Friday, 19 November 2021 — Albert Park

By Brian Chu Editor, The Daily Reckoning Australia

[3 min read]

• Things don’t make sense, but opportunities exist for the prudent
• Bracing for a zombie global economy
• Real assets versus cryptos
• The hidden dangers of investing in cryptos

Dear Reader,

There have been some interesting developments for gold and the US dollar in the recent two weeks. They are actually moving up together.

Check out the chart below containing the US Dollar Index and the US dollar gold price, especially what I circled in red:

Notice how the two are rising together since mid-October.

This goes against the normal trend where they move in opposite directions as the graph above shows.

Remember that gold and the US dollar are monetary substitutes.

Currently, much of the world’s major transactions are conducted using US dollars. Central banks around the world hold a combination of US dollars and gold as reserves to provide some economic stability.

The term ‘economic stability’ is almost ironic in this current day and age. The global economy is hardly stable.

Things don’t make sense, but opportunities exist for the prudent

Everyone can feel that something's not right.

They can sense it when they shop, dine out, and fill up the car. Prices are rising, and it is really cutting into one’s budget.

They can feel it when they pay the bills with rates creeping up.

They know something is not right when many people are walking out of their jobs because they refuse to take the mandatory vaccinations to keep it.

They can feel things are not right watching asset prices continue to levitate upwards despite companies facing staff shortages, rising input costs, and supply chain issues.

The combination of inflation, rising unemployment, broken supply chains, and rising asset markets in our global economy do not sit well together.

It seems like the worst combination you can have. It is like starting a game of poker with a four and a 10 in your hand.

But you have to play your hand the best you can.

To succeed, it pays to understand a bit of history.

But not the history of the developed world. Rather, understanding what happened in countries that experienced an economic collapse.

Bracing for a zombie global economy

It is possible that the world will go the way of Argentina, Venezuela, and Zimbabwe if the central banks and governments go down the path of debt-driven fiscal spending.

Those countries saw their government and the central bank holding a large proportion of shareholdings in the private sector. You have a zombie economy as many of these companies become dysfunctional. They are shell companies, propped up by bailouts.

You also see government debt reaching stratospheric levels, forcing the central bank to lower the interest rate to stave off massive budget deficits. This leads to the currency losing its value against other nations.

Households watch their savings evaporate. They are forced to take greater risk to preserve their purchasing power. This leads to more speculation which can lead to debt accumulation. Losses from investments may push the government or financial institutions to bailouts as a way to stave off civil unrest.

It is like falling into quicksand. You struggle to get out only to accelerate your sinking.

You have seen this happen around the world. They are disguising it under pandemic relief packages, moratoria on evictions, and the mainstream media pushing narratives that the economy is finally recovering.

This illusion can last, until it doesn’t.

As regular readers of The Daily Reckoning Australia, you can see through all this.

You know how to protect yourself from the imminent fallout.

Real assets versus cryptos

It is critical that you protect yourself against the ravages of a stagnating economy where inflation spirals out of control.

You can do it either by buying real assets such as gold, real estate, or running a business of your own. You have something from which you can directly receive cash flows or at least retain purchasing power.

Shares in a company may just miss the mark unless you are a major shareholder. What matters is whether you can receive direct payments from the company. Small shareholders are beholden to the board to declare dividends.

Another way is to get into cryptocurrencies. Buying digital assets in recent years have yielded spectacular returns.

That said, here are some factors you need to keep in mind when building your portfolio...

Many focus on the asset returns without considering the daily price fluctuations. This is especially the case for crypto investors who may experience daily price moves of 30%. Not many people are able to stomach this risk. Holding real assets will not expose you to this roller coaster.

The hidden dangers of investing in cryptos

Another important factor that many people underestimate when holding cryptos is the risk of a digital blackout. This occurs as a result of solar storms, power outages, and cyberattacks. The media is warning every so often of upcoming solar storms, including a recent article by The Independent.

Recently, we have experienced several major internet outages where websites shut down due to the cloud servers crashing (for an example, read this). These turn out to be temporary and lasting a short while.

Outages such as these can cause substantial losses of data. On top of that, massive hacks on crypto exchanges and wallets have occurred in the past.

Now, one can store cryptos in their own hardware wallet to safeguard against hacking, but they can malfunction like portable hard drives.

What I am saying is that digital assets have a significant risk to them that real assets do not. This risk is immeasurable as there are few preceding events to work off from.

So while cryptos have looked like they slain the dragon from the perspective of what to hold in a zombie economy, a digital outage is their kryptonite.

This is why I believe the path forward is a good balance of real and digital assets. My personal bias is on precious metals such as gold, silver, and platinum — some of my colleagues like it in real estate.

Regardless of what your preference is, Fat Tail Investment Research has in-house investment experts who can guide you. Why not check out our subscription services here and get in touch with our friendly customer services team!

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia