Tue, Aug 12, 2014|Sean Goldsmith

Steve's perfect timing...

Steve's perfect timing... Why the euro is going down... Bad news from Germany... Russia is sending 280 trucks to Ukraine... Jim Rickards: 'That's how desperate central banks are'... An extreme scenario with capital controls... The many ways central banks create inflation...
 
 The timing was perfect...
 
In today's DailyWealth, Steve Sjuggerud laid out his case for a lower euro. (We previously discussed Steve's short-euro thesis in the August 6 Digest.) From today's essay...
 
"Europe's currency – the euro – is going down... The reasoning is simple. A weaker euro is politically the easiest fix available... You see, Europe is struggling right now. But inflation is not a problem. So a weaker currency is an easy fix. And that is the exact solution that Europe is pursuing today.
 
"From the Wall Street Journal last week: 'European Central Bank President Mario Draghi signaled Thursday he was pleased with the recent decline in the euro's exchange rate and outlined a number of forces that may weaken it further...'
 
"Mr. Draghi, according to the article, made 'unusually blunt comments about exchange rates. Central bankers typically shy away from such direct remarks on currencies.' Government officials might be incompetent at a lot of things... But one thing they can do very well is 'trash' their currencies. And the euro is in the midst of its trashing. Draghi isn't even trying to hide it."
 
 Steve's favorite way to play the crash in the euro is through the ProShares UltraShort Euro Fund (EUO). EUO is a double inverse fund, meaning that if the euro falls 1%, EUO should rise 2%... and vice versa.
 
In two months, True Wealth subscribers are up 5% on the recommendation... But Steve says the investment thesis has only gotten clearer. Draghi is committed to lowering the value of the euro and easing credit in the European monetary union. And he will succeed. If you've learned anything these past six years, it's not to fight the central bank. The printing press is a powerful tool.
 
 And today, Germany's Center for European Economic Research "investor confidence survey" index dropped to 44.3 in August. That's down from 61.8 a month ago. Expectations were for 54... Anything below 50 is negative.
 
The expectations index fell from 27.1 to 8.6 – its lowest reading since 2012.
 
On Thursday, we'll see Germany's second quarter gross domestic product numbers... Economists expect a 0.1% contraction from last quarter.
 
 This is all bad news for the euro... If Germany – Europe's economic driver – slows, Draghi will have no choice but to flood the market with euros.
 
The euro fell as low as $1.3336 today on the news, approaching a nine-month low against the dollar.
 
 Adding further instability in Europe... Less than a week after ending military drills on the Ukraine border, Russia is potentially back at it...
 
Russia sent 280 trucks toward Ukraine. The trucks are allegedly carrying humanitarian aid – everything from sleeping bags to baby food – from the Red Cross. But the Red Cross hasn't yet confirmed the trucks' contents. And Ukraine will not allow the trucks to cross the border.
 
Valeriy Chaly, the deputy head of Ukraine's presidential administration, said the two countries could find an agreed-upon point to transfer the goods. Chaly said any attempt to bring the goods into Ukraine without proper authorization would be seen as an attack on the country.
 
 In today's Digest Premium, financial expert Jim Rickards shares his views on the current geopolitical instability in Europe... He discusses the effect that economic sanctions on Russia will have on global growth... and on the U.S. specifically.
 
Digest Premium subscribers can see the excerpt from our exclusive interview with Jim below. If you'd like to sign up for Digest Premium and get immediate access for less than the price of a cup of coffee per week, click here.
 
 As Jim discussed in Friday's Digest – the first part of our interview – he expects central banks around the world to print more money... This will lead to lower currencies and eventually inflation.
 
In today's installment, Jim explains whether central banks will be forced to push interest rates into negative territory to fight inflation...
 
Central banks have to do something. Of course, rates can't be any lower than they are because they're at zero, although in theory you could have negative rates. We've seen the European Central Bank move to negative interest rates. Let's say you put $100,000 in the bank and you have a negative interest rate of 1%. A year later, your bank account says $99,000. It took $1,000 out.
 
