An Election Year Financial Crisis
Uncle Sam Risks Default
We begin our 5 Bullets for 2024 in a bit of a quandary.
Ordinarily we’d spend much of this week rolling out the Paradigm Press editors’ big predictions for 2024. But we jumped the gun this year — or should we say, late last year — with our 7 Predictions Summit, an epic Zoom call held on Dec. 13. We shared highlights the day after, and the day after that.
So on this first business day of 2024, we augment those forecasts with another…
The U.S. government is poised to take a step so reckless that “it could rock the global financial system and cause a financial panic,” to borrow the words of Paradigm’s macroeconomics maven Jim Rickards.
On the Friday before Christmas, we mentioned how the Biden administration is pushing ahead with plans to confiscate $300 billion in assets held by the Russian central bank.
Washington and Brussels froze those assets after Russia’s invasion of Ukraine on Feb. 24, 2022.
Over the holidays, those plans started gathering momentum: “The U.S. has proposed that working groups from the G7 explore ways to seize $300 billion in frozen Russian assets,” the Financial Times reported last Thursday — “as the allies rush to agree a plan in time for the second anniversary of Moscow’s full-scale invasion of Ukraine.”
The salmon-colored rag says U.S. Treasury Secretary Janet Yellen is leading the way — along with her counterparts in the U.K., Canada and Japan. For the moment, the finance ministers of Germany, France and Italy appear to be a bit more hesitant.
To reiterate what we said just before the holidays, freezing Russia’s assets was already a first-order blunder. Seizing them and handing them to Ukraine could be catastrophic.
As Jim Rickards said from the beginning two years ago, freezing the assets of a central bank was bound to raise alarm bells in capital cities around the globe: If they’ll do it to Russia, they could do it to us.
Result: The dollar’s share of global currency reserves plunged from 55% in 2021 to 47% in 2022 — while central banks loaded up on gold at the fastest pace on record.
And in 2023, about 20% of the global oil trade occurred in currencies other than the U.S. dollar. That’s according to JPMorgan Chase figures reported over the holidays in The Wall Street Journal. It wasn’t that long ago when nearly all oil trading was settled in dollars.
Now consider this: Many of those frozen Russian assets consist of U.S. Treasury bonds.
Confiscating the Treasuries held by Russia “would amount to a default on U.S. government debt,” Jim Rickards warns — “since the securities were legally owned by Russia.
“Nations around the world would take note and accelerate their dumping of Treasury securities and their flight from the U.S. dollar. This would increase interest rates in the U.S. and hurt everyone from homebuyers to everyday consumers.
“It would make U.S. debt permanently more difficult to sell and less desirable to hold. It would introduce a new risk premium on U.S. debt over and above the existing inflation premium. At its worst, it could trigger a dollar panic and full-scale flight from the dollar.”
And it’s not just Jim Rickards issuing this warning. A mainstream Nobel Prize-winning economist agrees.
"If America does this to Russia today,” says Yale’s Robert Shiller, “then tomorrow it can do this to anyone.
"This will destroy the halo of security that surrounds the dollar,” Shiller tells Italy’s La Repubblica newspaper, “and will be the first step toward de-dollarization, which many are increasingly confidently leaning toward, from China to developing countries.”
According to Wikipedia, Shiller counts among his influences George Akerlof, also a Nobel Prize winner — and the husband of none other than Treasury Secretary Janet Yellen. Presumably he’s put a bug in his friend’s ear?
Too, it’s hard to imagine at least a few Biden administration apparatchiks aren’t speaking up behind closed doors: You don’t really want to risk trashing financial markets in an election year, do you?
Those are the stakes. The deadline is less than eight weeks away. We’ll keep you posted.
[Editor’s note: Jim Rickards recently released a critical message for anyone interested in AI. With the help of a trusted source — someone he describes as “a man with long and well-established connections in Silicon Valley, on Wall Street and in the artificial intelligence community,” he got the scoop on a $10 million AI project.
