The Most Important Geopolitical Trend of the Next Decade…Here’s How to Profit

By Nick Giambruno

The bloodbath was merciless. In 1842, 16,500 British soldiers and civilians withdrew from Kabul, Afghanistan. Only one would survive. It was the most humiliating military disaster in British history. The death toll sealed Afghanistan’s reputation as “the graveyard of empires.”

It was the desire for control of Central Asia that sucked the British Army into its Afghan disaster. For most of the 1800s, the UK and Russia pushed for power and influence in Central Asia in a competition known as “the Great Game.”

It wasn’t just to score points. The thought of losing India terrified the Brits more than anything else. India had huge economic resources, a plentiful supply of military-aged males, and strategic geography. London treasured India as “the jewel in the crown of the British Empire.”

To the Brits, the expansion of the Russian Empire into Central Asia was a threat to their control of India. Neighboring Afghanistan was their red line. If the Russians could draw Afghanistan into their sphere of influence, they would become an intolerable threat to British India.

So, in 1839, the British Army invaded. They installed a puppet regime in Kabul that would stand as a buffer to Russian influence. Every previous attempt to bring Afghanistan under foreign rule had ended badly. The Afghans are some of the toughest and most stubborn fighters in the world. The British knew that executing their plan wouldn’t be a cakewalk.

After a few years of trying and then failing to impose their will, the Brits threw in the towel. Early in 1842, 16,500 British soldiers and civilians packed up and left Kabul. As they fled through the mountainous trails, Afghan tribal fighters attacked repeatedly.

It added up to an epic massacre…..If the Afghan fighters didn’t kill you, disease and winter weather would.

After just seven days, only one man was still alive. William Brydon was bloody, torn, and exhausted. He was the only one to make it to the nearest British military outpost. That outpost was in Jalalabad, 90 miles away from Kabul. The Afghans let him live so there would be someone to tell the grisly story.

The garrison in Jalalabad lit signal fires to guide other British survivors to safety. After several days, they realized no one was left to see the light. Painter Elizabeth Butler captured the pain and desperation of the moment in her Remnants of an Army, below.

The debacle was a brutal lesson in geopolitics: geography constrains the destiny of nations and empires. Ignore that constraint at your peril. Despite their folly in Afghanistan, the British were generally shrewd players in geopolitics. It was a skill developed from a centuries-long career as an imperial power.

The godfather of geopolitical theory was British strategist Sir Halford Mackinder. Mackinder developed a general theory that connected geography with global power. To this day, planners in the US, Russia, and China study his teachings.

Mackinder argued that dominating the Eurasian landmass - Asia and Europe together - was the key to being the leading global power.

Zbigniew Brzezinski, the renowned American geopolitical strategist, echoes Mackinder on the importance of Eurasia in his book The Grand Chessboard: American Primacy and Its Geostrategic Imperatives: Ever since the continents started interacting politically, some five hundred years ago, Eurasia has been the center of world power.

A power that dominates “Eurasia” would control two of the world’s three most advanced and economically productive regions…rendering the Western Hemisphere and Oceania geopolitically peripheral to the world’s central continent. About 75% of the world’s people live in “Eurasia,” and most of the world’s physical wealth is there as well, both in its enterprises and underneath its soil. “Eurasia” accounts for about three-fourths of the world’s known energy resources.

A single power that controls the resources of Eurasia would be an unstoppable global superpower. If one couldn’t control all of Eurasia, the next best thing would be to dominate the world’s oceans. Control of the sea lanes means control of international trade and the flow of strategic commodities.

In 1900, the British Empire was near the peak of its strength. It was the world’s undisputed naval power. Its naval bases ringed Eurasia from the North Atlantic to the Mediterranean, from the Persian Gulf to the Indian Ocean, all the way to Hong Kong. This enabled the Brits to project event shaping military power into Eurasia.

Today, the US is far and away the world’s leading naval power. Like the British before them, the Americans have followed the geopolitical strategy of ringing Eurasia with military bases and exploiting its divisions. The aircraft carrier, with its 5,000-person crew, is the central instrument of US naval power. Putting just one of these enormous vessels into operation costs more than $25 billion.

The US Navy has 11 carriers, more than the rest of the world combined. And it’s not just ahead in quantity. The power and technological sophistication of US aircraft carriers are far beyond the capabilities of any competitor. There is simply no military force now or in the foreseeable future that could dispute US control of the high seas.....Soon, though, it may not matter.

That’s because China, Russia, and others are working on an ambitious plan. They seek to make US dominance of the seas unimportant. They’re tying Eurasia together with a web of land-based transport facilities. A constellation of supporting organizations for financial, political, and security cooperation is also in the works. If they’re successful, they’ll wipe away hundreds of years of geopolitical strategic thinking. They’ll make the current US planning paradigm obsolete. They’ll undermine the strategy that the US - and the UK before it - has relied on to dominate geopolitics. It would be the biggest shift in the global power balance since WWII.

It’s a game for the highest stakes…a real-life battle of Risk. The effort and countereffort to integrate Eurasia is the new Great Game. It’s the most important process to watch for the next 10 years. The central project to integrate Eurasia is the New Silk Road.

The World’s Most Ambitious Infrastructure Project

For over a thousand years, the Silk Road, named for the lucrative trade it carried, was the world’s most important land route. At 4,000 miles long, it passed through a chain of empires and civilizations and connected China to Europe. It was the path along which merchant Marco Polo traveled to the Orient. When he returned, he gave Europeans their first contemporary glimpse of China.

Today, China is planning to revive the Silk Road with modern transit corridors. This includes high speed rail lines, modern highways, fiber-optic cables, energy pipelines, seaports, and airports. They will link the Atlantic shores of Europe with the Pacific shores of Asia. It’s an almost unbelievable goal.

If all goes according to plan, it will be a reality by 2025. A train from Beijing would reach London in only two days.

New Silk Road Routes

The New Silk Road is history’s biggest infrastructure project. It aims to completely redraw the world economic map. And, if completed, it has the potential to be the biggest geopolitical game-changer in hundreds of years.

Tying Eurasia together with land routes frees it from dependence on maritime transport. That ends the importance of controlling the high seas. That reshapes the fundamentals of global power…and it’s exactly what the Chinese and Russians want.

In late 2013, Chinese president Xi Jinping announced the New Silk Road. The Chinese government rules by consensus. They’re careful long-term planners. When they make a strategic decision of this magnitude, you know they are totally committed. They have the political will to pull it off. They also have the financial, technological, and physical resources to do it.

The plan is still in the early stages, but important pieces are already falling into place. On November 18 of last year, a train carrying containerized goods left Yiwu, China. It arrived in Madrid, Spain, 21 days later. It was the first shipment across Eurasia on the Yiwu-Madrid route, which is now the longest train route in the world. It’s one of the first components of the New Silk Road.

As ambitious as the New Silk Road is, it’s just one aspect of the integration of Eurasia. In just the past year, a set of interlocking international organizations has emerged. These new linkages are the institutional support for a new political-economic-financial order in Eurasia.

Here are the most prominent organizations…

Asian Infrastructure Investment Bank (AIIB)
China launched the AIIB in 2014 with financing for New Silk Road projects in mind. Its initial capital base is more than $100 billion.

The AIIB would be a Eurasian alternative to the US-dominated International Monetary Fund (IMF) and World Bank. Those institutions have been standing atop the international financial system. China, Russia, and India are the main shareholders and decision makers at the AIIB.

Nearly 60 countries, mostly in Eurasia, have signed up to join the bank. Japan and the US declined to join. Then, the US government embarrassed itself by trying (and failing) to pressure allies the UK, France, and Germany into snubbing the organization.

BRICS and the New Development Bank (NDB)
The BRICS countries - Brazil, Russia, India, China, and South Africa - are all onboard for Eurasian integration. The NDB, like the AIIB, is an international financial institution headquartered in China (but headed by an Indian banker), with $100 billion in capital. Also like the AIIB, the NDB is an alternative to the IMF and World Bank. The BRICS countries established the NDB in July 2015.

The NDB and AIIB will complement, not compete with, each other in financing the integration of Eurasia. The NDB will also finance infrastructure projects in Africa and South America. The NDB will use members’ national currencies, bypassing the US dollar. It won’t depend on US controlled institutions for anything. That reduces the NDB’s exposure to US pressure. The BRICS countries are also exploring building an alternative to SWIFT, an international payments network.

SWIFT is truly integral to the current international financial system. Without it, it’s nearly impossible to transfer money from a bank in country A to a bank in country B. In 2012, the US was able to kick Iran out of SWIFT. That crippled Iran’s ability to trade internationally. It also demonstrated that SWIFT had become a US political weapon. Neutralizing that kind of power is precisely why the BRICS countries want their own international payments system.

Eurasian Economic Union (EEU)
The EEU is a Russian-led trading bloc. It opened for business in January 2015. The EEU provides free movement of goods, services, money, and people through Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia. Other countries may join. Trade discussions have started with India, Vietnam, and Iran. The EEU is gradually expanding as countries along the New Silk Road remove barriers to trade. Egypt, Argentina, Brazil, Paraguay, Uruguay, and Venezuela are also in trade talks with the EEU.

Shanghai Cooperation Organization (SCO)
In the military and security realm, there’s the SCO. Current members include China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. India and Pakistan will join by 2016. Iran is also likely to join in the future.

