AGOR A UK
financial
STRATEGIC INTELLIGENCE
A new global monetary reset has
begun… are you prepared?
INSIDE THIS ISSUE
A new global monetary reset
has begun…
are you prepared?
Jim Rickards looks at how
elite insiders could respond to
a new financial panic in the
international monetary system.
page 1
Why Strategic Intelligence is
wary of global equities
David Stevenson examines
why the outlook for the world’s
equity market returns is
looking downright poor.  to fiat currencies and floating exchange rates.
page 7
Jim Rickards
Editor
David Stevenson
Investment Director
Investing in a complex world
Issue 37 : July 2018
Jim Rickards
A s the international monetary system collapses, I believe the US dollar will be
dethroned as the world’s leading reserve currency and will be replaced with new
world money. Today I look at how elite insiders see the future of the international
monetary system and how they could respond to a new financial panic…
In my many public-speaking engagements and private consultations, one of the most
frequently-asked questions is my view on the timing and nature of the ‘global monetary
reset(GMR). The GMR is much more profound than just another business cycle or
market crash. Cycles and crashes come every five to 10 years. A true GMR is different. It
occurs more like every 30 to 40 years.
There were only three GMRs in the 20th century: 1914, 1944 and 1971. The 1914 GMR
was when nations abandoned gold to fight WW1. The 1944 GMR took place when the
Allies returned to a gold standard at the Bretton Woods conference. The 1971 GMR
marked the US abandonment of the Bretton Woods gold standard and the world’s move
There have been no GMRs in the 21st century so far. The pace of three GMRs in the
105-year period beginning in 1914 gives an average of one GMR every 35 years. It’s
been 47 years since the last one. Using those statistics alone, it’s not a stretch to say that
the world is overdue for the next GMR.
The world monetary system is ‘incoherent’
To argue that no GMR is looming is to suggest that the global elites have somehow
achieved a permanent state of monetary nirvana. Nothing could be further from the
truth. The international monetary system today is a patchwork of floating exchange
rates, hard pegs, dirty pegs, currency wars, as well as open and closed capital accounts,
with world money waiting in the wings. It has no anchor. It is incoherent.
Don’t take my word for the ‘incoherent’ bit. That’s the exact word used both by Ben
Bernanke, former-Fed chair, and John Lipsky, former-IMF head, in separate private
conversations with me (I spoke to Bernanke in Seoul, South Korea, on 27 May 2015
and I talked with Lipsky just a few months later in New York City).
By the way, I’ve never heard either use that word publicly. My conversations with both
were private. I’m also sure the use of that word was neither rehearsed for my benefit
nor was it coincidental. The fact that two of the top monetary elites in the world
used exactly the same word shows that incoherence is a live topic of discussion in elite
circles. I told them both that I completely agreed with their description.
By ‘incoherent’, both Bernanke and Lipsky meant there was no anchor for the system
and no universally-agreed reference point or metric for judging currency values. You
...continued overleaf...
 strategic intelligence

can assess every currency in relation to another, but under no pressing need for an anchor or an objective way of
present rules there’s no way to value any currency by determining currency values. Yet we’ve already seen how
an objective measure. the system won’t stay stable forever. In fact, it fails on a
regular basis and we’re seeing increasing signs that a new
Prior to the 17th century, gold and silver were money.
breakdown is occurring today.
There was no need to reference any paper currencies
(except for some medieval Chinese paper money Today I’ll be examining real insider views on the likelihood
experiments that failed catastrophically). Beginning in the and nature of a GMR. Then I’ll look at a number of
17th century, paper money backed by gold – and gold itself developments that could trigger an unexpected or chaotic
– circulated side-by-side. GMR. Finally, I consider surprising evidence that the GMR
has already taken place – unnoticed by the world – but
Eventually the gold backing was withdrawn. This with profound implications for the future.
happened in stages between 1914 and 1971 so that
everyday citizens barely noticed.
