From Poland With Concern

Many variables are at play, and they are trying to find their resting place. Let’s bring some into focus. August 14, 2024 [WEBSITE]( | [UNSUBSCRIBE]( From Poland With Concern SEAN RING Dear Reader, Greetings from a gorgeous Wroclaw (pronounced VROTS-wahf, not ROW-claw), Poland, where I’ll teach a banking course for new operations hires for the next two weeks. American, British, and European banks established a presence here years ago when they realized they could get brilliant, English-speaking, technically proficient talent on the cheap… or at least more affordable than in London, Paris, or Frankfurt. It’s a fascinating place. Let me give you a bit of history for your edification since this isn’t the sort of stuff they teach you in the States. The 10th Century Start Wroclaw was initially established as a Slavic settlement in the 10th century. It became part of the Kingdom of Poland in 992. During the Middle Ages, Wroclaw developed as an important trade center due to its strategic location along the Oder River. Control over the city changed hands several times over the centuries. From 1335, it was part of the Kingdom of Bohemia (now part of Czechia) and later came under the control of the Habsburg Monarchy in 1526. In 1741, during the Silesian Wars, the Kingdom of Prussia annexed Wroclaw. Under Prussian rule, the city was renamed Breslau and became heavily Germanized. During the 19th and early 20th centuries, Breslau grew rapidly, becoming the third-largest city in the German Empire by the early 1900s. The city was a significant cultural and industrial center, with a large population of Germans, Poles, and Jews. Name Change and Post-War Era The most significant turning point in Wroclaw's modern history came at the end of World War II. In 1945, after the defeat of Nazi Germany, the city was transferred from Germany to Poland as part of the Potsdam Agreement, and its German population was largely expelled. The city was repopulated by Poles, many of whom were themselves displaced from areas in the east the Soviet Union had annexed. With this shift, the city’s name was changed back to Wroclaw. The Polish government embarked on a major effort to rebuild the city, which had been heavily damaged during the war. Over the decades, Wroclaw became a major Polish city, blending its diverse cultural heritage with Polish traditions. Modern Wroclaw Today, Wroclaw is known for its stunning Old Town, Gothic architecture, numerous bridges and islands—and the beer is fabulous! It’s a bustling academic and economic hub, home to several universities and a growing tech industry, which the banks raid for IT talent. Wroclaw is also renowned for its cultural scene, hosting numerous festivals and events, including the European Capital of Culture in 2016. It’s simply beautiful. Having not been here for over a decade, what will I discuss with these kids, finance-wise? [**Urgent Note From Jim Rickards – Your Response Is Requested By 01/25**]( I’ve just made a [massive change]( to Strategic Intelligence. This is one of the biggest changes to a newsletter in the history of our business… As far as I know, nothing like it has been done before. What’s going on? In short, I’m adding 3 exciting new additions to [this all-new “Pro level”]( of Strategic Intelligence. And as a current subscriber, I don’t want to see you miss out. That’s why — for a very limited time, until the timer below hits 0 — you’ll be able to [upgrade your subscription to this new “Pro level” by clicking here.]( Seriously. [Just click here now to see how to claim your upgrade.]( Once the timer hits 0, however, it’ll be too late… you’ll miss out. I’d hate to see you left behind. [Click Here To Learn More]( High Rates Finally Bite Almost a year ago, [I published an edition of the Rude]( detailing how big companies avoided the pain of rate hikes by reversing their borrowing strategy. Let me refresh your memory. The USG Interest Expense It’s just ludicrous when you think about it. The US is supposed to be the wealthiest country in the world. But this generation of politicians has squandered it. “Deficits don’t matter,” said the appropriately named Dick Cheney. Credit: [Zero Hedge]( Welp, the national debt is nothing more than accumulated unpaid deficits. They sure look like they matter, Dick. But Corporate Interest Payments Fall Now, here’s where it gets cheeky. Albert Edwards, the famous permabear of Societe Generale, a French bank, noticed that corporate interest payments kept falling as the Fed was hiking rates. That’s not supposed to happen. Here’s the chart: Credit: [Zero Hedge]( Edwards explained the above chart thusly: We can see clearly from the Fed’s Z1 (table L103) that the US corporate sector is a massive net borrower. Normally when interest rates rise, so too do net debt payments, squeezing