Saudi Arabia Fires a Warning Shot

Saudi Arabia Spoils the Party

As leaders of the NATO nations gather today in Washington, D.C. — with the Russia-Ukraine war at the top of the agenda — Saudi Arabia just threw the proverbial cat among the pigeons…

“Saudi Arabia privately hinted earlier this year it might sell some European debt holdings if the Group of Seven decided to seize almost $300 billion of Russia’s frozen assets,” according to a Bloomberg account citing the usual “people familiar with the matter.”

While the kingdom’s holdings of euro bonds are relatively small, “European officials were still concerned because other countries might have followed Saudi Arabia’s lead.”

This development should not come as a surprise if you’ve been keeping up with these daily dispatches.

From the moment Washington and Brussels froze the dollar- and euro-denominated assets of Russia’s central bank in 2022, leaders of other governments around the world wondered whether they’d be next.

They accelerated their “de-dollarization” plans — among other things, setting up non-dollar payment systems and stepping up their purchases of physical gold.

Talk of outright confiscating those Russian assets ramped up earlier this year; in the end, the G7 settled on seizing the interest payments generated by those assets and not the assets themselves.

But even with that half-measure, it’s no coincidence the dollar price of gold has hovered near record highs for the last three months.

The timing of this Saudi Arabian revelation can’t be accidental. It will only add to the jitters among NATO leaders already apprehensive about Joe Biden’s capacity to be the alliance’s de facto leader.

In a world that’s increasingly taking sides between a Washington-led West and a Russia-China-Iran bloc… Saudi Arabian leaders are skillfully playing both sides off each other.

The kingdom signed up last year to join the BRICS grouping of countries led by Russia and China — but never formally followed through. Officially, it’s still “considering” membership.

Last month, Paradigm’s macro maven Jim Rickards detailed a new modus vivendi taking shape between Washington and Riyadh — an arrangement that would supplant the “petrodollar” arrangement that’s underpinned the global economy for 50 years.

But clearly Riyadh is not ready to go all-in with a Washington-led West. Not after today’s revelation.

Here Comes “the Unit” (New BRICS Currency)

Meanwhile a meeting every bit as important as the NATO summit took place a month ago — and was ignored by Western media.

It’s the St. Petersburg International Economic Forum — an annual event hosted by Russian President Vladimir Putin as a sort of alternative to the World Economic Forum’s gathering in Davos, Switzerland.

In St. Petersburg, the name and structure of a new BRICS currency was revealed.

Whether or not Saudi Arabia takes part in it… this currency will encompass a third of global GDP, well over 40% of the world’s population… and five of the world’s top 10 oil producers. That’s a force to be reckoned with.

[Just to be clear, the current BRICS constellation consists of original members Brazil, Russia, India and China… along with South Africa and last year’s additions of Iran, the United Arab Emirates, Ethiopia and Egypt.]

The BRICS currency will be called the Unit. “The formula for valuing the Unit is 40% gold (by weight) and 60% based on a basket of BRICS currencies,” Jim Rickards wrote his Insider Intel readers last week.

Exactly what that gold weight is, we still don’t know. “The important thing,” Jim says, “is that it's not a fixed dollar value based on the price of gold at the creation of the Unit. It's a fixed weight of gold.

“This means the dollar value will fluctuate based on the GOLD/USD cross-rate at any point in time. One attraction of this method from a gold investor’s perspective is that it gives the BRICS a vested interest in a higher dollar price of gold (therefore a lower value of the dollar). A higher dollar price of gold will increase the dollar exchange value of each Unit.”

So how will the BRICS currency work in practice?

“My expectation,” says Jim, “is that the BRICS' New Development Bank (NDB) based in Shanghai will be the issuer of Units. Dilma Rousseff is the president of the NDB and former President of Brazil.” As it happens, Rousseff met privately with Putin last month in St. Petersburg.

Without getting deep in the weeds, Jim says BRICS economies will obtain their Units in the same ways that non-U.S. economies obtain dollars now.

They can earn Units via a trade surplus… borrow Units from the NDB (the NDB is effectively the BRICS version of the World Bank)... or buy Units from the NDB by delivering gold and the BRICS currency basket to the NDB.

To be sure, none of this is an instant dollar killer. As I’ve been keen to emphasize for years now, de-dollarization is a process, not an event.

But the Unit does create “an alternative to the dollar anchored to gold rather than the dollar itself,” says Jim. “The gold part of the Unit valuation formula (40% by weight) does give any investor an interest in holding gold if you believe the dollar will be in decline in the future.”

The next step in the process comes just over three months from now — when Putin hosts the annual meeting of BRICS leaders in Kazan, Russia from Oct. 22–24. (For whatever it’s worth, that’s two weeks before the U.S. election.)

“The single most important requirement for a successful trade currency is a large currency area,” says Jim — so we’ll be on watch for the addition of more BRICS member states.

Maybe even Saudi Arabia, once and for all…

The Markets Today: Harder Times for “Dark Landlords”

The best days for the “dark landlords” have come and gone.