Instead of paying you interest on your money, the bank actually takes money away from you. In theory, that's designed to get people to spend money. If you sit on it and don't spend it, eventually it will go away.
 
Negative interest rates are designed to force prices up. This is called the velocity – or turnover – of money. When people start to spend money quickly, velocity goes up. Combined with the massive money supply, that would normally result in higher prices. That's how desperate the central banks are.
 
 Of course, as Jim points out, there are other things that banks can do besides lowering near-zero-percent interest rates. Negative interest rates cause people to withdraw their money from the bank and stick it under their mattresses...
 
The authorities know that, and they would probably have to limit your ability to withdraw the money. But that's fairly extreme. We're not there yet, although we might get there. In the meantime, they're printing more and more money. Interest rates aren't negative today. But by having so much money sloshing around, in theory, people might spend more. That's what the banks are doing through quantitative easing. But they're doing other things as well.
 
One is that they're trying to reduce the value of the dollar on foreign exchange markets. People say that's good because it makes U.S. exports cheaper. Maybe we'll sell a few more Boeing airplanes or a few more General Electric wind turbines.
 
But that's not why the central banks are doing it. They're doing because it makes imports more expensive. People forget that the U.S. may export a lot, but we're a net importer. And if you make the dollar cheaper, then all the things we buy –electronics, textiles, clothing, etc. – become more expensive. That's another way to get prices higher and that feeds into the supply chain and helps cause inflation.
 

Central banks have a whole toolkit designed to cause inflation. Zero-percent interest rates, printing money, currency wars, so-called forward guidance, nominal GDP targeting, etc. The problem is that none of them are working right now. It's a sad day when central banks want inflation and they can't get it. But they're going to keep trying because they have to avoid deflation.

 
 If you enjoyed today's interview with Jim, please consider getting a free copy of his new book, The Death of Money. Jim is one of the world's greatest financial minds. And in his new book, he further explains the actions central banks will take to destroy paper money and cause inflation. He also tells you exactly how to protect yourself.
 
We only ask you cover the cost of shipping and handling. (It's less than $5.) Plus, as a bonus for S&A subscribers, Jim wrote an extra chapter. Learn how to get your free copy by clicking here.
 
 New 52-week highs (as of 8/11/14): Brookfield Asset Management (BAM), Brookfield Property (BPY), Berkshire Hathaway (BRK), Kinder Morgan Management (KMR), and Royal Gold (RGLD).
 
 In today's mailbag, a subscriber's take on inflation... Send your thoughts to feedback@stansberryresearch.com.
 
 "While I really enjoy (and have learned much from) your various publications, Jim Rickards' focus on inflation as an increase in the money supply touched a nerve. A different perspective: Inflation is an increase in the SUPPLY of money. Deflation is an increase in the VALUE of money.
 
"If, during a period of economic expansion (i.e., more goods/services are being offered) the money supply is not increased, the value of the money in circulation will increase. The same amount of money will buy more goods/services. Existing goods/services will be reduced in price to the extent that new goods/services are demanded from the same supply of money. The increased value is distributed across the population (i.e., those who earned it and saved it).
 
"If, during a period of economic expansion, the money supply is increased at the same rate as the economic expansion (i.e., prices do not increase), the increased value is concentrated to the relatively few recipients of the newly 'printed' money. That's not an absence of inflation, it is simply theft... the value being stolen by the concentrated few who receive it from the distributed many who actually earned their money.
 
"Inflation/Deflation cycles amount to theft of money (the new supply) followed by concentration of value in the stolen money. All to the detriment of those who actually produce the value inherent in the goods/services that constitute the real economy (i.e., vs the faux economy of instruments of theft: government grants, bailouts, loans, guarantees, subsidies, entitlements, etc., etc., etc.).
 