Some global elites still back
In 1914, the UK nominally remained on the gold standard, king dollar
but its gold coins were melted down into 400-ounce bars
and put into bank vaults. Since it was inconvenient to walk In 2015 I participated in several economic conflict
about with a 25-pound ingot in your pocket, gold went panels, including one economic war game at the Pentagon
out of general circulation though it still supported currency where China and the US were the antagonists. These were
values from its place in those vaults. smaller and more focused exercises than the financial
war game that I facilitated for the Pentagon in 2009 as
In 1933, private gold holdings by US citizens were made described in my book Currency Wars (2011).
illegal. Then commercial banks were forced by law to
hand over their gold to the central bank. But the US One of these panels included David Dollar, who was the
remained on a gold standard with its foreign trading chief economic emissary of the US Treasury to China and
partners and the Fed was still required to back the who was based at the US Embassy in Beijing.
currency with at least 40% gold.
I repeated my concerns that China and Russia had tripled
The gold backing (called ‘cover’) was cut to 25% in their gold reserves in recent years and were aiming for
1945. In 1965, the gold backing was eliminated entirely the marginalisation of the US dollar as the leading global
for Federal Reserve deposits and in 1968 the gold cover reserve currency.
was reduced to zero for Fed notes. Finally, in 1971, David Dollar demurred. The eponymously-named
President Nixon ended gold convertibility of dollars by emissary, pounded the table and said, “The dollar has long
foreign trading partners. been the global reserve currency, it is the global reserve
The entire process took from 1914 to 1971. That by currency today, and it will be the global reserve currency in
going slowly, people barely notice. This is a favourite tactic the future!”
that George Soros has called “piecemeal social engineering”. I said, “David, I feel like I’m sitting in Whitehall in 1913
It works every time if you’re patient enough. listening to John Bull say ‘Sterling has long been the global
reserve currency, it is the global reserve currency today, and
What’s the anchor for currencies it will be the global reserve currency in the future!’”
Neither Lipsky nor Bernanke favours a return to the Of course, the long decline of sterling as a global
gold standard. Nowadays, scarcely any mainstream currency started in November of 1914 and continued to
economist does. So if you’re not using gold, but you want its dénouement in 1944 at Bretton Woods. Today, sterling
an anchor for currencies, what do you propose?  forms a trivial part of global reserves and payments.
This is where the discussion breaks down. Those who Still, Dollar is not the only prominent monetary elite
critique incoherence have no answer to the conundrum of with unlimited confidence in the role of the US dollar as
how to invent a suitable anchor for the existing the dominant global reserve currency and benchmark for
international monetary system. the international monetary system.
If the system remains stable indefinitely, there’s On 15 February 2017, I met privately with former-
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2
 strategic intelligence
Treasury Secretary Tim Geithner at a small gathering in
New York City. I asked him directly about the game plan
for the next monetary crisis, including aspects of the GMR.
I suggested that after the last crisis in 2008, the Fed had
done little to reduce its balance sheet (this was still around
the $4.2 trillion level it had reached in late-2014).
I expressed doubt that the Fed would be able to double
or even quadruple its balance sheet again. Then I asked
Geithner point blank if he believed the IMF would print
(maybe) trillions of special drawing rights (SDRs) to re-
liquify the international monetary system in a new crisis
(this would constitute one version of a GMR).
To my surprise, Geithner poured cold water on the idea of
the IMF saving the world. “We tried that after 2008 and it
didn’t work very well”, he said.
Geithner was right up to a point. In August and
September 2009, almost a year after the most acute phase
of the 2008 panic, the IMF issued SDR182.7bn (worth
about $255bn at today’s SDR/USD exchange rate). Most
market participants barely noticed the issuance and it did
little to stimulate world economic growth.
Part of the problem was that the issuance came long after
the panic had subsided and even after the US recovery
had commenced. Also, the amounts involved were
small relative to $10 trillion of currency swaps arranged
between the Fed and European Central Bank and the
trillions of dollars of money-printing the Fed had already
commenced under QE1 (later followed by QE2 and QE3).
Still, this did not mean that SDRs could not be effective,
merely that the timing had been slow and the amounts
issued were insufficient.
Who’s going to bail out
the government?
I pressed Geithner further. “If the Federal Reserve
can’t expand its balance sheet and IMF issuance of
SDRs is ineffective, how will the Fed and other central
banks deal with a new global liquidity crisis?” I asked.
Geithner paused, looked at me and said, “Guarantees”.