profit margins and slowing the economy. BUT NOT THIS TIME. Corporate net interest payments have instead collapsed (H/T my derivatives colleague, Jitesh Kumar). What on earth is going on? Edwards said he was “so surprised when I saw Jitesh’s chart (above), I assumed it was a mistake and emailed the SG macro-network for help. No, the chart is correct. The data comes from the BEA GDP press release (Table 11, line 9). Raw net interest payments in $bn are shown as the red line below." Credit: [Zero Hedge]( On the right-hand side of the chart, corporate net interest payments (red line) sharply declined when the Fed Funds rate went up (blue line). What new financial devilry is this? Companies Played the Yield Curve in Reverse A few things have happened recently that have delayed (even more than usual) the effect of Fed rate hikes. First, in the mortgage market, everyone with a house and a brain refinanced a few years ago when mortgage rates were under 3%. So, if you’ve got a 30-year fixed mortgage at 2.75%, you’re set for life and relatively immune to rate hikes. But what big companies did and are doing is positively sublime. Usually, big companies and banks (mainly) will borrow short and lend long. This makes sense with a normal yield curve. If the curve inverts, you’d expect the difference to be a loss, as the borrowing rate would be higher than the lending rate. But companies wised up to this and simply reversed their strategy. Since the curve was inverted, they’d borrow long and lend short. My goodness. That gives me morning wood in the early afternoon. Succinctly, big companies with access to the debt capital markets took Chairman Pow’s rate hikes and used them to their advantage. They’ve told Jay Powell, as Annette Benning told Warren Beatty in Bugsy, “Why don’t you run outside and jerk yourself a soda.” Ok, back to today. You may recall that it takes between 18 and 36 months for interest rate moves to filter through the system. Well, it looks like they’re finally arriving. [Economist James K. Galbraith writes]( The market meltdown and impending recession come over two full years after the Federal Reserve started hiking interest rates to “fight inflation.” They are the direct, but delayed, consequence of that policy. So, the Fed’s policy is finally having its intended effect – over two years after inflation peaked and began to fall, for reasons unrelated to the Fed’s policy. He continues: Unemployment is up almost a full percentage point over the past year, and job creation is way down. The number of newly unemployed, newly employed part-time for economic reasons, and those not in the labor force but wanting a job increased by over a million from June to July. Claudia Sahm’s indicator of recession – a half-point increase in unemployment on a three-month moving average basis – is blinking red. The Sahm rule has held since at least 1960. More Americans Own Stock Than Ever I’ll also let them know that, unlike in Europe, many Americans own stock. In fact, [41.6% of Americans own stock, an all-time high](. Europeans like to invest in houses and bonds. It’s an entirely different culture. Of course, with rates catching up to us, this will be a risky strategy going forward. Own Gold! Just take a look at this beauty: We’re going to $2,600 first, then to $3,000. We’re leaving the Age of Overfinancialization and returning to the Age of Stuff. Wrap Up I’ll be reporting from Poland until next Thursday. In the meantime, keep your eye on gold and the miners. I’m still hoping for a long sought-after rally. Have a great day! All the best, Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( Rate this email Like Dislike Thanks for rating this content! Looks like something went wrong. Please try to rate again. In Case You Missed It… After Brown’s Bottom, the UK Dumpster Dives For Gold SEAN RING When I landed in London in 1999, I didn’t know nearly as much as I thought. Sure, I was “armed” with a finance degree from Villanova. Oooooh… But I didn’t know how things actually worked. What’s remarkable about some things is that you know them in your bones. You don’t know why or how it got there. It’s as if we’re not blank slates at all; our forefathers, whether purposely or not, found a way to make an indelible impression on our very viscera. So when I heard the Chancellor of the Exchequer, Gordon Brown, had sold a boatload of the United Kingdom’s gold, I knew something wasn’t right. I didn’t know why. And I certainly didn’t understand anything about gold then. Of course, gold is never included in undergraduate macroeconomic courses. But by the powers of ancestral intuition or inheritance, I knew this was a wrong move. And so did everyone else… except Brown and his advisors. Gordon Brown was a rare bird among arrogant politicians. He’s Scottish, attended the University