ACT 8 - James Rickards Book Review "The New Great Depression"

Yesterday I covered part 2 of Life after Globalization. Today I’m going to introduce James aka Jim Rickards. Who makes predictions for the rest of 2021.

 

The amount of new debt being created all over the world being and purchased with printed dollars seems alarming. Will this debt shake up the world order? ie. Will the U.S.’ 1974 Petrodollar system survive? Will the US’ world reserve currency status remain & will subsequent asset inflation worldwide continue?

 

Jim Rickards is an American lawyer, economist, investment banker, speaker, media commentator, and New York Times bestselling author on matters of finance and precious metals. His recent comments during interviews promoting his book that was released last month are interesting. The book is called “The New Great Depression - Winners and Losers in a Post Pandemic World” and it sheds insight into the question of printed dollars.  

 

On the world’s reserve currency:

Jim pointes out that 60% of global reserves are in Dollars, and 25% are in Euros.  He states Reserves aren’t held in currencies, they are held in securities (ie. treasury notes), and that A bond market is a prerequisite to a reserve currency. A bond market is no small thing. You need to have: bonds in all maturities, liquidity, primary dealers, auctions, settlement payments, repos, forwards, when-issued-trading, hedging, and the basis for all this is the rule of law.  You need all this stuff to support a bond market (especially the rule of law), and that is why the U.S. with a navy / military larger than the rest of the world combined will continue as the owner of the world reserve currency.

 

Jim also makes the point that Alternatives to the U.S.’ reserve currency status that are suggested by pundits (the Chinese Yuan or Bitcoin) don’t have, nor will they have in the foreseeable future, a bond market.  Neither do SDRs (special drawing rights, the IMF’s version of a currency).   The only conclusion to draw is that because there is no other bond market, and no other rule of law, nothing is replacing the U.S. Dollar any time soon as the world reserve currency.  There is simply no alternative, and thus the ever increasing debt and budget deficits will continue.

On the question of inflation:

Jim is asked if Will we see Inflation / stagflation / or deflation?  Likely inflation, but Jim Rickards says owing gold is great in inflation or deflation (he also happens to sell gold so take that with a grain of salt).  Since I’m a real estate guy I’m interested in real estate price,  and if Jim’s right about coming inflation, real estate prices  will increase while the cost of repaying the debt decreases (as we’ve seen for the past 5 years). If stagflation, assets will rise in price despite the decreased economic output. 

 

If we enter into a period of deflation, real estate (and all assets) should decrease in price. However, when looking at Alberta’s long recession, we’ve seen that prices are quite sticky, with no large decreases in prices (and few significant buying opportunities). To protect against deflation and real estate price decreases, buying assets with sufficient rental income to cover all debt and expenses is critical, as this gives staying power, and protects investors from loss of investment capital.

Stock market predictions: 

The S&P 500 is more like the “S&P 6”, ie.  25% of the index is  apple, Microsoft, amazon, Tesla, amazon, Facebook and google. (AAPL, MSFT, AMZN, TSLA, FB & GOOGL). These tech stocks trade at a high multiple of earnings. ie. TSLA has a P/E ratio of ~140X, that is a value of 140 times earnings. Similarly, the P/E of AMZN ~96X.  AAPL ~13X , MSFT ~37X, FB ~32X, GOOGL ~36X.  Are these price-to-earnings ratios reasonable? 

- Jim Rickards predicts that by the end of 2021 / beginning of 2022, the S&P500 will drop from its current ~3800 to 1750, citing low employment (60% in the U.S.).

Jim recommends selling or going short on these losers: 

Commercial Real Estate; 

Stocks; 

Corporate Bonds. 

Jim suggests owning these winners: 

Gold; 

Residential Real Estate; 

US Treasuries.

 

I think Jim’s predictions would be correct if we were talking about the real economy.  Based on what central banks are doing and how far away we are getting from a real economy,  I think he is wrong about the massive drop in the S&P, and we could continue to see record high numbers.

 

You’ve got to admire his guts for taking a position on this, because predicting the future is not easy, although he has had a lot of practice as he has been comfortable in predicting a crash for the past 30 years.  One of these days, he’ll get it right and look like a genius.