In other words, Geithner expected that in a new crisis the
Treasury or Fed would be able to stop a run on the banks
and money market funds by guaranteeing deposits and
account balances.
The conversation ended there. Yet I was highly sceptical
of Geithner’s proposal. Guarantees had worked in
2008, because there was a run on private credit and the
government was able to use public credit and guarantees
to backstop private credit. I believe the next crisis will
be different.
The investing public and market participants take it
for granted today that the government will be able to bail
out the banks (even if it means using new ‘bail-in’ rules to
convert deposits to equity).
But who bails out the government? I believe the next
crisis will feature a loss of confidence in fiat currencies,
central banks and, indeed, government itself. How can the
government make ‘guarantees’ when it is the government’s
own credit that is being called into question?
On 31 May 2018, I had a one-on-one discussion with John
Lipsky, the only American ever to head the IMF.
This was my third meeting with Lipsky, including our
2015 conversation in New York noted above and another
occasion in Washington DC. It was by far our longest and
most in-depth discussion. Lipsky is not as well-known as
Geithner to the general public, but he was arguably even
more powerful than Geithner because he controlled the
IMF’s world money-printing press that produces SDRs.
Lipsky earned a Ph.D. in economics from Stanford.He began
his career in 1974 at the IMF and spent 10 years there.
He became the IMF’s top expert on exchange rate
surveillance. In 1984, he moved to Salomon Brothers
(today part of Citi) where he worked with the legendary
Henry Kaufman (aka ‘Dr. Doom’), eventually becoming
Chief Economist. 
In 1997, he left Salomon to become Chief Economist
of JPMorgan. In 2006, he returned to the IMF to serve
a five-year term as the First Deputy Managing Director.
The role of First Deputy is the result of an unwritten
power-sharing agreement between Europe and the US
reached at during the Bretton Woods monetary conference
in 1944.
The Bretton Woods’ institutions, including the IMF and
World Bank, were structured very much along the lines
desired by the US. The belief was that the US had too much
economic political power and it was necessary to share that
power with Europe.
The informal agreement was that an American would run
the World Bank, but an American would never be head
of the IMF. The top job at the latter (Managing Director)
would be reserved for Europeans.
The number two job, First Deputy Managing Director,
was created to be held by an American. In effect, the First
Deputy was America’s ‘eyes and ears’ at the IMF while the
top job went to a European. In his role as First Deputy,
Lipsky was an important part in the issuance of that
SDR182.7bn of world money in 2009.
This power-sharing arrangement remained in place until
IMF Managing Director Dominique Strauss-Kahn (DSK)
was arrested by the NYPD in New York City on 14 May
2011 on sexual assault and attempted rape charges.
Strauss-Kahn resigned as Managing Director a few days
later on 18 May 2011.
Since DSK’s departure was so abrupt, the Executive
Committee of the IMF did not have time properly to
consider naming a successor. Instead, John Lipsky was
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3
 strategic intelligence
elevated from First Deputy to Acting Managing Director,
becoming the first and only American ever to run the IMF.
Lipsky’s tenure at the IMF was short but tumultuous.  At
the G8 Summit in Deauville, France on 26-27 May 2011,
Lipsky threatened to withhold IMF support from Greece
unless Germany provided more direct relief to it.
In effect, Lipsky threatened to throw Greece into default
and possibly collapse the entire Eurozone and the euro
with it unless Germany backed down from its austerity
demands. Germany blinked, Lipsky released the funds
and the euro was saved. Lipsky’s approach was far more
confrontational and more American than his predecessor,
the smooth-talking DSK.
After that historic showdown, Lipsky retired from the
IMF at the end of August 2011 and began a new career
in academia, although he remained for a time as a
consultant to the IMF.
SDRs: The new world money
My 31 May 2018 meeting with Lipsky in Hong Kong was
fascinating. No one in the world knows more about the
inner workings of the IMF and the use of SDRs to provide
global liquidity as part of the GMR than John Lipsky. I was
getting the GMR playbook straight from the horse’s mouth.
The IMF is like a lot of institutions with a large
membership and diverse interests including the UN, the
EU and the US Congress in the sense that it’s difficult to get
things done but easy to stop things in their tracks.
The only exception to that inertia is a crisis. For example,
after the 2001 attack on the World Trade Center, the
US Congress passed the USA Patriot Act in 45 days.
Normally it could take years to gain consensus on major
legislation of that type, assuming it could be passed at all.
Likewise, prior to the 2009 issuance, the IMF had not
issued any SDRs since 1981, a period of 38 years, despite
severe emerging markets crises in 1982, 1994 and 1997.
A cynic might say that the IMF didn’t issue world money
to save emerging economies but did issue SDRs to save
developed economies in 2008. In any case, Lipsky
emphasised to me the difficulty of achieving consensus
inside the IMF and that any issuance of SDRs as part of a
GMR was unlikely, except in a crisis.
In other words, the IMF would not proactively push
for a GMR at a new monetary conference but might
reactively be involved in the midst of a crisis.
I asked Lipsky about Geithner’s critique of the 2009 SDR
issuance and his dismissal of the IMF’s ability to be of much
use in a crisis. John practically shouted, “Have you read his
book?” I hadn’t at the time (but I have in the days since).
John said, “Geithner was at the IMF between his time at the
Treasury and when he moved to the Fed. I’m not sure what
happened but he had a bad experience and has nothing good to
say about the IMF.”
4
Geithner was President of the Federal Reserve Bank of
New York from 2003 to 2009 and became Secretary of the
Treasury on 26 January 2009. He had a prior Treasury stint
as Under Secretary for International Affairs from 1998-
2001. From 2001 to 2003, Geithner was at the IMF. That
period was the one to which Lipsky referred.
Lipsky was right.
I checked out Geithner’s book, Stress Test (2014). Here’s
an excerpt:
“The IMF was a more formal and less fun place to
work than Treasury. The meetings were endless, with
crushing bureaucracy, an intrusive and fractious executive
board, an appalling amount of paper, and a lot of factional
conflict among various fiefdoms… The pace was much
slower than I was used to… The IMF was full of smart
and dedicated people, but not many had experienced the
burden of making policy decisions as government officials.
There was a lot of bureaucracy and talking.”
That’s just a small sample of Geithner’s many
scathing critiques of the IMF going back to the 1997-1998
emerging markets crisis in his time at Treasury.
Given President Trump’s self-proclaimed nationalist
‘America First’ views, it’s unlikely that he has any higher
opinion of the IMF; he almost certainly has a much lower
opinion and would be disinclined to provide emergency
funding to the IMF in a liquidity crunch or to partner with
the IMF in a global financial crisis.
It’s one thing to study documents and papers and
theorise about the potential shape of the GMR. It’s
another to speak one-on-one in private settings with
top policymakers like Ben Bernanke, David Dollar, Tim
Geithner and John Lipsky. The picture they paint privately
is unsettling in terms of how the GMR will evolve.
The global elites won’t see this
reset coming
What my conversations with the global monetary elites
have revealed is that while institutions like the Treasury,
Fed and IMF may be powerful on paper, they are often
dysfunctional and slow in practice.
None of the leaders with whom I’ve spoken or the others
that I have followed sees the GMR coming. They share the
view of David Dollar that the US dollar will be the global
reserve currency indefinitely and that no changes in the
international monetary system are expected.
As a result, when the GMR does happen, we’ll be able to
say that no one saw it coming, at least among the elites. At
the height of the storm it is likely that no one will really be
in charge. The solutions to evolve are more likely to be ad
hoc and temporary rather than thoughtful and long-lasting.
The future does not hold a new Bretton Woods. A new
Panic of 2008, but much worse, is far more likely.
The catalysts for this new panic or loss of confidence in the
US dollar are all around us. Let’s look at the prime suspects:
 strategic intelligence
President Trump has already placed financial sanctions
on Iran that are tougher that those imposed on North
Korea. I believe that the financial war with Iran is likely
to escalate. This could result in concessions by Iran, but it
could also drive it into the arms of China as part of a larger
global effort to sidestep the dollar payments system and
overthrow the 1974 petrodollar agreement.
Further, the tripling of gold reserves by Russia and China
in the past 10 years lays the foundation for a new crypto-
currency – to manage trade balances and capital flows on
a distributed ledger, or blockchain – that may be formed
by the likes of Russia and China. Those balances could be
settled using gold and excluding the dollar. Other countries
that could join this New Axis of Gold include Iran, Turkey,
North Korea, Venezuela, etc.
In fact, the US doesn’t need any help in destroying
confidence in the dollar. It can manage this all by itself due
to out-of-control deficits and an expanding debt-to-GDP
ratio that already tops 105%. With likely trillion-dollar
deficits stretching over the horizon and no spending curbs,
I believe the US debt-to-GDP ratio will exceed 110% in a
few years’ time.
Meanwhile, a new crisis is developing in emerging markets
that can’t service their dollar-denominated debts as the
US currency strengthens and American interest rates rise.
The favourites for a horrendous default are Argentina,
Venezuela and Turkey, but China, Brazil, Mexico and South
Africa are also candidates. As soon as a real crisis kicks off
in one of these countries, the contagion will spread, with
worldwide panic a potential danger.
The major central banks are out of bullets because they
have never normalised their balance sheets since the last
crisis. I believe that resorting to zero-rate policies and
quantitative easing will not produce the same effects as in
2008-2015. Citizens will see that the original efforts failed,
and only produced a new crisis; therefore efforts to repeat
the failed policies will not inspire confidence.
Geithner’s policy of government guarantees will not work
because it is the government’s credit that is being called
into question. The task of re-liquifying the world will fall to
the IMF by default, notwithstanding Lipsky’s concerns that
the IMF is not geared to respond quickly. The IMF may
have no choice.
I consider that newly-printed SDRs distributed to
members, perhaps on a distributed ledger now being
explored by the IMF, will be the only liquidity left.
Has the GMR already happened?
In addition to the extreme scenarios discussed above, an
even more profound outcome is possible.
What if I showed you that the GMR has already happened?
There is highly compelling evidence for this.
Here I have to acknowledge that some of the evidence that
follows was provided to me by a source named D. H. Bauer,
in Switzerland. We’ll call him ‘DHB’ for now.
Let’s start with a simple analysis we’ve all done ourselves
and expand that analysis with information from DHB.
We all follow the price of gold. We think of gold as
around $1,250 per ounce today. We say it’s ‘up’ or ‘down’
by $10 per ounce etc. When we do this, we’re really
quoting a cross-rate between US dollars (USD) and one
ounce of gold (GLD).
Let’s call this cross-rate USD/GLD.
If you’re a monetary geek like me, you might also take
a look at the US dollar value of the SDR. It’s not a secret:
the IMF publishes (http://www.imf.org/external/np/fin/data/
rms_sdrv.aspx?Month=05&Day=17&Year=2018&submit=S
ubmit&cid=em-COM-123-37079) that cross-rate very day.
And it changes daily like any floating exchange rate.
Let’s call this cross-rate SDR/USD.
Now for a quick equation.
Yes, I know. The moment any writer includes one of these
into his text, most readers stop reading straightaway. But
please bear with me for a second. This one really is simple.
But the point that it makes is key to understanding gold
and SDRs.
So here goes…
If A = B, and
B = C, then
A = C.
In other words, if you have two equalities, you can
substitute a factor from one for a factor from another and
still end up with an equality. It’s called transitive law.
Here’s where DHB’s insight comes in.
The new world money is backed
by gold
DHB took the known quantities of USD/GLD and SDR/
USD and applied the transitive law to calculate SDR/GLD.
Most people don’t think about SDR/GLD.
Why would you? The IMF only issues SDRs to member
countries and they’re traded among the members through
a secret trading desk inside the IMF. Individuals can’t get
their hands on them. The idea of buying gold with SDRs
may develop in the future, but there’s no active gold market
priced in SDRs today.
Or is there?
DHB took a look. What he found was shocking. It’s
summarised in this chart (see chart on page 6).
The horizontal x-axis runs from 31 December 2014 to 31
March 2018.
...continued overleaf...
5
 strategic intelligence
The vertical y-axis is measured in units of dollars or
SDRs depending on the data series.
The dark blue line is the dollar price per gold ounce
(USD/GLD). The dotted dark blue line is the USD/
GLD trend. The light blue line is the price per ounce
of gold in SDRs (SDR/GLD). The dotted light blue line
is the SDR/GLD trend.