The essential background: After the 2007–09 housing bust, millions of foreclosed single-family homes sat on the federal government’s books. Under a 2012 scheme called “REO-to-rental,” the feds began unloading these homes at a deep discount to hedge funds and private-equity types — who would then manage them as rentals.

This deal was available only to investors who could drop $1 billion or more on a bulk transaction; you were out of luck if you just wanted to buy the bargain-priced foreclosure down the street for a little investment income. It was crony capitalism at its worst.

And sure enough, once these “dark landlords” made the easy money, they turned their holdings into REITs — real estate investment trusts whose shares everyday folks could buy on the stock market.

As one of the first people to write about this scheme as it was being hatched in 2012, I was always suspicious about the investment potential of these single-family rental REITs. Again, the easy money had already been made.

But as the housing market started taking off in 2020, Paradigm’s income-investing specialist Zach Scheidt recommended shares of Invitation Homes (INVH) — which had been spun out of the private equity giant Blackstone Group a few years earlier.

Invitation Homes had a good run… but this morning, Zach advised his Lifetime Income Report readers to sell their INVH shares for a 41% gain.

His rationale: Sooner or later, the Federal Reserve will start cutting interest rates. “Many homeowners who have been reluctant to move due to higher mortgage rates will soon find it more palatable to enter the market,” he says.

“This shift is likely to unleash a considerable amount of pent-up supply” — pushing home prices down, finally. “Many of INVH's current tenants may opt to purchase their own homes, which could result in higher vacancy rates and reduced pricing power for the company.”

Couldn’t happen to a bunch of nicer guys!

Speaking of the Fed’s plans to lower interest rates, Fed chair Jerome Powell is testifying to Congress today.

Powell didn’t tip his hand about when the first cut might come, but he did say waiting too long to cut “could unduly weaken economic activity and employment.”

With Powell having demonstrated a keen grasp of the obvious, Mr. Market is sending the major U.S. stock averages higher. At 5,583 the S&P 500 is on track to set another record close.

Precious metals are little moved, gold at $2,356 and silver at $30.72. Crude sits at $81.66, Bitcoin at $57,588.

“Main Street Remains Pessimistic”

Gee, small-business owners haven’t felt this sunny all year.

The National Federation of Independent Business is out with its monthly Small Business Optimism Index. At 91.5, the headline number is the highest it’s been during 2024. All the same, the number has now spent 30 straight months below its long-term average going back 50 years.

The uncertainty we spotlighted in the previous month’s survey has eased a bit, falling from 85 to 82. (With this part of the survey, higher numbers are bad.)

Still, the uncertainty figure remains elevated by recent standards; 82 was the number registered in mid-2021, when the prospect of COVID jab mandates loomed over much of the business world. “Main Street remains pessimistic about the economy for the balance of the year,” says NFIB Chief Economist Bill Dunkelberg.

On the portion of the survey where respondents are asked to identify their single most important problem, inflation remains tops — cited by 21%. But good help is still hard to find; “quality of labor” is cited by 19%. Taxes came in third place at 14%.

Mailbag: The Next Bailout — or Something Else?

“I have enjoyed all of the macroeconomic discussions since being a member and have given a lot of thought to the direction of markets,” a reader writes. “But I do have a scenario that I would like your opinion on.

“Presently, the government has taken the position that there are a number of large banks which fall in the category of ‘too big to fail.’ We got a taste of what that would look like when the financial system was on the verge of collapse when the housing market did just that back in 2007. The government came up with TARP and saved the banks at the expense of anybody else who was underwater on a mortgage.

“What I would like to know is if there is a scenario in which the government says it will not be the backstop for these large banks. Not a likely scenario, but what would happen if such an announcement were made? 

“The other possible scenario is that the government is faced with backstopping such huge losses, which would make TARP look like a small loan, and it is forced to let one or more of these large banks to go down — because the alternatives are revolt by the people as they see big banks being bailed out at their expense, and that expense would be an explosion in inflation.

“Something to think about and I hope to hear your thoughts on this one.”

Dave responds: The problem in trying to tease out questions like these is that the powers that be continue making it up as they go along.

Case in point: After the global bank bailouts of 2008, U.S. and European leaders coalesced around the notion of “bail-ins” to address future bank crises.

This scheme was implemented when the banking system in Cyprus collapsed during 2013. Deposits over 100,000 euros were effectively raided — converted into equity shares of the banks (which, of course, were nigh-worthless).

But then in 2023, Silicon Valley Bank collapsed in the United States — and we went right back to bail-outs.

In fact, it was even more obscene than 2008 — because despite FDIC insurance covering deposits up to $250,000, the government and the Fed decided that all deposits would be protected, no matter how large.

Alas, it’s hard to predict what the control freaks and power trippers will do when they sense that events are spiraling out of their control.

Thus, it’s sound advice to keep a certain amount of cash and precious metals in your personal possession (not in a bank!)

The precise amount will vary depending on your means, the safety of your neighborhood, your home security, your comfort level…

It will differ for everyone. But it’s definitely not too soon to start thinking about such things…

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets