Which Snowflake Will Trigger the Financial Avalanche?
Loose monetary policy has dumped billions of dollars of easy money into the world’s financial systems over the last eight years, pumping up a whole slew of bubbles. We are still on the upside of the business cycle, with stock markets hitting record levels it seems like on a daily basis. But if history serves as any kind of indicator, a crisis is on the horizon.
What will precipitate it? That’s the proverbial $64,000 question.
Jim Rickards has compared financial crises to an avalanche. Snow piles up becoming increasingly unstable. Eventually, it reaches the point when all it takes is one more snowflake to set off an avalanche.
In a recent column, Rickards highlights three potential “snowflakes” that could set off the next deluge.
Credit Crisis in China
Earlier this month, Mint Capital strategist Bill Blain predicted that “the great crash of 2018 is going to start in the deeper, darker depths of the credit market.” Hearing this, most Americans will immediately think of debt piling up in the US. But Rickards says China is actually in an even bigger credit bubble. He uses an anecdotal story to illustrate this point.
I was out in the countryside south of Nanjing not too long ago, visiting some of China’s famous ghost cities. I was with some Communist Party officials and provincial officials who were behind it all. Everything I saw, construction as far as the eye can see, magnificent in scope, was all empty. I’ve seen it firsthand. I turned to one of these officials and said, ‘This is all debt finance. This is all empty, so you have no revenue to pay the debt. So how are you gonna pay the debt?’ And he said, ‘Oh, we can’t. But Beijing’s going to bail us out.’ Not we hope Beijing will bail us out — but Beijing will bail us out.
“That isn’t an isolated viewpoint. It’s widespread.”
Rickards points out that Beijing has its own issues. It’s not going to be able to provide the expected bailout. The credit bubble will burst and the Chinese have no idea about how to deal with it.
Failure to Deliver Gold
A large portion of the gold market is “paper gold.” Rickards contends the paper gold market is so manipulated that we don’t even have to speculate about it anymore. It’s well documented that the whole thing rests on a very small base of physical gold.
I describe the market as an inverted period with a little bit of gold at the bottom and a big inverted pyramid of paper gold resting on top.”
Rickards explains that even though the total amount of gold in the world is growing, the amount of available gold (floating gold) to back paper transactions is actually shrinking. Meanwhile, you have bullion banks like USB selling an ounce of gold 10 times over. That means you have 10 claims for every ounce of gold. What happens when a large number of people show up and say, “I want my gold, please. “?
The custodian won’t be able to give it to them. What if a major institution wants its gold but can’t get it? That would be a shock wave. It would set off panic buying in gold, and inflation expectations — now subdued — could spiral out of control.”
We’ve been saying geopolitical risk is the new normal. The focus has primarily been on tensions between the US and North Korea in recent months. But it’s gotten to the point where people just kind of shrug when Pres. Trump and Kim Jong Un start blustering at each other.
Earlier this week, the North Koreans launched another ICBM. Some reports say Kim Jong Un can now target anyplace in the US. It hardly registered as a blip in the financial markets. As we get used to living with a certain level of uncertainty and turmoil, it becomes normal – like background noise. But as Rickards points out, that doesn’t mean the risk suddenly ceases to exist. Things could easily spin out of control.
When a rogue North Korea builds a nuclear program capable of targeting the world’s sole superpower, that’s a snowflake. When China asserts territorial dominion over the South China Sea that pits it against key US allies, that’s a snowflake. When Saudi Arabia is roiled by internal strife and seems on a collision course with Iran throughout the entire Middle East, that’s a snowflake.”
So, which snowflake will trigger the avalanche? Nobody knows. It’s impossible to predict exactly which snowflake will be the last snowflake – the one that sets the avalanche in motion. Most snowflakes fall harmlessly, but as Rickards says, they ultimately make the avalanche worse by building up the snowpack.
The way to think about it is that the triggering snowflake might not look much different from the harmless snowflake that preceded it. It’s just that it hit the system at the wrong time, at the wrong place. To switch metaphors, it’s like the straw that breaks the camel’s back. You can’t tell in advance which straw will trigger the collapse. It only becomes obvious afterward. But that doesn’t mean you can’t have a good idea when the threat can no longer be ignored. The system is getting more and more unstable, and it might not take that much to trigger the avalanche.”
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