Jim Rickards wrote...
No one in the publishing industry really knows why a book
becomes a best-seller. If they did, the business would be
easy. Instead, best-seller status is difficult to guess at,
and often takes both the publisher and author by surprise.
It’s a lot like the movie business in that respect. Big-name
films like The Lone Ranger (2013) featuring talented actors
like Johnny Depp can be flops. Small-budget films like
Sideways (2004) with Paul Giamatti can come out of nowhere
and win an Oscar. As they say in New York: Go figure. My
2011 book, Currency Wars, was in the Sideways category. My
publisher and I put a lot into the writing and editing, but
our hopes were modest. After all, it was an economics book
by a first-time author with an entire chapter on complexity
theory. Most books only sell 1,000 copies or so and then
disappear. I thought if Currency Wars could sell 10,000
copies, I would consider it a success and a job well done.
Instead, the book became a national best-seller and has sold
over 200,000 copies in multiple editions in 10 languages
around the world. The ideas in Currency Wars are the
foundation of what has become the IMPACT system that
we use in Currency Wars Alert. I’m grateful for the
surprise success, but with hindsight one can start to
see where it came from. The last currency war lasted 20
years, from 1967–1987. This one may be the same. It’s
no surprise we’re still talking about currency wars in
2015. The currency wars have been raging since 2010 and
will continue for years to come. Currency Wars was about
a subject whose time had come. The currency wars have
been raging since 2010 and will continue for years to come.
Some books are best-sellers for more obvious reasons, such
as an already famous author. They may also capture an idea
that’s in the air or the popular imagination. Yet sometimes
the idea is not one whose time has come -- it’s one whose
time has passed. Examples of this include The End of History
and the Last Man (1992), by Frank Fukuyama, and The World Is
Flat (2005), by Tom Friedman. Fukuyama is a brilliant scholar.
Friedman is a world-famous and award-winning journalist. Yet
both of their books missed the mark. Fukuyama predicted a
world that was converging on peace and democracy just as Middle
Eastern wars and terrorism were about to run rampant. Friedman
predicted a planet where telecommunications, education and the
Internet would homogenize culture and human interaction in a
kind of post-nation-state world. In fact, nationalism is on
the rise everywhere from Russia to Greece and beyond. Fukuyama
and Friedman had best-sellers based on ideas that had peaked
and whose time was soon past. The world is now more complex
and more uncertain than the optimistic formulas of those authors.
The lesson of these hits and flops is that complexity is the
best tool for analyzing densely connected dynamic systems with
continually surprising outcomes. This applies to books, movies
-- and the global economy. Many analysts fall into the trap
of looking at one market with a few relevant factors and fail
to see connections and feedback loops that can affect different
markets on opposite sides of the planet. Here’s a specific
example...
- Interesting Times
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The interaction of currency wars, natural gas, coal, Appalachia
and Australia may not be obvious, but it’s a good case in point.
Using complexity theory and IMPACT, we can make some sense of
those connections. Energy prices have collapsed since late 2014.
This has shown up mostly in oil, but natural gas and coal have
been affected as well since some of the resources are co-located,
and these three forms of energy can substitute for each other
to a limited extent. Of the three, coal is perhaps the most
vilified and least understood. We associate coal with dirty
energy because we all know a lump of coal can get your hands
dirty, and we’ve seen images of 19th-century smokestacks from
coal furnaces spewing black smoke into the air. We are also
constantly bombarded with support for “clean energy” in the
form of solar, wind and battery-powered cars like Tesla’s.
Superficially, coal is friendless. The reality is more complex.
Clean coal is now the norm with modern coal-burning plants that
meet strict emissions standards. We all favor innovation in
solar and wind power, but for the moment, both are heavily
subsidized by taxpayers and account for only a small fraction
of energy needs. That won’t change soon, because those
industries have not demonstrated that they are viable without
subsidies, and government deficits make the subsidies hard
to sustain. The “electric car” is really a coal-powered car
when you go back to the source. As for battery-powered cars,
where does the electricity come from to charge the batteries?
Odds are it’s a coal-powered plant. So the “electric car” is
really a coal-powered car when you go back to the source.
Coal is the biggest source of energy in the world’s second
largest economy -- China -- another situation that won’t change
for decades. Coal is a huge source of energy and will remain so
for the rest of our lives. What about the coal industry and coal
company stocks? To say they have been beaten down is like saying
the 1962 Mets had a losing season: true, but a gross understatement.
The 1962 Mets went 40-120 and finished 60½ games out of first place.
Coal stocks have been beaten down over 90%, and many companies in
the sector will go bankrupt. You get the idea. The thing about
stocks that go down 90% on fundamentals is they can’t decline much
further. They only have two places left to go -- either bankruptcy
court or a huge turnaround. Once we eliminate the coal companies
with weak balance sheets, bad management and hungry creditors, we
are left with a small group of well-run companies poised for huge
gains when the energy markets rebound -- which they inevitably do.
To this promising mix, we can add a currency wars twist. The U.S.
dollar rallied strongly from its all-time lows in August 2011 to
its interim highs in March 2015. But it has been moving sideways
since then, and with good reason. The strong dollar is killing
the U.S. economy. Growth in the first half will be the same weak
2% growth we’ve seen since 2008. Early signs for the second half
are not promising. Employment growth is stalling, real wages are
flat and corporate earnings are set to disappoint because of the
lagged effect of foreign exchange hedging of overseas revenues.
It looks like the Fed is out of bullets, because interest rates
are already at zero. It looks like the Fed is out of bullets,
because interest rates are already at zero. It’s difficult to
see how the Fed can raise rates given the weak data and the
deleterious effect of a strong dollar on U.S. growth. Yet the
Fed still has three bullets left. The first is that not raising
rates when the market expects a rate increase is psychologically
the same as a rate cut. The second is more quantitative easing,
which we may see in 2016. The third is a return to the currency
wars and a cheaper dollar. The world may not like a cheaper dollar,
because our trading partners want to cheapen their own currencies.
But the U.S. is the world’s largest economy, and the U.S. consumer
is the world’s “buyer of last resort.” If we go down, we’ll take
the rest of the world with us. This means a weaker dollar is in
the cards. A weaker dollar means unexpected profits for U.S.
companies with overseas assets and earnings, because those foreign
assets are worth more in U.S. dollars when the dollar weakens.
This is the opposite of the strong dollar effect that’s playing
out now. Currency wars are not a one-way street; they go back
and forth like a tug of war.
- Tricky Dick
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