Market Musings 25/04/22: The End of An Era: What does the new post-COVID Era promise?

25th Apr '22 by Edmund Shing

16 comments 2363 reads

The End of An Era:
What does the new post-COVID Era promise?

Summary:

The end of an era of: Plenty (of raw materials, goods), lowflation, easy money, the peace dividend, technology mega-cap domination..
A new era of: Shortages (e.g. of raw materials), rising prices, rising interest rates and more expensive financing, a new focus on security, reshoring of supply chains and production, persistence of remote working.
Some themes linked to this new era: renewed consumer focus on value for money, investment in commodity production, investment in cybersecurity and physical defence, increased industrial automation, political shift towards greater income redistribution and taxation of high incomes and wealth
Idea of the week: PHGP Wisdomtree Physical Gold Fund (in pounds sterling)

Where we have come from, and where we are going

The last two years have seen a huge upheaval across global society and the economy, thanks first to the COVID-19 pandemic and now to the war in Ukraine.

From a world of plenty to a world of shortages: we had become used to plentiful supplies of cheap food, energy, goods and technology-based services. Today in 2022, this is no longer the case. We are faced with shortages of essential food and energy, together with supply chain difficulties restricting the supply of essential goods such as semiconductor chips.

Remember Inflation? Well, it’s back! After the sterling efforts of Chairman Volcker of the US Federal Reserve in the 1980s, the wave of global goods deflation unleashed on the developed world by China in the wake of its 2001 accession to the World Trade Organisation, and finally the financial deflation forces which followed the 2008 Global Financial Crisis, inflation all but disappeared. Well as we can all experience for ourselves today, inflation is well and truly back and is pressuring our living standards.

Turning off the easy money tap: with the return of inflation, the huge waves of global liquidity unleashed by governments and central banks to combat first the Global Financial Crisis and then the effects of COVID-related lockdowns are slowly being reversed. Higher short- and long-term interest rates replace zero interest rate policies. Governments now have to begin to rein in heavy deficit spending as the cost of debt goes back up, increasing financing costs for governments as well as companies and consumers.

The Peace Dividend looks to have vanished, replaced by security focus: following Perestroika in the former Soviet Union…

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harrymunro

25th Apr '22

Thanks Edmund. On gold another viable option that may suit some is the physical purchase of coins which are capital gains tax exempt. Of course what comes with that is the question of how to store and there are losses made in the margin of buying and selling.

Howard Adams

Hi Edmund (and others)

(this might be a Monday morning blues posting, apologies up front :( )

A point of note I think quite important is the potential risk to the US dollar as the world's reserve currency.

There seems to have been several signals over past weeks that it's role might be under scrutiny, if not direct attack,

I have noted the following:

China raising possibilities of Saudi's accepting the Yuan instead of the (Petro) dollars for oil purchases.

Russia demanding purchases of oil/gas being transacted in Rubles with Europe.

Very recently, rumours that some Europeans might actually do this.

Russia placing a floor of 5,000 Rubles under the value of gold backed by their large gold reserve (I understand they hold the largest gold reserves in the world and have been building for a few years now, I believe China is the second largest holder in the world).

A seemingly tightening of relationships between Russia, China, India, Iran and Pakistan, while relationships between US and each of these seem to be weakening (indeed broken with Russia). As has, seemingly, the US/Saudi relationship.

Small steps (in the overall context of the financial system) but steadily increasing impacts of digital currencies on financial services, products and alternative stores of value.

Some rather pointed comments made in high places such as the IMF, G20 and other institutions about the significant influences the decisions of a few Americans sitting in the Fed. have across the world. Criticisms that this small group seem to be failing to give due considerations to how economies of very differing countries behave and are often disproportionately badly affected by Feb. diktats and decisions.

Personally, I cannot fathom out what any of this really means for me as a PI in the UK. But added to all the points Edmund has made above, I sense considerable instability emanating from this post Covid, post Ukraine world.

Regards

Howard

Indie

The FT’s Money Clinic podcast had an episode recently Is Gold the Safest Place to Invest?

The blurb: ”Investors traditionally turn to gold as a ‘haven investment’ during volatile times so it will come as no surprise that Russia’s invasion of Ukraine, as well as rising global inflation, have caused a jump in its price. But there are many ways to invest in gold and in this episode, presenter Claer Barrett, the FT’s consumer editor, visits the vault of a gold shop in Mayfair and speaks to FT columnist Merryn Somerset Webb about what role gold can play in an investment portfolio.”

Bullsnbears

Hi Edmund, thanks so much for your insight and thoughts. Very useful.