of Edinburgh, and received his PhD in History. You’d think he’d have known better. He’s shockingly pedantic, often asking people what books they were reading to test them. He rated himself highly as an intellectual. Like Larry Summers, he’d mix these nonsensical word salads and vomit them out publicly. His colleagues would nod and pretend to understand Brown. You were assumed to have less of a brain if you didn't nod in agreement. But of all the hare-brained things to do, Brown authorized the sale of half the UK’s gold reserves when the market was bottoming out. Hence, it’s called the Brown Bottom. How to Get a Brown Bottom Behold, the 'Brown Bottom'—a moment in history when the then-Chancellor of the Exchequer decided to showcase his brilliant financial acumen. Picture this: It's 1999, and gold is languishing around $282 an ounce, clearly a great time to sell off a significant chunk of the UK's gold reserves. Why not? Who needs that glittery metal that's been a store of value for thousands of years, right? Indeed, the world's financial markets were just waiting for the UK to dump 395 tons of gold onto the market to drive prices even lower! But wait, it gets better. In his infinite wisdom, Brown announced this sale in advance, just in case anyone might have missed the opportunity to take advantage of this fire sale. The result? Gold prices plummeted even further – to a low of $252 per ounce – while the UK was selling, ensuring that the country locked in the lowest possible price. How considerate of him to help everyone else buy gold on the cheap! Of course, in the years that followed, the price of gold didn't just recover; it skyrocketed, reaching over $1,900 an ounce by 2011. And where are we trading now? Nearly $2,500 per ounce, or 10 times higher than where Gordon Brown, PhD, sold it. But hey, who could have predicted that? Surely, not anyone with even a basic understanding of market dynamics. Hence, Brown's decision is now lovingly referred to as the "Brown Bottom," a term of endearment for that moment when the UK expertly demonstrated how not to manage a country's reserves. [Man Who Predicted Biden's Drop Out In October Issues Shocking New Election Prediction]( After calling Biden's withdraw, former White House advisor Jim Rickards issues an even more shocking election warning... [Watch This Video to Learn More]( The Unintended Consequences Now, this plan isn’t to rebuild the UK’s gold reserves. But I wonder if the Royal Mint would need to employ it if they could just tap UK reserves (if it had any). From CBS News: The U.K.'s Royal Mint, the country's official coinmaker, has opened a factory that will extract gold from e-waste to reduce its reliance on traditional mining and encourage more sustainable practices. "The factory underpins our commitment to using sustainable precious metals and providing a new source of high quality, recovered gold," Sean Millard, Chief Growth Officer at The Royal Mint, said in a statement. "It allows us to reduce our reliance on mined materials and is another example of how we're working to decarbonize our operations." It continues: According to the United Nations Institute for Training and Research, the generation of e-waste is rising by 2.6 million tons annually. Less than a quarter of that waste is properly collected and recycled, "leaving $62 billion worth of recoverable natural resources unaccounted for and increasing pollution risks to communities worldwide." That’s no small number. Of course, when gold is trading at just under $2,500 per ounce, it’s absolutely worth going for. After all, the only cure for high prices is high prices. Of course, Peter Schiff at [SchiffGold]( ate this up with a spoon: From governmental entrepreneurship to the pricing effects of conservation, this recent innovation highlights all areas of this intriguing and multivariable world. While the conditions and incentives that drive human action are always changing, the role of gold in civic and private life is ever-present. You can’t argue with that. Wrap Up Gargantuan mistakes like the Brown Bottom have enormous consequences, sometimes decades into the future. The Royal Mint dumpster diving for gold to make jewelry isn’t one of them. But 395 tons of gold at $2,500 per ounce? That would be worth nearly $35 billion or GBP 27.4 billion. Wow. Funnily enough, Gordon Brown may be the only politician I know who’s actually been ostracized in some way. No one buys his books, pays to listen to his speeches, or cares about his opinions. And it’s not just over the Brown Bottom, but a litany of mistakes he made as Chancellor and later as Prime Minister. It’s a shame Tony Blair isn’t ostracized the same way for even worse mistakes. All the best, Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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