Wednesday, 2 February 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[8 min read]

Dear Reader,

The pandemic has impacted everyone’s lives. But it isn’t something we will just suddenly get over. The impact of COVID and related measures, from lockdowns to masks, is going to continue shaping our futures for years to come.

Perhaps nowhere is this clearer than in the economy. COVID has brought up many questions for the future of the world economy. In today’s issue of The Daily Reckoning Australia, Jim Rickards tries to answer some of the most important ones.

Below, you’ll find some of the most vital dots to connect for the future of the economy and your finances.

Read on to find out more.

One other thing before I sign off. Yesterday, I recorded a podcast with noted US tech investor Matt McCall. We discussed why he sees the ‘Roaring 2020s’ coming, thoughts on the metaverse, and how to play the recent big drop in Nasdaq stocks. It’s all free for you. Check it out here.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

By Jim Rickards Editor, The Daily Reckoning Australia

Lockdowns clearly damaged the economy. Most lost sales were permanent losses, not temporary losses. There is no pent-up demand, just weak, new demand. Lockdowns don’t always work to stop the spread of the virus because they keep people indoors where the virus can spread more easily. Outdoor activity is essential for fresh air, mental and physical health, and exercise.

People will find a way to gather and interact even with lockdown rules. As I see it, this means that lockdowns impose all of the economic costs with few of the supposed public health benefits. This was recognised in a paper in 2006 by DA Henderson, the greatest virologist and epidemiologist of the 20^th century who led the successful effort to eradicate smallpox and won the US Presidential Medal of Freedom. He said lockdowns don’t work and provided detailed reasons why. Unfortunately, his award-winning work was ignored by politicians eager to appear to be doing something.

New variants of the virus are emerging and more will come. That’s how viruses work. We should learn to live with the mutations and treat COVID as a relatively low-risk endemic disease. Efforts to impose extreme lockdowns at every sight of a new outbreak will continue to stymie global economic growth.

How will different parts of the world be affected by the pandemic-related new great depression? How will the developed and developing countries fare on a relative basis?

The global economy is highly interdependent, so all economies will be affected adversely. Yet, some will be more affected than others. Consumption is slowing in developed economies, which means reduced demand for exports from developing economies. All countries are adversely affected by the declines in tourism, travel, resorts, cruise ships, casinos, restaurants, salons, and other public spaces.

The pandemic has been a headwind for growth, but it would be a mistake to blame weak growth solely on the virus. The global liquidity shortage that is now emerging is a much more powerful drag on growth than the pandemic.

There was a hope for a V-shaped recovery beginning from the second half of the 2020. How far are we in that process?

There was no V-shaped recovery, and one should not be expected. There was a severe contraction in March–April 2020 followed by a recovery in July–September 2020. However, the recovery only made up part of the lost ground, not all of it.

We had a partial V or a truncated V. The economy recovered somewhat, but growth is not back to the prior trend, bearing in mind that the prior trend (from 2009–19) was itself below the long-term trend. Now we are experiencing slowing growth and metrics in employment and wages that are moving sideways or down without having recovered previous highs. This is characteristic of a new great depression.

Which industries will this new depression affect most? Which industries will most benefit?

The worst-hit industries are travel, bars, restaurants, hotels, resorts, salons, boutique shopping, and other personal service industries. The industries that benefitted the most are in technology or e-commerce such as Amazon, Apple, Facebook, Google, Netflix, and Microsoft. This much is clear from market behaviour and company data over the past 18 months.

Going forward, there will be some surprise winners. Energy companies will outperform. Despite the extensive climate alarmism, it’s simply the case that world energy demand will outpace energy supply even when wind turbines and solar panels are considered.

Hydroelectric and nuclear energy will expand also, but those projects can take years or decades to bring online. The gap will be filled with oil and natural gas, which are plentiful and relatively inexpensive compared to alternatives. When this sector is beaten down by the Green New Deal crowd and climate hysteria, it’s an excellent buying opportunity.

What can we expect from the Biden administration in terms of the US economy and its recovery? How will the Biden presidency affect the global economic landscape?

The Biden administration will slow US and global growth with a combination of higher taxes, more regulation, and wasteful spending on programs such as the Green New Deal.

Biden administration deficit spending, which will approach US$6 trillion of new authorisations in fiscal 2021, are continually claimed as stimulus. In fact, there is no stimulus from such spending because the US debt-to-GDP ratio is now approaching 130%. There is good evidence that debt-to-GDP ratios in excess of 90% produce less growth than the amount of new debt itself. In other words, there is no stimulus and only an increasing debt-to-GDP ratio that makes the situation worse.

Biden is also compromised by the Chinese because of his family’s criminal sales of favours and access in exchange for money and investment partnerships with Chinese communists. Biden is also suffering from serious cognitive impairment, which limits his ability to understand issues and make sound policy decisions.

The US was facing slower growth in the years ahead with or without the Biden administration’s policies because of high debt and a central bank that doesn’t understand monetary economics. Now that Biden’s polices are fully revealed and becoming law, it is clear that growth will be even worse than would otherwise be expected.

While the pandemic has had a lasting impact on the world economy, other factors still influence things. In my next issue of The Daily Reckoning Australia, I let you in on a problem that might be even worse than the pandemic…

Regards,

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

We’ve come up to Dublin for a few days to help take care of a grandchild.

