Jim Rickards, Saudi Arabia, and the “Great Currency Shock of 2016”

What was Rickards pitching this week for his Currency Wars Alert?

By Travis Johnson, Stock Gumshoe, January 20, 2016

I’m absolutely sure that Jim Rickards knows a lot more about the global political economy and currency fluctuation than I do, so I’ll give you that point right up front.

That doesn’t necessarily mean he’s going to be able to make you a lot of money, or that the promises he uses to sell his trading service will come true.

Richards’ Currency Wars Alert and IMPACT System have been very, very heavily promoted in the past year or so by his publisher (Agora), and I haven’t written about him… so I guess it’s time to get around to it.

Why now? Well, partly because he’s had some time to be both right and wrong in his trade recommendations, so our readers who have tried the service out may be able to provide some feedback (is that you? Use the comment box at the bottom, please!) … and partly because his latest big sales push with a “live video event” earlier in the week promoted one specific “secret” trade, so there’s at least one teased idea of his that I can explain for you.

Generally, Rickards is predicting a US recession — caused by the Federal Reserve tightening during a time of weakness… but while that means he says he wouldn’t own US stocks right now, he says he does see opportunities to make money by buying options to leverage his insight into global currency trends.

The basic spiel for this next “currency shock” that he thinks you can profit from is about Saudi Arabia — he says that there have been two big “Currency Shocks” recently from overnight currency revaluations, the first one being the Swiss Franc’s decoupling from the Euro about a year ago (the second was the bump down in the Chinese Yuan, though that’s still underway and it wasn’t just a one-time thing like the Franc)…. and that the next one will be the Saudis removing their currency’s peg to the US Dollar, all of which are little salvos in the “currency war” that he says has been going on around the world since 2010.

This would cause a drop in the value of Saudi businesses, at least in US Dollar terms, so should bring down the value of the Saudi stock market… but, unfortunately, Rickards says there isn’t an easy and liquid way for individual investors to bet against the Saudi currency or stock market, so he has found what he thinks is a very good proxy: Turkey.

His argument, based on his analysis of the past and his expectations about how the dynamics will work in the region, is that a Saudi de-peg will cause the other governments in the region to also bring down the value of their currencies, and that Turkey — with lots of pressures on it from all sides — will be the largest and most liquid market to suffer as a result.

So he’s recommending a bet against Turkey’s market, and since he only recommends buying options in his newsletter/trading service, that means he’s buying puts on a Turkish ETF.

There’s really only one of those, particularly if you want options and liquidity, and that’s the iShares Turkey index ETF, ticker TUR.

Turkey’s market is cheap by most standard valuation metrics (PE of 8, for example), but has also fallen by more than 40% over the past year and is obviously a risky market for geopolitical reasons — if you shoot down a Russian jet and have ISIS and independence-seeking Kurds on your doorstep, let alone a flood of refugees and a perilous connection to the Euro, risks are high and unpredictable. So it makes sense that it’s cheap. Turkey is going to have a slowing economy for quite a while thanks partly to war and refugees cutting into tourism and, like many emerging markets, is beaten down.

Whether the Turkish market will fall further if the Saudi’s depeg their currency from the US Dollar, I have no idea.

The one Saudi Arabian ETF has fallen more or less in line with most other emerging markets ETFs (including TUR), but it has only existed for a couple months (and has no options trading, in case you’re wondering). I also checked with a couple of my brokers, and there are no shares of the Saudi ETF available to sell short… so, surprise surprise, lots of other folks have figured out that the Saudi economy is going to pay a price for their intentional flooding of the global oil market and the crash in oil prices. (That doesn’t necessarily mean a lot of people are shorting the ETF, it has very low liquidity and very few shares outstanding so it might just be too small to have many shares available to short — but I would assume that there’s far more demand to short that ETF now than there is to go long the ETF, it has fallen 20% this year and a bit more than that since it was launched last Fall.)

So, assuming you believe Rickards is right that the Saudi currency is going to be depegged from the dollar “any day now,” what would the investment be? He continually says that it could h