Geopolitical Update : Markets face Perfect Storm – Gold & Crypto

By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 9 Mar 2020 (public release delayed by 5 days, adjusted)

“Is this the Perfect Storm you have been forecasting?” I am asked.

Not yet, rather a foreshadow of what is to come. There are several paths to stabilise and to recover – this doesn’t have to end in a major depression. It is still a moderate Perfect Storm though, because it is -as we have been warning- an overlap of several crises. There will be more of them as global geopolitical and macroeconomic trends converge during this decade over the Middle East and Monetary Policy.

Let’s not blame the virus

Mass air travel and our refusal to constrain it immediately may have led to to the current magnitude of the pandemic and the economic uncertainty.

On 29th January 2020 I wrote “It is remarkable that nations around the world have been passive in accepting the free movement of passengers.”   I personally still have serious doubts about the real mortality rates of this new corona virus, but I was puzzled by the lack of consistency in the response by Western governments. Until early March European leaders insisted “we will never limit air travel and free mobility”. So, had total mobility become the “sacred cow” of a society that only wants to enjoy the benefits of globalisation, without responsibly facing the risks it brings along? pandemics, environmental degradation, over-dependence on China, vulnerable supply chains, lack of essential medicines, (behavioural) restlessness etc. As a global citizen and economist I am for globalisation, but in the past decade I saw how it had run amok.

Our world badly needed a time-out for some soul-searching. It is here now.

Why we should take heart 

Most investors and experts are screaming for big government monetary-fiscal intervention. I don’t.

I am personally happy for every single day our policy makers fail to inject more liquidity, because most of their past interventions did far more harm than good. They have a terrible track record in strategic foresight and analysis of complex strategic theatres. The only government officials I trust for this are currently working for the US and Russian military intelligence complexes. We can’t blame policy makers alone, it is a collective systemic failure.

Western policy makers quietly like populism – they made voters addicted to never have to go through an economic contraction (or clean-up as we economists call it). As a result voters and investors throw a tantrum whenever adjustment comes. Last week the FED just gave investors what they demanded – a massive 1/2% rate cut. A historic mistake. It is excessive liquidity that made the economy so vulnerable, how can this be the solution. The little dry ammunition the FED had, should be kept for the real big emergencies and crises ahead. Trust me, they are coming.

I don’t mean that our governments should not do their homework during this health crisis. It is their duty to “think ahead” and protect their citizens. Governments may also have to support small businesses and provide income assistance to millions of people. I just advised a government to pay money directly to low-income earners to stay home during one month. I am not suggesting inactivity.

What I am concerned about is monetary over-stimulus and excessive interventionism. Many economic segments were vulnerable and in need of a correction before this virus came along. Some governments may for instance want to support the overblown and unsustainable mass travel and event industry. These two industries need to do some soul-searching and come to a more sustainable growth path – for society and the environment. Governments have to be careful they don’t overreact now and do more of the interventionism that has not worked in the past.

It is good to keep an independent critical mind: Throughout history policy makers have often been tempted to go from passivity to overreaction – this allows crises to be magnified, which in turn allows a government to call forth the State of Emergency and even Martial Law. Policy Makers can arm themselves with extraordinary powers and increase their control of a nation. They can test protocols & measures that voters would not allow them in normal times.

Why this economy will be shaken 

Every single day our governments delay their concerted monetary-fiscal measures, is a day for free market forces to clean up and dismantle the Monopoly economy that our policy makers have built over the past few decades. Kindly allow me to use this rather un-academic term.

We actually already have an economy with ever tighter control of Demand & Supply by big government and big firms. An economy driven by ever bigger injections of (de facto worthless) Monopoly money. An economy sustained actually by Money Illusion. Millions of people believing gigantic paper-money printing creates no inflation, .. while stock, bond & real estate prices are in the biggest hyper-inflation bubble in modern history. Professor Irving Fisher, a founding father of the FED, called this collective Money Illusion 110 years ago. As key central banks print money simultaneously, the Exchange Rates remain stable and consumers believe the value of their money is stable. This explains why central banks and big banks fight Gold as their Enemy No 1, while quietly they are accumulating it. 

