Wednesday, 9 February 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

Of course, we have written about the pandemic and its impact on the economy a lot here at The Daily Reckoning Australia. But today, Jim Rickards says there might be a problem even bigger than the pandemic…and it faces China in particular.

Today, Jim continues answering some FAQs about the broader picture of the world economy. These touch on everything from Bitcoin [BTC] to the biggest risks facing the economy going forward.

But no matter what sector you look at, the dust of the pandemic will still be settling for years to come. Make sure you keep that in mind when you’re investing.

Read on to find out more.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

By Jim Rickards Editor, The Daily Reckoning Australia

Is China facing a demographic problem that may be even worse than the impact of the pandemic, high debt, and slowing global growth?

China is facing the greatest demographic collapse in the history of the world. Its replacement birth rate may be as low as 1.0 children per woman of child-bearing age. The replacement birth rate that maintains a constant population is 2.1 children. A birth rate higher than 2.1 is needed to grow a population.

China’s population is not only collapsing, but also ageing. This will result in hundreds of millions of octogenarians (or older) with a high likelihood of having Alzheimer’s disease, Parkinson’s disease, and dementia. Tens of millions more will be heavily involved in elder care, which is a low-productivity activity.

This will leave a much smaller group to provide workers for Chinese manufacturing and technology. The demographic collapse will lead to higher wages for prime-age workers, which will erode China’s advantage in unit labour costs. The damage to the Chinese economy will be so severe as to constitute a threat to the legitimacy of the Communist Party of China. Internal social disorder is another likely outcome.

Of course, the economic damage from the demographic time bomb will not be confined to China. The developed world and most developed economies are facing the same issue. Even the Sub-Saharan African countries with higher birth rates today are rapidly converging on rates below 2.1.

The result will be global cost-push inflation as fewer workers demand higher wages. This inflation will not emerge in the next two years but will be a feature of the global economy for decades beginning in the mid-to-late 2020s.

Which assets will be on the rise despite slow growth and economic adversity?

Treasury notes, gold, land, residential real estate, agriculture and other natural resources, and artificial intelligence should all perform well. A two-year note, or a five-year note will provide less volatility.

Bitcoin reached new heights this year. Are cryptocurrencies a good alternative investment? Or are they overrated?

In my view, cryptocurrencies are not investments. They are a form of gambling. There are winners and losers, but no net wealth is created. A panic-style collapse in the not-so-distant future is likely.

Bitcoin [BTC] doesn’t function very well as a store of value; if you want to make it a speculative side bet, you can do that, but it’s not very good as a store of value. And because it’s not a good store of value, it’s also not a good unit of account. I hate to be running a corporation, keeping my books in bitcoin. You would have to reissue your financial statements popping up on a daily basis.

In the post-COVID era, what are the true risks for the financial system and what can savvy investors do to survive or even prosper during a time of unrivalled turbulence?

Cash is a good asset because it reduces volatility in a portfolio and provides the ability to buy assets at bargain prices when asset prices in stocks and other categories collapse. Gold will preserve wealth in all states of the world and will increase in value in the case of a financial panic. Oil and natural gas plays could be worth considering because wind, solar, and hydropower will not grow fast enough to meet real energy needs of the future.

Geographically, where will world economic growth come from in 2021 and after?

Turkey is positioned to do well because it has a large and relatively well-educated population. India is another attractive opportunity because its population is not as old as China’s, and it has a more flexible market system and a more creative technology industry.

There are also good growth opportunities in Sub-Saharan Africa, including Nigeria and Kenya. Russia will do well because it has ample oil, natural gas, and gold. Taiwan is another attractive market because of its dominance in semiconductors.

The biggest problems in developing economies are corruption, bribery, and unstable political governance. One way to mitigate these problems is to invest in giant global companies such as Chevron and Volkswagen that have the resources to resist the impact of corruption.

What are the biggest risks and challenges for the world economy in 2021 and after? What kind of a world economy should we expect ‘after the dust settles?’

The point is that the dust will not settle for 30 years. We are not going back to normal, and we are not going back to the pre-2020 world. Many facets of the economy and society will be quite different for a long time to come. The biggest risks going forward are war and adverse demographic trends.

I hope you have enjoyed my recent editions of The Daily Reckoning Australia. I have tried to cover some of the most important FAQs on topics from central banking to the pandemic, demographics, emerging markets, gold, and more.

Understanding these answers and connecting the dots for the bigger picture could greatly benefit you as an investor.

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

‘Nobody wants to do this kind of work anymore.’

Mick, our old-school stonemason, turns 65 this year. He will retire soon.

