A SUBMERGING GLOBAL ECONOMY

By Egon von Greyerz

Founder and Chairman

September 13, 2018

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 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. 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 soul. 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.