“You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

– Rahm Emanuel

September 4, 2024 – Tech stocks continued to sell off globally overnight. Then on the open in New York, Nvidia tried to claw back some of its losses from yesterday’s 9% rout.

The market is nervy.

Only one data point set off sell signals yesterday: Nvidia, the epicenter of the AI chip manufacturing, is now facing an antitrust lawsuit from the Department of Justice.

Yes, U.S. manufacturing data also released yesterday. But it showed only a slight decline, nothing to write home about. Manufacturing data for the past two years hasn’t moved the markets at all.

On Friday, we’ll get the August jobs number. But it’ll likely be for entertainment purposes only. We’ll get to see how much crow the BLS data nerds have eaten since their August 20 miscalc announcement of 818,000 jobs.

After the second steep selloff in a month yesterday, the percentage of Wall Street analysts clamoring for a 50 point drop in the overnight rate on September 18 increased to 30%. Still well under the panic levels from early August.

Our concern remains: Even with press coverage of the broadening market, there is still a dangerous level of market concentration in a very few stocks right now.

The combined market cap of Nvidia and the rest of the “Mag 7” tech stocks is still higher than 30% today.

Nobody minded the consolidation on the way up. We’ll see how they feel on the way down.

“Watching markets drop brings us no joy,” writes our own Andrew Packer. “We know as stocks decline, investors watch months and even years of their hard-fought savings disappear.

“What’s worse, many investors lose faith in their own strategy, panic and sell out at the wrong time. Or simply realize they bought in too close to the top… and are destined to lose money after following hyped-up headlines. FOMO is a strong motivator in a bubble.”

We also know that for all that hard work millions undertake to save and invest, the capital markets are rigged. We don’t say that lightly. Central bankers and politicians can and do conjure up new money for themselves out of thin air – or digital ether, as it were.

Easy money creates excess. Excess creates chaos. Chaos begets crisis. Banks and governments issue more debt. Lather, rinse, repeat.

The “grey swan” event – a global debt crisis – everyone knows is coming, no one is willing to predict. The more debt, the fewer policy options politicians have when a crisis does actually arrive.

And there’s always some crisis. Most occur outside the stock market. But in our age of global, social and securitized risk, the stock market is where the pain is felt by the broadest number of unwitting speculators… those who’ve entrusted their savings to Wall Street’s money managers and pension funds.

We don’t know the exact timing of any danger. And that’s just it. We don’t know. Nobody does.

So our goal is to study the trends, read history, look at what can happen… then anticipate accordingly. Serendipity favors the prepared.

That, and we always keep one eye on the world-improvers, the do-gooders, the central planners. After all, we know what the road to hell is paved with…

Today, Doug Casey’s Lau Vegys takes a critical look at a proposal by the monetary mandarins of the top two global economies on how to deal with “financial stress events.” Enjoy ~~ Addison

Global Financial Crisis Imminent?

Lau Vegys, Doug Casey’s Crisis Investing

I’m seeing storm clouds gathering on the horizon.

I don’t have a crystal ball for the timing or what will be the lightning strike that sets it off. It could be another pandemic, a systemic financial crisis overwhelming our fragile system, or something else entirely.

But whatever it is, it’ll cause a huge panic event in the markets.

Last month, while traveling from Buenos Aires, Argentina, back to our green refuge in Asuncion, Paraguay, I stumbled upon some news from Bloomberg that added weight to these apprehensions. It highlighted a recent meeting between senior officials from the U.S. Department of the Treasury and the People’s Bank of China (PBOC) during their two-day discussions in Shanghai, China. Here’s a snippet:

China’s central bank said a meeting in Shanghai produced an agreement with the U.S. Treasury to appoint contact people to deal with any future “financial stress events,” a rare example of the world’s two biggest economies seeking common ground.

“Appoint contact people to deal with any future financial stress events”? This is just a fancy way of saying they’re setting up a panic room for when the financial disaster hits the fan.

Storm Warning

But is this good news? “Seeking common ground” definitely has a positive ring to it, after all.

Definitely not.

