Many emerging markets are now turning to submerging markets as country
after country is experiencing falling economies, currencies and stock
markets.
The currency is often the best indication of a country’s economic health.
Just look at these six currencies submerging into obscurity:
CURRENCY CONTAGION IS SPREADING
But these are just some of the worst ones. The currency collapse is
spreading like wild fire. High inflation and hyperinflation is hitting
country after country. Here are some more countries with collapsing
currencies in 2018: Sudan -61%, Angola -39%, Liberia -18% and India -12%. The
list goes on. There are at least another 15 countries whose currencies have
lost 10% or more against the dollar in 2018.
GLOBAL STOCK DOWNTURN STARTING
Many major stock markets around the world are also telling us that the
global economy is now starting a secular bear market. China is down 25% in
2018, Brazil – 20%, Turkey -23%, Italy -16%, Spain -15%, Germany -10%, UK –
10%. The Emerging Market ETF is down 20%.
The BRIC countries – Brazil, Russia, India and China encompass 40%
of the world’s population and has a GDP of $20 trillion. Therefore, the
weakness that these economies are showing is an ominous sign for what is to
come. Their downturn so far is obviously not on the scale of
Venezuela or Argentina but it is an indication of how the world economy is
starting to fray at the edges.
EMERGING DOLLAR DEBT DISASTER
An economic downturn would not be so serious if the world wasn’t indebted
up to the hilt. Western economies have debts that they can never repay but it
is even worse for submerging markets since their growth has been financed to
a large extent with US dollar debt.
Submerging market debt was $8 trillion in 2000 and is now
approaching $50 trillion.
The dollar denominated part of this debt has grown exponentially and since
most of these countries’ currencies are falling substantially against the
dollar, they are likely to default on their debt in coming years. As the
graphs show below, dollar denominated debts have gone up 5 to 10
times for most of these countries. The currency of virtually every
country in the graph, is coming off rapidly and will continue to fall until
it becomes practically worthless.
ARGENTINA 60% INTEREST RATE
If we have a quick look at Argentina, we can see the pattern that will hit
not only emerging markets but also the West. With high inflation and the Peso
collapsing 50% this year, Argentina has raised interest rates to 60%.
No country can cope with interest rates at 60%, especially not one with a
heavy debt burden. So rates at that level is total lunacy and will quickly
kill the patient if it continues.
The message cannot be clearer. Debt growing exponentially and
totally out of proportion to the growth of GDP will eventually lead to a
currency collapse and then default. The world could deal with
Argentina defaulting. It has happened numerous times already. Same with the
catastrophic Venezuelan economy. Although, there is a total collapse of both
the economy and society, it will not in itself have global ramifications.
MOLEHILLS MOUNTING
As often is the case trouble starts in the periphery. So what we are
seeing now are not single incidences of a localised problem. Molehills are
popping up in country after country and it will soon spread to the West.
PATIENCE – A LOST VIRTUE
A few years ago I was asked in an interview what were some of the most
important things I have learnt during a long life in business. “Patience” was
my very clear answer. When you are young, everything must happen quickly.
Instant gratification is a major part of today’s culture with most people
being restless and ungrounded. It is the same for young and old. No one can
sit still for more than a second until they get their iPhone out. Mobile
phones are today’s cigarettes, without them people get anxious and twitchy.
But sadly they also get twitchy with them.
Even worse, when young people get together, it is more important to
communicate with the rest of the world on Instagram or Snapchat rather than
to talk to your friend sitting next to you. And anyone who sends an email or
a message expects an instant response. One hundred years ago you wrote a
letter to someone on the other side of the Atlantic and it would take many
weeks before you had a reply. In many respects quality of life was better
then than today. But the technological evolution is happening at an ever increasing
speed.
WILL ROBOTS AND AI MAKE PEOPLE SUPERFLUOUS?
Robots and Artificial Intelligence are gradually taking control of
everything. I remember Sir Clive Sinclair who invented the first mass-market
computer for under £100 in 1980 saying already at that time that eventually
computers will be more intelligent than human beings. How right he was since
this is now happening with AI. Sinclair also stated that as computers take
over our lives, their will be no need for human beings who will become
extinct. He considered that the only difference between humans and
computers would be if humans had a sole. But he didn’t believe that was the
case. So with AI, are human beings making themselves redundant that
will eventually lead to our extinction? Frightening thought but not
impossible.
Coming back to patience, is a virtue that is sadly disappearing from our
lives. When it comes to investment decisions, it is today all about
short-termism. But Warren Buffet has taught us that longterm value investing
can be incredibly successful. So until AI totally takes over our lives and
also makes all investment decisions, patience will remain a very important
virtue.
GOLD – A BARGAIN IN EARLY 2000s AND A BARGAIN TODAY
In the late 1990s I considered that the risks in the world economy were
becoming very dangerous. After the 80% tech crash of 2000-2, we decided that
risk still remained very high due to debt and derivatives. The gold price had
not reflected this risk and after a 20 year fall from the 1980 $850 peak,
gold had bottomed at $250 in 1999 and was still only at $300 in early 2002.
We considered that to be a bargain, especially since it looked like gold was
turning up. Remember that to be successful in investing you mustn’t
buy what everyone else buys, like gold at $800 in 1979 or the Nasdaq at the
end of 1999. Whenever the media starts covering an asset class on
the front page, then the risk is already much higher. The time to buy
is when an asset is unloved and undervalued like gold in 2002.
Gold then started a six year uptrend until a temporary peak at $1,030 in
2008. The next intermediate top was in September 2011 at $1,930. Gold held up
between $1,600-1,750 until 2013 when it came down to $1,200. Since then gold
has been in that region for five years.
We have not changed our views on risk or gold as protection against global
risk. Obviously we have not sold any gold. Patiently we have waited for
several years since the last peak. The reasons for holding gold in 2002 have
certainly not diminished. Instead since 2006, risk has increased
exponentially with the debt and asset explosion the world has experienced. If
we add to that derivatives, pensions and other unfunded liabilities, total
risk is now in the Quadrillions of dollars.
Thus the reason for buying gold today is much greater than in
2002. But the price of gold and silver is not reflecting this risk.
Sentiment is similar to what it was in 2002. Gold and silver are again
unloved and undervalued. This means that the timing is perfect for acquiring
gold and silver for wealth preservation purposes.
PROBLEMS IN PERIPHERY WILL SPREAD TO THE CENTRE
To understand what will happen next, let’s go back to the periphery to see
what has hit some countries already. A drop in the currency is just one side
of the equation. The other side is of course how gold reveals the
mismanagement of the country and also protects against a total loss of
wealth.
Venezuela is a clear basket case with the currency worthless. But with a
gold price at 300 million Bolivars, any Venezuelan who owned a bit of gold
from the beginning of this year or even better for a few years, would not be
in the desperate situation that almost everyone is in currently.
The same with the other countries. By holding physical gold and
some silver, you are not just insuring your wealth from the destruction of
paper money but also from a potential bail-in or a collapse of the banking
system.
We have a number of warning signs from around the world currently. The Dark Years have
already started in the periphery and will move quickly to the centre. Some
stock markets, like in the US, are still near their peak. Fundamentally the
bubble markets can crash at any time.
The technical signals are now indicating that a crash is imminent.
Same with gold and silver. They are poised for a resumption of the long term
uptrend and a major move up.
These moves could happen any day. If they are delayed for a brief period,
it would make no difference. The world economy will turn this autumn and the
consequences will be horrific for the world.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 442 136 245
Matterhorn Asset Management’s global client base strategically stores an
important part of their wealth in Switzerland in physical gold and silver
outside the banking system. Matterhorn Asset Management is pleased to deliver
a unique and exceptional service to our highly esteemed wealth preservation
clientele in over 55 countries.
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