Putting the Pieces Together

Eurasian integration, and the US attempt to block it, will be the most important story for the next 10 years. This is the new Great Game. Oddly, the US media has barely made a peep about it. Maybe the story of Eurasian integration is just too big and complex to fit into sound bites.

The New Silk Road…the Asian Infrastructure Investment Bank…the BRICS New Development Bank…an alternative SWIFT system…the Eurasian Economic Union…the Shanghai Cooperation Organization…these are the building blocks for a new world. There could be huge profits for investors who position themselves correctly ahead of this monumental trend.

There is an easy way for US investors to tap into this trend. Click here to get the latest issue of Crisis Speculator for all the details.

The article was originally published at internationalman.com.

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A Powerful Weapon of Financial Warfare--The US Treasury's Kiss of Death

By Nick Giambruno

It’s an amazingly powerful weapon that only the US government can wield—kicking anyone it doesn’t like out of the world’s US dollar based financial system.

It’s a weapon foreign banks fear. A sound institution can be rendered insolvent at the flip of a switch that the US government controls. It would be akin to an economic kiss of death. When applied to entire countries—such as the case with Iran—it’s like a nuclear attack on the country’s financial system.

That is because, thanks to the petrodollar regime, the US dollar is still the world’s reserve currency, and that indirectly gives the US a chokehold on international trade.

For example, if a company in Italy wants to buy products made in India, the Indian seller probably will want to be paid in US dollars. So the company in Italy first needs to purchase those dollars on the foreign exchange market. But it can’t do so without involving a bank that is permitted to operate in the US. And no such bank will cooperate if it finds that the Italian company is on any of Washington’s bad-boy lists.

The US dollar may be just a facilitator for an international transaction unrelated to any product or service tied to the US, but it’s a facilitator most buyers and sellers in world markets want to use. Thus Uncle Sam’s ability to say “no dollars for you” gives it tremendous leverage to pressure other countries.

The BRICS countries have been trying to move toward a more multipolar international financial system, but it’s an arduous process. Any weakening of the US government’s ability to use the dollar as a stick to compel compliance is likely years away.

When the time comes, no country will care about losing access to the US financial system any more than it would worry today about being shut out of the peso-based Mexican financial system. But for a while yet, losing Uncle Sam’s blessing still can be an economic kiss of death, as the recent experience of Banca Privada d’Andorra shows.

Andorra, a Peculiar Country Without a Central Bank

The Principality of Andorra is a tiny jurisdiction sandwiched between Spain and France in the eastern Pyrenees mountains. It hasn’t joined the EU and thus is not burdened by every edict passed down in Brussels. However, as a matter of practice, the euro is in general use. Interestingly, the country does not have a central bank.

Andorra is a renowned offshore banking jurisdiction. Banking is the country’s second-biggest source of income, after tourism. Its five banks had made names for themselves by being particularly well capitalized, welcoming to nonresidents (even Americans), and willing to work with offshore companies and international trusts.

One Andorran bank that had been recommended prominently by others (but not by International Man) is Banca Privada d’Andorra (BPA).

Recently BPA received the financial kiss of death from FinCEN, the US Treasury Department’s financial crimes bureau. FinCEN accused BPA of laundering money for individuals in Russia, China, and Venezuela—interestingly, all geopolitical rivals of the US.

Never mind that unlike murder, robbery and rape, money laundering is a victimless, make-believe crime invented by US politicians.

But let’s set that argument aside and assume that money laundering is indeed a real crime. While FinCEN seems to enjoy pointing the money laundering finger here and there, it never mentions that New York and London are among of the busiest money laundering centers in the world, which underscores the political, not criminal, nature of their accusations.

And that’s all it takes, a mere accusation from FinCEN to shatter the reputation of a foreign bank and the confidence of its depositors.

The foreign bank has little recourse. There is no adjudication to determine whether the accusation has any merit nor is there any opportunity for the bank to make a defense to stop the damage to its reputation.
And not even the most solvent foreign banks—such as BPA—are immune.

Shortly after FinCEN made its accusation public, BPA’s global correspondent accounts—which allow it to conduct international transactions—were closed. No other bank wants to risk Washington’s ire by doing business with a blacklisted institution. BPA was effectively banned from the international financial system.

This predictably led to an evaporation of confidence by BPA’s depositors. To prevent a run on the bank, the Andorran government took BPA under its administration and imposed a €2,500 per week withdrawal limit on depositors.

However, it’s not just BPA that is feeling the results of Washington’s displeasure. FinCEN’s accusation against BPA is sending a shockwave that is shaking Andorra to its core.

The ordeal has led S&P to downgrade Andorra’s credit rating, noting that “The risk profile of Andorra’s financial sector, which is large relative to the size of the domestic economy, has increased beyond our expectations.”

For comparison, BPA’s assets amount to €3 billion, and the Andorran government’s annual budget is only €400 million. There is no way the government could bail out BPA even if it wanted to.

The last time there was a banking crisis in a European country with an oversized financial sector, many depositors were blindsided with a bail-in and lost most, or in some cases, all of their money over €100,000.
While the damage to BPA’s customers appears to be contained for the moment, it remains to be seen whether Andorra turns into the next Cyprus.

BPA is hardly the only example of a US government attack on a foreign bank. In a similar fashion in 2013, the US effectively shut down Bank Wegelin, Switzerland’s oldest bank, which, like BPA, operated without branches in the US.

To appreciate the brazen overreach that has become routine for FinCEN, it helps to examine matters from an alternative perspective.

Imagine that China was the world’s dominant financial power instead of the US and it had the power to enforce its will and trample over the sovereignty of other countries. Imagine bureaucrats in Beijing having the power to effectively shut down any bank in the world. Imagine those same bureaucrats accusing BNY Mellon (Bank of New York is the oldest bank in the US) of breaking some Chinese financial law and cutting it off from the international financial system, causing a crisis of confidence and effectively shuttering it.

In a world of fiat currencies and fractional reserve banking, that is a power—a financial weapon—that the steward of the international financial system wields.

Currently, that steward is the US. It remains to be seen whether or not the BRICS will learn to be just as overbearing once their parallel international financial system is up and running.

In any case, the new system will give the world an alternative, and that will be a good thing.

But regardless of what the international financial system is going to look like, you should take action now to protect yourself from getting caught in the crossfire when financial weapons are going off.

One way to make sure your savings don’t go poof the next time some bureaucrat at FinCEN decides a bank did something that they didn’t like is to offshore your money into safe jurisdictions. And we've put together an in-depth video presentation to help you do just that. It's called, "Internationalizing Your Assets."

Our all-star panel of experts, with Doug Casey and Peter Schiff, provide low cost options for international diversification that anyone can implement - including how to safely set up foreign storage for your gold and silver bullion and how to move your savings abroad without triggering invasive reporting requirements.

This is a must watch video for any investor and it's completely free. Click here to watch Internationalizing Your Assets right now. 

The article was originally published at internationalman.com.

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Seven Questions Gold Bears Must Answer

By Jeff Clark, Senior Precious Metals Analyst

A glance at any gold price chart reveals the severity of the bear mauling it has endured over the last three years. More alarming, even for die hard gold investors, is that some of the fundamental drivers that would normally push gold higher, like a weak U.S. dollar, have reversed.

Throw in a correction defying Wall Street stock market and the never ending rain of disdain for gold from the mainstream and it may seem that there’s no reason to buy gold; the bear is here to stay.
If so, then I have a question. Actually, a whole bunch of questions.

If we’re in a bear market, then…..

Why Is China Accumulating Record Amounts of Gold?

Mainstream reports will tell you Chinese imports through Hong Kong are down. They are.
But total gold imports are up. Most journalists continue to overlook the fact that China imports gold directly into Beijing and Shanghai now. And there are at least 12 importing banks—that we know of.
Counting these “unreported” sources, imports have risen sharply. How do we know? From other countries’ export data. Take Switzerland, for example:

So far in 2014, Switzerland has shipped 153 tonnes (4.9 million ounces) to China directly. This represents over 50% of what they sent through Hong Kong (299 tonnes).

The UK has also exported £15 billion in gold so far in 2014, according to customs data. In fact, London has shipped so much gold to China (and other parts of Asia) that their domestic market has “tightened significantly” according to bullion analysts there.

Why Is China Working to Accelerate Its Accumulation?

This is a growing trend. The People’s Bank of China released a plan just last Wednesday to open up gold imports to qualified miners, as well as all banks that are members of the Shanghai Gold Exchange. Even commemorative gold maker China Gold Coin could qualify to import bullion. Not only will this further increase imports, but it will serve to lower premiums for Chinese buyers, making purchases more affordable.

As evidence of burgeoning demand, gold trading on China’s largest physical exchange has already exceeded last year’s record volume. YTD volume on the Shanghai Gold Exchange, including the city’s free trade zone, was 12,077 tonnes through October vs. 11,614 tonnes in all of 2013.

The Chinese wave has reached tidal proportions—and it’s still growing.

Why Are Other Countries Hoarding Gold?

The World Gold Council (WGC) reports that for the 12 months ending September 2014, gold demand outside of China and India was 1,566 tonnes (50.3 million ounces). The problem is that demand from China and India already equals global production!

India and China currently account for approximately 3,100 tonnes of gold demand, and the WGC says new mine production was 3,115 tonnes during the same period.

And in spite of all the government attempts to limit gold imports, India just recorded the highest level of imports in 41 months; the country imported over 39 tonnes in November alone, the most since May 2011.

