Will 2014 Be The Year That Changes Everything?

The financial crisis in 2008 was an event, but it wasn't a one-off crisis (no matter what Paul Krugman and other economists believe). It was instead the first adjustment phase of the new global world order, the "de-Americanized" world coming into being. De-Americanized here simply means an America with far less power. America could remain the world's most powerful nation by a long-shot, but be eclipsed economically by China and thwarted by Russia in the Middle East and Eastern Europe, or it could slip into a major crisis that leaves America a shadow of its former self.

American policy since 2008 has been designed to forestall its decline. There has been little effort aimed at reversing the decline and much effort spent on policies that will accelerate its collapse, namely Obamacare.

Meanwhile in Asia, China continues to push forward with economic reform. A major credit bubble remains a serious issue that could severely hit China's economy and standing in the world for a period of time. However, the crisis would also be very bullish for the U.S. dollar and erode the competitiveness of the U.S. economy. Assuming China continues on the same path as the past 30 years, its response to the crisis would likely be a rapid acceleration of reforms, since what is holding back reform today is the secured power and wealth of the party elite. Therefore, I expect crisis or not, China will increasingly become a more competitive economic player in the world.

In Japan, the nation's slow motion path to default continues with an increase in nationalist sentiment (also reflected in China). In the South China Sea, China and several nations continue to bicker over issues, with China's stingy relief aid to the Philippines the latest sign of a deteriorating situation. There is unlikely to be open conflict in Asia, but an increase in tension will cause allies to put pressure on the United States.

We have already seen the U.S. ignore pressure from its allies in the Middle East. Saudi Arabia has secured nuclear weapons from Pakistan and Israel and Saudi Arabia are working closely to contain and possible attack Iran, a response to America's refusal to act in Syria.

In Europe, the right-wing parties are advancing strongly and the National Front (FN)is set for a huge win in EU elections. Although they are dissimilar from the UK Independence Party (also set for a major win in European parliamentary elections) in almost every way, they agree on their dislike for the EU. A growing anti-EU consensus is building in Europe and these parties may form a majority in the EU parliament. These political victories will likely send the euro down into at least the 1.20s, even if no further steps are taken against the euro. A weaker euro is dollar bullish and bad news for emerging markets and China.

The other day I linked to this story: PBOC Will ‘Basically’ End Normal Yuan Intervention: Zhou

One day later this story came out: PBOC Says No Longer in China’s Interest to Increase Reserves

China has to become more flexible with its currency for reform to work, but it also gives them flexibility to let the yuan drop if needed, something that is politically difficult as long as they maintain strict control over the currency.

China to start gold swaps trading on Nov. 25

China, set to overtake India this year as the world's top gold consumer, will start gold swaps trading on the interbank market next week, giving more hedging tools for banks dealing in bullion.

The Shanghai-based China Foreign Exchange Trade System will start gold swaps trading on November 25th, with the Shanghai Gold Exchange responsible for related settlement and delivery, the National Interbank Funding Center said in a statement on Friday.

The start of gold swaps trading comes as China is taking steps to open up its gold market and increase financial investments.

The Shanghai Futures Exchange launched simulated trading for gold and copper options on Tuesday. The central bank said in September it plans to raise the number of firms allowed to import and export gold and also ease restrictions on individual buyers of the precious metal.

Aside from gold and copper, China is also set to begin trading oil futures in Shanghai and allow foreigners to participate. Also, there will very likely be yuan denominated contracts. If the contract proves popular (and it may attract investors looking for yuan exposure), it could pave the way for oil sales in yuan, since China is now the largest importer of oil in the world.

Gold bulls haven't given up their dreams even as prices tumble: Gold Option Wagers on Surge to $3,000 Was Most-Active Yesterday

Wagers betting that gold prices will rally 141 percent in about two years were the most-traded option in New York bullion yesterday.

Call options giving owners the right to buy gold at $3,000 an ounce by December 2015 traded 7,250 contracts yesterday on the Comex in New York, more than double the amount of the next most-active option, data compiled by Bloomberg show.

U.S. elections are coming up next year as well and the Affordable Care Act has three paths it can go by. The first is that it works, but spikes the deficit due to higher spending. The second is it fails, and damages the economy and the healthcare sector. The third is that it is delayed, delivering a major political loss to President Obama.

Internationalization of the Yuan, the opening of Saudi Arabia, the implosion of the EU, and three of the last pillars of the dollar crumble

The rapid internationalization of the Yuan, causing a decline in the central role of the dollar; the loss of Saudi support, a key part of the petrodollar edifice; and the loss of the Americanist bastion of the EU, replaced by a Euroland relying on the Euro, are all threats to the three remaining essential pillars of American power, which will disappear in 2014, precipitating considerable global upheaval.

The US is betting that the potential barrier (3) between the status quo and the world thereafter is too painful to go through, and that countries, despite all of the benefits that would accrue in the new organization of the world, will not cross that Rubicon. One example is China, with its mountains of dollars in reserve which would not be worth much if it moves too pointedly; another is Saudi Arabia, which would lose a good customer and assured security if it let go of the US. But these are neither more nor less than cold calculations of costs and benefits, and for a number of stakeholders the benefits will exceed the costs. According to LEAP/E2020, the American wager has already been lost.

GEAB is pro-Europe and relatively anti-Anglo Amercian in its outlook, but they summarize the changes well at the link.

The U.S. does have some positive forces on its side, such as increased energy production, but this is also a double edged sword. The war weary American public is already losing interest in Middle East conflicts and higher energy output has strengthened the idea that energy independence is possible. It also means Saudi Arabia down the road will receive fewer U.S. dollars, which means fewer dollars to recycle (eventually, through the global financial system) into U.S. Treasuries. Thus, U.S. strengths serve to help "de-Americanize" the world.

In sum, most of the trends today and their possible offshoots are negative for the U.S. position in the world. Whether the U.S. gains or loses in the short-run, the long-term position of the U.S. will be eroded relative to the rest of the world. Maybe 2014 will be like all the prior years before it, but with an aging bull market and an economy increasingly due for recession, time is running out for the U.S. Next year will also mark 5 years since the bottom of the 2008 iteration of the financial crisis, and it was 5 years from the bottom of the first wave of the Depression, in 1932, to the "depression within the Depression" in 1937. The reason for that, Keynesians argue, was because the Federal Reserve tightened monetary policy......what today they call the taper.