Remember, we’re talking about two global superpowers that have been at each other’s throats for the past 6-7 years. Here’s a quick rundown of some notable run-ins between them (and this is far from an exhaustive list):

Trade wars. Trump slapped 25% tariffs on $34 billion of Chinese goods in July 2018. China retaliated. By 2019, average U.S. tariffs on Chinese goods hit 21%.
TikTok drama. Trump tried to ban TikTok in 2020. Feds banned it on government devices in 2022. By 2023, over 30 states followed suit, and in 2024, Congress pushed for a nationwide ban.
Spy Balloon incident. A Chinese “weather balloon” was spotted over Montana on February 1, 2023. The U.S. shot it down off the coast of South Carolina on February 4. In response, China accused the U.S. of overreacting.
De-dollarization. Since 2009, China has been the main driver behind de-dollarization, from making deals that bypass the dollar to starting oil trades in yuan, promoting its digital yuan (e-CNY) globally, and dumping U.S. debt.
South China Sea tensions. China claimed about 90% of the South China Sea in 2009 and constructed around 3,200 acres of artificial islands by 2021. The U.S. started its first “freedom of navigation” operation (FONOP) in 2015, with over 50 operations conducted by 2023 to challenge China’s excessive maritime claims.
Human rights. The U.S. sanctioned 28 Chinese entities over human rights abuses involving Uighurs in 2019. Trump signed the Hong Kong Autonomy Act in 2020. Biden expanded sanctions to 59 Chinese companies in 2021.
Cyber wars. A major hack of the Office of Personnel Management (OPM) was blamed on China in 2015. In 2018, the U.S. charged Chinese hackers with stealing technology secrets. In 2020, the U.S. accused China of hacking COVID-19 research.
Arms race. China’s defense budget grew 7.2% in 2023. U.S. passed $858 billion defense bill for 2023, citing China as primary challenge.
Diplomatic tensions. The U.S. closed the Chinese consulate in Houston in July 2020. China retaliated by closing the U.S. consulate in Chengdu. More tit-for-tat expulsions followed in 2021.
Taiwan tensions. There were a record 380 Chinese warplane incursions in 2022. Pelosi visited Taiwan in August 2022, triggering major Chinese military drills. In September 2022, the U.S. approved a $1.1 billion arms sale to Taiwan.
Sanction threats. U.S. warned of sanctions if China helped Russia evade Ukraine war sanctions in 2022. Threatened more over potential Taiwan conflict in 2023.
Yellen’s 2023 visit to China. Treasury Secretary Janet Yellen traveled to China in July 2023, warning of “severe consequences” if China aided Russia in Ukraine.

The bottom line is that when rival powers with such a track record of strained relations team up to weather “financial stress events,” it’s not a kumbaya moment—it’s a storm warning.

Here’s a snippet from the U.S. Treasury readout released after the meeting in Shanghai:

The meetings concluded with Treasury and the PBOC exchanging letters in support for coordination during times of financial stress to strengthen appropriate information sharing and reduce overall uncertainty between Treasury and the PBOC regarding crisis management and recovery and resolution frameworks.

In layman’s terms, this means that the financial power players in Washington and Beijing are getting serious about preparing for a financial tsunami. When the two economically most important nations on the planet start making contingency plans like this, it’s definitely time to pay attention.

Canary in the Coal Mine?

Now, what I found particularly interesting about this move is the timing.

The meeting in Shanghai between the U.S. Treasury and the PBOC took place just days after global markets crashed, triggered by the unwinding of the Japanese yen carry trade I told you about in an essay last month.

You may recall that on August 5, Japan’s Nikkei index plummeted an astonishing 12.4%—the largest drop since the infamous Black Monday crash of 1987.

As panic spread through international markets, the Dow Jones fell over 1,000 points, dropping 3%. The S&P 500 lost nearly $2.1 trillion in hours, ending down 3.1%, while the NASDAQ Composite slid 3.6%.

In total, the global stock market wiped out over $5 trillion in a single day.

I went into some detail unpacking what the “yen carry trade” is and what happened in this particular instance.

The point is, there’s reason to be worried about these carry crashes because history shows they often lead to major crises.

The yen-dollar carry trade, for instance, also played a role in contributing to the global financial crisis of 2007-08. A 2009 report by the Bank for International Settlements (BIS), often called “the central bank for central banks,” tied the yen carry trade unwinding to the 2007 credit crunch. It was this crunch that caused lending to suddenly dry up across the financial system. The rest is history. ~~ Lau Vegys, Doug Casey’s Crisis Investing

So it goes,

Addison Wiggin,

Grey Swan

P.S. Mr. Vegys also notes: The crisis worsened in the latter half of 2007 and continued into 2008, transforming from a credit squeeze into a full-blown global financial meltdown.

Is this why the U.S. and China are suddenly eager to team up on dealing with future “financial stress events”? I can’t say for sure. But one thing’s clear: when two global superpowers – locked in geopolitical, technological, and economic rivalry – start prepping for crisis together, it’s a glaring warning sign that a mother of all financial storms might be just around the corner.

Might be a good idea for you to prepare, too.