Wednesday, 8 March 2023 — Albert Park

By Jim Rickards Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

The global economic contraction described in part one and two of this series has many facets. These include supply chain dysfunctions, energy shortages, zero-COVID policies in China, the war in Ukraine, failing central bank policies, and the wilful ignorance of elites pushing the new green scam. Senile leadership in the US, revanchist leadership in Russia, and megalomaniacal leadership in China don’t help.

The economic consequences can be foreseen, and well-advised investors can preserve wealth and even profit from the resulting disruptions. Still, even the nimblest investor can be caught out by developments that percolate over decades and then overflow seemingly overnight.

One such development is a diminution in the role of the US dollar as a global payment currency. In considering this development, it’s important to distinguish between the role of a payment currency and a reserve currency.

The dollar’s role as a reserve currency involving the denomination of assets such as stocks and bonds held by central banks and finance ministries is not in immediate jeopardy, although that topic bears watching and is one we’ll return to in Strategic Intelligence Australia.

A payment currency is different. This doesn’t involve reserve positions but involves how countries pay each other for exports and imports and how they periodically settle their balance of trade. It’s much easier to launch a new payment currency than a new reserve currency.

Today, Russia is in discussions with India about selling oil for UAE dirhams. China is in discussions with Saudi Arabia about paying for oil in the Chinese yuan. The BRICS+ (Brazil, Russia, India, China, and South Africa, plus invited members including Turkey, Iran, and Argentina) are considering a new trade or payment currency tied to a basket of commodities including gold.

Two other groups — the Shanghai Cooperation Organisation (SCO) of China, Russia, and Central Asian nations, and the Eurasian Economic Union (EEU), consisting of Russia and several Eastern European and Central Asian nations — have both commenced discussions of possible regional payment currencies other than dollars and euros.

Major earthquakes are preceded by small tremors. The efforts of the BRICS+, SCO, EEU, and bilateral trading partners are still preliminary — but they all point in the same direction: an erosion of the role of the dollar and euro in global payments. Once that movement gathers steam, the eventual displacement or diminution of the dollar and euro as global reserve currencies will not be far behind.

Everyday investors who may feel uninvolved in these international negotiations can, in fact, be involved in terms of preserving wealth and staying ahead of the monetary power curve. The way to do this is with holdings of physical gold and gold mining stocks.

Commodity-backed currencies have been considered before, and the affected parties sooner or later decide that gold is preferable to the complexities of creating and weighting baskets of non-fungible commodities. (For example, there are more than 70 different kinds of oil based on sulphur content and viscosity, among other factors.) Gold is the ultimate fungible commodity and, therefore, the ultimate form of money.

What you can do to navigate these multiple storms

When British General Cornwallis surrendered to George Washington’s troops in Yorktown, Virginia, in 1781, he ordered his military band to play the song The World Turned Upside Down — at least according to legend. That title seems strangely appropriate today.

Wars, famine, commodity shortages, pandemics, recession, inflation, and weak leadership have all happened before and sometimes go together in part. Still, it’s extraordinary to find all of them occurring at once in today’s complex and densely connected world.

The war in Ukraine is by far the largest armed conflict in Europe since the end of the Second World War. The currency supply chain disruptions today resemble the conditions found in Eastern Europe during the Cold War or in the US during the Great Depression. COVID was the worst pandemic since the Spanish flu of 1918 and is still going.

Recessions come and go, but a global recession is rare. Inflation in advanced economies is the worst since the late 1970s. Weak leaders are not uncommon, but Joe Biden is senile, angry, and incompetent all at once while being the worst president in US history. The odds of any one of these conditions arising are low. The odds of all of them happening at once are infinitesimal. Yet here we are.

The key for investors is to stay well informed and remain nimble. Trying to read the future and placing firm bets can be a huge mistake, given the fact that any forecast is subject to quick reversals, and investment bets can be hard to unwind (at best) or can produce large losses when the wind shifts suddenly.

The best approach is a robust form of diversification that protects you in all conditions and offers significant potential for gains to offset the inevitable losses. This portfolio would include the following:

• Cash for liquidity, reduced volatility, and optionality.
• Real estate, gold, and natural resource stocks (in energy, mining, and agriculture) for inflation protection.
• Treasury notes for disinflation and deflation protection.
• And a slice of large-cap stocks in case the clouds part and everything turns out well.

All these scenarios are possible and can even come in rapid succession as inflation turns to deflation and supply chain bottlenecks turn to inventory gluts.

