The consequences I refer to are the financial shifts which are beginning to occur in the global economy. Our world turns relatively slowly but financial changes can be fast and unexpected.
In my last letter I wrote about the massive money printing underway by central banks around the world. It took 2000 years to reach $100 trillion global debt and most of that has been accumulated since 1971. Now 50 years later global debt has trebled to $300 trillion. If you add unfunded liabilities of at least $200 trillion globally plus total derivatives of at least $1.5 quadrillion, that takes us to $2 quadrillion. That is a lot of debt.
The biggest player in this game is the US Federal Reserve, ably assisted by the UK, EU, Japan and others. Any rescue plan starts with interest rates already at zero and money printing at record levels. Interest rates cannot be reduced from here. We can rule out negative rates on the basis that that would collapse the $4.5 trillion money market fund business. The only option is to increase the scale and effectiveness of QE, or money creation. Put crudely, support for bond and equity markets will have to be more blatant. But printing money to support financial assets is more inflationary, adding fuel to the inflationary fire.
Inflation is always a consequence of money printing. We have been assured that this is simply transitory but reality is now exposing that lie. The direction of inflation is clear. A once in a generation transition into a world of higher inflation and inflation volatility is underway.
Many events are now unfolding simultaneously around the world. Here is a brief summary of some of them.
It is likely that the forty year bull market is ending, and that it will be replaced by hard investment times. I am sure it will be a period dominated by what has come to be known as financial repression – a period when the post-tax returns from assets don’t keep pace with higher inflation. Savers will endure many years of enforced declines in the value of their wealth – in real (inflation-adjusted) terms.
The return of inflation will first scare, then maim, then ruin the traditional balanced portfolios that have served investors well for a generation. Investors need to prepare for a world of greater inflation volatility. And with it a monumental risk – bonds and equities falling in tandem. This will severely impact the dominance of a traditional balanced portfolio of 60% equities, 40% bonds.
We are seeing clear signs that the Chinese economy is under pressure. The Industrial and Commercial Bank of China is the largest bank in the world with $5.24 trillion in assets. Its stock price has been in freefall since March. Every other major Chinese bank looks just as dismal.
China Evergrande Group, the largest and most indebted, and certainly most insolvent property developer in China, is rapidly approaching financial collapse. Debt defaults at developers the size of Evergrande are so rare in China that no precedent exists to solving a debt problem quite like Evergrande, which has more than $300 billion in liabilities.
Here in the UK we are beginning to experience the results of a weakened global economy. Supply chains are severely disrupted, shortages are being widely discussed and energy costs are escalating at unprecedented rates.
The cost of shipping a container from Asia to Europe has risen tenfold since May 2020 and the cost between Shanghai and Los Angeles more than sixfold, the Drewry World Container Index reported recently.
Some shippers have abandoned fixed pricing and are auctioning container space to the highest bidder, according to Bloomberg.
In August, Toyota announced it is suspending work at 14 plants in Japan and cutting vehicle production by 40 percent because of a shortage of a variety of components, not just chips.
These are not signs of a robust global economy. Paper money everywhere is under threat. Every currency in history has disappeared or become worthless. There are at least 160 currencies that have died through hyperinflation but the real number is likely to be much higher.
The longest surviving currency today is the British Pound which has been in existence since 1694. At that time one pound bought 12 ounces of silver and today one pound buys 0.05 oz. So although the pound has survived for over 300 years in name, it has lost over 99.99% of its purchasing power in that time.
Likewise the US dollar. When the United States abandoned the gold standard in 1971, an ounce of gold cost $35. Today that same ounce costs $1776. The dollar has lost over 98% of its purchasing power — measured in gold.
People and companies are beginning to take action. Their aim is to preserve their wealth. Read the article below. Palantir Technologies is one of the world’s biggest software developers. They create systems for governments, the military and industry. They just purchased $50 million in physical gold bars. What do they see that we don’t?
Palantir Technologies buys gold
Regardless, it’s a good idea for you to review your savings and make sure you’ll be well-insulated from both a market meltdown and an inflation bonfire. Protecting your retirement and your future from the Fed’s follies should be a high priority.