Let’s not forget Russia. Not only does the Russian central bank continue to buy aggressively on the international market, Moscow now buys directly from Russian miners. This is largely because banks and brokers are blocked from using international markets by US sanctions. Despite this, and the fact that Russia doesn’t have to buy gold but keeps doing so anyway.

Global gold demand now eats up more than miners around the world can produce. Do all these countries see something we don’t?

Why Are Retail Investors NOT Selling SLV?

SPDR gold ETF (GLD) holdings continue to largely track the price of gold—but not the iShares silver ETF (SLV). The latter has more retail investors than GLD, and they’re not selling. In fact, while GLD holdings continue to decline, SLV holdings have shot higher.

While the silver price has fallen 16.5% so far this year, SLV holdings have risen 9.5%.

Why are so many silver investors not only holding on to their ETF shares but buying more?

Why Are Bullion Sales Setting New Records?

2013 was a record-setting year for gold and silver purchases from the US Mint. Pretty bullish when you consider the price crashed and headlines were universally negative.
And yet 2014 is on track to exceed last year’s record-setting pace, particularly with silver…

• November silver Eagle sales from the US Mint totaled 3,426,000 ounces, 49% more than the previous year. If December sales surpass 1.1 million coins—a near certainty at this point—2014 will be another record-breaking year.

• Silver sales at the Perth Mint last month also hit their highest level since January. Silver coin sales jumped to 851,836 ounces in November. That was also substantially higher than the 655,881 ounces in October.

• And India’s silver imports rose 14% for the first 10 months of the year and set a record for that period. Silver imports totaled a massive 169 million ounces, draining many vaults in the UK, similar to the drain for gold I mentioned above.

To be fair, the Royal Canadian Mint reported lower gold and silver bullion sales for Q3. But volumes are still historically high.

Why Are Some Mainstream Investors Buying Gold?

The negative headlines we all see about gold come from the mainstream. Yet, some in that group are buyers…..

Ray Dalio runs the world’s largest hedge fund, with approximately $150 billion in assets under management. As my colleague Marin Katusa puts it, “When Ray talks, you listen.”

And Ray currently allocates 7.5% of his portfolio to gold.

He’s not alone. Joe Wickwire, portfolio manager of Fidelity Investments, said last week, “I believe now is a good time to take advantage of negative short-term trading sentiment in gold.”

Then there are Japanese pension funds, which as recently as 2011 did not invest in gold at all. Today, several hundred Japanese pension funds actively invest in the metal. Consider that Japan is the second-largest pension market in the world. Demand is also reportedly growing from defined benefit and defined contribution plans.

And just last Friday, Credit Suisse sold $24 million of US notes tied to an index of gold stocks, the largest offering in 14 months, a bet that producers will rebound from near six-year lows.

These (and other) mainstream investors are clearly not expecting gold and gold stocks to keep declining.

Why Are Countries Repatriating Gold?

I mean, it’s not as if the New York depository is unsafe. It and Ft. Knox rank as among the most secure storage facilities in the world. That makes the following developments very curious:

• Netherlands repatriated 122 tonnes (3.9 million ounces) last month.

• France’s National Front leader urged the Bank of France last month to repatriate all its gold from overseas vaults, and to increase its bullion assets by 20%.

• The Swiss Gold Initiative, which did not pass a popular vote, would’ve required all overseas gold be repatriated, as well as gold to comprise 20% of Swiss assets.

• Germany announced a repatriation program last year, though the plan has since fizzled.

• And this just in: there are reports that the Belgian central bank is investigating repatriation of its gold reserves.

What’s so important about gold right now that’s spurned a new trend to store it closer to home and increase reserves?

These strong signs of demand don’t normally correlate with an asset in a bear market. Do you know of any bear market, in any asset, that’s seen this kind of demand?

Neither do I.

My friends, there’s only one explanation: all these parties see the bear soon yielding to the bull. You and I obviously aren’t the only ones that see it on the horizon.

Christmas Wishes Come True…..

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I say we back up the truck for the bargain of the century. Just like all the others above are doing.

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The article 7 Questions Gold Bears Must Answer was originally published at casey research.

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The End of Monetary Policy

Thoughts from the Frontline: The End of Monetary Policy

By John Mauldin

We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar…

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

            –  T. S. Eliot, “The Hollow Men”

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. This is not to say that there will no longer be events to fill the pages of Foreign Affairs' yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run.

– Francis Fukuyama, The End of History and the Last Man

Francis Fukuyama created all sorts of controversy when he declared “the end of history” in 1989 (and again in 1992 in the book cited above). That book won general applause, and unlike many other academics he has gone on to produce similarly thoughtful work. A review of his latest book, Political Order and Political Decay: From the Industrial Revolution to the Globalisation of Democracy, appeared just yesterday in The Economist. It’s the second volume in a two-volume tour de force on “political order.”

I was struck by the closing paragraphs of the review:

Mr. Fukuyama argues that the political institutions that allowed the United States to become a successful modern democracy are beginning to decay. The division of powers has always created a potential for gridlock. But two big changes have turned potential into reality: political parties are polarised along ideological lines and powerful interest groups exercise a veto over policies they dislike. America has degenerated into a “vetocracy”. It is almost incapable of addressing many of its serious problems, from illegal immigration to stagnating living standards; it may even be degenerating into what Mr. Fukuyama calls a “neopatrimonial” society in which dynasties control blocks of votes and political insiders trade power for favours.

Mr. Fukuyama’s central message in this long book is as depressing as the central message in “The End of History” was inspiring. Slowly at first but then with gathering momentum political decay can take away the great advantages that political order has delivered: a stable, prosperous and harmonious society.

While I am somewhat more hopeful than Professor Fukuyama is about the future of our political process (I see the rise of a refreshing new kind of libertarianism, especially among our youth, in both conservative and liberal circles, as a potential game changer), I am concerned about what I think will be the increasing impotence of monetary policy in a world where the political class has not wisely used the time that monetary policy has bought them to correct the problems of debt and market restricting policies. They have avoided making the difficult political decisions that would set the stage for the next few decades of powerful growth.

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So while the title of this letter, “The End of Monetary Policy,” is purposely provocative, the longer and more appropriate title would be “The End of Effective and Productive Monetary Policy.” My concern is not that we will move into an era of no monetary policy, but that monetary policy will become increasingly ineffective, so that we will have to solve our social and physical problems in a much less friendly economic environment.
In today’s Thoughts from the Frontline, let’s explore the limits of monetary policy and think about the evolution and then the endgame of economic history. Not the end of monetary policy per se, but its emasculation.

The End of Monetary Policy

Asset classes all over the developed world have responded positively to lower interest rates and successive rounds of quantitative easing from the major central banks. To the current generation it all seems so easy. All we have to do is ensure permanently low rates and a continual supply of new money, and everything works like a charm. Stock and real estate prices go up; new private equity and credit deals abound; and corporations get loans at low rates with ridiculously easy terms. Subprime borrowers have access to credit for a cornucopia of products.

What was Paul Volcker really thinking by raising interest rates and punishing the economy with two successive recessions? Why didn’t he just print money and drop rates even further? Oh wait, he was dealing with the highest inflation our country had seen in the last century, and the problem is that his predecessor had been printing money, keeping rates too low, and allowing inflation to run out of control. Kind of like what we have now, except we’re missing the inflation.

Let’s Look at the Numbers

The Organization for Economic Cooperation and Development has a marvelous website full of all sorts of useful information. Let’s start by looking at inflation around the world. This table is rather dense and is offered only to give you a taste of what’s available.



What we find out is that inflation is strikingly, almost shockingly, low. It certainly seems so to those of us who came of age in the ’60s and ’70s and who now, in the fullness of time, are watching aghast as stupendous amounts of various currencies are fabricated out of thin air. Seriously, if I had suggested to you back in 2007 that central bank balance sheets would expand by $7-8 trillion in the next half decade but that inflation would be averaging less than 2%, you would have laughed in my face.

Let’s take a quick world tour. France has inflation of 0.5%; Italy’s is -0.2% (as in deflation); the euro area on the whole has 0.4% inflation; the United Kingdom (which still includes Scotland) is at an amazingly low 1.5% for the latest month, down from 4.5% in 2011; China with its huge debt bubble has 2.2% inflation; Mexico, which has been synonymous with high inflation for decades, is only running in the 4% range. And so on. Looking at the list of the major economies of the world, including the BRICS and other large emerging markets, there is not one country with double digit inflation (with the exception of Argentina, and Argentina is always an exception – their data lies, too, because inflation is 3-4 times what they publish.) Even India, at least since Rajan assumed control of the Reserve Bank of India, has watched its inflation rate steadily drop.

Japan is the anomaly. The imposition of Abenomics has seemingly engineered an inflation rate of 3.4%, finally overcoming deflation. Or has it? What you find is that inflation magically appeared in March of this year when a 3% hike in the consumption tax was introduced. When government decrees that prices will go up 3%, then voilà, like magic, you get 3% inflation. Take out the 3% tax, and inflation is running about 1% in the midst of one of the most massive monetary expansions ever seen. And there is reason to suspect that a considerable part of that 1% is actually due to the ongoing currency devaluation. The yen closed just shy of 110 yesterday, up from less than 80 two years ago.

I should also point out that, one year from now, this 3% inflation may disappear into yesteryear’s statistics. The new tax will already be factored into all current and future prices, and inflation will go back to its normal low levels in Japan.