“This could have a massive and direct impact on your life,” he says — as you’ll see when you follow this link and watch Jim’s two-minute video.]
Red Sea Update: U.S. Airstrikes Next?
The situation in the Red Sea didn’t get any better over the holidays. In fact, it got considerably worse.
No sooner did the U.S. military hype its “Operation Prosperity Guardian” patrols to safeguard civilian shipping than three members of the 10-nation “coalition” pulled out — Italy, France and Spain. They said they’ll answer to NATO but not to U.S. commanders. Oops.
The giant shipping line Maersk announced last week it was resuming transit through the Red Sea, although it stood nearly alone on that score.
But this morning, news broke that Maersk is suspending Red Sea shipping again. That’s after U.S. Central Command says members of Yemen’s Houthi faction tried to seize the container ship Maersk Hangzhou on Saturday. U.S. forces responded by sinking three Houthi vessels, killing 10.
It’s the first attack by U.S. forces on the Houthis since the Houthis started harassing Israeli-linked ships in solidarity with the Palestinian population of Gaza.
And so a meaningful percentage of global trade, including oil shipments, is sailing clear around Africa to avoid the Red Sea — adding 40% to shipping times, not to mention additional fuel costs, overtime for crews, etc.
Meanwhile, The Times of London reports that U.S. and U.K. forces are planning airstrikes against Houthi targets — either at sea or possibly on Yemeni territory controlled by the Houthis.
Not that you see any of this reflected in the oil price this morning. A barrel of West Texas Intermediate is down nearly a buck to $70.81 — the lowest since mid-December.
Finally, the “Mag Seven” Are Getting Some Help
As 2024 begins, “Market ‘breadth’ is picking up in a big way,” says Paradigm’s retirement pro Zach Scheidt.
“The term ‘breadth’,” he reminds us, “refers to the number of stocks that are actually participating in the overall market rally.
“A few months ago, it was just the mega-cap growth stocks — often referred to as the ‘Magnificent Seven’ — that were holding the market up. Since these companies are so large, they make up a very large portion of the overall market. But the strength in these mega-cap goliaths was masking the fact that all the other smaller-cap stocks were floundering.”
No longer: “As interest rates pull back and investors start searching for new plays, a large number of smaller stocks are catching a bid.
“Investors are excited about new themes — like artificial intelligence (AI) — and how these new themes affect different areas of the market. Industries like manufacturing, finance and travel will soon (if they aren’t already) start using AI to improve efficiencies, shorten wait times and save money.
“All of these applications are helping a new generation of smaller stocks to trade higher.”
That said, the broad market is taking a breather on this first trading day of the year.
The S&P 500 ended 2023 on Friday just a half-percent shy of its record close set on the first trading day of 2022. This morning, it’s in retreat — down a little over a half percent to 4,742.
There’s still nothing standing in the way of taking out the all-time high of 4,796 — but after the furious run-up of the last six weeks, a little consolidation is both necessary and desirable.
Gold ended the year well above $2,000 and this morning the bid is up a couple of bucks to $2,064. Silver is nearly unchanged at $23.79.
Meanwhile, “Bitcoin has surged to its highest level since April 2022,” reports the Financial Times, “amid speculation that the U.S. Securities and Exchange Commission will soon grant regulatory approval for exchange-traded funds tied to the cryptocurrency’s spot price.”
Which makes sense until you realize the SEC has been facing down a Jan. 10 deadline for weeks now. We mentioned it in mid-November.
Whatever. Checking our screens, Bitcoin is a little over $45,000. Which is a nice surge from about $42,500 when the calendar flipped to the new year. But it was over $44K less than a month ago.
The real excitement in Bitcoin won’t get underway until it exceeds the March 2022 peak of $47K.
In the meantime, there’s some unfinished business from the crypto world that will remain unfinished forever…
The Follow-up File: An SBF Cover-Up
It’s a truism in government: If you want to bury inconvenient news, release it on a Friday evening when no one’s paying attention. Or better yet, over the holidays.