JohnEustace

Given the current situation in Shanghai and now I hear in Beijing it seems premature to talk about being in the post Covid era. There is still plenty of scope for the Chinese zero-Covid strategy to disrupt further. It may be obvious to us that this policy has to be abandoned, and I thought it might be after the Winter Olympics, but it seems that Xi Jinping intends to keep following this path until his re-election in November.

Harry Hindsight

Gold coin. Can always barter for a can of beans. Mr Wick stores under a concrete floor - but make sure have a good sledge hammer to hand presumably with a metal handle.

Armageddon = water, coal, gas, petroleum, food and weapons. Bottom line investment theme and will work up from there.

26th Apr '22

All

Further to my previous post about concerns for the petro dollar. I saw a snippet claiming Mondi paying Russia for oil in Rupees.

No idea if this is true as yet, though. Something to watch.

Bronstein

27th Apr '22

This is an excellent summary which has helped me clarify my own thinking on some of these points. I do worry about commodities prices, though. Do they really have further to go? At some point demand must dry-up and prices come back down to Earth? I also struggle with gold. Most other commodities I get because they get used to power cars, store energy, make food etc. but gold is just an inert block of metal that pays no dividend and for which the only value seems to be that which we humans have arbitrarily proffered on it. True the resale value has held up throughout history but, nevertheless. I still feel safer with assets that do something or can be used to produce something with a certain utility beyond just looking nice.

Snowbum

So maybe you should consider the question, what is money? There have been many forms of money over the course of human civilisations….

Gold is a store of value as it is not reactive, it has the greatest electron affinity of all metals, it is perpetual.

https://www.investopedia.com/t...

When the real interest rate is negative it’s bullish for gold, so until the central bankers are no longer ‘behind the curve’, gold is set to rise. Ignore it at your peril.

https://seekingalpha.com/amp/a...

More on petro dollar concerns.

Four European countries paid for gas in Rubles, according to Bloomberg today.

Putin stopping gas to Poland and Bulgaria because they refuse to pay in Rubles.

Very helpful. Thank you

I note the bull case for gold in the (year old) seeking alpha article at the above link is predicated on (1) increased negative falling real interest rates AND (2) a weakening dollar. While it's clear we have (1), we very much do not have (2). While interest rates are not be keeping up with inflation, the Fed is still the most bullish central bank when it comes to raising rates meaning, in relative terms, the dollar is strengthening (check charts of UUP). Do we need both conditions for a strengthening gold price or is one enough? Also, will the dollar be weakened by the apparent willingness of the Saudi's accepting the Yuan instead of (Petro) dollars for oil purchases? Is the potential, emerging soft alignment between Saudi's, China, India & Russia a real threat to the dollar? I guess it is. I think I may buy.

Is the dollar strengthening, thanks I hadn’t noticed :D

I prefer to use the USDOLLAR ticker for my charts btw.

The dominance of the dollar has been waning for years now, the Iranians and Venezuelans have accepted euros, yuan or whatever currency you’d like to pay with in recent times - I wonder why the US govt sanctioned those nations….

The Saudis will accept non dollar denominated payment soon too…. China has an oil futures market based on medium sour oil, who has a lot of that I wonder…. The rouble is now linked to gold….

Of course the USD hegemony won’t end overnight but it’s recent, blatant weaponisation, will drive other nations to diversify out of dollars as if they can just have their foreign reserves confiscated or sanctioned is it as desirable to have them?

The age of the article is not relevant , only the points it makes. Inflation is running well ahead of rates, the currently hawkish fed will be forced to pivot dovish again and cap the rate rises at some point as the conclusion states, or the US govt won’t be able to afford their interest payments on their massive debt so inflation is by design.

I’m bullish on gold but don’t feel the need to ‘sell’ this point to you :D

28th Apr '22

There's a good summary of how money is created in the modern economy in this BoE paper and accompanying video from their gold vault.

https://www.bankofengland.co.u...

Edit - video links still seem to be broken since the move to the new site. The Youtube video is found if you search there for CvRAqR2pAgw

Good article, well worth a read for a recap. I think the real story though is that we appear to be entering a new era where there will be 2 monetary systems in the world. A purely Fiat one in the west and an emerging commodity backed one in the East.

Or summarily as I read elsewhere: ‘one backed by gold and one backed by guns’.

29th Apr '22

Yep, you don't need to sell it to me. Happy to DYOR but happy to take advantage of you are an expert source ;). By coincidence, Daily Telegraph has an article in it's Money pages today claiming Goldman Sachs predict gold to rise to $2500 per ounce this year.

Market Musings 25/04/22: The End of An Era: What does the new post-COVID Era promise?

The End of An Era:
What does the new post-COVID Era promise?

Summary:

Where we have come from, and where we are going

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Edmund Shing

16 comments

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