Inflation in the US is running less than 2% (latest month is 1.7%) as the Fed pulls the plug on QE. As I’ve been writing for … my gods, has it really been two decades?! – the overall trend is deflationary for a host of reasons. That trend will change someday, but it will be with us for a while.

Where’s my GDP?

Gross domestic product around the developed world ranges anywhere from subdued to anemic to outright recessionary:



The G-20 itself is growing at an almost respectable 3%, but when you look at the developed world’s portion of that statistic, the picture gets much worse. The European Union grew at 0.1% last year and is barely on target to beat that this year. The euro area is flat to down. The United Kingdom and the United States are at 1.7% and 2.2% respectively. Japan is in recession. France is literally at 0% for the year and is likely to enter recession by the end of the year. Italy remains mired in recession. Powerhouse Germany was in recession during the second quarter.

Let’s put those stats in context. We have seen the most massive monetary stimulation of the last 200 years in the developed world, and growth can be best described as faltering. Without the totally serendipitous shale oil revolution in the United States, growth here would be about 1%, or not much ahead of where Europe is today.

Demographics, Debt, Bond Bubbles, and Currency Wars

Look at the rest of the economic ecology. Demographics are decidedly deflationary. Every country in the developed world is getting older, and with each year there are fewer people in the working cohort to support those in retirement. Government debt is massive and rising in almost every country. In Japan and many countries of Europe it is approaching true bubble status. Anybody who thinks the current corporate junk bond market is sustainable is smoking funny smelling cigarettes. (The song from my youth “Don’t Bogart That Joint” pops to mind. But I digrass.)

We are seeing the beginnings of an outright global currency war that I expect to ensue in earnest in 2015. My co-author Jonathan Tepper and I outlined in both Endgame and Code Red what we still believe to be the future. The Japanese are clearly in the process of weakening their currency. This is just the beginning. The yen is going to be weakening 10 to 15% a year for a very long time. I truly expect to see the yen at 200 to the dollar somewhere near the end of the decade.

ECB head Mario Draghi is committed to weakening the euro. The reigning economic philosophy has it that weakening your currency will boost exports and thus growth. And Europe desperately needs growth. Absent QE4 from the Fed, the euro is going to continue to weaken against the dollar. Emerging-market countries will be alarmed at the increasing strength of the dollar and other developed world currencies against their currencies and will try to fight back by weakening their own money. This is what Greg Weldon described back in 2001 as the Competitive Devaluation Raceway, which back then described the competition among emerging markets to maintain the devaluation of their currencies against the dollar.

Today, with Europe and Japan gunning their engines, which have considerable horsepower left, it is a very competitive race indeed – and one with far reaching political implications for each country. As I have written in past letters, it is now every central banker for him or herself.

That Pesky Budget Thing

Developed governments around the world are running deficits. France will be close to a 4% deficit this year, with no improvement in sight. Germany is running a small deficit. Japan has a mind boggling 8% deficit, which they keep talking about dealing with, but nothing ever actually happens. How is this possible with a debt of 250% of GDP? Any European country with such a debt structure would be in a state of collapse. The US is at 5.8% and the United Kingdom at 5.3%, while Spain is still at 5.5%.

Let’s focus on the US. Everyone knows that the US has an entitlement driven spending problem, but very few people I talk with understand the true nature of the situation, which is actually quite dire, looming up ahead of us. In less than 10 years, at current debt projection growth rates, the third largest expenditure of the United States government will be interest expense. The other three largest categories are all entitlement programs. Discretionary spending, whether for defense or anything else, is becoming an ever smaller part of the budget. Social Security, Medicare, and Medicaid now command nearly two thirds of the national budget and rising. Ironically, polls suggest that 80% of Americans are concerned about the rising deficit and debt, but 69% oppose Medicare cutbacks, and 78% oppose Medicaid cutbacks.



At some point in the middle of the next decade, entitlement spending plus interest payments will be more than the total revenue of the government. The deficit that we are currently experiencing will explode. The following chart is what will happen if nothing changes. But this chart also cannot happen, because the bond market and the economy will simply implode before it does.



A Multitude of Sins

Monetary policy has been able to mask a multitude of our government’s fiscal sins. My worry for the economy is what will happen when Band-Aid monetary policy can no longer forestall the hemorrhaging of the US economy. Long before we get to 2024 we will have a crisis. In past years, I have expected the problems to come to a head sooner rather than later, but I have come to realize that the US economy can absorb a great deal of punishment. But it cannot absorb the outcomes depicted in those last two charts. Something will have to give.

And these projections assume there will be no recession within the next 10 years. How likely is that? What happens when the US has to deal with its imbalances at the same time Europe and Japan must deal with theirs? These problems are not resolvable by monetary policy.

Right now the markets move on every utterance from Janet Yellen, Mario Draghi, and their central bank friends. Central banking dominates the economic narrative. But what happens to the power of central banks to move markets when the fiscal imperative overcomes the central bank narrative?

Sometime this decade (which at my age seems to be passing mind-numbingly quickly) we are going to face a situation where monetary policy no longer works. Optimistically speaking, interest rates may be in the 2% range by the end of 2016, assuming the Fed starts to raise rates the middle of next year and raises by 25 basis points per meeting. If we were to enter a recession with rates already low, what would dropping rates to the zero bound again really do? What kind of confidence would that tactic actually inspire? And gods forbid we find ourselves in a recession or a period of slow growth prior to that time. Will the Fed under Janet Yellen raise interest rates if growth sputters at less than 2%?

An even scarier scenario is what will happen if we don’t deal with our fiscal issues. You can’t solve a yawning deficit with monetary policy.

Further, at some point the velocity of money is going to reverse, and monetary policy will have to be far more restrained. The only reason, and I mean only, that we’ve been able to get away with such a massively easy monetary policy is that the velocity of money has been dropping consistently for the last 10 years. The velocity of money is at its lowest level since the end of World War II, but it is altogether possible that it will slow further to Great Depression levels.

When the velocity of money begins to once again rise – and in the fullness of time it always does – we are going to face the nemesis of inflation. Monetary policy during periods of inflation is far more constrained. Quantitative easing will not be the order of the day.

For Keynesians, we are in the Golden Age of Monetary Policy. It can’t get any better than this: free money and low rates and no consequences (at least no consequences that can be seen by the public). This will end, as it always does…..

Not with a Bang but a Whimper

Will we see the end of monetary policy? No, policy will just be constrained. The current era of easy monetary policy will not end (in the words of T.S. Eliot) with a bang but a whimper. Janet or Mario will walk to the podium and say the same words they do today, and the markets will not respond. Central banks will lose control of the narrative, and we will have to figure out what to do in a world where profits and productivity are once again more important than quantitative easing and monetary policy.

You need to be thinking about how you will react and how you want to protect your portfolios in such a circumstance. Even if that volatility is years off, “war-gaming” how you will respond is an important exercise. Because it will happen, unless Congress and the White House decide to resolve the fiscal crisis before it happens. Calculate the odds on that happening and then decide whether you need to have a plan.

Unless you think the bond market will continue to finance the US government through endless deficits (as so far has happened in Japan), then you need to start to contemplate the end of effective monetary policy. I would note that, even in Japan, monetary policy has not been effective in restarting an economy. It is a quirk of Japan’s social structure that the Japanese have devoted almost their entire net savings to government bonds. As the savings rate there is getting ready to turn negative, we are going to see a very different economic result. Japan with the yen at 200 and an even older society will look a great deal different than the country does today.

Current market levels of volatility and complacency should be seen as temporary. Plan accordingly.

Washington DC, Chicago, Athens (Texas), and Boston

I am in Washington DC as you read this. I have a few meetings set up, as well as a speaking engagement, and then I’ll return home to meet with my business partners at Mauldin Economics later in the week. In the middle of October I will go to Chicago for a speech, fly back to a meeting with Kyle Bass and his friends at the Barefoot Ranch in Athens, Texas, and then fly out to Boston to spend the weekend with Niall Ferguson and some of his friends. I am sure I will be happily surfing mental stimulus overload that week.

Next weekend (October 4) is my 65^th birthday. I had originally thought I would do a rather low key event with family; but my staff, family, and friends have different plans. I’m not really supposed to know what’s going on and don’t really have much of an idea as I am not allowed around planning sessions, but it sounds like fun.

I am walking on legs that feel like Jell-O, as it was “legs day” yesterday, working out with The Beast. My regular workout partner couldn’t make it, so he was able to focus on exhausting me to the maximum extent possible. I’ve never been all that athletic. As a kid, for the most part I was not allowed to participate in PE due to some physical limitations (which fortunately went away as I grew older).

I became a true geek. Not that that is all bad: it has served me rather well later in life. Geeks rule. It wasn’t until I was in my mid 40s that I began to go to the gym on more than a haphazard basis. And I must confess that I was a typical male in that I focused on my upper body as opposed to my legs and abdominals. That oversight is catching up with me now. The Beast is forcing me to devote more time to my legs and core. Much better for me as I approach the latter half of my 60s, but it’s painful to realize the cost of my negligence.

In the last five or six years my travel has reduced my gym time, or at least that’s my excuse. For whatever reason, my travel has been reduced for the last two months, so I’m getting much more time in the gym, and my workouts are more well rounded. I typically try to do at least another 30 minutes of cardio after our training sessions, even if the session was based around cardio. Except on leg days. There’s nothing left for extra walking or cycling after leg days.