"Increasing the money supply is not just inflation. It is theft. The natural course of real money is to increase in value as the economy increases and to act as a store or reserve of value when the economy decreases. Until people wake up to the fact that increasing the money supply is theft, we are doomed to repeat the inflationary cycles of the past. Security is not obtained by receiving stolen money from the government. Security is the ability to produce... and to keep the fruit of your labors." – Paid-up subscriber Gene Boyd
 
Goldsmith comment: We never accused the Federal Reserve of being honest...
 
Regards,
 
Sean Goldsmith
Baltimore, Maryland
August 12, 2014
 
Why sanctions on Russia are actually hurting the U.S...
 
On Friday, we shared part of an exclusive interview with financial expert Jim Rickards, where he discussed the difference between inflation and deflation and how to profit from either scenario.
 
In today's Digest Premium, he discusses why the recent sanctions on Russia are stunting global growth... and hurting the U.S. more than you might think...
 
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Why sanctions on Russia are actually hurting the U.S...
 
 The timing was perfect...
 
In today's DailyWealth, Steve Sjuggerud laid out his case for a lower euro. (We previously discussed Steve's short-euro thesis in the August 6 Digest.) From today's essay...
 
"Europe's currency – the euro – is going down... The reasoning is simple. A weaker euro is politically the easiest fix available... You see, Europe is struggling right now. But inflation is not a problem. So a weaker currency is an easy fix. And that is the exact solution that Europe is pursuing today.
 
"From the Wall Street Journal last week: 'European Central Bank President Mario Draghi signaled Thursday he was pleased with the recent decline in the euro's exchange rate and outlined a number of forces that may weaken it further...'
 
"Mr. Draghi, according to the article, made 'unusually blunt comments about exchange rates. Central bankers typically shy away from such direct remarks on currencies.' Government officials might be incompetent at a lot of things... But one thing they can do very well is 'trash' their currencies. And the euro is in the midst of its trashing. Draghi isn't even trying to hide it."
 
 Steve's favorite way to play the crash in the euro is through the ProShares UltraShort Euro Fund (EUO). EUO is a double inverse fund, meaning that if the euro falls 1%, EUO should rise 2%... and vice versa.
 
In two months, True Wealth subscribers are up 5% on the recommendation... But Steve says the investment thesis has only gotten clearer. Draghi is committed to lowering the value of the euro and easing credit in the European monetary union. And he will succeed. If you've learned anything these past six years, it's not to fight the central bank. The printing press is a powerful tool.
 
 And today, Germany's Center for European Economic Research "investor confidence survey" index dropped to 44.3 in August. That's down from 61.8 a month ago. Expectations were for 54... Anything below 50 is negative.
 
The expectations index fell from 27.1 to 8.6 – its lowest reading since 2012.
 
On Thursday, we'll see Germany's second quarter gross domestic product numbers... Economists expect a 0.1% contraction from last quarter.
 
 This is all bad news for the euro... If Germany – Europe's economic driver – slows, Draghi will have no choice but to flood the market with euros.
 
The euro fell as low as $1.3336 today on the news, approaching a nine-month low against the dollar.
 
 Adding further instability in Europe... Less than a week after ending military drills on the Ukraine border, Russia is potentially back at it...
 
Russia sent 280 trucks toward Ukraine. The trucks are allegedly carrying humanitarian aid – everything from sleeping bags to baby food – from the Red Cross. But the Red Cross hasn't yet confirmed the trucks' contents. And Ukraine will not allow the trucks to cross the border.
 
Valeriy Chaly, the deputy head of Ukraine's presidential administration, said the two countries could find an agreed-upon point to transfer the goods. Chaly said any attempt to bring the goods into Ukraine without proper authorization would be seen as an attack on the country.
 
 As Jim Rickards discussed in Friday's Digest – the first part of our interview – he expects central banks around the world to print more money... This will lead to lower currencies and eventually inflation.
 
In today's installment, Jim explains whether central banks will be forced to push interest rates into negative territory to fight inflation...
 
Central banks have to do something. Of course, rates can't be any lower than they are because they're at zero, although in theory you could have negative rates. We've seen the European Central Bank move to negative interest rates. Let's say you put $100,000 in the bank and you have a negative interest rate of 1%. A year later, your bank account says $99,000. It took $1,000 out.
 
