Dear Markets and Money,
You have been talking about your “Trade of the Decade” to buy gold for a long time. Do we have to hear about it for the rest of the decade?
I read DR because you are irreverent and contrarian. But now that the gold trade is becoming widely endorsed, isn’t it time to start looking somewhere else?
Just after the US invasion of Iraq, when the USA was still purportedly looking successful in Iraq and was therefore eyeing out the next step of invading Iran, Marc Faber was advocating purchase of Iranian real estate as a classic contrarian play. That’s the sort of contrarian, off-the-wall thinking I am used to from DR. But frankly, of late, your message is sounding a little hackneyed.
Surely when everyone is spruiking a particular trade, it’s time to move on. I recall when the AFR Boss Magazine carried a front page article with a picture of Ben Gray, Managing Director of Texas Pacific Group in Australia, with the title “Kings of Private Equity”. That article pretty much rung the bell at the top of the credit-induced private equity bubble in Australia. Is gold now in a similar position?
Come on DR, give us some more of your off-the-wall thinking. If you don’t, I shall be forced to start being contrarian about where I get my market information, and maybe even start reading some stock-broker research (I said “maybe”).
Yes yes. It’s a good point. We’ve thought about this a lot lately. Here’s our answer…
Ten year ago when the Markets and Money started, we were way ahead of the curve in casting doubt on the dot.com boom. Later we turned bullish on gold when it languished below $300. Then we spotted and called (albeit two years early) the massive bubble forming in the U.S. mortgage market (mortgage bubble is a better description than housing bubble.) Peak oil, the bear market in the U.S. dollar… all of these positions which were delightfully kooky even three years ago are front page news now.
What is not on the front pages of the newspapers today that you should be reading about? Well, plenty. The trouble is, none of it is the sort of thing you can immediately turn around and trade or invest in. But since you asked…
We believe the major networks and systems that have supported the last 200 years of industrial economic growth and political integration are under heavy stress. Some of them will not survive. This includes the world’s physical networks for distributing energy and physical goods. It obviously includes the global financial system.
The failure of these systems is going to lead to a contraction in trade and economic growth and gradual political disintegration in places where only cheap money has kept people tied together economically.
There will be an interlude in the great progress of globalisation, characterized by severed connections in trade and commerce. These networks that have been so intricately built up over the last 100 years become overloaded and fail, or are deliberately hacked (power grids, internet cables, you name it).
But hey, we are not hoping for a return to the Dark Ages. The systems that replace what we have now will have some key properties: resilience, sustainability, adaptability to name a few. The world will also become a looser network of smaller economic units. The nation state model itself is going to be a victim of more expensive energy and credit.
Large central governments all over the world have made promises to their populations that simply won’t be fulfilled in the coming years. The centralised nation state will be unable to deliver some of the basic services its citizens expect from it (physical security, retirement security, functioning road, water, and electric networks). It will be challenged by smaller groups (gangs, drug lords, tribes, warlords) who have actual physical control over neighbourhoods that the representatives of the State (the police and the Army) no longer venture into.
The world will have more gated communities of people who live together out of common ethnic or religious and racial interests. The spaces between these gated cities will be more unregulated, ungoverned, and unpopulated.
Large institutions, like dinosaurs, will give way to smaller, more agile, more adaptable institutions. The city-state model (Singapore and Hong Kong) for example, will become more prominent. Security will privatised. Identity management and permission based travel will become the norm.
It won’t be easy for institutions to adapt. But city states will do it better. And even they will have trouble. Resource-poor city states have to get food, fuel, and water from somewhere.
Yet much of the public-private research and development in Singapore right now is pursing exactly these problems. For investors that’s where all the interesting action is: firms that offer platforms to replace the systems we see failing all around us today.
So you see, the newspaper headlines chronicle the destruction of the old systems. WE live in one of those eras of history where old orders are falling apart and only gradually being replaced. The downside is that it’s full of uncertainty and volatility.
The upside is that it’s full of opportunity. From an investment perspective, wealth preservation is the first order of business. Keep what you’ve got. This is why we think that even though it’s seven years on, the trade of the decade still has considerable life in it.
But what about wealth creation?
Well, that requires a little more forward thinking. There isn’t really any low-hanging fruit in world equity markets anymore. It’s all been picked.
If you want the bigger returns, you have to go out further in time and imagine the world we’re going to wake up to in ten and twenty years. That process, like any kind of forecasting, is fraught with danger. But that’s where we reckon you’ll have to move your mind to if you want to make it to the far side of this crisis with enough capital to have some interesting choices.
Markets and Money