3 Minute Gold News
A Quick Read for Busy People
Low Oil Prices
Geopolitical Flash Points
Venezuela Bond Default
November 1, 2014
China is about 10% of the global GDP, so if it fell by half then it would become somewhere around 4%.
This would add to the deflation.
Jim doesn’t see the rebalancing in China. Rebalancing is supposed to be from investment to consumption.
But inside China, the problem is that most of the investment has been wasted — and it’s 45% of their GDP.
The investment component is such a large part of China’s GDP, that if you start reducing it, then it has to go down faster than the consumption piece can come up. Plus, if you have a credit crisis in China then it’s going to “ding” confidence and make consumption even tougher.
It’s hard to see how China gets out of that.
They’ve been trying to cheapen their currency — back to the currency wars — but the U.S. probably has a limited tolerance for that.
There’s no good way out of this through monetary policy.
Monetary policy cannot solve a structural problem.
The whole world needs to restructure.
Japan, the U.S., China and Europe all need to restructure.
Of those four areas, the only one that is dealing with restructuring is Europe. Their growth is suffering because that’s part of the price you pay.
The U.S., Japan and China are trying to pretend that everything’s okay. But not making the structural adjustments now means they’re going to have a worse collapse later.
China is becoming one of the world’s largest oil importers — they might be at that point already. They have an enormous demand for energy. They burn a lot of coal, but coal is poisoning the air and the water over there.
If China slows down then they might use a little less oil.
Energy prices move by three vectors:
1. Basic Supply and Demand
The supply side is very good right now. The economy is slowing down which weakens the demand for it.
There’s some talk that maybe Saudi Arabia is purposely supressing the price of oil to put pressure on the Russians to back away from their support of Assad and Syria.
There’s no direct evidence of that, and you wouldn’t expect any. That would be something that would be a closely guarded secret between the major governments of the world.
2. Inflation and Deflation
The world is deflating so that puts downward price pressure.
The interesting thing about the Islamic State is that they’re pumping oil. There are all these trouble spots all over the Middle East but all of them want to pump oil.
Something similar happened in 1986 in the Iran – Iraq war. While some people thought that the war would cause supply to go down and the price to go down, Jim predicted it would be the exact opposite.
In war you need the money. So you pump more which brings the price down.
The price of oil went down to about $12 per barrel.
At this time, unless people start blowing up oil fields or sinking tankers (which isn’t going to happen because the U.S. military would prevent that), they would tend to produce more, to get money to prop up their wars.
GEOPOLITICAL FLASH POINTS
There are flash points all over the world.
The geopolitical flash points would be the South China Sea, the islands between China and Japan, Ukraine, Central Asia, Venezuela, and the Islamic State.
Ebola is another potential flash point.
There’s a lot of them, unfortunately, and they could get worse, but they’re all on the radar screen.
What Jim is worried about, which could really cause a financial panic and the “House of Cards” to collapse, is the thing that we don’t see and we’re not thinking about.
That could be an unexpected bank collapse or the unexpected failure to deliver gold by a major broker or exchange.
It could be something like an MF Global that comes out of nowhere, takes people by surprise, and starts a liquidity crisis.
That is perhaps more troubling than the geopolitical flash points, because you can see those and discount them to some extent.
VENEZUELA BOND DEFAULT
There could be contagion if Venezuela defaults.
You can see the defaults coming, but what you possibly can’t see is who the creditors are.
It’s sort of like, when AIG failed the big loser wasn’t AIG it was Goldman Sachs.
The bailout of AIG was really a bail out of their major creditor, which was Goldman Sachs.
The same thing is true today when you see Venezuela collapsing, you have to say that while you know who the debtor is… who are the lenders? What’s the next domino that’s ready to fall?
That’s harder to know.
It reminds you of the 1930s, when the failures started popping up, people started going off the gold standard, calling in their debts, and imposing capital controls.
Then there was a super catalyst with the failure of the Viennese bank Credit-Anstalt in 1931.
There were some warning signs ahead of the Credit -Anstalt collapse, and Jim sees the warning signs today.
Japan has been in a depression for twenty five years, and if they don’t make some changes then they’ll be in a depression for another twenty five years.
You can’t print or deficit your way out of a depression. You’re wasting your money.
There’s a lot of things Japan could do structurally to help — cut taxes, allow greater immigration, increase the role of women in their economy, break up some of the big banks, force some companies into bankruptcy, make some changes to their antiquated retail distribution system — there are a lot of things that Japan could do.
But they’re not doing any of them.
Here’s a tweet from Jim regarding this interview:
Another Week on Wall Street
words and music Elaine Diane Taylor
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