tightening talk saying, “the case to tighten policy preemptively is less compelling.”

That calmed markets. That day. It reminded them nothing is changing any time soon. U.S. stock markets rejoiced. Bubble-baiters bought. The Dow soared 1.3%. Elsewhere in the world though, no one wants their market whipsawed by Fed speak. Certainly not the People’s Bank of China.

The PBoC’s approach has been to send out anti-Fed policy sound-bites through elite officials. These clips are picked up by national and international media and then spread to the general public.

On September 13th, for instance, Yi Gang, a deputy governor from the PBoC, told a central banking conference in Vienna, “We’re still very cautious on this (zero-interest rate) mone-tary policy.” He added going in for the kill, “We have to be very careful and look at the limitations and uncertainty of a zero-interest rate policy, because in China we still have a decent growth rate.” Subtle. What he basically said was “the Fed’s policy is a joke and we’re not laughing.”

In The Game of Monetary Policy, the Fed whacked the idea of “free markets” in the face. The ECB chucked an arrow in its heart. The BOJ sliced off its head. Markets are sustained artificially. The Fed has become, as you’ll read more about in my book, the chief Artisan of Money. Central banks are bankrupt of new ideas to keep the system afloat.

Or are they? While the Fed cut rates to zero, bloated its book to $4.5 trillion, and pressed the rest of the developed world to follow, global skepticism bubbled over. First the Chinese, then Latin America. Then the IMF. Then the Chinese again.

Central bank elite took turns bashing Fed policy and calling for an alternative to the U.S. dollar associated with it. This is the equivalent of financial warfare. The U.S. and Fed struck first. It will take time, but the blowback is in motion.

The U.S. dollar was attached to a financial crisis fueled by big bank recklessness and Fed apathy, followed by a Fed policy that devalued money itself. Many other countries had no choice but to follow the Fed’s lead and directives, but that doesn’t mean they were happy about it. As in Game of Thrones, the choice going forward is to forge strategic alliances with other houses or be slaughtered.

rickards’ strategic intelligence

12

The IMF is one of the houses who will be a crucial player in the new power constructs.

The IMF Power PlayThe IMF, created by the U.S. and Europe, has been seeking a broader role in the monetary politics wars. For all the media dissection of every word Janet Yellen utters about rates, the IMF knows the Fed is lost. Its policy hasn’t worked. It ignored this and raised rates last December, despite warnings from managing director, Christine Lagarde. Market punishment was swift and the damage was global. It caused renewed fear and anger from nations that had already suffered at the hands of the Fed and the U.S. banks it sustains.

The U.S. has the largest voting block within the IMF, which is located blocks away from the White House, but IMF leadership understands how the winds of change are blowing. If the BRICS and a few more developed states were to act as a voting block (or increase their voting power, as they’re attempting), they could potentially dislodge the strong influence that the U.S. has within the IMF.

It was the U.S. voting block that gave Lagarde her job in 2011, and allowed Europe to maintain its 70-year stronghold on the IMF. As a result, Lagarde’s opposition, Augustin Cars-tens, head of the Central Bank of Mexico, lost that country’s first bid for the role.

In Game of Thrones, this is the story of Tyrion Lannister. He’s Cersei’s brother, but has been loudly critical of her leadership. Originally, he tried to guide his sister towards better practices. She didn’t listen to him.

Now, he has joined forces with Daenerys and is helping her rise to power. His loyal alliance with Daenerys has led him to ascend the ranks again, from another angle. He is well-connected throughout the seven kingdoms. He is strategic. He knows the strengths and weaknesses of all the players. He is formidable despite his size (or in central bank terms, the volume of reserves).

This is the Fed and the IMF. That entity was spawned to augment U.S. central bank and government power in the wake of WWII. Powerful, but not as powerful.

Since the financial crisis, the IMF has been strategically chipping away at the Fed’s power base. Like the PBoC, the IMF has been both criticizing and warning about the impact of Fed policy on other nations. By disparaging the Fed, it is amassing its own power. Its international influence has never been higher.

Under Lagarde, the IMF is doing more than funding develop-ment projects and supplying overall currency directives to the world, as was its original mandate. It is reconstructing new

alliances amongst countries not involved in its creation. In doing so, it is building its own power by elevating their allies.

