12 Days In August
The Myth of August
We pick up where we left off last week with Jim Rickards’ reflections on how August isn’t necessarily a sleepy month — either for markets or for the world at large.
Jim ran down a laundry list of earth-shaking events that took place in August — the start of World War I (1914), the conclusion of World War II (1945) and Hurricane Katrina (2005), among others.
Today, with 12 days remaining in the month, we zero in on the financial events that can turn the “dog days” into a real bear, shall we say.
While Wall Street types typically retreat to the Hamptons this month, sometimes they still have to work the phones to tamp down a crisis. With Jim’s help, we recount four episodes that all occurred within a baby boomer’s lifetime…
August 1971: President Nixon cuts the dollar’s last tie to gold. Between the Vietnam War and LBJ’s Great Society programs, the national debt was mounting quickly. Foreign governments — especially France — were losing confidence in the U.S. dollar. Under the terms of the 1944 Bretton Woods agreement, those governments were exercising their right to trade in dollars for gold.
Uncle Sam’s gold stash was dwindling quickly, so Nixon decided to “close the gold window.”
“Nixon said the suspension of convertibility was ‘temporary,’” Jim recalled for us on the 50th anniversary in 2021. He spoke with two of the officials present at Camp David that fateful weekend. “The plan was to have a new Bretton Woods-style conference, devalue the dollar against gold (and against other currencies such as the yen, the Deutsche mark and French francs) and then return to the gold standard at the new valuations.”
The conference took place later in 1971 — but nothing else on that agenda panned out.
Going by the official inflation numbers, you need $7.77 today to have the same purchasing power of one dollar in 1971.
August 1998: The Russian government defaults on its debt and the ruble collapses. “That default triggered the collapse of hedge fund Long-Term Capital Management (LTCM),” Jim says — “and a global liquidity crisis that came close to shutting down every exchange in the world before a rescue was engineered with Fed assistance in late September.”
When Jim says LTCM’s collapse nearly took down the global financial system with it, believe him. He was LTCM’s lead counsel, negotiating a rescue package with the Fed and 14 big banks. LTCM was able to cover its losses and prevent a domino effect among the banks’ derivatives trades. (No taxpayers were harmed during this bailout).
August 2007 was a crucial month in the run-up to the global financial crisis — even though it was more than a year before the collapse of Lehman Bros.
“August 3, 2007, was the day that Jim Cramer of CNBC went into an epic rant that the Fed was clueless about an emerging liquidity crisis,” Jim reminds us. “On August 9, BNP Paribas closed the gates on two of its money market funds due to a ‘complete evaporation of liquidity.’ On August 17, the Federal Reserve began a series of rate cuts that would take their target rate to zero.”
August 2015: China devalues the yuan. “August 11 was the beginning of three quick devaluations in the Chinese yuan,” Jim says, “that combined to produce an over 3% maxi-devaluation that led to major stock market losses around the world.”
Almost no one remembers the turbulent summer of 2015 anymore. But it was huge at the time — at one point, the Dow dropped 1,000 points in a couple of hours (which was a big number back then).
The losses were such that the U.S. stock market ended 2015 more or less where it began. It was the first year since the 2008 financial crisis that the market didn’t go up, up, up.
Bottom line: History doesn’t necessarily take a time-out in August.
Golden Milestone
As Uncle Sam’s finances look ever more shaky — and no one’s talking about it on the campaign trail — gold ended last week over $2,500 for the first time.
Gold futures ended last week at $2,538. The spot price of gold was somewhat lower at $2,508 — but still exceeding that big, fat round number. Checking our screens this morning, the spot price is still holding the line on that round number at $2,502.
Meanwhile, silver pushed past $29 at week’s end… and is holding onto those gains today. The HUI index of gold stocks ended last week solidly over the 300 level… and is up nearly 2% again today at 318.
Meanwhile, crude’s latest climb had no staying power.
After sinking below $72 two weeks ago today… then touching the $80 level… then falling nearly as fast as it rose… a barrel of West Texas Intermediate is down over 2% on the day, sitting at $75 on the nose.
Perhaps that’s a reflection of the geopolitical temperature in the Middle East. It’s been nearly three weeks since Israel assassinated Hamas’ political chief (and Hamas’ chief negotiator for a cease-fire) while on a visit to Tehran. Iran’s reprisal has been a long time coming… and hasn’t come yet.
After notching its best week all year, the U.S. stock market continues its rebound from the early-August swoon.
At last check, all the major indexes are up about a half percent. At 5,580, the S&P is barely 1.5% below the record close it notched on July 16.
It will be a quiet week for economic indicators. But the Federal Reserve will issue the minutes from its July meeting on Wednesday, and Fed chair Jerome Powell delivers his much-ballyhooed annual address in Jackson Hole, Wyo., on Friday.
Crypto, you ask? Bitcoin can’t catch a break, mired well under $59,000 as we write.
A Winning Sector — No Matter Who Wins the Election
“For the foreseeable future, military spending is likely to be robust, regardless of who wins the next presidential election,” ventures Paradigm’s income investing pro Zach Scheidt.