I share this because I want you to understand that working out is just as important as your investment strategy. I fully intend to be going strong for a very long time. But that doesn’t happen (at least as easily) if you lose your legs. As much as I hate leg days, I probably need those workouts more than any others.

It’s time to hit the send button. I hear kids and grand kids gathering in the next room. That’s something else that is just as important as investment strategy. You have a great week.

Your thinking about how to profit from the coming crisis analyst,

John Mauldin

The article Thoughts from the Frontline: The End of Monetary Policy was originally published at mauldineconomics.com.

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Mining and the Environment — Facts vs. Fear

By Laurynas Vegys, Research Analyst

“I would NEVER invest in a mining company—they destroy land, pollute our water and air, and wreck the habitat of plants and animals.”


These were the points made to me by a woman at a social gathering after I told her what I do for living. She prided herself on her moral high ground and looked upon me with obvious disdain. It was clear that as a mining researcher, I was partly responsible for destroying the environment.

I knew a reasonable discussion with her wouldn’t be possible, so I opted out of trying. (As Winston Churchill said, “A fanatic is one who can’t change his mind and won’t change the subject.”) She left the party convinced her position was indisputably correct. But was she?

Not at all.

In fact, with few exceptions, today’s mining operations are designed, developed, operated, and ultimately closed in an environmentally sound manner. On top of that, considerable effort goes into the continued improvement of environmental standards.

My environmentalist acquaintance, of course, would loudly disagree with those statements. Many people may feel uncomfortable investing in an industry that’s so closely scrutinized and vehemently criticized by the public and mainstream media—whether there’s good reason for that criticism or not. This actually is to the benefit of those who dare to think for themselves.

So let’s examine what mining REALLY does to the environment. As Doug Casey always says, we should start by defining our terms…

How Do You Define “Environment”?

In modern mining, the term “environment” is broader than just air, water, land, and plant and animal life. It also encompasses the social, economic, and cultural environment and, ultimately, the health and safety conditions of anyone involved with or affected by a given mining activity.

Armed with this more comprehensive view of the industry’s impact on the environment, we can evaluate the effects of mining and its benefits in a more holistic fashion.

Impact on the Economy

According to a study commissioned by the World Gold Council, to take an example from mining of our favorite metal, the gold mines in the world’s top 15 producing countries generated about US$78.4 billion of direct Gross Value Added (GVA) in 2012. (GVA measures the contribution to the economy of each individual producer, industry, or sector in a country.) That sum is roughly the annual GDP of Ecuador or Azerbaijan, or 30% of the estimated GDP of Shanghai, China. Here’s a look at the GVA for each of these countries.

Keep in mind that this doesn’t include the indirect effects of gold mining that come from spending in the supply chain and by employees on goods and services. If this impact were reflected in the numbers, the overall economic contribution of gold mining would be significantly larger. Also, it’s evident that gold mining’s imprint on national economies varies considerably. For countries like Papua New Guinea, Ghana, Tanzania, and Uzbekistan, gold mining is one of the principal sources of prosperity.

Another measure of economic contribution is the jobs created and supported by businesses. The chart below shows the share of jobs created of each major gold-producing country.

The four countries with the highest numbers of gold mining employees are South Africa (145,000), Russia (138,000), China (98,200), and Australia (32,300). The industry also employs 18,600 in Indonesia, 17,100 in Tanzania, and 16,100 in Papua New Guinea. (As an aside, it’s quite telling that South Africa employs more gold miners than China, but China produces more gold than South Africa.)

Note that these employment figures don’t include jobs in the artisanal and small-scale production mining fields, or any type of indirect employment attributable to gold mining—so they understate the actual figures
For many countries, gold mining accounts for a significant share of exports. As an example, gold merchandise comprised 36% of Tanzanian and 26% of Ghana’s and Papua New Guinea’s exports in 2012.

Below, you see a more comprehensive picture of gold exports by 15 major gold-producing countries.

Other, often overlooked ways in which the mining industry supports the economy include:

• Foreign Direct Investment (FDI). The three mining giants—Canada, the United States, and Australia—have been dominating this category for a number of years, both as the primary destinations for investment and as the main investor countries.

• Government revenue. All mining businesses, regardless of jurisdiction, have to pay certain levies on their revenue and earnings, including license fees, resource rents, withholding and sales taxes, export duties, corporate income taxes, and various royalties. Taken all together, these payments make up a large portion of overall mining costs. For example, estimates suggest that the total of mining royalty payments in 2012 across the top gold-producing countries worked out to the tune of US$4.1 billion. This, of course, doesn’t account for other types of tax normally applied to the mining industry.

• Gold products. Gold as a symbol of prosperity and the ultimate “wealth insurance” is very important to many nations around the globe—especially in Asia and Africa. Gold jewelry is given as a dowry to brides and as gifts at major holidays. In India, the government’s ban on gold purchases by the public led to so much smuggling that the incoming prime minister is considering removing it. Chinese, Vietnamese, and peoples of India and Africa may all be divided across linguistic lines, but they all share the view of gold being a symbol of prosperity and ultimate insurance against life’s uncertainties.

It’s also important to note that jobs with modern mining companies are usually the most desirable options for poverty stricken people in the remote areas where many mines are built. These jobs not only pay more than anything else in such regions, they provide training and health benefits simply not available anywhere else.
Mining provides work with dignity and a chance at a better future for hundreds of thousands of struggling families all around the world.

Let’s now have a look at the most debated and contentious side to mining.

Impact on the (Physical) Environment

In previous millennia, humans labored with little concern for the environment. Resources seemed infinite, and the land vast and adaptable to our needs. An older acquaintance of ours who grew up in 1930s Pittsburgh remembers the constant coal soot hanging in the air: “Every day, it got dark around noon time.” Victorian London was famous for its noxious, smoky, sulfurous fog, year round.

Initially, the mining industry followed the same trend. Early mine operations had little, if any, regard for the environment, and were usually abandoned with no thought given to cleaning up the mess once an ore body was depleted.

In the second half of the 20^th century, however, the situation turned around, as the mining industry realized the need to better understand and mitigate its impact on the environment.

The force of law, it must be admitted, had a lot to do with this change, but today, what is sometimes called “social permitting” frequently has an even more powerful regulatory effect than government mandates. Today’s executives understand that good environmental stewardship is good business—and many have strong personal environmental ethics.

That said, mining is an extractive industry, and it’s always going to have an impact. Here’s a quick look at some of the biggest environmental scares associated with gold mining and how they are confronted today.

Mercury

Symbol: Hg

Occurrence in the earth’s crust: Rare

Toxicity: High

Mercury, also known as quicksilver, has been used to process gold and silver since the Roman era. Mercury doesn’t break down in the environment and is highly toxic for both humans and animals. Today, the use of mercury is largely limited to artisanal and illegal mining. Industrial mining companies have switched to more efficient and less environmentally damaging techniques (e.g., cyanide leaching).

Developing countries with a heavy illegal mining presence, on the other hand, have seen mercury pollution increase. The United Nations Industrial Development Organization (UNIDO) estimates that 1,000 tons of mercury are annually released into the air, soil, and water as a result of illegal mining activity.

To help combat the problem, the mining industry, through the members of the International Council on Mining & Metals (ICMM), has partnered with governments of those nations to transfer low- or no-mercury processing technologies to the artisanal mining sector.

Sodium Cyanide

Mining compound employed: NaCN

Occurrence in nature: Common

Toxicity: High

This is one of the widely used chemicals in the industry that can make people’s emotions run high. Historically considered a deadly poison, cyanide has been implicated in events such as the Holocaust, Middle Eastern wars, and the Jonestown suicides. Given such associations, it’s no wonder that the public perceives it with alarm, without even adding mining to the equation.

It is important, however, to understand that cyanide:

• is a naturally occurring chemical;
• is not toxic in all forms or all concentrations;
• has a wide range of industrial uses and is safely manufactured, stored, and transported every day;
• is biodegradable and doesn’t build up in fish populations;
• is not cumulative in humans and is metabolized at low exposure levels;
• should not be confused with Acid Rock Drainage (ARD; see below); and
• is not a heavy metal.

Cyanide is one of only a few chemical reagents that dissolves gold in water and has been used to leach gold from various ores for over a hundred years. This technique—known as cyanidation—is considered a much safer alternative to extraction with liquid mercury, which was previously the main method used. Cyanidation has been the dominant gold extraction technology since the 1970s; in Canada, more than 90% of gold mined is processed with cyanide.

Despite its many advantages for industrial uses, cyanide remains acutely toxic to humans and obviously is a concern on the environmental front. There are two primary environmental risks from gold cyanidation:

• Cyanide might leach into the soil and ground water at toxic concentrations.
• A catastrophic spill could contaminate the ecosystem with toxic levels of cyanide.

In response to these concerns, gold mining companies around the world have developed precautionary systems to prevent the escape of cyanide into the environment—for example, special leach pads lined with a plastic membrane to prevent the cyanide from invading the soil. The cyanide is subsequently captured and recycled.

Further, to minimize the environmental impact of any cyanide that is not recycled, mine facilities treat cyanide waste through several processes that allow it to degrade naturally through sunlight, hydrolysis, and oxidation.

Acid Rock Drainage (ARD)

Target chemical: Sulfuric acid

ARD occurrence in nature: Common

Toxicity: Varies

Contrary to popular belief, ARD is the natural oxidation of sulfide minerals such as pyrite when these are exposed to air and water. The result of this oxidation is an increase in the acidity of the water, sometimes to dangerous levels. The problem intensifies when the acid comes into contact with high levels of metals and thereby dissolves them, which adds to the water contamination.