On October 1, for the first time in 43 years, the IMF will add China’s currency, the Renminbi (denominated in yuan), into its Special Drawing Rights basket (SDR). In doing so, the IMF, at the zenith of its own power, has tipped the scales away from the U.S. and the Bretton Woods crew that created it in 1969. The expanding SDR basket is as much a political power play as it is about increasing the number of reserve currencies for central banks.

The SDR FactorAs I’ve noted in Strategic Intelligence from my reporting on the ground there, China’s power ambitions go well beyond the SDR. They include international diplomacy, sustainable energy dominance, and becoming a focal point for alliances through Europe, Russia and the ASEAN states.

The ASEAN–China Free Trade Area (ACFTA) is a prime ex-ample of why the SDR for China and the region is important as China expands its influence. So are new trade and financial pacts with Russia where the yuan and ruble exchange in deals without involving U.S. dollars. In addition, Russia and China are both starting to amass gold which could return as the 6th component of the SDR someday.

(Jim has discussed the mechanical elements of the SDR in past issues, so I’ll only underscore what’s relevant to the elite power shift of this post-crisis resurrection of the SDR.)

When the SDR was created as a global reserve asset, it was to supplement the international supply of gold and the U.S. dollar. Once the gold standard was demolished and coun-tries began accumulating international reserves, there was less of a need for this global reserve asset. It lay dormant, along with the power of the IMF. But in the wake of the financial crisis, it sprang back to life as another liquidity source for member countries. The IMF sprang back to power as well.

The SDR was initially defined relative to gold (0.888671 grams of fine gold — the equivalent of one U.S. dollar.) After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a weighted basket of four currencies — the U.S. dollar, euro, Japanese yen, and pound sterling.

But in the wake of the financial crisis, it sprang back to life…

rickards’ strategic intelligence

13

In 2015, when the yuan was approved, a new weighting formula was adopted. It assigns equal shares to the cur-rency issuer’s exports plus a composite financial indicator. That means the more prevalent the currency in the world, the bigger its weight. If more Yuan are used in the world, its position in the SDR grows. In a crisis, it could take on the U.S. dollar and Euro, and by extension the Fed.

The SDR weight of the yuan is just 10.92 percent compared to 41.73 percent for the U.S. dollar and 10.92 percent for the Euro. That’s not a bad opening gambit. The next official weights review is in September 30, 2021. But in a crisis, there is latitude for it to happen much sooner.

As China continues to play host to global events (Olympics, G20, etc.) it also is in pursuit of greater regional influence. With the largest economy, and now showing its capability as having a globally recognized reserve currency, China is adding another layer of strength to its position.

While the associated confidence measure will not be the death of the dollar, it indicates that the dollar is not the only option to turn to in times of panic, or increased trade or financial growth. The intrinsic power of that position at-tacks not only the dollar but the overall power of the U.S.

Competing Central Bank Kingdoms and their Power BasesCurrencies reflect both political and economic clout. Even if SDR’s themselves aren’t that voluminous yet, the shift in the make-up is meaningful. The Fed has already lost ground in the process. The IMF and PBoC have gained it. In the middle, there is an increasingly shaky, EU.

The ECB was established after the creation of the Euro in 1998 to oversee other member European central banks. It has more power than any of them because it sets rates for the EU, which dictates the cost of their money and how it flows.

Former Goldman Sachs executive and former Bank of Italy Governor, Mario Draghi is the current President of the ECB. He has followed the Fed’s policy to a letter — despite grumblings from other EU power brokers that negative interest rates have solved nothing and instead aided to the fractiousness of the EU experiment itself. In 2012, facing an acute European debt crisis, he promised, “The ECB is ready

to do whatever it takes to preserve the Euro.” The Euro has fallen precipitously since.

If Draghi’s words are weak, his actions are weaker. The ECB is offering to pay banks that borrow money from it, plus, giving them 85 billion Euro each month through its ongoing QE program to purchase their debt. From a battleground standpoint, that smacks of desperation.

The ECB just announced it would give banks three years to write off bad loans — meaning they have lots of bad loans. The ECB has failed to mitigate any risk. Its alliance with the Fed hasn’t helped Draghi build his power, just retain it, and it certainly hasn’t helped the EU as a whole.

Within the wider European Area, the Bank of England, under Governor Mark Carney, retains legacy power. That power has waned though, and increasingly so since the Brexit vote. If Britain leaves the EU in more than name, then the Bank of England’s actions are less relevant to the EU. This elevates the power of the ECB and the Euro. But as noted, those are already weak to begin with.