The best preparation is to be ready for anything and everything.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘So you think you can tell,
Heaven from Hell,
Blue skies from pain’

Pink Floyd

Our story so far…

The feds spent too much money. Prices went up. The Fed raised rates. Stocks and bonds went down.

‘Not to worry’, they said; the inflation was ‘transitory’. But months go by, and prices are still going up. Friday’s news from Breitbart:

‘With the February jobs report delayed until next Friday, a lot of focus today was on the Institute for Supply Management’s (ISM) services sector index for February. The ISM index held steady at 55.1, just one-tenth of a point below the January reading and above the consensus estimate.

‘Readings above 50 indicate expansion, while readings below indicate contraction. A reading at 50 exactly indicates levels were unchanged from the prior month.

‘In other words, this was a serious blow to Team Transitory.

‘The subindexes were also uncomfortably hot and point to inflation pressures remaining high. The employment index jumped from 50 to 54, indicating payroll expansion. That suggests we may get a hotter-than-expected payrolls number next week, which would increase pressure on the Federal Reserve to ramp up the pace of its rate hikes to 50 basis points.’

Cluster threats

So, the Fed must continue to raise its key rate until either 1) it gets ahead of inflation and/or 2) something goes seriously wrong.

Note that as long as assets are going up faster than interest rates, people will continue borrowing to speculate. This raises stock prices. But it also increases the money supply (banks create money as it is lent out). As the supply of fast money increases, prices rise (inflation). One way or another, the Fed must bring down the financial markets as well as inflation.

That is why Number 2 is what we’re prepared for here at our headquarters in Argentina; it’s where the risk is. We avoid it by only owning things (stocks, gold…real estate) that we want to hold for a long time, even through a major 10-year bear market.

All of that seems obvious to us.

Less obvious are the bigger, ‘cluster’ threats. Those are:

…the growing, unpayable, ‘national’ debt…

…war, and the decline of the US empire…

… the forced abandonment of traditional energy sources…

…and the destruction of the US economy by excess government spending and regulation…silly, distracting ‘culture wars’…sanctions and tariffs…and inflation.

Regulatory drag

These things pose even more risks to investors. We already have a government with US$31 trillion of debt. The deficit for this year is headed towards US$1.4 trillion. And interest payments of more than US$1 trillion per year are coming soon.

The ‘green transition’ crusade is going to be expensive too. ‘Alternative’ energy costs more than traditional oil and gas. And since energy is an essential component of modern life, at a minimum, standards of living will fall.

Regulations also cost money. Here’s Gilder Guideposts:

‘According to the American Action Forum, quoted in the Wall Street Journal, in two years the Biden administration has imposed 517 “regulatory actions,” with some $318 billion in total costs, worse even than the Obama administration’s $208 billion in costs in its first two years. In his entire term, Trump’s additional regulatory burden came to just $64.7 billion.

‘Federal regulations are gouging at least $2 trillion a year from the U.S. economy, some 8% of U.S. GDP, according to the Competitive Enterprise Institute (CEE). That comes to some $14,684 per family more than is extracted by the federal income tax, the CEE reported.’

And then, there’s the war agenda. It already costs as much as US$1 trillion per year — 4% of GDP — to fund the Pentagon, spy on everyone, everywhere, maintain bases all over the world and meddle in the affairs of foreign nations.

Enemy of the people

Between war, interest on the debt, and regulation, we’re already facing US$4 trillion a year. This is equivalent to spending about 85 cents of every dollar of federal tax income on things that ‘The People’ don’t really want or need…things that will make us all poorer.

Yesterday, we recalled our Bad Guy Theory (BGT). It’s a way of explaining the otherwise incomprehensible tendency for the press and the public to suddenly make an enemy out of people who’ve done them no harm…and to spend trillions of dollars going to war with them.

In 2002, for example, George W Bush’s speechwriter, David Frum — who later went on to greater fame by suggesting that people who didn’t get vaccinated against COVID should be punished — came up with the ‘Axis of Evil’ jingo. The idea wasn’t that Iraq, Iran, and North Korea had actually done anything for which they should be penalised; it was that they were ‘bad guys’. Frum et al think they can tell Heaven from Hell. In their doltish way, they think some people are good; some are bad. You can make a better world, they believe, by eliminating the bad ones.

The US soon invaded Iraq…spent US$2 trillion…killed thousands of people…turned millions into refugees. And now Iraq is arguably a worse guy. But no one talks about Iraq anymore. Now we have a new bad guy, China!

Stay tuned...

Regards,

Bill Bonner,
For The Daily Reckoning Australia