Once again, ARD is a natural process that can happen whenever such rocks are exposed on the surface of the earth, even when no mining was involved at all. Possible sources of ARD at a mine site can include waste-rock piles, tailings storage facilities, and mine openings. However, since many mineral deposits contain little or no pyrite, ARD is a potential issue only at mines with specific rock types.

Part of a mining company’s environmental assessment is to conduct technical studies to evaluate the ARD potential of the rocks that may be disturbed. Once ARD has developed, the company may employ measures to prevent its spread or reduce the migration of ARD waters and perhaps even treat the water to reduce acidity and remove dissolved metals.

In some places where exposed sulfide minerals are already causing ARD, a clean, modern mine that treats all outflowing water can actually improve water quality.

Arsenic

Symbol: As

Occurrence in the earth’s crust: Moderate

Toxicity: High

Similar to mercury, arsenic is a naturally occurring element that is commonly found as an impurity in metal ores. In fact, arsenic is the 33rd most abundant element in the earth’s crust and is present in rocks and soil, in natural waters, and in small amounts in all living things. For comparison, silver (Ag) is 47th and gold (Au) 79th (see the periodic table of elements). Arsenic is toxic in large doses.

The largest contribution of arsenic from the mining industry comes from atmospheric emissions from copper smelting. It can also, however, leach out of some metal ores through ARD and, when present, needs to be removed as an impurity to produce a saleable product.

Several pollution-control technologies have been successful at capturing and removing arsenic from smelting stacks and mine tailings. As a result, between 1993 and 2009, the release of arsenic from mining activities in Canada fell by 79%. Similar figures have been reported in other countries.

Mythbusters

Now, here’s our quick stab at dispelling the three most widespread myths environmentalists commonly bring up in their rants against the mining industry.

Myth 1: Mining Uses Excessive Amounts of Land

Reality: Less than 1% of the total land area in any given jurisdiction is allotted for mining operations (normally far less than that). Even a modest forestry project affects far more trees than the largest open-pit mine. Mining activities must also meet stringent environmental standards before a company can even get a permit to operate.

The assessment process applied to mining operations is very detailed and based on a long string of policies and regulations (e.g., the National Environmental Policy Act in the US). Environmentalists may claim that the mining industry is rife with greedy land barons, but there’s more than enough evidence to the contrary.

Myth 2: Mining Is Always Detrimental to the Water Supply

Reality: Quite the opposite, actually. Before mine operations start, a mining company must submit a project proposal that includes detailed water utility studies (which are then evaluated by scientists and government agencies). Many companies even install water supply systems in local communities that lack easy access to this basic resource. It’s also common for the rocks to be mined to be naturally acid-generating—a problem the mine cleans up, by its very nature.

Some die hard zealots blame the mining industry for consuming huge amounts of water, but in fact it normally only uses +1% of the total water supplied to a given community, and 80% of that water is recycled continuously.

Myth 3: Mining Is Invasive to the Natural Environment

Reality: Yes, mining activity in certain countries has led to negative outcomes for certain plants and animals—not to mention the rocks themselves, which are blasted and hauled away. However, the industry has progressed a long way in the last few decades and, apart from rare accidents, the worst is behind us now.

The key determinant here is compliance. All mining activity must comply with strict environmental guidelines, leading up to and during operations and also following mine closure. After mining activity ends, the company is required to rehabilitate the land. In some cases, the land is remediated into forests, parks, or farmland—and left in better condition than before.

It’s worth reiterating that in some cases—where there’s naturally occurring ARD or where hundreds of years of irresponsible mining have led to environmental disasters—a modern mine is a solution to the problem that pays for itself.

Can You Be Pro-Mining and an Environmentalist? Absolutely.

Gold mining (and mining in general) is extractive and will always leave some mark on our planet. Over time, however, the risks have been mitigated by modern mining technologies. This is an ongoing process; even mining asteroids instead of planet Earth is now the subject of serious consideration among today’s most visionary entrepreneurs.

Meanwhile, the (vastly diminished) risks associated with mining are far outweighed by the economic contribution and positive effects on local communities and the greater society. This net positive contribution is here to stay—unless our civilization opts for collective suicide by sending us all back to the Stone Age.

Right now, gold and gold stocks are so undervalued that you can build a sizable portfolio at a fraction of what you would have had to spend just a few years ago. To discover the best ways to invest in gold, read Casey Research’s 2014 Gold Investor’s Guide—Get it for Free Here.

The article Mining & Environment—Facts vs. Fear was originally published at Casey Research

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The Cost of Code Red

By John Mauldin

(It is especially important to read the opening quotes this week. They set up the theme in the proper context.)

 “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

– Ludwig von Mises

“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”

– Ludwig von Mises

“[Central banks are at] serious risk of exhausting the policy room for manoeuver over time.”

– Jaime Caruana, General Manager of the Bank for International Settlements

“The gap between the models in the world of monetary policymaking is now wider than at any time since the 1930s.”

– Benjamin Friedman, William Joseph Maier Professor of Political Economy, Harvard

To listen to most of the heads of the world’s central banks, things are going along swimmingly. The dogmatic majority exude a great deal of confidence in their ability to manage their economies through whatever crisis may present itself. (Raghuram Rajan, the sober minded head of the Reserve Bank of India, is a notable exception.)

However, there is reason to believe that there have been major policy mistakes made by central banks – and will be more of them – that will lead to dislocations in the markets – all types of markets. And it’s not just the usual anti-central bank curmudgeon types (among whose number I have been counted, quite justifiably) who are worried. Sources within the central bank community are worried, too, which should give thoughtful observers of the market cause for concern.

Too often we as investors (and economists) are like the generals who are always fighting the last war. We look at bank balance sheets (except those of Europe and China), corporate balance sheets, sovereign bond spreads and yields, and say it isn’t likely that we will repeat this mistakes which led to 2008. And I smile and say, “You are absolutely right; we are not going to repeat those mistakes. We learned our lessons. Now we are going to make entirely new mistakes.” And while the root cause of the problems, then and now, may be the same – central bank policy – the outcome will be somewhat different. But a crisis by any other name will still be uncomfortable.

If you look at some of the recent statements from the Bank for International Settlements, you should come away with a view much more cautious than the optimistic one that is bandied about in the media today. In fact, to listen to the former chief economist of the BIS, we should all be quite worried.

I am of course referring to Bill White, who is one of my personal intellectual heroes. I hope to get to meet him someday. We have discussed some of his other papers, written in conjunction with the Dallas Federal Reserve, in past letters. He was clearly warning about imbalances and potential bubbles in 2007 and has generally been one of the most prescient observers of the global economy. The prestigious Swiss business newspaper Finanz und Wirtschaft did a far reaching interview with him a few weeks ago, and I’ve taken the liberty to excerpt pieces that I think are very important. The excerpts run a few pages, but this is really essential reading. (The article is by Mehr zum Thema, and you can read the full piece here.)

Speculative Bubbles

The headline for the interview is “I see speculative bubbles like in 2007.” As the interviewer rolls out the key questions, White warns of grave adverse effects of ultra loose monetary policy:

William White is worried. The former chief economist of the Bank for International Settlements is highly skeptical of the ultra-loose monetary policy that most central banks are still pursuing. “It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin,” he warns.

Mr. White, all the major central banks have been running expansive monetary policies for more than five years now. Have you ever experienced anything like this?

The honest truth is no one has ever seen anything like this. Not even during the Great Depression in the Thirties has monetary policy been this loose. And if you look at the details of what these central banks are doing, it’s all very experimental. They are making it up as they go along. I am very worried about any kind of policies that have that nature.

But didn’t the extreme circumstances after the collapse of Lehman Brothers warrant these extreme measures?

Yes, absolutely. After Lehman, many markets just seized up. Central bankers rightly tried to maintain the basic functioning of the system. That was good crisis management. But in my career I have always distinguished between crisis prevention, crisis management, and crisis resolution. Today, the Fed still acts as if it was in crisis management. But we’re six years past that. They are essentially doing more than what they did right in the beginning. There is something fundamentally wrong with that. Plus, the Fed has moved to a completely different motivation. From the attempt to get the markets going again, they suddenly and explicitly started to inflate asset prices again. The aim is to make people feel richer, make them spend more, and have it all trickle down to get the economy going again. Frankly, I don’t think it works, and I think this is extremely dangerous.

So, the first quantitative easing in November 2008 was warranted?

Absolutely.

But they should have stopped these kinds of policies long ago?

Yes. But here’s the problem. When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs. That’s government policy, not central bank policy. Central banks can’t rescue insolvent institutions. All around the western world, and I include Japan, governments have resolutely failed to see that they bear the responsibility to deal with the underlying problems. With the ultraloose monetary policy, governments have no incentive to act. But if we don’t deal with this now, we will be in worse shape than before.

But wouldn’t large-scale debt write-offs hurt the banking sector again?

Absolutely. But you see, we have a lot of zombie companies and banks out there. That’s a particular worry in Europe, where the banking sector is just a continuous story of denial, denial and denial. With interest rates so low, banks just keep ever-greening everything, pretending all the money is still there. But the more you do that, the more you keep the zombies alive, they pull down the healthy parts of the economy. When you have made bad investments, and the money is gone, it’s much better to write it off and get fifty percent than to pretend it’s still there and end up getting nothing. So yes, we need more debt reduction and more recapitalization of the banking system. This is called facing up to reality.

Where do you see the most acute negative effects of this monetary policy?

The first thing I would worry about are asset prices. Every asset price you could think of is in very odd territory. Equity prices are extremely high if you at valuation measures such as Tobin’s Q or a Shiller-type normalized P/E. Risk-free bond rates are at enormously low levels, spreads are very low, you have all these funny things like covenant-lite loans again. It all looks and feels like 2007.

And frankly, I think it’s worse than 2007, because then it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.

Do you see outright bubbles in financial markets?

Yes, I do. Investors try to attribute the rising stock markets to good fundamentals. But I don’t buy that. People are caught up in the momentum of all the liquidity that is provided by the central banks. This is a liquidity-driven thing, not based on fundamentals.

So are we mostly seeing what the Fed has been doing since 1987 – provide liquidity and pump markets up again?

Absolutely. We just saw the last chapter of that long history. This is the last of a whole series of bubbles that have been blown. In the past, monetary policy has always succeeded in pulling up the economy. But each time, the Fed had to act more vigorously to achieve its results. So, logically, at a certain point, it won’t work anymore. Then we’ll be in big trouble. And we will have wasted many years in which we could have been following better policies that would have maintained growth in much more sustainable ways. Now, to make you feel better, I said the same in 1998, and I was way too early.

What about the moral hazard of all this?

The fact of the matter is that if you have had 25 years of central bank and government bailout whenever there was a problem, and the bankers come to appreciate that fact, then we are back in a world where the banks get all the profits, while the government socializes all the losses. Then it just gets worse and worse. So, in terms of curbing the financial system, my own sense is that all of the stuff that has been done until now, while very useful, Basel III and all that, is not going to be sufficient to deal with the moral hazard problem. I would have liked to see a return to limited banking, a return to private ownership, a return to people going to prison when they do bad things. Moral hazard is a real issue.

Do you have any indication that the Yellen Fed will be different than the Greenspan and Bernanke Fed?

Not really. The one person in the FOMC that was kicking up a real fuss about asset bubbles was Governor Jeremy Stein. Unfortunately, he has gone back to Harvard.

The markets seem to assume that the tapering will run very smoothly, though. Volatility, as measured by the Vix index, is low.

Don’t forget that the Vix was at [a] record low in 2007. All that liquidity raises the asset prices and lowers the cost of insurance. I see at least three possible scenarios how this will all work out. One is: Maybe all this monetary stuff will work perfectly. I don’t think this is likely, but I could be wrong. I have been wrong so many times before. So if it works, the long bond rates can go up slowly and smoothly, and the financial system will adapt nicely. But even against the backdrop of strengthening growth, we could still see a disorderly reaction in financial markets, which would then feed back to destroy the economic recovery.

How?

We are such a long way away from normal long term interest rates. Normal would be perhaps around four percent. Markets have a tendency to rush to the end point immediately. They overshoot. Keynes said in late Thirties that the long bond market could fluctuate at the wrong levels for decades. If fears of inflation suddenly re-appear, this can move interest rates quickly. Plus, there are other possible accidents. What about the fact that maybe most of the collateral you need for normal trading is all tied up now? What about the fact that the big investment dealers have got inventories that are 20 percent of what they were in 2007? When things start to move, the inventory for the market makers might not be there. That’s a particular worry in fields like corporate bonds, which can be quite illiquid to begin with. I’ve met so many people who are in the markets, thinking they are absolutely brilliantly smart, thinking they can get out in the right time. The problem is, they all think that. And when everyone races for the exit at the same time, we will have big problems. I’m not saying all of this will happen, but reasonable people should think about what could go wrong, even against a backdrop of faster growth.

And what is the third scenario?

The strengthening growth might be a mirage. And if it does not materialize, all those elevated prices will be way out of line of fundamentals.

Which of the major central banks runs the highest risk of something going seriously wrong?

At the moment what I am most worried about is Japan. I know there is an expression that the Japanese bond market is called the widowmaker. People have bet against it and lost money. The reason I worry now is that they are much further down the line even than the Americans. What is Abenomics really? As far as I see it, they print the money and tell people that there will be high inflation. But I don’t think it will work. The Japanese consumer will say prices are going up, but my wages won’t. Because they haven’t for years. So I am confronted with a real wage loss, and I have to hunker down. At the same time, financial markets might suddenly not want to hold Japanese Government Bonds anymore with a perspective of 2 percent inflation. This will end up being a double whammy, and Japan will just drop back into deflation. And now happens what Professor Peter Bernholz wrote in his latest book. Now we have a stagnating Japanese economy, tax revenues dropping like a stone, the deficit already at eight percent of GDP, debt at more than 200 percent and counting. I have no difficulty in seeing this thing tipping overnight into hyperinflation. If you go back into history, a lot of hyperinflations started with deflation.

Many people have warned of inflation in the past five years, but nothing has materialized. Isn’t the fear of inflation simply overblown?

One reason we don’t see inflation is because monetary policy is not working. The signals are not getting through. Consumers and corporates are not responding to the signals. We still have a disinflationary gap. There has been a huge increase in base money, but it has not translated into an increase in broader aggregates. And in Europe, the money supply is still shrinking. My worry is that at some point, people will look at this situation and lose confidence that stability will be maintained. If they do and they do start to fear inflation, that change in expectations can have very rapid effects.

More from the BIS

The Bank for International Settlements is known as the “central bankers’ central bank.” It hosts a meeting once a month for all the major central bankers to get together for an extravagant dinner and candid conversation. Surprisingly, there has been no tell-all book about these meetings by some retiring central banker. They take the code of “omertà” (embed) seriously.

Jaime Caruana, the General Manager of the BIS, recently stated that monetary institutions (central banks) are at “serious risk of exhausting the policy room for manoeuver over time.” He followed that statement with a very serious speech at the Harvard Kennedy School two weeks ago. Here is the abstract of the speech (emphasis mine):

This speech contrasts two explanatory views of what he characterizes as “the sluggish and uneven recovery from the global financial crisis of 2008-09.” One view points to a persistent shortfall of demand and the other to the specificities of a financial cycle-induced recession – the “shortfall of demand” vs. the “balance sheet” view. The speech summarizes each diagnosis [and]… then reviews evidence bearing on the two views and contrasts the policy prescriptions to be inferred from each view. The speech concludes that the balance sheet view provides a better overarching explanation of events. In terms of policy, the implication is that there has been too much emphasis since the crisis on stimulating demand and not enough on balance sheet repair and structural reforms to boost productivity. Looking forward, policy frameworks need to ensure that policies are more symmetrical over the financial cycle, so as to avoid the risks of entrenching instability and eventually running out of policy ammunition.

Coming from the head of the BIS, the statement I have highlighted is quite remarkable. He is basically saying (along with his predecessor, William White) that quantitative easing as it is currently practiced is highly problematical. We wasted the past five years by avoiding balance sheet repair and trying to stimulate demand. His analysis perfectly mirrors the one Jonathan Tepper and I laid out in our book Code Red.

How Does the Economy Adjust to Asset Purchases?

In 2011 the Bank of England gave us a paper outlining what they expected to be the consequences of quantitative easing. Note that in the chart below they predict exactly what we have seen. Real (inflation-adjusted) asset prices rise in the initial phase. Nominal demand rises slowly, and there is a lagging effect on real GDP. But note what happens when a central bank begins to flatten out its asset purchases or what is called “broad money” in the graph: real asset prices begin to fall rather precipitously, and consumer price levels rise. I must confess that I look at the graph and scratch my head and go, “I can understand why you might want the first phase, but what in the name of the wide, wide world of sports are you going to do for policy adjustment in the second phase?” Clearly the central bankers thought this QE thing was a good idea, but from my seat in the back of the plane it seems like they are expecting a rather bumpy ride at some point in the future.



Let’s go to the quote in the BoE paper that explains this graph (emphasis mine):

The overall effect of asset purchases on the macroeconomy can be broken down into two stages: an initial ‘impact’ phase and an ‘adjustment’ phase, during which the stimulus from asset purchases works through the economy, as illustrated in Chart 1. As discussed above, in the impact phase, asset purchases change the composition of the portfolios held by the private sector, increasing holdings of broad money and decreasing those of medium and long-term gilts. But because gilts [gilts is the English term for bonds] and money are imperfect substitutes, this creates an initial imbalance. As asset portfolios are rebalanced, asset prices are bid up until equilibrium in money and asset markets is restored. This is reinforced by the signalling channel and the other effects of asset purchases already discussed, which may also act to raise asset prices. Through lower borrowing costs and higher wealth, asset prices then raise demand, which acts to push up the consumer price level.

[Quick note: I think Lacy Hunt thoroughly devastated the notion that there is a wealth effect and that rising asset prices affect demand in last week’s Outside the Box. Lacy gives us the results of numerous studies which show the theory to be wrong. Nevertheless, many economists and central bankers cling to the wealth effect like shipwrecked sailors to a piece of wood on a stormy sea. Now back to the BoE.]

In the adjustment phase, rising consumer and asset prices raise the demand for money balances and the supply of long-term assets. So the initial imbalance in money and asset markets shrinks, and real asset prices begin to fall back. The boost to demand therefore diminishes and the price level continues to increase but by smaller amounts. The whole process continues until the price level has risen sufficiently to restore real money balances, real asset prices and real output to their equilibrium levels. Thus, from a position of deficient demand, asset purchases should accelerate the return of the economy to equilibrium.