If the Bank of England follows the course that Brexit has laid out, the SDR could see a further reduction of the pound weighting, and Euro weighting, which would push up the weighting of the yuan by sheer math. This shift is symbolic now, but power can start in that realm.

The Bank of Japan, before Governor Haruhiko Kuroda took the helm, had run-ins with the Japanese minister of finance over its negative rate policy and bond-buying programs. The Japanese stock market lies in a constant state of tension. Because the BOJ is on the same monetary policy plane as the Fed, Japan’s markets have similarly become used to monetary adrenalin shots. Globally, this has led capital, seeking a fix in times of instability, to Japan and to the yen.

But lately Japan’s markets have also been reacting more viciously whenever the possibility of a Fed tightening hits, or lack of fresh BOJ easing measures. The alliance of the BOJ and PBoC has not been fleshed out yet, but I believe that’s only a matter of time. Old fights might be discarded if economic or financial survival is imperiled, which is what these sharper market moves foreshadow.

People’s Bank of China: Dragon RisingThis dragon’s about to take flight. The People’s Bank of China governor is Zhou Xiaochuan, who has held that post longer than any other G20 central bank leader. The PBoC holds more U.S. treasuries than any other central bank and is ready to battle.

This shift is symbolic now, but power can start in that realm.

rickards’ strategic intelligence

14

Zhou understands global paradigm shifts. He’s the only Chinese person on the G30 and on the board of the BIS. He’s been the leading figure pushing the yuan into the SDR basket by slowly allowing it to float with the market, despite allegations of ongoing currency manipulation.

As China’s position has grown, so has Zhou’s voice, albeit without giving too much away. “The central bank has a clear and strong desire to improve its communication with the public and market,” he told Caixin, a major publication in China. “At the same time, it’s not easy to do a good job in communication.”

China wants to keep internal inflation down. This is why it would prefer a strong currency. This negates the charge that China is trying to devalue or manipulate the yuan for better trade profits perpetuated by Donald Trump and Hillary Clinton. This is true to a minor extent due to economic pressures, but barely.

The stronger the yuan, and the more prevalent it is globally, the more the PBoC challenges the Fed and the more control the China bloc gains over the U.S. In Chinese culture and the Game of Thrones, the Dragon symbolizes life and expan-sion. It’s a fitting symbol for the rising power of China and the yuan.

Zhou Xiaochuan, Governor of People’s Bank of China

The Current Central Bank HierarchyThe Fed is the world’s most powerful central bank. The ECB is a close second. Third, is the Bank of Japan, with rates depressed into negative territory as it elevated its bond-buying prowess. Fourth, for now, is the People’s Bank of China. That will change.

The PBoC has crafted its own techniques to support China’s economy through monetary policy. Although, at the recent G20 meeting, Xi Jianping told reporters that the age of monetary and fiscal stimulation is over and new strategies must arise. As he said, “In light of the pronounced issue of lackluster global economic growth, we need to innovate our macroeconomic policies and effectively combine fiscal and monetary policies with structural reform policies.”

The Fed’s power is resting on the dollar’s dominance. That dominance, in turn, was established by political design based on military prowess following two world wars — which were financed by elite U.S. banks.

The U.S. Treasury market is the world’s largest and most liquid. Central banks holding U.S. dollars are really hold-ing U.S. Treasuries. They are lending the U.S. money, and we pay them for it with interest. But when rates are zero, we are paying them nothing to lend us more money. This is why growing debt is so easy under current Fed policy.

Just like Cersei Lannister, the Fed thinks it will retain its power simply because it currently has power, even though everyone hates and fears her and the house she represents. In contrast, Daenerys is not hated. Like China, she is clever and building alliances. They are playing the long game patiently and strategically.

Bad Bad Contagion The Fed is re-assembled in Washington on September 20–21. Prior to that, they were in “black out” mode. But I wasn’t. I discovered a new report while sleuthing around the Fed’s website for you. It’s about 45 pages of mathemati-cal equations, beyond which lies some scary thoughts.

In this September 2016 report, to which not a single main stream reporter has paid attention, Fed economist, Juan M. Londono addresses the notion of “contagion.” The Fed’s own research team is ahead of its management.

Bad contagion, Londono notes, is the “confluence of un-expectedly low stock returns across several international stock markets simultaneously.” His findings revealed that, “episodes of bad contagion are followed by significant and meaningful deteriorations to financial stability indicators.”

If stock markets crumble, so do economies. The elites running central banks in those economies don’t want that happening on their watch. The only way to avoid the collapse is to distance themselves from the Fed and the dollar.