The black vertical line indicates when, 1 October
2016, the IMF allowed the Chinese yuan to join the
‘basket’ used to determine the value of an SDR (the
rest of the basket consists of dollars, pounds sterling,
euros and yen).
Here’s what DHB discovered. Before China joined the
SDR, both the dollar price of gold and the SDR price
of gold were volatile. After China joined the SDR, the dollar
price of gold continued to be volatile, but the SDR price of
gold exhibited much less volatility.
Most importantly, the trend line of SDR/GLD is a near-
perfect horizontal line.
In short, it appears that world money has now been pegged
to gold at a rate of SDR900 = 1 ounce of gold. It’s a new
gold standard using the IMF’s world money.
There’s the GMR right in front of your eyes.
It takes a while to sink in. Why did SDR/GLD go from
normal volatility to no volatility overnight? The straight-
line behaviour of SDR/GLD after the Chinese yuan
joined the SDR is impossible without some kind of
intervention or manipulation. The odds of this happening
randomly are infinitesimal.
As gold trades in a relatively free market determined
by supply and demand, we can rule out randomness
(statistically almost impossible) and fraud (the data comes
from public sources). That leaves manipulation as the only
possible explanation.
Who’s manipulating gold prices?
How would you conduct such a manipulation? And who’s
behind it?
To peg a cross-rate, in this case SDR/GLD, you need a large
floating supply of both components. Or a printing press to
make, or shrink, as much money as you need.
If the SDR price of gold falls below SDR900 (on an inverted
scale), you sell gold and buy SDRs (or the currency
basket). If the SDR price of gold rises above SDR900 (also
on an inverted scale), you buy gold and sell SDRs (or the
currency basket). By monitoring markets and intervening
continually with open market operations in gold and
currencies, you can maintain the peg.
There are only four parties in the world who could conduct
such a manipulation: the US Treasury, the European
Central Bank (ECB), the Chinese State Administration on
Foreign Exchange (SAFE) and the IMF itself. These are
the only entities with enough gold and SDRs (or basket
6
Source: DH Bauer
of currencies) to be able to conduct the open market
operations needed to peg the price.
We can eliminate the US Treasury and ECB. Both are
relatively transparent about their total gold holdings,
foreign exchange reserves and the SDR component of their
reserves. If either were conducting open market operations,
there would be fluctuations in holdings of gold and SDR
component currencies that would appear in official reports.
No such fluctuations appear, so they’re off the list.
That leaves SAFE and the IMF. Both are non-
transparent. China admits to holding about 1,840 tons of
gold (it could have much more) and has been acquiring
SDRs in secondary market trading in addition to official
allocations to IMF members.
The IMF has about 2,800 tons of gold and can print all the
SDRs it wants with its printing press. The IMF also makes
loans and receives principal and interest in SDRs. These
can be traded through the IMF’s secret trading desk.
The gold can be traded secretly through the Bank for
International Settlements (BIS) which traded Nazi gold
in WWII. The BIS is super-secret and is controlled by the
same people who control the IMF. China can also conduct
gold purchases and basket currency buys or sells on the
open market in Shanghai and London.
Analysts have speculated for years that China was acquiring
gold in anticipation of a new gold-backed yuan. I always
disputed that idea because China does not have a good
rule of law. The yuan lacks the kind of deep liquid bond
markets, primary dealers, repo facilities, futures contracts
and other legal infrastructure needed to be a major reserve
currency with or without gold backing.
The yuan is a decade or more from becoming a major
reserve currency.
But the SDR is an ideal vehicle for a gold-backed
currency because it has the support of every major
economic power on earth through the IMF.
Protecting your money during
the reset
The bottom line is that it appears China has now pegged
the SDR to gold. This is highly ironic because when the
 strategic intelligence
SDR was created in 1969 it was originally pegged to gold
and defined as a weight in gold (SDR1 = 0.88867 grams of
gold). That peg was abandoned soon after, as was the dollar
peg (USD1 = 1/35th ounce of gold).
Since this new SDR peg to gold is informal, it can be
abandoned at any time. It’ll probably be dumped because
the Chinese sponsors of the peg have ignored the lessons of
1925 when the UK returned sterling to the gold standard at
the wrong price. The result was catastrophic deflation that
presaged the Great Depression.