Before leaving home, we decided to spend a couple of days working alongside Mick and Connie, the local stonemasons. They were building a wall on the side of our garden until Mick came down with COVID. Then, the project stalled for almost a year. Here, we’re helping them to pick it up again:

We’ve done masonry work for 50 years…but very little stone masonry. Mick is a real old-time pro. We thought we might learn something from him.

‘It’s not the stone you’re laying that you need to worry about,’ he said. ‘It’s the next one that gives you trouble.’

Thus had Mick brought into focus the problem of all human life. Actions have consequences. Today is followed by tomorrow…which is when the troubles arrive.

Mick was merely pointing out that a poorly-laid stone makes it difficult to pose the next one on top of it. But the principle is universal: problems always reveal themselves later.

It may be fun, for example, to have a fling with the hat-check girl. But then what?

Rob a liquor store? Same problem.

Try to goose up the US economy with artificially low interest rates (below zero in real terms) and printing press money? Yeah…there will be Hell to pay.

The cost of doing business

But we are going to desist from our usual old-school, middle-American moralising…

…instead, we take up a practical Dear Reader’s question.

Our reader has noticed that we own a lot of non-performing real estate. He guesses, correctly, that they must cost us money:

‘From following you all these years, I know that you own many properties around the world including several hundred thousand acres of land. Having been involved in the real estate business for 40 years, I know that without substantial rental income these properties become a drain. So my question is, does someone in your position think about the effects of negative cash flow or does it continue to be the cost of doing business?’

Our reader puts it politely, but the gist of his question is: what kind of fool are you; what about the consequences?

Herewith…an explanation.

And we begin by taking the high road: not everything we do is intended to make money.

We have farms in France, the US, Nicaragua, and Argentina. None were bought as serious farm investments (although…we had hopes!). We lose money on all of them.

Is this a good idea? Probably not. Each one makes us poorer. But heck…we have no other expensive tastes or hobbies. No fast cars. No corporate jet. No art collections. No racy girlfriends. No yachts. We rarely travel for fun (besides, it’s not much fun anymore). Our houses are modest. We drive a Ford F-150. We wear Lee blue jeans.

If we have a weakness, it’s property. We like owning it. We like fixing old houses and restoring old fields, fences, and gardens. And we tell ourselves: after all our improvements, maybe…when we finally shake the clods off our boots…perhaps the grandchildren will be able to sell them at a profit.

Or maybe not.

And since, as our reader points out, these properties produce ‘negative cash flow’ we have to be careful. Annual negativity could overwhelm the eventual positivity, such as it may be.

Contrarian farmers

We’re also getting older. In the final innings of our career, we’re learning how to bunt and walk — how to cut costs…increase income…and invest in better land. And overall, we’re almost at breakeven!

Yes, while we own a lot of ‘non-performing’ farmland, we are also buying performing farmland. And here is where our globetrotting gives us at least a broader perspective. We’ve become ‘contrarian farmers’. No…we don’t plant backwards to fool the crows. Instead, we are buying land in Argentina.

Here in Ireland, we were bidding on an adjoining farm. The bids went up and up…until the price was more than US$12,000 an acre. We gave up, figuring that the local bidder wanted it more than we did. At that price, it’s hard to see how it could ever be profitable. But like us, the Irish like owning land. Perhaps it brings a psychic benefit that doesn’t appear on an income statement.

Meanwhile, in Poitou, France, land sells for only about US$5,000 a hectare…or about US$2,000 an acre. It was always poor land. Still is. And the rental income is running about US$50 per acre/year — a rate of return of about 2.5%...not enough to cover the taxes and maintenance.

In the US, in the Upper Midwest, rental rates are running about US$225 per acre. Iowa farmland is trading hands at about US$7,000 an acre. So the return on investment is only a bit better than in France.

Crop yields are heavy in the US. And prices are high. Farmers should be doing well. Trouble is that costs are rising sharply too. Potash, nitrogen, and phosphates approximately doubled last year. Costs for fuel, pesticides, herbicides, and seeds are also going up. Farming is no clear winner in an era of rising inflation.

Meanwhile, down in the northwest corner of Argentina, there may be a unique opportunity. A terrible drought has wreaked havoc. And whatever damage nature leaves undone, the Argentine government fills the gaps. Effectively, farmers cannot sell their land to foreigners — substantially lowering market demand. And even if they could buy, non-Argentines would find that they couldn’t repatriate their profits except at the ‘official rate’…which would wipe out at least half the value of their earnings. The peso is getting cut in half each year. Shortages of machinery, fuel, and chemical products bedevil the hard-pressed gaucho farmers.

There is not yet any light visible at the end of this tunnel. And it’s rather amazing that there’s any market at all for Argentina farmland. But there is. And prime cereal land — good for wheat, soy, corn, or other field crops — sells (up in Salta province) at about US$1,200 per acre, an 80% discount from US prices.

Crop yields are lower than in the US. But so is the dependence on fertilisers and pesticides.

This leaves, we believe, the Argentines in a strong position among the world’s low-cost producers. And in recent years, returns to investors have been running between 5% and 10% (not counting farmland capital appreciation).

In any case, our goal is modest. We only seek to make enough to cover the losses on our other Argentine farming ventures. Then, we can leave the farms to our children with a clear conscience; at least, they won’t be a burden.

We’ll be heading back down to the pampas in March…to have a closer look — stay tuned for an update.

Regards,

Bill Bonner,
For The Daily Reckoning Australia

PS: None of this should be taken as investment advice, by the way. Land is not fungible. Each situation is unique. Each requires management…and careful, detailed knowledge of the facts on the ground.