Goldex Heartbeats: The disconnect between markets and fundamentals

Goldex Team

Editorial content

The struggling global economy is now starting to realise how much the Coronavirus will further deteriorate economic activity. Airlines, tech companies and apparel manufacturers have all either stopped flying, suspended operations or warned the market that if the virus spreads, this will have significant real-world effects on profitability and revenue forecasts:

But as markets react positively to Chinese central bank liquidity injections and reach new – or close to new – all-time highs a closer look under the surface is warranted. The Baltic Dry Index, which shows global shipping costs and is a well-followed economic indicator has collapsed since September last year.

France’s GDP turned negative for the first time since Q2 2016:

This is the US manufacturing PMI in the last three years:

At the same time valuations remain sky-high:

Extreme Valuation Cases Wanted for a Red-Hot Rally in Equities

However, the disconnect between markets and fundamentals remains strong. The perfect example of this is the huge move up in the electric car maker Tesla. And this is while car sales in China are forecasted to have fallen 25-30% according to preliminary data from the China Car Association. This is what happens with easy monetary policy (bespokeinvest):

Indeed, Tesla is now close to or at the entire market value of Bitcoin (Charlie Billello):

At least in the West it is still possible to short-sell. This is what happens when markets are not allowed to go down elsewhere:

China moves to limit short selling as virus looms over market reopening

Asia has much more of an impact than people realise. Global GDP is approximately $90 trillion. The US has $20 trillion while China, Japan and South Korea combined have more or less the same. This is three or four times more than twenty years ago. The era of US dominance has already passed. So, if the virus spreads as some fear then a global recession is a real possibility.

However, the narrative continues. Central Banks will bail out the markets. For many investors, bad news is constantly required in order for the central banks to constantly reassure and have justification for what were once extraordinary and emergency policies.

Greece Sells 15-Year Debt for First Time in More Than Decade

And the US borrows for 10 years at 1.6% while Greece borrows at 1.16%. Everything you were taught about economics is wrong, it seems.

Furthermore, there are now leaks to help prepare the ground for new measures in the US once the next recession arrives:

Fed Officials Weigh New Recession-Fighting Tool: Capping Treasury Yields

A few commentators believe that this recession is imminent:

Even some famous investors, such as value-legend Seth Klarman, are becoming very concerned:

Seth Klarman passionately defends value investing and said its time is coming again soon

For value strategies to work then interest rates would have to normalise. And the only thing that would make rates rise is inflation. With the amount of continued money-printing occurring then this is inevitable at some point. And then of course, gold would go through the roof. However, if inflation fell and prices of all assets and goods significantly dropped the damage to the financial system would be so fast, in a world so over-indebted and dependant on cheap interest rates. That means gold would, in this case also, move sharply higher.

The final scenario is that inflation rises, but that the central orthodoxy of the Fed and others dies, and they refuse to rase rates and thus encourage inflation. Their argument would be that still, the economy is too weak to take on higher rates and that inflation, or even hyper inflation would be a better evil than a financial catastrophe.

This is the situation that is being faced in the coming years and months. And no scenario is really attractive for the global economy and the health of capitalism, and democracy in general. Only gold will remain strong. And that is why, with all the interventionism, and all-time highs in markets, it does not collapse. If the economy was rosy, and capitalism in rude health then Gold would be much, much lower.

The fact that it isn’t says a lot.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.