Why Strategic Intelligence is wary
of global equities
David Stevenson
E veryone knows that the US stock is seriously OTT on
the valuation front.
OK, let me re-phrase that… here at Strategic
Intelligence we’ve been saying for months about how
expensive American stocks have become.
And how – when the States finally sees sense – share prices
around the world are likely to drop in sympathy.
Yet some people will tell you that compared to the US,
there’s more value to be found in equity markets such as
Europe, making the latter a better long-term bet.
But what if I told you that Europe’s cheapness is something
of an illusion? And that the outlook for global equity
market returns is looking downright poor?
Valuation gap?
There are several different ways of valuing stock markets.
One well-established method is CAPE, the cyclically-
adjusted price/earnings ratio. This measures the overall
level of the stock market against average inflation-adjusted
earnings over a 10-year period. In other words, it smooths
out corporate profits fluctuations over the business cycle.
It’s a great concept. But while the latest CAPE readings
show that US equities are very pricey versus quite
expensive levels for Europe, they’re still looking through
the rear-view mirror.
So let’s look into the future, in particular at forward
operating EPS (earnings per share). While I’m a bit cynical
about historic operating earnings – they can exclude all
those unwelcome one-off costs that managements like to
ignore – forecast operating EPS are a better indicator of
underlying earnings than reported EPS.
John Higgins at Capital Economics has been comparing
price/estimated operating EPS ratios for the MSCI EMU
and USA indices (i.e. for Europe v. the US). And he’s found
The Chinese peg of SDR900 is far too cheap to be
sustainable given the scarce supply of gold and the growing
supply of SDRs. Further, the IMF will print trillions of
SDRs in the next global financial crisis. That will prove
highly inflationary.
Even if the peg is non-sustainable in the long-run, it’s a
clear short-run signal that China is betting on the SDR
and gold, not the dollar. So dump dollars and the SDR
basket currencies… and get gold (up to a 10% portfolio
allocation).
there’s only a three-point gap between the readings, namely
that Europe is at around 13 times estimated operating
earnings while the US stands at some 16 times.
Even more surprising, take out the financial and consumer
discretionary sectors – which can be heavily influenced by
local factors – and the valuation gap between Europe and
the US shrinks to only about 1 point (15 x versus 16x).
“And it disappears altogether if we apply the weightings of
the remaining sectors in the USA index to the EMU index in
order to put them on an equal footing,” says Higgins.
To put it another way, European equity markets don’t
appear to have the valuation advantage that’s widely
assumed. So the Continent’s stock indices might not fare
any better than their American equivalents in the future.
And right now, the prospect of good forward returns
isn’t great. That’s according to strategists at Morningstar
Investment Management Europe.
“Our expectation at the moment is that you won’t have any
real return from US equities over the next 10 years,” says
Dan Kemp, Chief Investment Officer for the company’s
operations in Europe, the Middle East and Africa.
Leuthold Group’s Chief Investment Strategist Jim
Paulsen also reckons US stock markets are likely to struggle
over the next five years as economic growth peaks.
That analysis is no surprise to us here at Strategic
Intelligence. Following the strong rise in stock markets in
recent times, we’d fully expect the subsequent years to be
very dull - at best.
Don’t forget that the US market made no progress at all, on
balance, between the mid-1960s and the early 1980s. Note
the ‘on balance’ that I slipped into that statement. Within
that near-20 year period, there was a serious shake-out at
the start of the 1970s as well as a very nasty bear market in
1973/74.
...continued overleaf...
7
 strategic intelligence

I can’t claim to have experienced either of those personally. higher inflation, otherwise known as stagflation.
But they’re indicative of what can happen when markets
That’s a combination that equities loathe.
have enjoyed a strong bull market (in the latter case since
the end of WWII) and when valuations have become Summing up: At SI, we’re very wary of equity markets
over extended. at current levels. We believe they’re expensive given the
maturity of the economic cycle and considering the most
Are the current p/e multiples in both Europe and the US
likely potential outcomes.
seriously overheated?