Instead of paying you interest on your money, the bank actually takes money away from you. In theory, that's designed to get people to spend money. If you sit on it and don't spend it, eventually it will go away.
 
Negative interest rates are designed to force prices up. This is called the velocity – or turnover – of money. When people start to spend money quickly, velocity goes up. Combined with the massive money supply, that would normally result in higher prices. That's how desperate the central banks are.
 
 Of course, as Jim points out, there are other things that banks can do besides lowering near-zero-percent interest rates. Negative interest rates cause people to withdraw their money from the bank and stick it under their mattresses...
 
The authorities know that, and they would probably have to limit your ability to withdraw the money. But that's fairly extreme. We're not there yet, although we might get there. In the meantime, they're printing more and more money. Interest rates aren't negative today. But by having so much money sloshing around, in theory, people might spend more. That's what the banks are doing through quantitative easing. But they're doing other things as well.
 
One is that they're trying to reduce the value of the dollar on foreign exchange markets. People say that's good because it makes U.S. exports cheaper. Maybe we'll sell a few more Boeing airplanes or a few more General Electric wind turbines.
 
But that's not why the central banks are doing it. They're doing because it makes imports more expensive. People forget that the U.S. may export a lot, but we're a net importer. And if you make the dollar cheaper, then all the things we buy –electronics, textiles, clothing, etc. – become more expensive. That's another way to get prices higher and that feeds into the supply chain and helps cause inflation.
 

Central banks have a whole toolkit designed to cause inflation. Zero-percent interest rates, printing money, currency wars, so-called forward guidance, nominal GDP targeting, etc. The problem is that none of them are working right now. It's a sad day when central banks want inflation and they can't get it. But they're going to keep trying because they have to avoid deflation.

 
 If you enjoyed today's interview with Jim, please consider getting a free copy of his new book, The Death of Money. Jim is one of the world's greatest financial minds. And in his new book, he further explains the actions central banks will take to destroy paper money and cause inflation. He also tells you exactly how to protect yourself.
 
We only ask you cover the cost of shipping and handling. (It's less than $5.) Plus, as a bonus for S&A subscribers, Jim wrote an extra chapter. Learn how to get your free copy by clicking here.
 
 
 New 52-week highs (as of 8/11/14): Brookfield Asset Management (BAM), Brookfield Property (BPY), Berkshire Hathaway (BRK), Kinder Morgan Management (KMR), and Royal Gold (RGLD).
 
 In today's mailbag, a subscriber's take on inflation... Send your thoughts to feedback@stansberryresearch.com.
 
 "While I really enjoy (and have learned much from) your various publications, Jim Rickards' focus on inflation as an increase in the money supply touched a nerve. A different perspective: Inflation is an increase in the SUPPLY of money. Deflation is an increase in the VALUE of money.
 
"If, during a period of economic expansion (i.e., more goods/services are being offered) the money supply is not increased, the value of the money in circulation will increase. The same amount of money will buy more goods/services. Existing goods/services will be reduced in price to the extent that new goods/services are demanded from the same supply of money. The increased value is distributed across the population (i.e., those who earned it and saved it).
 
"If, during a period of economic expansion, the money supply is increased at the same rate as the economic expansion (i.e., prices do not increase), the increased value is concentrated to the relatively few recipients of the newly 'printed' money. That's not an absence of inflation, it is simply theft... the value being stolen by the concentrated few who receive it from the distributed many who actually earned their money.
 
"Inflation/Deflation cycles amount to theft of money (the new supply) followed by concentration of value in the stolen money. All to the detriment of those who actually produce the value inherent in the goods/services that constitute the real economy (i.e., vs the faux economy of instruments of theft: government grants, bailouts, loans, guarantees, subsidies, entitlements, etc., etc., etc.).
 
