Economist David Mitchell shares his view of the post-Covid macroeconomy.
The world is already halfway through 2020 yet the pandemic is still raging on, leaving trails of destruction in its wake. The result is countless closures and measures just to try and keep things afloat. Countries are already feeling the heat of the resulting economic fallout as many businesses can no longer afford to remain closed and industries are trying hard not to hemorrhage more money.
The outlook in Singapore looks just as bleak. Analysts are already expecting that the country’s economy will be amongst the last to bounce back from the pandemic, with Q1 GDP already shrinking 2%. Growth forecast for the rest of the year is in the red with an expected further downturn by -2.8%, according to a Fitch Solutions report. Worse, the closure of production plants across China in January to February caused Singapore’s manufacturing PMI to fall to a four-year low, a DBS Group Research revealed.
It begs the question: how can the regional and Singapore’s local economy survive this crisis, and when it does, how will the aftermath play out?
Singapore Business Review talks to David J Mitchell, founder of precious metals trader Indigo Precious Metals (IPM), whose three-decade long record in the financial industry has helped them navigate the current slump. He explains how his company and the precious metals industry are holding on amidst the pandemic, and what he thinks are the far-reaching economic effects of the ongoing crisis.
What expectations do you have for the macro economy as a whole in Singapore and the wider Asia-Pacific region?
I study the broad based global macroeconomic picture; trying not to discount any particular regional landscapes or anomalies. But firstly at this juncture it must be clearly acknowledged by all concerned that this is a global crisis, no one particular region of the world is sitting prettier than another. Covid-19 was the perfect ‘black swan’ deflationary trigger for the world to fall into crisis in unison, but it must be noted that there were already a series of fundamental and structural events that were leading us here.
Singapore itself is likely to be somewhat sheltered from this once-in-a-multi-generational storm, but sadly it will not escape entirely.
Every global economy has fed off the same ‘kool aid’ of easy and cheap money since the Global Financial Crisis of 2007 - 2009. Global policy makers from China, USA, UK and Europe have led the charge in kicking the proverbial ‘can down the road', effectively compounding and twisting the final and painful economic resolution by many multiples.
Our central bankers in particular have certainly led us down a dark path insofar as supporting the breathless expansion of our global debt crisis. In 2008 when the Western banking system was crippled we needed Quantitative Easing (monetary expansion), effectively providing tsunamis of liquidity and zero percent interest rates to support this monetary expansion as a tool to prevent the money supply from contracting. The liquidity crisis of 2008 has, as a result, morphed into the largest global debt crisis versus GDP ever recorded and wholeheartedly supported by government and central bank largesse.
There are several trains of economic thought from here on which have been debated by the macroeconomic fund management community. On the one side we have the devastating deflationary argument where collapsing money velocity feeds on itself in debt deflation; destroying pretty much all asset class valuations. This view is fully corroborated by the global bond markets. On the other side of the argument, governments and central banks stand resolute in exploding money supply numbers in the fight against debt deflation and the insolvency crisis; in the vain attempt to create long-term inflation in the hope that it will deteriorate the effects of the global debt crisis. For example, the USA growth rate of “independently restored” M3 money supply (USA Fed no longer reports M3) is reportedly running at an annualised rate of over 80 per cent since mid-March 2020, this number is simply gigantic. Globally it has been less extreme but the levels are still unprecedented in the post-War era.
My own analysis is more biased towards the third view which is an eventual stagflationary outcome. That is, a contradictory economic situation driven by very low economic growth, high unemployment and price deflation in classic asset classes. This is effectively economic stagnation accompanied by rising prices (i.e. inflation) in food, water, energy and other vitally important assets off the back of continued monetary debasement.
Which industries do you believe will be hit hardest; and/or recover strongest from the global recession that is expected?
This is a very exciting period in history, the burning down of unsustainable industries and scorching the dead wood away from tired old business frameworks that have been propped-up by cheap money. It will eventually lead to a new age of productive growth generated by leading technologies in conjunction with a new-found monetary system that is not based on a never-ending debt and energy growth system to sustain itself. A system that will not allow governments to make unceasing fiscal promises to engender their time in office through misguided policies. Note - I am not suggesting a new fixed gold standard!
