While equity markets soar and continue to make new all-time highs in many cases, the global system continues to struggle to contain the twin forces of unprecedented debt and deglobalisation. Fear in markets however – thanks to the perception that Central Banks will support stocks – is at an all-time low. This is demonstrated below as bets on lower market volatility reach an all-time low:
Bad economic data has rarely seemed to matter less. US CEOs fear a recession is imminent at a similar level to 2008:
Meanwhile the US-China trade war rumbles on, with only vague headlines as a possible reprieve. China’s economy continues to struggle, with industrial profits falling drastically by 9.9% in the past year while debt rose 4.9%. US corporate debt is also showing a worrying trend, now at $10 trillion:
This breakdown shows a sub-section snapshot in publicly listed companies:
Everywhere, the story is the same. The global economy is totally addicted to debt. This situation cannot mathematically continue indefinitely. With the US yield curve recently flirting with inversion, which many suggest means a recession is imminent, it is interesting to see what has happened to Gold in similar situations:
It is perhaps why there are increasingly more of these sovereign repatriation stories doing the rounds. Poland is the latest to move some of its gold back home:
Poland Repatriates 100 Tons of Gold From Bank of England Storage
Everywhere signs of major stress are there. It is no wonder sovereigns are still interested in increasing their gold exposure.
The percentage of IPOs with negative earnings has now surpassed the Dotcom bubble:
In credit markets, 20% of US leveraged loans are now in deep junk territory, the most since 2009. And despite the huge surge in equity markets in recent years, US pension deficits remain worryingly large. This is a pattern repeated globally:
‘Their house is on fire’: the pension crisis sweeping the world
Beyond the charts, these numbers have real effects on the day-to-day lives of normal people. Protests continue across the world against governments, against inequality, against stagnant wages. In Iran, the Central Bank was set ablaze. This, in a country where such dissent is usually dealt with very severely, shows the real strength of anger of normal people, just trying to lead normal lives.
Mass Protests Erupt Throughout Iran, Central Bank Burned Down
Paul Tudor Jones, the famous macro hedge fund manager, is another influential figure saying we are in unprecedented times:
“We’ve got a 5% budget deficit coupled with the lowest real rates that you can image with the economy at full employment. That’s the most unorthodox, and potentially explosive, combination that you can imagine.”
Paul Tudor Jones sees an ‘explosive combination’ of forces driving the market higher
It thus appears that the interventionism of Central Banks coupled with the “dismembering” of the interconnectivity if the global economy could indeed ramp the market higher. Ultimately however, is there an end point to all this? Will these government institutions just simply keep supporting the market in the US, or will they, like the EU and Japan have already done, start purchasing securities themselves. What does that mean for capitalism if what should be held in public hands become, in a sense, partially nationalised by proxy or stealth?
Where does this all stop? Nobody seems to know. When governments overreach, when debt is out of control, when money printing is normalised and is the primary, perceived driver of asset price gain where does the savvy investor turn to?
Hard assets such as Gold have stood the test of time for Millenia. Gold has outlasted every state, every empire, every regime that humankind has constructed. For the crypto enthusiasts, the current Bitcoin decline, shows that at present it is a long way from a real safe-haven and store of value. Only gold has the history that makes it the go-to asset when situations of excess, badly allocated capital, and systemic stress like now occur.
From every vantage point on a political and macroeconomic basis the current world order does not look like surviving intact in the next few years. There are too many overwhelming forces that will ensure a return to fiscal discipline, to free markets to the basic standards essential to capitalism (fair valuations, trust in the system etc) is just a distant hope, and nothing more.
So in the meantime, as these moments come around, asset allocation process will increasingly turn to Gold as a safe haven. Hegel once said “history teaches us that history teaches us nothing”. And so, once again this seems true. But that is not true for everyone. The smart money will continue to increasingly allocate to Gold as the potential turmoil draws nearer.
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.