Social Exclusion is a Bigger Threat Than China

All steady on markets last night. The long weekend in the US obviously calmed a few nerves.

Gold was down a little.

Everyone wants to pretend China’s economy grew at 6.9% last year so markets can keep up appearances.

Our market should take some comfort today from a stronger ore price and a steady US lead.

From where I sit, it’s an uneasy calm.

The vast and growing gap between rich and poor has been laid bare in a new Oxfam report showing that the 62 richest billionaires own as much wealth as the poorer half of the world’s population.

The Guardian, 18 January 2016

This is the unintended (or perhaps it was an intended) consequence of what happens when you print trillions of dollars to prop up an economy.

Those standing closest to the money get the lion’s share and the rest get to squabble over the scraps.

QE was supposed to deliver the wealth effect and it sure did. It just wasn’t the wealth effect the central bankers theoretical models predicted would happen.

The theory was to make money freely available to push up asset prices. Those owning the assets would feel wealthier. Apparently the feel-good effect of being wealthy would result in purses and wallets being opened wider. All this anticipated caring and sharing would then trickle down through the economy and everyone’s lives would be enriched.

Great storyline for a children’s book…we all live happily ever after with milk and honey flowing freely from our central bank saviours.

Back to reality.

Anything designed by academic bureaucrats — ably assisted by Wall Street appointed consultants — is all but guaranteed to result in an outcome where 1% get 99% and 99% get diddly.

The Fed’s ‘trickle up’ wealth effect has been an outstanding success. According to Oxfam, in 2010 it required 388 of the world’s richest billionaires to own as much as the poorer half…compared to 62 today.

Making the wealthy wealthier and the poor poorer is a recipe for social discontent.

This divide between the haves and have nots is also playing out in Europe.

Germany’s intake of one million immigrants is not going as smoothly as planned.

The sexual assault allegations in Cologne are the thin edge of the wedge. Far right wing groups will no doubt use the events in Cologne to incite racial divisions. According to NBC News, the first 4,000 copies of Adolf Hitler’s Mein Kampf have sold out in less than a week after hitting German bookstores.

The son of a good friend is working in Munich. He tells me the neo-Nazi skin heads are on the trains, in the streets and itching for a fight.

Angela Merkel is under pressure from her allies to stem the flow of refugees. According to the Financial Times on 18 January 2016:

A prominent ally of German Chancellor Angela Merkel has threatened to take her government to court over its “open doors” refugee policy as political pressure grows for the chancellor to reduce the number of new arrivals.

Bavarian state premier Horst Seehofer said he would send the federal government a written request within the next two weeks to restore “orderly conditions” at the nation’s borders, through which one million migrants and refugees passed last year alone.

1 million refugees are creating tensions within Europe, what about another 20 million?

This is the estimated number of people who have been displaced or are escaping violence in the Middle East and Africa. What does Europe do? Close its borders? Turn back the boats? Watch as people starve, are murdered or drown?

This is a human rights, social and financial problem on a scale we cannot imagine.

Some European nations may open their borders to increased refugee intakes, but others may not — for political and/or economic reasons.

Do we go back to a Europe with border controls? The potential collapse or at least significant restructuring of the Euro zone may be the end result from this humanitarian crisis.

Adding to Europe’s list of woes is Greece.

For us in Australia, Greece is out of sight and out of mind. But it hasn’t gone away. Greece’s financial problems haven’t be solved…just postponed.

Murphy’s Law almost assures us that Greece’s debt crisis will once again be front and centre just when the refugee crisis is at a flashpoint. Perhaps, Greece — with a leftist Government — will opt to exit and leave a trail of sovereign defaults in its wake.

If Europe is teetering, then the political willpower in Britain may wane. Britain might also opt to exit the European Union.

Social discontent provides political opportunists with the perfect platform to appeal to the masses.

Anti-Muslim parties are gaining traction in central and northern Europe — Sweden, Denmark, Finland and the Netherlands.

In France, the far right National Front gave a good account of itself at the recent regional elections…nearly winning power. France also has a very strong anti-Muslim and anti-refugee political movement. The National Front leader, Marine LePen, is contesting France’s 2017 Presidential election and has a very real prospect of winning…especially if there are more terrorist attacks and social unrest.

As mentioned previously, the almost untouchable Angela Merkel is under a lot more friendly fire these days. Her position is no longer as assured as it once was. Will she bow to political pressure and close Germany’s borders?

In Italy two anti-euro parties are attracting a lot of attention in recent opinion polls.

Spain’s recent general election, held on 20 December 2015, provided no clear winner. The left-wing Podemas Party — established in 2014 with a platform of fixing unemployment, inequality and economic malaise — managed to win 69 out of 350 seats.

If a government cannot be formed and another election is called, the opinion polls predict Podemas would increase its number of seats.

While China and its slowing economy dominate the headlines, for me the real issue is the growing level of social exclusion in the world.

Angry, hungry, impoverished people tend to riot.

If you want proof of this in recent times, look no further than the Arab Spring uprising. People had enough of being oppressed and not being listened to.

People power is a very potent weapon for change. But that change may not be for the better…opening doors for crackpot politicians with protectionist economic theories.

It is only whispered — for fear of spooking the masses — but we are in a deflationary world.

China is taking measured steps to protect its economy by devaluing its currency…to make exports cheaper and imports more expensive.

Europe will follow with further measures to take the euro lower to maintain the competitiveness of Germany’s export machine…they need the money to fund social integration programs.

Japan won’t sit idly by and watch their export sector lose ground.

All these measures make the US dollar stronger, which squeezes emerging markets loaded with US dollar debt.

The squeeze is on. Financial hardship will only intensify the simmering social unrest caused by the wealth divide and wholesale displacement of people from their lands.

While all eyes are on the markets, an increase in social tensions could be the X factor that brings this debt laden world to its knees.

Vern Gowdie,

For Markets and Money

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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