In the past few months, we witnessed a series of defining moments in our political history, with Britain’s vote to Brexit, (several) terror attacks in France and Germany, up to the recent attempted military coup in Europe’s backyard, Turkey. Ultimately, observers are uncertain about Europe’s political stability and the future of the EU.
These worries are very valid, as geopolitics is a primary force that can shake the markets. Therefore, the high-risk environment that we live in, underlines the importance of making prudent decisions in your investments to protect your wealth.
Markets have greeted the rumors of helicopter money with intense enthusiasm, since Ben Bernanke’s visit to Japan. It is yet another symptom of our economy’s addiction to loose monetary policies and “something for nothing” fiscal remedies. Helicopter money, the next evolutionary stage of QE, is the manifestation of the failing, yet persistent, monetary policies adopted and enforced by our Central Bankers. This time, their proposed solution for an economy that just flatly refuses to get back on a growth track, despite the long series of aggressive interventions, is a direct and permanent injection of newly printed money into the economy, by circumventing completely the banking system. The idea is that this measure will succeed, where QE failed: This time, the consumer will be directly reached, and the funds will not remain trapped within banks and institutions. Therefore, their thinking goes, the money will be spent, demand will be inevitably stimulated, boosting the overall economic health of the whole country and reaching the Central Banks’ price inflation targets. Even if such an irresponsible and desperate move does make a difference in the short term, its long-term consequences have the potential to be deeply detrimental: Such an action, by default and by design, cannot be reversed, and it can only further corrode the already unsound money base of our economy.
Ever since the creation of the EU, and the adoption of Brussels’ vision of full integration the assumption was that the logical next step would be a move towards complete unification of member states into one European superstate. That was indeed the plan, until the Brexit shock.
Every action has a reaction, and we are yet to see Brussels’ reaction to Brexit. It will either drive a transformation into a federalist structure, or intensify the centralization of the union, only to fuel nationalist sentiments across the continent, that are particularly strong after the recent terrorist attacks in France and Germany (as we discuss in our article on the rise of the Right in this issue). This is not limited to Europe, as voters everywhere are dissatisfied with their leaders. Governments will fall; we just don’t know which ones yet. Even as the U.S. elections draw closer in November, we do not know how the vote will turn out, and what direction either candidate will lead the U.S. in, both politically and economically.
The world’s financial system is at a dead-end, inherent in its own design. As we explained before, the petrodollar system that made the Dollar the global reserve currency was intended to create an artificial demand for dollars that would leave a current account deficit. This dollar supply was fortified through oil imports. Economist Robert Triffin argued that because the United States cannot guarantee this sustained supply and thereby maintain an account deficit, this would inevitably trigger a contraction in the U.S. economy that would quickly spread worldwide. This is exactly what happened since the beginning of the oil price slump. One of its major causes was the boom of America’s fracking industry, which made it less dependent on oil imports: less petrodollars circulated in the economy led to a shrinking current account deficit. Ironically, the U.S. has self-sabotaged the system that was designed to ensure its economic and political supremacy. This is a validation of the views of Ron Paul and others (even Alan Greenspan): a return to the gold standard is the solution to our financial system.
Public dissatisfaction with our governments is directly linked to their failure to meet expectations or actually keep their promises after the 2008 financial crisis. Instead of fixing the root problems, we are seeing more money being pumped into the market at full speed. Investors were happy to see the stock markets boom, when in fact they are insanely overvalued, at irrational price levels. According to Prof. Robert Shiller, who devised the cyclically adjusted price/earnings ratio, it has reached the same levels of November 2007, just after the pre-crisis peak of U.S. stocks, and stands 50% above its average since 1881, as seen in the chart below. Meanwhile, the U.S. bond market has reached record high levels. My friend and German economist, Thorsten Polleit configured his own calculation adjustment to Prof. Shiller’s CAPE ratio and applied it to the U.S. bond market. The ratio reflects the number of years it takes for interest income to return the amount of money that the investor had paid for the bond. In turn, this implies that the higher the price-earnings ratio, the greater is the risk that the investor bears. Back in 1872, the P/E ratio was at 20, but now has reached the shocking levels of 70! *Shiller’s PE ratio was designed to smoothen real earnings over a ten-year period and eliminate any net income Source: Wall Street Journal fluctuations that could occur during a business cycle. It achieves this objective by measuring real per-share earnings over a 10-year period.
Shiller’s PE ratio says the stock market is overvalued*
Source: Wall Street Journal
*Shiller’s PE ratio was designed to smoothen real earnings over a ten-year period and eliminate any net income fluctuations that could occur during a business cycle. It achieves this objective by measuring real per-share earnings over a 10-year period.
The Wall Street Journal wrote, “investors are more funereal than enthusiastic”, or as Alan Greenspan described it back in 1996 “irrational exuberance”. Investors are cornered in an unfriendly and unhealthy environment, with economic contraction at bay, negative interest rates, and worries about China and the EU’s future: there is no real escape route.
Let’s look at investor’s reaction to Brexit: the British Pound collapsed against the US dollar to its lowest level in 30 years. Wall Street had its largest selloff in 10 months, while we saw the gold price shoot up by almost 4% according to the LBMA on the 24th of June. This run continued for six weeks, and only saw its first drop on July 7th. According to analysts, it was one of the strongest years for gold, climbing about 25%. Gold is in a bear bounce, we might see another drop in the price, but this is a very short-sighted view; gold’s bull run has not come to an end. What needs to be considered is the future – that is riddled with uncertainty. What we do know, is that the growing negative sentiment towards our governments that have failed us both politically and economically, presents a need to safeguard wealth from the tides ahead. If you haven’t yet included gold in your portfolios, now is the time to do it.
Submitted by: Claudio Grass
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