Time for a Reality Check

Good News and Bad News Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Time for a Reality Check - Rickards: Growth is slowing, although you probably don’t have to worry about runaway inflation for now… - “Unfortunately, there’s no reason to believe we won’t confront a sixth, seventh or eighth wave of the virus in the year ahead, and more destructive policies imposed by clueless politicians”… - Then Jim Rickards shows you why a looming liquidity crisis is poised to shatter today’s complacent markets… Recommended Link [INCOMING MESSAGE FROM JAMES ALTUCHER]( [Read more here...]( Did you know Coronavirus could have very little to do with these crazy up and down markets? And the reason your retirement account could go down to zero? I’ve been warning readers about the REAL CAUSE behind this… I explain everything in my video. [Click Here To Watch Now]( Portsmouth, New Hampshire September 7, 2021 [Jim Rickards]Dear Reader, You’ve heard the narrative that the economy has come roaring back from COVID, that inflation is raging out of control and that there is a massive labor shortage that will quickly lead to higher wages (and even more inflation). None of that is true. It is true that the economy bounced back in the third quarter of 2020 after the collapse in the second quarter; that much is to be expected. Since then, growth has been around 6% on an annualized basis. That’s not too bad, but it’s below expectations considering how bad things were in 2020. Worse yet, growth has been slowing dramatically. The Atlanta Fed GDPNow forecasting tool showed annualized growth of 13% last April. That fell to 11%, then 7.5%, then 6.5%, and the latest forecast is 3.7%. The economy is quickly reverting to the 2.2% annual average growth we produced from 2009–2019 before the pandemic hit. Inflation is also dropping quickly. Once you strip out base effects (comparisons to an awful 2020 base) and a few outliers (basically, new and used cars), the core inflation is around 3% and is also heading quickly to the 1.8% rate that prevailed from 2009–2019. There is no labor shortage. There are 10–15 million prime-working-age Americans out of the labor force, sitting at home. (True, some are homemakers, students or early retirees, but it’s still a huge pool of unused labor.) The reason employers can’t get help is not because there are no workers but because the employers can’t afford to pay a market-clearing wage without going broke. Not exactly a sign of strength. Now comes the last nail in the coffin… The growth we have witnessed has been propped up by government transfer payments and benefits. This has come through Paycheck Protection Program loans, student loan deferrals, rent deferrals, eviction bans, direct handout checks and increased unemployment benefits. One by one, these programs are going away. Paycheck Protection Program loans are done. The eviction moratorium has expired, and evictions have begun. There are no handout checks on the drawing boards. And now the expanded unemployment benefits are over as of Sept. 1. The odds are good that economic growth will slow even more as government assistance ends. We’ll find out very soon. Given what we already know about slowing growth, the results won’t be pretty. But wait, it gets even worse… We’re now in the middle of the fifth wave of the virus in the U.S. It started in July and is peaking about now. It should abate by late September, based on the best epidemiological models I have discovered. Still, we’re in the thick of it, and politicians are back to the useless sideshow of masks and lockdowns. The evidence is clear that masks and lockdowns do not stop the spread of the virus and are only good for destroying the economy. That doesn’t stop politicians from mandating them. They want to be seen as “taking action.” As was the case during the first and third waves, the hardest-hit businesses involve travel, hotels, cruise ships, resorts, casinos, restaurants and other service businesses. TSA airport screenings are at their lowest level since last May. With reduced air travel come reductions in all other aspects of the travel and leisure business, as well as reduced business travel, which is the bread and butter of the airlines. Unfortunately, there’s no reason to believe we won’t confront a sixth, seventh or eighth wave of the virus in the year ahead and more destructive policies imposed by clueless politicians. Vaccines don’t stop infections and don’t stop the spread of the virus. The vaccines do reduce severe symptoms and death, but they may also provide a road map for viral mutations that will ultimately negate the vaccines. Right now, the biggest defeat apart from the disease itself is the economy. Weak growth will linger as long as the virus does. That could be a long time. Regards, Jim Rickards for The Daily Reckoning P.S. Have you seen my [new blockbuster video on the Sixth Domain of War?]( It’s generating a lot of chatter on the internet. I think you’ll see why when you [click here]( to see it. It involves instead a massive, $6.6 trillion daily flow of capital that you can tap for potentially explosive gains. [And I recently revealed my proprietary secret]( for profiting from this massive daily flow of capital that’s overlooked by most investors. Quite simply, few know about it. And that’s a shame. But I’m out to change all that. [My system is called COBRA.]( My team and I have built a new computerized Tactical Operations Center to track this massive cross-border capital flow. It’s something you really need to see. I think you’ll be amazed. 