Nine months ago, Zach told his Lifetime Income Report readers that higher military spending was a sure thing for 2024, given U.S. involvement in the Russia-Ukraine and Israel-Hamas conflicts.
And he sees no change on the horizon: Under the Biden administration, “the U.S. has supplied munitions and defense systems to the tune of tens of billions of dollars. And the more resources we send overseas, the more that needs to be replenished back here in the United States.”
A Harris administration might tinker at the margins of Biden’s policy, but in all likelihood “it means sending billions of dollars in military support overseas and then spending billions more at home to bolster our own resources.”
And a Trump presidency? Trump promises a quick end to the Russia-Ukraine war, but that promise is thin on details. Even if he follows through, a more limited agenda overseas doesn’t automatically translate to lower defense spending.
“While political and economic negotiations may keep the U.S. out of a hot war under a Trump administration,” says Zach, “peace through power would still continue to drive military spending.”
Zach has two defense contractors in the Lifetime Income Report portfolio. Of course, you can also buy the whole sector through an exchange-traded fund (ETF).
The most popular defense ETF is the iShares US Aerospace & Defense ETF (ITA). But as we’ve pointed out for several years, it has a handicap: Boeing has a major presence in ITA’s composition, and Boeing is beleaguered by its many blunders in civilian aircraft (and now spacecraft!).
Meanwhile, Boeing doesn’t even figure in the top 10 holdings of the SPDR S&P Aerospace & Defense ETF (XAR).
That said, both ETFs are up about 15% year-to-date — slightly trailing the S&P 500.
There’s No “Green” Energy Without China
When it comes to copper, Western nations face a choice: Dial back on “decarbonization” or remain dependent on China.
A new report from research firm Wood Mackenzie projects that copper demand could grow by 75% over the next 25 years, thanks in large part to the “green” energy transition.
While China accounts for only 8% of global copper production, the Middle Kingdom has a much bigger presence in smelting and refining, fabricating and manufacturing. China accounts for 75% of the world’s smelter capacity growth since 2000.
“Hundreds of billions of dollars in new copper processing and fabrication capacity would be required to replace China,” says the report. “This would create inefficiencies that would result in significantly higher-priced finished goods and increase the cost and timeliness of the energy transition.”
As it stands, no one is planning new primary smelting capacities in North America or Europe.
Concludes the report’s lead author, Nick Pickens: “Pragmatism and compromise will be essential to achieve net zero goals without imposing excessive costs on taxpayers. Easing global trade restrictions could be one necessary concession.”
Yeah, how likely is any of that?
Consider this report one more sign that the “energy transition” won’t be the seamless process that Western politicos have advertised, with zero disruption to a First-World lifestyle. Either the “decarbonization” goals will have to be scaled down… or the everyday individual’s standard of living will be scaled down. Stay tuned…
Epic Data Breach: Please Take This One Seriously
We don’t usually do “personal finance” stuff in these virtual pages — tax planning, shopping for the best mortgage rates, etc. However…
No, that’s not a typo. An outfit called National Public Data copped last week to a data breach affecting 2.7 billion records in its servers.
By now, most of us are inured to news about data breaches; they’ve become so common. Even the theft of Social Security numbers isn’t enough to drive us to take action.
So if you’re inclined to blow this one off too, I understand. But please don’t. This one’s different.
I was spurred into action this weekend by Karl Denninger’s Market Ticker blog. Denninger is an IT pro from the ‘90s, running a dial-up internet service provider in Chicago. He had the good sense to sell his business at an absurdly high valuation, knowing the dot-com bust was coming sooner or later. Although the proceeds allowed him to effectively retire in his mid-30s, he still has the technical chops to know when something bad is going down.
And something really bad went down here.
“One of the more-common ‘prove you're real’ things is to ask for a former address,” he writes. “That's now worthless with this file out there as any criminal can get a highly-accurate list of former addresses going back at least 30 years.”
Not all addresses, but enough to make your life hell if you’re not careful.
His guidance: “If you haven't locked your credit file, you had better do so right now. Go to any of the bureaus, sign in, pass their authentication and then put a freeze on your credit file. Then repeat at the other two. The good news is that a number of years ago Congress passed a law to make this free.”
Yes, you have to sign up for an account separately at all three of them — Experian, Equifax and TransUnion. But if you don’t, you run the risk that someone else can set up an account with these outfits in your name and start applying for credit cards, auto loans, etc.
My wife and I both set freezes. Takes about 15 minutes to do all three. Experian has the clumsiest interface, and it’s the outfit that will send you the most aggressive text/email marketing afterward. But you can opt out of that.
If later you want to take out a mortgage or a car loan or apply for a new credit card, unfreezing your credit is as straightforward as logging into the credit bureau’s website and following a few simple prompts.
And whatever you do, don’t follow the advice I’ve seen in several corporate media stories about this breach.
Many of them are linking to a cybersecurity firm’s website where allegedly you can check to see if you’re among the victims whose data was pinched. You have to plug in your name, state of residence and year of birth to get started. What could possibly go wrong?
Screw that noise. Just freeze your credit at the three bureaus and get on with your life.