The current shake up of this monetary experiment that started in 1974 gives me a reason for hope and enthusiasm. This is a great opportunity. Let us not miss it.

The term “Monopoly” money is really not far off. But in fact it is worse than that. The player acting as the banker has rigged the game and is “bailing out” every single player that goes bankrupt for taking reckless risks. He then injects twice the amount of money in circulation. Those players feel smart and very rich in this game. Just as the owners of unicorn companies that never produced 1 USD in profits, but have billions in market capitalisation. Central bankers have punished prudent & responsible citizens and empowered the trend-followers. That death of critical thinking can be seen in the narrow consensus view.

Formidable geopolitical move by Russia – Oil tanks by 30% 

It was a matter of time until Russia would try to take advantage of what is happening around the world. It had waited patiently since 2014.

Russia walked away from the OPEC+ meeting in Vienna shocking oil producing states and investors alike. None of them saw it coming. We have warned the West is underestimating Russia and Moscow’s ability to strike hard with the limited assets it has at her disposal.

Moscow’s move is well timed for these reasons ..

• After the West cut Russia from most of the Global Financial System, Moscow shifted its economy to a War mode
• The Global Health Crisis is exposing the big vulnerabilities of the Global Supply Chain and popular business models
• Western Central Banks have very little room to lower interest rates to fight a complex exogenous-endogenous shock 
• The Covid19 outbreak exposes the Achilles heel of America: millions of Americans have no health care coverage nor sick paid leave
• US energy companies are highly leveraged and US banks are exposed
• Oil Prices below US-Saudi operating break-even levels sends a powerful Deflationary Signal 
• President Trump’s maneuvering room over the next 8 months is limited – Elections 2020

With its isolated war-ready economy, President Putin can hold Oil prices low for longer than most experts assume. Reason why he won’t have to. We have been ascertaining for months that Russia was the geopolitical power with the greatest interest in triggering a global reset. 

Stocks markets plunge 

The correction over the past few days was long overdue. Even equity bulls concede this market needed a healthy correction. But they might be wrong, it may need a bigger correction. The reason lies in the big picture.

Stock markets went up for the past 11 years in an impressive rally. But for the most part it was a manufactured rally orchestrated by policy makers. It was fuelled by ultra low interest rates and a flood of cash. Policy makers “kidnapped” the Yield Curve by tightly controlling the Supply and Demand for Treasuries. Then they told investors and academics to look only at CPI for inflation, nowhere else. Meanwhile they staged the biggest hyper-inflation in stock, bond and real estate prices of modern history.

The Roman and the Spanish Empires also took monetary experiments to an extreme and paid for it. Interestingly no great empire falls without “sinning” with its finances first. How a state or person deals with Money reflects more than just financial acumen, it reflects the state of its heart and ethics.

A side note: I have managed funds for many years – this is not a capitulation yet.

If we don’t welcome recessions, we invite Socialism

The interesting thing is this: The US economy would have self-healed and recovered in 1995, 2001, 2008 and 2014 if central banks had allowed the real economy to contract for 1-2 years. Flawed or reckless firms would have disappeared and healthy firms would have grown faster – The stock market would have followed suit. By printing money to avoid every recession, flawed and reckless business models were empowered, the prudent guys lost out. Companies stopped investing in “proper” research & their staff, and begun to borrow cheap money to take over their competitors and buy back their own shares. As bigger companies became oligopolies they destroyed the essential Free Market Competition.

Capitalism is atomistic competition – many competing firms, all of them being price takers. When the state “enables” dominant players to take over competitors, it destroys competition and Free Market Economy. The decline of democracy is not far off then.