With that in mind, we’ll note here that federal prosecutors will not follow through with a second trial for FTX co-founder Sam Bankman-Fried.
SBF was found guilty in November on charges of fraud and money laundering — that is, the theft of $8 billion in FTX customer funds which were used for trading by FTX’s sister company Alameda Research.
But SBF still faced six other counts including conspiracy to commit bribery, conspiracy to operate an unlicensed money transmitting business and… campaign finance violations.
Last Friday, the feds quietly notified the presiding judge in the case that they won’t try SBF on those other charges, citing “the public interest in a prompt resolution of this matter” — i.e., so SBF can be sentenced on schedule for the original charges on March 28.
That’s an interesting redefinition of “the public interest” in light of what we know about SBF’s campaign contributions.
Back when SBF was first indicted, US Attorney Damian Williams said, in fact the contributions were funded by Alameda Research with stolen customer money. All of this dirty money was used in service of Bankman-Fried’s desire to buy bipartisan influence and impact the direction of public policy in Washington.”
And now we’ll never learn which politicos were the recipients of these ill-gotten gains. (There’s limited documentation, but a lot of the funds went to so-called dark money groups where it’s hard to trace.)
Not that the politicos necessarily did anything underhanded by accepting those contributions — but don’t you think we the people deserve to know who SBF was trying to influence by throwing around $100 million ahead of the 2022 midterms?
Yeah, well, the feds beg to differ now.
What was it we said again about a system that’s not worth preserving and not worth fighting for?
Mailbag: Censorship, Financial Dragnet, Assange
“This was the best Bullets I've read. You masterfully stepped back and drew lines between events in the past that have led to where we are now,” a reader writes after last Wednesday’s edition previewing a pivotal free-speech case the Supreme Court will decide soon.
“Often, those of us that see little cracks in the system start warning others that these little things, if not stopped then, turn into big things that we are stuck hoping the Supreme Court will strike down in a way that ends the problem. But that rarely happens, and, if that becomes our only hope, hope is lost.
“Unfortunately, America's experiment is failing. It relied, for its success, on a virtuous people that put others, and the county, before themselves. Without virtue, all good things are eventually lost. Unfortunately, either we descend into 1984's dystopia and/or we will eventually be in a world where there will be endless uprising, underground rebellions and/or an entire world that looks like the USSR did.
“I don't see another alternative. Optimism at this point is simply an excuse to do nothing. It's easier. It's a sad period. I only hope that somehow, some way my kids survive and keep up hope that this life is only temporary, and if they can live virtuous lives, in a world lacking virtue, that they will be happy after this life even if they are persecuted endlessly in this life.
“So from that perspective, hope is not lost. Just a rejiggering of perspective can keep one from despair.”
On the related topic of financial cancellation, another reader warns, “The dragnet of financial control and deplatforming is indeed here.
“I withdrew $2,500 (not $25K or $10K!!) from my checking account face-to-face with a teller, who instructed me to give her a text message code that she had just sent to my smartphone in order to complete the transaction. Never mind that she had my driver's license and debit card in front of her.
“I gave her the code and asked what if I didn't have a smartphone or my phone with me and she replied that ‘Oh, that would have made it much more difficult to withdraw the money.’
“I have elderly neighbors that do not have a smartphone. Prepare, peeps!”
“Great article — I forgot about Julian Assange,” a reader writes after last Thursday’s edition. “He gave us information that was hidden from the American people.”
“Many thanks, Dave,” says another, “for insight and fortitude in speaking up for Assange. If he goes down then we are all in trouble.”
Dave responds: One of Assange’s greatest champions died on Saturday at age 84 — the Australian journalist and documentary filmmaker John Pilger.
Among Pilger’s many accomplishments was his eerily prescient 2016 documentary The Coming War on China — released a couple of years before the U.S. establishment started turning on Beijing.
With a pivotal election in Taiwan coming up a week from Saturday, it’s worth a watch now.
Best regards,
Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets
