Worldview Investing - Ruminations on the World Economy

We have written frequently about the harmful effects of government policies on the middle and lower classes throughout the Western world. Wage gains never keep pace with rising inflation. Ever more authoritarian controls over the public constrain their freedoms and limit their opportunities. No one in politics takes responsibility for these outcomes. Rather, those in power appear to be doubling down in their efforts to further enrich the elite at the expense of the workers who produce the goods and provide the services. A LendingClub report found that nearly two-thirds of the U.S. population now lives paycheck to paycheck, up from 61% at the end of the last year. Bankrate.com reports that three-quarters of respondents say that price hikes have hurt them financially. It is not their imagination. The US government admits to soaring inflation through their consumer price index (CPI) reports but the real numbers are far worse.

Investors are facing multiple crises that span the globe. The one captivating the most attention is Putin’s brutal invasion of Ukraine, the second largest country in Europe after Russia. With 43 million people it is the eighth most populous country in Europe. As we all are now aware, it borders Russia to the west. Ukraine has an ancient history. It has been continuously inhabited since 32,000 BCE. Its population now includes 78% Ukrainians and 17% Russians - the latter of which are gathered mostly in the eastern regions and Crimea. It has a long history of being dominated by foreign powers including the Mongols in the 13th century. For six centuries it was fought over and ruled by Poland, Austria, the Ottoman Empire, the Tsardom of Russia and most recently the USSR.

Whether you own a small neighborhood retail store or are the CEO of General Motors, you need to know whether the economy is shrinking or growing. If it is the former, you may decide to cut staff, reduce inventories and defer updating your technology in order to conserve cash. If it is the latter you may choose to preemptively hire staff and buy machinery and equipment to grow your output capacity in expectation of future sales growth. The typical way one gleans this important trend is to study gross domestic product (GDP) statistics.

Over the years there have been many dramatic thefts and cons pulled off by daring criminals. In 1963 thieves stole bags from a Royal Mail train in the UK containing over $3.5 million. The Antwerp Diamond Heist in February 2003 saw thieves make off with over $100 million worth of diamonds, gold, silver and jewelry from a heavily guarded vault in the diamond district. General Sani Abacha, governor of Nigeria in the late 1990’s, is believed to have stolen $3-5 billion from his government. Philippine president Ferdinand Marcos pocketed between $5-10 billion in bribes and money stolen from the government. “Baby Doc” Duvalier in Haiti stole up to 5% of his nation’s GDP. Bernie Madoff conned investors out of billions of dollars in his huge Ponzi scheme. But these miscreants are minor league players in the world of financial embezzlements.

Inflation is at thirty-year highs. Markets are at extreme over-valuations. Fuel and winter heating costs are spiking. Governments are seeking to dictate ever more of what you can do and when you can do it. Real interest rates are at negative levels. Politics has never before been so divisive. Social activists are seeking to overturn national histories and cultures. Why have things become so fraught? Lance Morrow, writing for the Wall Street Journal, observed that everything in politics, the economy, and society is threatening to self-destruct. He tartly explained why: We are “living in a golden age of stupidity.”

The Fed assures us that the major US banks are in good health and have passed rigorous stress tests that ensure taxpayers will not have to bail them out yet again at the next financial crisis. The banks’ health is critical to the US economy. When they are stressed their ability to lend to corporations and individuals is severely restricted and the economy quickly suffers.

We want to be able to retire with enough money to support ourselves in reasonable comfort. That means saving relentlessly over the years. It also means anticipating the financial threats that face us now and in the future. We must correctly identify our enemies.

The inflation debate continues.  Of course, no one knows what the future holds.  If they did they could quickly accumulate all the wealth in the world.  While many people have an opinion about what is to come, it is just that, an opinion.  The great frustration is that very cogent arguments can be made for both temporary and long-term higher prices.  John Mauldin recently concluded his annual Strategic Investment Conference.  He presented many heavy-hitters in the world of economics, finance and investment.  Most of them addressed the inflation debate.

We are not predicting an imminent financial crisis.  But what has transpired over the last decade ensures that we will suffer major pain at some point. It is difficult to wrap one’s arms around what has happened since the 2008 sub-prime mortgage debacle.  But what has happened during just the last year is astonishing.  If you tally up all the money the Fed has  ever printed , over 40% of it was printed in 2020. 

We are all familiar with the aphorism that, “those who do not know history are doomed to repeat it.” But even those who do know history are often doomed because they convince themselves that “this time is different.” Some events occur infrequently, so we are repeatedly surprised by and unprepared for them, like recessions, pandemics, and social unrest.