I speak of Socialism and Capitalism without judging them: China has been more honest about her system than the EU or America. China doesn’t pretend to be a democracy nor a free market economy. The EU and the USA consider themselves capitalistic economies, but the truth is they are currently on a Socialistic fast track and converging ever more with China. Big government, huge oligopolies and the absence of cleansing recessions are the foundation of the coming Socialistic systems.

I try to summarise now: The Cheap Money of policy makers has created a managed economy – It has backfired and

• weakened the World Economy – You can say it weakened its “Immune System”
• accentuated the deflationary forces it was supposed to combat
• created a whole generation of professional investors that are consensus-followers, passive & unfamiliar with risk

All the above means that the stock market may still have further downside, and that vulnerable segments in the bond and real estate markets may soon follow the sell-off. I believe that many stocks are already fair value, but markets tend to test the bottoms by over-shooting. It is healthy.

Governments are likely to announce drastic measures at one point though. They will perpetuate the problems, but they will provide psychological stimulus to stabilise markets. I recommend governments to stand back and allow for natural contractions. I call upon governments to allow free markets to reallocate resources again. Governments should rather focus on public health and fiscal measures to support private households and to invest in industries with potential. There is a healthy role for a government – but it is a subsidiary one.

If we allow inflated markets and wealth to shrink back to normal levels, the World Economy will find a bottom and recommence to grow on a much more solid and sustainable foundation. We have to have trust in the capitalistic free market forces.

Enter Gold and Digital Currencies

Nothing can expose the current Money Illusion like Gold, if it is allowed to. But the above also explains why digital currencies may have a reasonable chance to be adopted one day as alternative currencies – if their sponsors can change their strategy. Their biggest problem is not technology, rather viability, and yet still most of all the political process. The political monopoly of central banks over the official currency. Let us approach it differently: If central banks print paper-money over this weekend, they are on easing mode or unleashing Q.E. If you print paper-money in your garage this weekend, you face a criminal charge.

Apart from the high volatility of key digital currencies, their easy use by criminal elements poses additional viability concerns. But while these can be addressed, it is the overall strategy of digital currencies that calls for a review. There is the concern that they may have been designed primarily for investors to make money with or to circumvent the traditional payment systems, rather than to serve society and policy makers as a widespread legal tender.

This is where some crypto currencies went wrong or on a detour: They didn’t go to the right people first – to some extent they positioned themselves as a challenger to central banks. It is hard for crypto currencies to seriously challenge an established central bank system, no matter how wounded it is. The fact of the matter is that their best chance is in their subsidiary properties. Digital currency founders should have studied Monetary Theory first, and then approached central banks with a humble and collaborative approach. You need a viable currency, trust and political power (i.e. geopolitical-political backing). Some may say, you need to study your enemy first, I say you need to first understand whom you want to help out. Alternative currency sponsors would then understand the complex predicaments central bankers face, and be able to approach to ask if they can help. Many a central bank would have said “let’s talk”,

I am convinced. Gold and digital currencies are part of the solution for our future Monetary System, at least for the transition that lies ahead. As you can see the alternatives are already on the horizon. Because of the shortcomings in digital currency strategies, it is most likely that Gold will have the most geopolitical-political backing to serve as pivot for a monetary transition. One that could lead to a more permanent digital solution. A gold-backed digital currency could be most likely long-term scenario.

Given the US military Super Power status the USD is not down and out yet. This rationale is the biggest blind spot of economists and digital currency experts. They overlook that no economic or monetary system can exist unless someone provides for the military security of the overall system. No (military) security, no business and no prosperity. Economists and currency experts continue to take the security that the USA provides for granted.  Reason why so many keep erring in predicting ceaselessly the downfall of the ..

If you want to get the full report kindly write to c.takushi@bluewin.ch ..

 

I hope our truly independent research does somehow give you a different perspective, food for thought and helps you stay ahead of consensus.

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 9 Mar 2020

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) Takushi only writes when his analysis deviates from Consensus