So we continue to advise maintaining a higher-than-usual
Arguably they may not be right now – at current ultra-low
cash allocation in your portfolio, with our present target
interest rates. But if these return to anywhere near normal
being at least 25% liquidity. In the dark market days
levels – as is gradually happening – then the answer is
ahead that we see approaching, this will help to protect
yes, they could well be. In particular, if the next major
your money. It’ll also enable you to take advantage of
economic development proves to be slowing growth and
considerably lower prices than are around today. SI

AGOR A UK
financial

The Strategic Intelligence Portfolio as at 18 July 2018

INVESTMENT Original Rec. Current £ Return
Rec. (issue number) Code Sector Rec. Price Price To Date
Date

Open Positions
HOLD Interserve (12) 15/06/2016 IRV-L Infrastructure 292.00p 65.15p -75%
BUY intu Properties PLC (19) 18/01/2017 INTU-L Property 282.00p 182.05p -19%
BUY Goldcorp (21) 14/03/2017 GG Gold Mining $14.56 $13.38 -13%
BUY Cameco Corp (22) 10/04/2017 CCJ Uranium Mining $11.16 $10.87 -6%
BUY Impala Platinum (Implats) (26) 14/08/2017 IMPUY Platinum $2.75 $1.39 -50%
HOLD BT Group PLC (28) 19/10/2017 BT.A-L Telecom Services 270.00p 218.70p -17%
BUY Uranium Participation Corp (29) 17/11/2017 U-T Uranium Investing C3.93 C4.15 3%
BUY Suez SA (30) 13/12/2017 SEV Water €15.46 €11.52 -25%
BUY Hecla Mining (32) 16/02/2018 HL Silver Mining $3.87 $3.45 -4%
BUY ETFS Physical PM Basket ETC (0) 27/04/2018 PHPM-L Precious Metals $96.52 $89.45 -3%

Investment Original Rec. Close £ Return

Code Sector Rec. Price Date sold
(issue number) Date Price To Date

Closed Positions
Anglo American (1) 15/07/2015 AAL-L Mining 874.40p 859.90p 8% 05/08/2016
Drax Group (1) 15/07/2015 DRX-L Energy 256.30p 341.80p 36% 29/07/2016
Newton Long Gilt Fund (1) 15/07/2015 GB00B01X1152 UK Govt. Bonds 451.00p 579.50p 28% 01/07/2016
Royal Dutch Shell B (1) 15/07/2015 RDSB-L Oil & Gas 1,848.50p 2,596.00p 65% 24/04/2018
Silver Wheaton (1) 15/07/2015 SLW Silver $14.40 $28.81 141% 05/08/2016
Smiths Group (1) 15/07/2015 SMIN-L Engineering 1,139.00p 1,279.00p 16% 05/08/2016
Tesco (1) 15/07/2015 TSCO-L Food Retail 217.10p 239.00p 11% 25/04/2018
Tate & Lyle (5) 14/11/2015 TATE-L Food Ingredients 607.00p 738.50p 26% 26/08/2016
Digital Globe (8) 24/02/2016 DGI Technology $14.63 $27.30 99% 05/08/2016
OMV (10) 20/04/2016 OMV-VI Oil & Gas €25.49 €34.04 47% 20/01/2017
Balfour Beatty (12) 15/06/2016 BBY-L Infrastructure 227.00p 289.90p 28% 11/11/2016
Carillion (12) 15/06/2016 CLLN-L Infrastructure 259.00p 0.00p -93% 02/02/2018
Sainsbury (J) (15) 14/09/2016 SBRY-L Food Retail 235.10p 311.00p 38% 02/05/2018
Aecom (16) 12/10/2016 ACM Infrastructure $27.88 $37.60 32% 25/11/2016
RPS Group plc (17) 16/11/2016 RPS-L Services 175.25p 255.50p 46% 03/02/2017
SIG plc (20) 15/02/2017 SHI-L Building Materials 112.80p 152.50p 35% 05/07/2017
You can access daily portfolio valuations on our website (www.agorafinancial.co.uk/strategic-intelligence-portfolio)
where you can also see full details of our previous recommendations.

RECOMMENDATIONS: These show our current view on each RETURN TO DATE: Investments that are quoted in currencies other
investment. Buy and Sell are self-explanatory. Hold means keep if you than sterling are converted into pounds using the relevant exchange
already own it, but don’t buy now if you don’t. rates to calculate this figure.
8