This is the theory under which central banks of the world are operating. Look at this rather cool chart prepared by my team (and specifically Worth Wray). The Fed (with a few notable exceptions on the FOMC) has been openly concerned about deflationary trends. They are purposely trying to induce a higher target inflation. The problem is, the inflation is only showing up in stock prices – and not just in large cap equity markets but in all assets around the world that price off of the supposedly “risk-free” rate of return.



I hope you get the main idea, because understanding this dynamic is absolutely critical for navigating what the Chairman of the South African Reserve Bank, Gill Marcus, is calling the next phase of the global financial crisis. Every asset price (yes, even and especially in emerging markets) that has been driven higher by unnaturally low interest rates, quantitative easing, and forward guidance must eventually fall back to earth as real interest rates eventually normalize.

Trickle-Down Monetary Policy

For all intents and purposes we have adopted a trickle-down monetary policy, one which manifestly does not work and has served only to enrich financial institutions and the already wealthy. Now I admit that I benefit from that, but it’s a false type of enrichment, since it has come at the expense of the general economy, which is where true wealth is created. I would rather have my business and investments based on something more stably productive, thank you very much.

Monetary policies implemented by central banks around the world are beginning to diverge in a major way. And don’t look now, but that sort of divergence almost always spells disaster for all or part of the global economy. Which is why Indian Central Bank Governor Rajan is pounding the table for more coordinated policies. He can see what is going to happen to cross-border capital flows and doesn’t appreciate being caught in the middle of the field of fire with hardly more than a small pistol to defend himself. And the central banks even smaller than his are bringing only a knife to the gunfight.



The Fed & BoE Are Heading for the Exits…

In the United States, Federal Reserve Chairwoman Janet Yellen is clearly signaling her interest – if not outright intent – to turn the Fed’s steady $10 billion “tapering” of its $55 billion/month quantitative easing program into a more formal exit strategy. The Fed is still actively expanding its balance sheet, but by a smaller amount after every FOMC meeting (so far)… and global markets are already nervously anticipating any move to sell QE-era assets or explicitly raise rates. Just like China’s slowdown (which we have written about extensively), the Fed’s eventual exit will be a global event with major implications for the rest of the world. And US rate normalization could drastically disrupt cross-border real interest rate differentials and trigger the strongest wave of emerging-market balance of payments crises since the 1930s.

In the United Kingdom, Bank of England Governor Mark Carney is carefully broadcasting his intent to hike rates before selling QE-era assets. According to his view, financial markets tend to respond rather mechanically to rate hikes, but unwinding the BoE’s bloated balance sheet could trigger a series of unintended and potentially destructive consequences. Delaying those asset sales indefinitely and leaning on rate targeting once more allows him to guide the BoE toward tightening without giving up the ability to rapidly reverse course if financial markets freeze. Then again, Carney may be making a massive, credibility-cracking mistake.



While the BoJ & ECB Are Just Getting Started

In Japan, Bank of Japan Governor Haruhiko Kuroda is resisting the equity market’s call for additional asset purchases as the Abe administration implements its national sales tax increase – precisely the same mistake that triggered Japan’s 1997 recession. As I have written repeatedly, Japan is the most leveraged government in the world, with a government debt-to-GDP ratio of more than 240%. Against the backdrop of a roughly $6 trillion economy, Japan needs to inflate away something like 150% to 200% of its current debt-to-GDP… that’s roughly $9 trillion to $12 trillion in today’s dollars.

Think about that for a moment. At some point I need to do a whole letter on this, but I seriously believe the Bank of Japan will print something on the order of $8 trillion (give or take) over the next six to ten years. In relative terms, this is the equivalent of the US Federal Reserve printing $32 trillion. To think this will have no impact on the world is simply to ignore how capital flows work. Japan is a seriously large economy with a seriously powerful central bank. This is not Greece or Argentina. This is going to do some damage.

I have no idea whether Japan’s BANG! moment is just around the corner or still several years off, but rest assured that Governor Kuroda and his colleagues at the Bank of Japan will respond to economic weakness with more… and more… and more easing over the coming years.

In the euro area, European Central Bank Chairman Mario Draghi – with unexpected support from his two voting colleagues from the German Bundesbank – is finally signaling that more quantitative easing may be on the way to lower painfully high exchange rates that constrain competitiveness and to raise worryingly low inflation rates that can precipitate a debt crisis by steepening debt-growth trajectories. This QE will be disguised under the rubric of fighting inflation, and all sorts of other euphemisms will be applied to it, but at the end of the day, Europe will have joined in an outright global currency war.

I don’t expect the Japanese and Europeans to engage in modest quantitative easing. Both central banks are getting ready to hit the panic button in response to too low inflation, steepening debt trajectories, and inconveniently strong exchange rates.

While the Federal Reserve, European Central Bank, Swiss National Bank, Bank of England, and Bank of Japan have collectively grown their balance sheets to roughly $9 trillion today, the next wave of asset purchases could more than double that balance in relatively quick order.

This is what I mean by Code Red: frantic pounding on the central bank panic button that invites tit-for-tat retaliation around the world and especially by emerging-market central banks, leading to a DOUBLING of the assets shown in the chart below and a race to the bottom, as the “guardians” of the world’s primary currencies become their executioners.



The opportunity for a significant policy mistake from a major central bank is higher today than ever. I share Bill White’s concern about Japan. I worry about China and seriously hope they can keep their deleveraging and rebalancing under control, although I doubt that many parts of the world are ready for a China that only grows at 3 to 4% for the next five years. That will cause a serious adjustment in many business and government models.

It is time to hit the send button, but let me close with the point that was made graphically in the Bank of England’s chart back in the middle of the letter. Once central bank asset purchases cease, the BoE expects real asset prices to fall… a lot. You will notice that there is no scale on the vertical axis and no timeline along the bottom of the chart. No one really knows the timing. My friend Doug Kass has an interview (subscribers only) in Barron’s this week, talking about how to handle what he sees as a bubble.

“Sell in May and go away” might be a very good adage to remember.

Amsterdam, Brussels, Geneva, San Diego, Rome, and Tuscany

I leave Tuesday night for Amsterdam to speak on Thursday afternoon for VBA Beleggingsprofessionals. There will be a debate-style format around the theme of “Are there any safe havens left in this volatile world?” I plan to write my letter from Amsterdam on Friday and then play tourist on Saturday in that delightful city full of wonderful museums. Then, if all goes well, I will rent a car and take a leisurely drive to Brussels through the countryside, something I have always wanted to do. I may try to get lost, at least for a few hours. Who knows what you might stumble on?

I will be speaking Monday night in Brussels for my good friend Geert Wellens of Econopolis Wealth Management before we fly to Geneva for another speech with his firm, and of course there will be the usual meetings with clients and friends. I find Geneva the most irrationally expensive city I travel to, and the current exchange rates don’t suggest I will find anything different this time.

I come back for a few days before heading to San Diego and my Strategic Investment Conference, cosponsored with Altegris. I have spent time with each of the speakers over the last few weeks, going over their topics, and I have to tell you, I am like a kid in a candy store, about as excited as I can get. This is going to be one incredible conference. You really want to make an effort to get there, but if you can’t, be sure to listen to the audio CDs.  You can get a discounted rate by purchasing prior to the conference.

The Dallas weather may be an analogy for the current economic environment. To look out my window is to see nothing but blue sky with puffy little clouds, and the temperature is perfect. My good friend and business partner Darrell Cain will be arriving in a little bit for a late lunch. We’ll go somewhere and sit outside and then move on to an early Dallas Mavericks game against the San Antonio Spurs. Contrary to expectations, the Mavs actually trounced the Spurs down in San Antonio last week. Of course the local fans would like to see that trend continue, but I would not encourage my readers to place any bets on the Mavericks’ winning the current playoff series.

I live only a few blocks from American Airlines Center, and so normally on such a beautiful day we would leisurely walk to the game. But the local weather aficionados are warning us that while we are at the game tornadoes and hail may appear, along with the attendant severe thunderstorms. That kind of thing can happen in Texas. Then again, it could all blow south of here. That sort of thing also happens.

So when I warn people of an impending potential central bank policy mistake, which would be the economic equivalent of tornadoes and hail storms, I also have to acknowledge that the whole thing could blow away and miss us entirely. I think someone once said that the role of economists is to make weathermen look good. Recently, 67 out of 67 economists said they expect interest rates to rise this year. We’ll review that prediction at the end of the year.

I’ve been interrupted while trying to finish this letter by daughter Tiffani, who is frantically trying to figure out how to buy tickets to get us to Italy (Tuscany) for the first part of June for a little vacation (along with a few friends who will be visiting). I am going to take advantage of being in Rome at the end of that trip, in order to spend a few days with my friend Christian Menegatti, the managing director of research for Roubini Global Economics. We will spend June 16-17  visiting with local businessmen, economists, central bankers, and politicians. Or that’s the plan. If you’d like to be part of that visit, drop me a note.

Finally I should note that my Canadian partners, Nicola Wealth Management, are opening a new office in Toronto. They will be having a special event there on May 8. If you’re in the area, you may want to check it out.

Have a great week, and make sure you take a little time to enjoy life. Avoid tornadoes.

Your hoping for a major upset analyst,

John Mauldin, Editor
Mauldin Economics

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The article Thoughts from the Frontline: The Cost of Code Red was originally published at Mauldin Economics

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