"Increasing the money supply is not just inflation. It is theft. The natural course of real money is to increase in value as the economy increases and to act as a store or reserve of value when the economy decreases. Until people wake up to the fact that increasing the money supply is theft, we are doomed to repeat the inflationary cycles of the past. Security is not obtained by receiving stolen money from the government. Security is the ability to produce... and to keep the fruit of your labors." – Paid-up subscriber Gene Boyd
 
Goldsmith comment: We never accused the Federal Reserve of being honest...
 
Regards,
 
Sean Goldsmith
Baltimore, Maryland
August 12, 2014
 
​
Editor's note: Jim Rickards is one of the brightest minds in finance. He's a hedge-fund manager and bestselling author with a doctorate and multiple advanced degrees. He is also a go-to resource for many media outlets and serves as an advisor to top-level U.S. intelligence agencies.
 
On Friday, we shared part of an exclusive interview with Jim, where he discussed the difference between inflation and deflation and how to profit from either scenario. In today's Digest Premium, he discusses why the recent sanctions on Russia are stunting global growth... and hurting the U.S. more than you might think...
 
 
 America's sanctions on Russia are actually hurting us as a nation.
 
You have to separate the sanctions' economic effects from the geopolitical and moral effects. Russia is clearly behaving in abominable ways... ways that aren't normal or diplomatic. Russia invaded Ukraine's Crimea territory and has caused revolt in eastern Ukraine. Most recently, we have the tragic story about the Malaysian airplane being shot down.
 
Nobody is defending Russia's behavior. Maybe economic sanctions are the right response. From a geopolitical point of view, they may be necessary. But we shouldn't lose sight of the fact that, from an economic point of view, everybody loses.
 
 Sanctions may hurt Russia. But remember that Russia and Europe are among each other's largest trading partners. Europe depends on Russia for its energy supplies. As a member of the "BRIC" nations, Russia is one of the largest economies in the world. Its economy is about $2 trillion. That's one-eighth the size of the U.S., but it's still huge.
 
Taking those things together, does Russia deserve those sanctions? Perhaps. But the outcome on global growth is that everybody loses. When trade is loosened up, everybody wins. When it's tightened up, everybody loses.
 
 The global economy is hanging by a thread as it is. If you go back to the end of 2013, everybody on Wall Street, at the Federal Reserve, and at the International Monetary Fund (IMF) was predicting 3%-3.5% growth for 2014.
 
For the first half of 2014, it's apparent that growth will actually be negative. We're going to have to grow 7% in the second half of the year just to get back to even. Clearly that's not going to happen.
 
 Growth is weak. Europe is on the verge of another recession. The U.S. had negative growth in the first half of 2014. China is slowing down. It's on the verge of a credit crisis. Go around the world and you find anemic growth.
 
Now you throw in what's really financial warfare – an economic war – add economic sanctions on top of that, and it's going to stunt growth even more. It's one of the reasons why Europe has been very reluctant to go along with U.S. sanctions. Europe doesn't think Russian President Vladimir Putin is a nice guy. They know that it will hurt growth... and that it's worse for Europe than it is for the U.S.
 
Separating ethics from the discussion, this is just one more nail in the coffin for global growth... and it's one more reason to be concerned about a financial panic or liquidity crisis sooner rather than later.
 
– Jim Rickards
 
 
Editor's note: Jim recently wrote what we think is one of the most important books of the year – The Death of Money. In it, he explains everything you need to know about the U.S. currency system... why huge changes are imminent... what's most likely to happen next... and the important steps you must take to prepare. We believe this book is so important, we arranged a deal with Jim and his publisher to give S&A subscribers a free copy. All we ask is that you pay less than $5 in shipping costs. Get the full details by clicking here.
Why sanctions on Russia are actually hurting the U.S...
 
On Friday, we shared part of an exclusive interview with financial expert Jim Rickards, where he discussed the difference between inflation and deflation and how to profit from either scenario.
 
In today's Digest Premium, he discusses why the recent sanctions on Russia are stunting global growth... and hurting the U.S. more than you might think...
 
To continue reading, scroll down or click here.
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