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[Click Here To Learn More]( The Daily Reckoning Presents: Things are quiet — too quiet… ****************************** The Perils of Complacency By Jim Rickards [Jim Rickards]The best advice for investors these days is not to confuse calm with stability. Calm and complacency are all around us. Despite blaring headlines about new “all-time highs,” the Dow Jones Industrial Average is only 1.9% higher than it was on May 7, almost four months ago. It has traded in a range of 33,290–35,625 the entire time. The S&P 500 Index is also just 2.8% higher than it was almost two months ago. Those gains are not trivial, but they’re not consistent with the “booming economy” and “inflation” narratives you hear every day. Considering the amount of money printing, QE and forward guidance the Fed has been pumping into markets, those gains are small beer. The same is true in the bond market. The yield-to-maturity on the 10-year Treasury note (our favorite benchmark with the best predictive power) has been stuck in a range of 1.43–1.17% for the past two months with multiple ups and downs within that fairly tight range. The same range-bound behavior is true for gold, albeit with more volatility. Gold was slammed on June 16 (because of a Fed announcement) and again on Aug. 8 (for reasons that are still unknown) but bounced back both times. The dips took gold to $1,769 per ounce on June 18 and to $1,726 per ounce on Aug. 9 (intraday trading went even lower). Still, gold rallied back to $1,831 per ounce on July 29 after the June mini-crash and rebounded to $1,820 per ounce on Aug. 27 following the August smash. In all events, gold sits comfortably near $1,800 per ounce today, right in the middle of the broad range of $1,700–1,900 per ounce it has occupied for the past year. I mention gold specifically because gold is the only form of money not created by banks, and it has powerful predictive powers, as does the Treasury note market. Unsurprisingly, this range-bound behavior is prevalent in foreign exchange markets. The U.S. dollar index (DXY) has traded in a narrow range between 92.22 on June 18 and 93.57 on Aug. 19. After a modest rally in mid-August, the index tailed off to 92.68 last Friday. The U.S. dollar has gained strength over the course of the summer, but the gain has been modest, with some drawdowns along the way. We see the same behavior in the EUR/USD cross-rate. The euro was as high as $1.2251 on May 25 but then suffered a mini-crash on June 16 in response to the Fed’s intimation that it might begin the taper sooner than markets had expected. (Gold crashed against the dollar on the same day for the same reason.) Since then, the euro has traded in a narrow range between $1.19 and $1.17, with a central tendency at $1.18. So what’s up? Stocks, bonds, gold and the major currencies have been range-bound for the past few months (with a slight upward bias in stocks). Markets have been relatively stable and mostly moving sideways despite some volatile days here and there (especially in gold). Even when volatility strikes, prices tend to correct quickly and return to the range. Are the dealers and hedgies on vacation? Is it just a case of the summertime blues? Recommended Link [No more banks. No more accountants. No more Wall Street?]( [Read more here...]( This new type of Internet could change everything in the coming years… But your chance to profit from it could start in the coming days! [Click Here To Learn More]( Don’t be fooled by the complacency and range-bound trading in major markets. Many investors take low volatility and range-bound prices as signs of equilibrium. They assume that if prices are not behaving in a disorderly way, the capital markets themselves and the world-at-large have achieved stability. This belief tends to let investors increase leverage, decrease cash and fall asleep at the wheel. The opposite is true. An apparent equilibrium state may be highly unstable and ready to crack. A good metaphor for this (with similar dynamics) is a tug-of-war. At the beginning of the contest, not much happens except a slight to-and-fro. The two teams are digging in their heels and pulling as hard as they can, but neither side moves much at first. Still, seasoned observers know that enormous forces are being applied to the rope in opposite directions. They also know that the situation is highly unstable despite the lack of much movement. Each side is wearing down the other. Suddenly one side gives way, and the other side pulls them over the center line in a victorious rout. The visible equilibrium was a mask for an invisible dynamic that emerged quickly and unexpectedly for the complacent observer. That’s what’s going on in markets today. On the one side is a narrative about a booming economy, rising inflation, Fed tightening (in the form of a taper this year) and crashing markets for notes and gold as interest rates move up. On the other side is the reality of slowing economic growth, disinflation (and possible deflation) and rallies in gold and notes as the inflation narrative melts and investors seek safe havens. Above all is what we call the paradox of a strong dollar. There are ample reasons for the dollar to decline, including Fed blundering (they will tighten at exactly the wrong time) and fiscal recklessness from Congress and the White House. The debacle in Afghanistan is not only a geopolitical humiliation. Events that put U.S. power in doubt also put confidence in the U.S. dollar in doubt. That may be a story for another day, but it’s on the minds of bankers and politicians from Shanghai to Moscow to Berlin. Yet, there’s an invisible backstory that will dramatically strengthen the dollar, at least for a time. There’s a global liquidity crisis fast emerging. It’s not at the critical stage yet, but it’s getting close. Banks are deleveraging because they can’t source high-quality collateral (mainly Treasury bills) in repo markets. This has led to a desperate scramble for Treasury bills, which means capital flows from Europe and Asia into USD in order to buy the bills. Astute investors see the crack-up coming and are running for the safe havens (dollars and gold) in advance. This dynamic will come to a head in late September as dealer banks start to window-dress their balance sheets for quarter-end reporting. Reduced leverage and the scramble for safe assets will exacerbate the liquidity crisis. This acute stage may pass safely (only to be repeated on Dec. 31, 2021), or it may erupt into highly volatile markets in October. In either case, the current low-vol sideways stage is coming to an end. There is huge profit potential for those who place their bets now while we’re still in a relatively calm stage. Regards, Jim Rickards for The Daily Reckoning P.S. Many investors aren’t even aware of the largest market in the world. And that’s a shame. But I’m out to change all that. This widely ignored market involves a massive, $6.6 trillion daily flow of capital that you can tap for potentially explosive gains. [And I recently revealed my proprietary secret]( for profiting from this massive daily flow of capital that’s overlooked by most investors. [My system is called COBRA.]( My team and I have built a new computerized Tactical Operations Center to track this massive cross-border capital flow. It’s something you really need to see. I think you’ll be amazed. [Click here now for details.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. 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