Major changes will however, not come easy, and governments as well as special interest groups will fight them tooth and nail in an attempt to maintain the status quo.
The hardest hit industries I believe will be the property sectors, leisure and travel, as well as the classical banking sector as it presently stands; to name a few.
How about your industry – the precious metals business? How has that been impacted by the pandemic and/or lockdowns? Is there a ‘rush to gold’ taking place or expected across money markets?
We are in the throes of a global debt and insolvency crisis, and money markets are seeing something of a continued rally in debt instruments, with the desperate hunt for yield and protection. In my view this will clearly end in disaster considering yields are approaching zero or already negative alongside the continued issuance of enormous new debt on top of the old debt. Loss of confidence in the strategy of holding debt with guaranteed capital losses is not particularly attractive to anyone. The markets will eventually start to sell down their exposure to debt instruments once outright debt monetisation is instigated, or inflation creeps back into the CPI number. Simultaneously, the large and global need for money to fund debt-servicing liabilities will contribute to the “big squeeze” for funding and higher interest rates further down the line, compounding the economic pain.
Precious metals on the other hand have yet again confirmed their premier position as the classical crisis hedge with zero third party liability. While the global monetary debasement continues unabated, investment funds will continue to direct their flows into hard, wholly segregated precious metals as a critical wealth preservation asset class.
This is a diversification into a non-correlated asset class that’s become very important to investors, especially as there is currently an unsustainable price undervaluation in precious metals which is causing a worldwide increase in demand. Gold has also been officially reclassified by the Bank for International Settlements (BIS) as a “Tier-1” asset on a banks' balance sheet and has therefore been recognised as the ‘true money of last resort’ since 2019.
My industry does have its extreme difficulties currently with global supply chains shut down as a result of Covid-19 lockdowns from mine production, to refining, recycling, mint production and logistics in moving investment metals across the world, coupled with a huge increase in investor demand. This has created shortages as well as a back-log of orders for physical delivery.
What threats and opportunities are there for investors in times of upheaval such as these?
In all economic cycles but particularly in a major crisis, there are great trading and investment opportunities which arise alongside the deterioration in the value of assets that were previously considered by the majority to be sensible (property, stocks etc..).
Having a well-balanced portfolio and re-weighting these regularly (as we do for our clients with Auctus Metal Portfolios) as these cycles and the crisis unfolds is of paramount importance.
As the economic picture develops in each of the 3 scenarios that I mentioned earlier, either outright deflation, high inflation or stagflation, investments in physical precious metals will outperform, making it a clear asset class allocation that all investors should have, irrespective of which of the 3 economic environments unfolds.
We are also facing a global US dollar shortage with a reported US$20 trillion open carry trade (debt denominated in USD exposure held in foreign countries) so I have been a very long term US dollar bull and continue to be over the next couple of years. A continued rally in the US dollar will however tighten the noose around debt exposure denominated in USD and will further compound the debt deflation cycle, so an active US Federal Reserve will continue to offer markets USD swaps in an attempt to contain the economic pain of a rising dollar.
Clearly all of this is leading to greater volatility in the markets over the next few years with numerous false dawns driven by the hard hand of government and central bank intervention. This debt cycle will have to run its course (water always finds its way downhill) and hence a global debt deleveraging event needs to be worked into your mind-set with a clear idea of how this will affect the overall holdings in your portfolio.
I am afraid the old normal has well and truly left us behind.
Any other tips for investors at this strange and volatile time?
Be very careful out there and actively re-evaluate what you are saving in, as well as the makeup of your overall portfolio.
It is critically important to avoid various paper instruments such as ETFs that purport to represent gold or precious metals. These products are only trading vehicles and not wealth preservation assets. I must emphasise this as we have entered a truly historical insolvency crisis event and therefore ensuring that there are no claims to your assets, no liabilities or third-party risk whatsoever is absolutely essential.
Savings are an essential ingredient and higher net savings can help you move into opportunities as they arise. But you must be extremely cautious in what you save in. If, for example, you save in the government's currency that only pays sub-standard interest rates and is set to be considerably debased; then saving in real money (i.e. gold) is a natural choice, given the intrinsic wealth preservation component it offers.
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