Even David Reifschneider, deputy director of research for the Fed, noted, “There could be circumstances in the future in which the ability of the FOMC to provide the desired degree of accommodation using these tools would be strained.” (Translation: The Fed is running out of bul-lets, as Jim explains today. And losing its power over other central banks.)

This doesn’t mean the dollar will tank like a stone im-mediately as some people predict — the power base that supports it won’t go down without a fight. (Nor will the Lannister’s — Season 7 will be bloody.) But once the fight starts in earnest, it will accelerate off its own momentum.

rickards’ strategic intelligence

15

Stock markets have reached historic highs on a steady diet of artificial money. We are in a danger zone. Conta-gion is real. Having gone down with the U.S. economic ship in 2008, why would any country want to endure that again?

During the past eight years, the Fed has led a global race to the bottom of responsible monetary policy while exuding bi-polar verbiage as to its effectiveness. As Byron explains, this blind continuity of Fed policy is the clearest indication of its lack of success. The inability to articulate an exit strategy is another.

The third, is the denial that other central banks and coun-tries want to distance themselves from the Fed. For the moment, the leader in that regard is the PBoC. The Dragon is re-entering the fight now that the stakes are highest. The swords are drawn. The battles of the East and West are on.

The Patient PlayIn the face of impending contagion and ineffective Fed pol-icy, we cannot underestimate how quickly countries will buy the yuan as an attempt to exit the Fed vortex before it implodes. To escape some of the volatility associated with the global shift of power, we can buy gold.

Right now is a good entry point. We’re just ahead of the yuan entering the SDR on October 1st, and just after the Fed returned to rambling in the press. Gold is like China in a lot of ways — an old reserve asset whose time is re-emerging.

You can play the long game too. China has no intention of staging a temporary victory. They are structured for a long, steady march. Gold is a protective investment. It is safe, secure, and timely as central banks battle amongst them-selves for the world.

Appendix: The Game of PowerBy Nomi Prins, Contributing editor

The Fed, led by Janet Yellen, is acting as if it will retain its power forever simply because it’s currently the most power player in the game of global monetary policy. As stated at the beginning of my article, the Fed behaves as if it has

no idea that there are other countries and central banks

operating around the world which would love to claim the

top power spot.

IMF

CHINA

U.S.A.Fed

Janet Yellen

MarioDraghi

AgustinCarstens

MarkCarney

ZhouXiaochuan

ChristineLagarde

ECB

SDRs

People’s Bankof China

BANK OFMEXICO

BANK OFENGLAND

Haruhiko KurodaBANK OF JAPAN

rickards’ strategic intelligence

16

FOR IMMEDIATE RELEASE: THE 6-MONTH “GOLD RUSH” HAS JUST BEGUN!

My Top Geologist and I just uncovered a BRAND NEW way to play gold. Already a small group of beta “prospectors” has seen the potential for quick-hit gains of 100%, 109% and 120%.

This could be the biggest moneymaker in gold for average Americans since the 1850s gold rush. With the potential to double your money in as little as 53 days

Click here for your time-sensitive invitation.

The People’s Bank of China (PBoC) doesn’t have to convince these other central bankers that it is the best candidate to take over that top spot, it only has to be the best alternative to the Fed. Under the Fed’s monetary lead, stock markets have reached historic highs on a steady diet of artificial money. The global economy is in a danger zone. Contagion is real. The Fed sunk the global economy in 2008 and many countries are trying to prevent the same outcome this time around.

The IMF, which will control the next global recovery with the issuance of SDRs, realizes that the Fed’s days are numbered. With the inclusion of the yuan in SDRs on October 1st, the IMF begins a shift in the scales of power in China’s favor.

Japan itself is forging alliances with China right now, but the Bank of Japan is still following the Fed — for now. The ECB is also following the Fed, but it’s president, Mario Draghi, is one of the few central bankers who “says little and does less” with monetary policy. In the aftermath of Brexit, the Bank of England could see its influence reduced even further. This means that the Fed’s allies are becoming weaker as the PBoC’s allies are becoming stronger.

In the coming days and weeks, the yuan will join the SDR basket. As the world inches closer to a collapse and closer to reliance on SDRs for recovery, the yuan’s inclusion will be even more critical to the PBoC’s rise to power. We’ll keep you posted on the latest developments as they arise. For now, get your wealth out of the line of fire and away from over-inflated stocks by buying gold.