KW: Extracts from Jim Rickards latest newsletter. 2 comments I thought might be interesting to others

Let’s Hope Investors Can Surf, Because a Wave of Defaults Is Coming

So many credit crises are brewing, it’s hard to keep track without a score card. The mother of all credit crises is coming to China with over a quarter trillion dollars owed by insolvent banks and state-owned enterprises, not to mention off-the-books liabilities of provincial governments, wealth management products and developers of white elephant infrastructure projects. Then there’s the emerging-markets credit crisis, with Turkey and Argentina leading a parade of potentially bankrupt borrowers vulnerable to hot money capital outflows and a slowdown of growth in developing economies. Close on their heels is the U.S. student loan debacle, with over $1.5 trillion in outstanding debts and default rates approaching 20%. Now comes a new warning about junk bond defaults as described in this article. Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!” The problem is that regulators are like generals fighting the last war. In 2008, the global financial crisis started in the U.S. mortgage market and spread quickly to the overleveraged banking sector. Since then, mortgage lending standards have been tightened considerably and bank capital requirements have been raised steeply. Banks and mortgage lenders may be safer today, but the system is not. New cracks are appearing in emerging markets, student loans, auto loans, municipal bonds and junk bonds. It doesn’t matter where the crisis begins. Once the tsunami hits, no one will be spared.

Russia Fights Back in Financial Wars With a Secret Weapon: A Surplus!

The U.S. and Russia have been at war since 2014. The war began when the CIA and MI6 tried to undermine Ukrainian President Viktor Yanukovych, who was favored by Russia’s Putin and disfavored by the U.S. and U.K. The plot worked and Yanukovych soon headed for exile in Russia. Putin retaliated by annexing Crimea and intervening in eastern Ukraine to promote autonomous districts there. The war has continued since, but the weapons have been mostly financial and cyber, not kinetic. The Obama administration excluded Russian corporations from access to Western capital markets and placed numerous Russian officials on lists of those with whom U.S. banks (and foreign banks with U.S. links) cannot do business. Putin fought back with interference in the 2016 U.S. elections. Trump has dialed up Obama-era sanctions. U.S.-Russia relations are at their worst level since the end of the Cold War. But Russia’s not done. They are continuing the financial war with huge purchases of gold in anticipation of the overthrow of the U.S. dollar as the preeminent global reserve currency. Russia has more than tripled its gold reserves in the past 10 years and is now approaching 2,000 tons. Russia’s gold-to-GDP ratio is over 6% while the U.S. is relatively weak at 1.7%. As this article describes, Russia’s newest weapon is a budget surplus (thanks to higher oil prices) at a time when U.S. deficits are approaching $1 trillion per year and the U.S. debt-to-GDP ratio is over 105% and headed much higher. When the chips are down, the U.S. will be highly vulnerable to its creditors and Russia will not be. This financial and cyber war has far to run. For now, Russia is piling up gold and eliminating debt to prepare for a showdown with the U.S. dollar. Investors can take refuge by buying gold for their own accounts.