QE must go to infinity or the Fed will be history.
– Jim Sinclair
The Reversal of Globalization: Why we Desperately Need a New Model for Economic Advancement
The biggest theme I see in the world economy at this moment is a massive reversal of the trend to globalization and a move toward “local” thinking and acting on every level of human society. Many people on this list will read this and be revolted by the concept and indeed there are reasons for concern. That said, it is important to put all things in context. The world has seen a massive secular trend toward free trade for decades and to think that this can or will just continue at the prior pace forever is nonsensical. I am in the camp that believes free trade and globalization have generally been a major positive for the living standards of most of humanity (just look at the millions that exited poverty in India and China alone), but that there are limits to the trend in a world with limited resources in the short-term. So just as knowledge, standards of living and technological progress have generally advanced since the Dark Ages, there have been periods of disruption where things turned the other way, regressed and led to some monumental disasters and human suffering. I believe we are at one of those periods and there is no way around it. The best we can hope for is to understand the limits to the old fiat money printing, unlimited credit, environmentally destructive, “growth at all costs model” and readjust or we are doomed for a very dangerous period on the horizon.
Bureaucracy Gone Wild and the Return of Nation-States
Back in 1H08 I wrote repeatedly that commodity prices were in a bubble and would crash. I believed this because it was clear that the world was growing way too fast for the near-term resource availability of the planet. This was particularly the case for China and India, where leaders were competing with each other for who could grow the fastest without any regard to the unsustainable depletion being done to resources globally. Now I am not a Malthusian in the sense the term is so often used. I do not think there is this fixed long-term limit to the planet’s ability to provide for an increasing population as technological advancements have over time put to rest such nightmarish predictions. That being said, there are certainly limits to growth in the short-term. Think about it, if there weren’t then why wouldn’t governments just print infinite money and create infinite credit to make everyone wealthier and happier? I think most people understand inherently that this is not feasible but this is essentially the EXACT policy that governments and Central Banks around the world are implementing and it will lead to complete societal collapse and destruction of economies all over the world if it is not reversed soon.
In China, India and elsewhere in Asia we have already seen for months now serious evidence of high inflation in both real estate and everyday prices. This is because we never dealt with the issues of three years ago. Basically, governments everywhere have no idea what they are doing and are hopeful that by printing money and creating credit they can just make the very real problems that existed going into 2007 just go away. That way they can continue to get re-elected and live out the rest of their lives comfortably in power. It is not just governments though. What has essentially happened is that the governments of the world have pretty much decided to team up with the very wealthy and powerful large multinational corporations and big financial interests to protect each other’s wealth and the status quo. This is why the tea party movement and very far left liberal progressives have so much in common with each other on certain issues like the Wall Street bailouts and the “Audit the Fed” bill. It is because the entrenched special interests in this country, whether they are large financial institutions, bloated unions or corrupt politicians have basically sold out everyone else for their own benefit. It is so obvious. This is why the fake left-right, Democratic-Republican paradigm is breaking down. Many are making pathetic attempts to keep this phony fight alive by calling tea party protestors “racist” or far left progressives like Dennis Kucinich or Alan Grayson radicals because they actually want to make real changes. The overly simplistic left-right paradigm propagated so heavily in the media is a distraction to keep people bickering on issues of lesser importance. Let’s get all angry at each other rather than get mad at the fact that Central Banks print currency at will and can direct it to whomever or wherever they want. The idea that Obama is unpopular in his own party because he fails to be aggressive enough on things like healthcare is pure propaganda at its finest. They are upset because he bailed out and now protects the connected (again this means everything from unions to financial oligopolies) and continues the aggressive erosion of civil liberties. Has anyone read the recent Act proposed by John McCain and Joe Lieberman that essentially allows for the indefinite detention of American citizens without trial? An article on it is at the following link from the Atlantic: http://www.theatlantic.com/politics/archive/2010/03/a-detention-bill-you-ought-to-read-more-carefully/37116. You can link to the Act itself from the article and it is a quick, worthwhile read.
What is truly ironic about the whole mess we find ourselves in is that it seems the greatest fear of those that want to just keep pushing forward on the prior economic model that totally died in 2008 but has been resuscitated briefly by the printing of monopoly paper is that the world will move away from globalization into more isolated and potentially aggressive nation-states. The irony is that by doing what they have done they are not going to stop that progression but rather will make that outcome that much more extreme once it ultimately presents itself. The whole crisis in Greece has made me learn a lot more about the European Union and its origins. Many Americans may not realize it but one of the primary objectives (if not the primary objective) of those that first envisioned it was to create a peaceful economic union that would put an end to the prior history or warring nation-states. What is most interesting and concerning about the current situation is that growing populations across Europe seem to be increasingly skeptical and hostile to what is being seen as an undemocratic European Commission. Now I am no expert on this and would love to hear those across the pond that have insight into this matter. In any event, the following interviews are very interesting and I think many Americans that are not as up to speed with what is happening in Europe should take a listen. I am not saying I agree or disagree with what these folks are saying (quite frankly I just don’t know enough about Europe) but it seems these ideas are gaining traction.
In any event, as can be seen by some of the nasty World War II commentary and other rhetoric from various politicians in Greece and Germany, large political blocs are indeed fragmenting and nation-states are remerging in an anti-globalization push. Ironically, while the current policies being implemented are trying to stem this tide I think they will in fact make it much worse once the policies are seen as an abject failure.
Why the Above Commentary Matters to Investors
Ok, so what does all of the above mean to investors? If we are looking at investment from the serious angle rather than as a casino game, if I am right about the above it has tremendous implications. First, governments and Central Banks have already chosen their poison: Massive currency debasement. Anyone that owns sovereign bonds is in the crosshairs of what is about to be one of the most significant debasements of currency in human history, especially if you own U.S. or UK debt. If you do own significant amounts of such bonds remember one thing, you are betting that Central Banks and governments reverse policy and stop the printing. As Jim Sinclair notes at the top of this report “QE must go to infinity or the Fed will be history.” I actually think the Fed may be history in either event but that’s beside the point. Now these authorities may decide for a brief respite (such as the Fed claiming it will cease buying MBS at the end of March) and this could very well lead to a major correction in stocks and an erroneous rush back to sovereign bonds; however, this would only give further cover for more QE and that’s exactly what they will do. In such an environment where basically all fiat currencies are being systematically debased the number one area for protection will be everyday commodities that cannot be printed. The equities of such companies should be greatly overweighted as a result and should be bought on pullbacks. While two years ago governments had a choice to let the system come down and rebuild it on a solid footing, those days are now long gone. We have rebuilt our paper pyramid global economy on a pile of even more unsteady sand and it’s only a matter of being in the right assets and bracing for the impact. Just as commodities served as the canary in the coalmine in 1H08 that something was just not right, so too will they in the months ahead.