‘It’s great work. You’re outside all day. And it’s healthy. You get a lot of exercise. But it’s hard, physical work. 

‘I’ve been doing it for 50 years. I’ve always enjoyed it. But it takes a toll.

‘And when I retire [my employer] won’t have a mason on the payroll anymore. The kids want to go to Dublin. They all want to work in finance. Or those computer things. They’ve got that area [in Dublin] they call the Silicon Docklands. That’s where all those high-tech firms are. That’s where the kids want to go.’

Here with a few thoughts on where the kids want to go… 

Mick was right. The two big moneymakers of the last quarter-century have been Wall Street and Silicon Valley. It’s been a puzzle to us. A real economy is based on give and take. And, generally, the more you give…the more you get.

We get bread from bakers…wheels from the carmakers...nice people in Indonesia prick their fingers so we will have clothes to wear…John Deere made our tractor…the Ford company made our truck…lumberjacks in Canada send us lumber…carpenters build our houses…roughnecks drill for oil…truckers deliver it…clerks sell it.  

When we go to a good restaurant, we compliment the chef and tip the waiter. A man came to the house yesterday to check if our in-ground gas tank was leaking; we thanked him. And last night, we opened a bottle of wine from Chile. The harvesters had picked the grapes. The winemaker had bottled it. The captain had brought his ship into Dublin harbour with the wine aboard. And the local SuperValue had stocked it on its shelves for us. All for only $12.

All of these people work hard to make our lives more agreeable. But what do Wall Street and Silicon Valley do?

Face down

Whatever Meta (formally Facebook) does, last week, investors figured it was worth less than they had previously thought. In the space of a few hours, US$250 billion of market cap dissolved. The proximate cause of this big drop was Meta’s quarterly report to investors, in which it revealed that revenues went down. And so did its customers (users). This looked like a top; now it’s clear that even the most successful ‘tech’ firms don’t go up forever.  

Meanwhile, it is up, up, and up for Wall Street. Here’s an update from last week. Bloomberg:

‘Ten million dollars, $15 million, $25 million, more: Big money is back on Wall Street.

‘Not since the late 2000s, when lavish bonuses rained down before and after federal bailouts, have pay packages at U.S. investment banks swelled as much as they have right now.

‘Goldman Sachs Group Inc. just finished spending an average of 23% more per employee for the past year — the biggest jump in more than a decade. And that figure is muted compared with how dramatically bonuses have gone up for dealmakers, with Morgan Stanley, JPMorgan Chase & Co. and Goldman raising them to the tune of 30%, 40% and 50%.

‘After years of restraint, bank leaders are once again projecting a “whatever it takes” approach to compensation, vowing they won’t be outbid for top performers, lest they lose an edge in a hot market for trading and deals. That has their employees in Manhattan uncorking $2,000 bottles of wine at the fastest pace in years, buying bigger homes in fashionable TriBeCa, and snapping up yachts.’

There is a minor discipline of economists and historians who try to figure out why societies decline — often catastrophically. Many are the hypotheses — climate change, war, disease, overpopulation, and so forth. 

Here is one of them: in every society, some people rule…others are ruled. As time goes by, more and more people want to join the governing class. In our own time, mothers encourage their children to go to college…to wear suits, rather than overalls…and to join the elite.    

The Sultan’s sedan

The trouble is the ruling classes don’t add much of value. They regulate…they control…they administer…they supervise…they advise. In an honest society, you need some people — an elite — to provide these services. But extra weight in the upper classes is a burden. An unproductive elite is parasitic. It toils not. Neither does it spin. It is toted on the shoulders of the common man, like a Turkish sultan in a sedan chair.

Wall Street is a regulator…a facilitator. Its role is to match businesses and investors up with each other…allocating precious capital to the enterprises that are most likely to fructify it. It is a useful service. But in an honest world, capital is limited. So are the opportunities to use it wisely. And the appetite for risking them in bizarre speculations — on NFTs, cryptos, money losing, zombie companies, meme stocks, options, SPACs, and hugely overpriced ‘tech’ companies — is restrained.  

Investors usually make money by buying moneymaking businesses…not by gambling on wacky, weird innovations. So the opportunity for the middlemen — Wall Street — to make money is also limited. That’s why, back in the Land Before Financialisation, in 1982, the finance industry represented about only 10% of corporate profits. It only hit after the US began its decline in 2000.  

And now that the big bonuses are back, no wonder the young stonemasons want to put down their trowels.  

More dots to be connected — why Meta has topped out…why people on Wall Street are overpaid…and why the US empire is in retreat. Stay tuned.

Regards,

Bill Bonner,
For The Daily Reckoning Australia