At the risk of boring you by repeating myself, now at this beginning of the new year and with the publication of my book Principles for Dealing with the Changing World Order, I want to concisely convey the most important thoughts I have about the paradigm we are now in, which is a result of how the world order appears to be changing. To be clear, while I express concerns and risks, I believe that we collectively have the power to manage our challenges well if we are smart and considerate with each other. Also, please know that I am not sure that any expectations I have are right. I’m just passing along my thinking for you to take or leave as you like.
MY CONCLUSIONS UP-FRONT
The world order is changing in important ways that have happened many times before in history, though not in our lifetimes. How the world order is changing has created the paradigm that we are in. By “paradigm,” I mean the environment that we are in. Paradigms typically last about 10 years, with occasional big corrections within them. They are driven by a persistent set of conditions that takes those conditions in a swing from one extreme to an opposite extreme. Because of this, each paradigm is more likely to be opposite than similar to the one before it. For example, the Roaring ’20s were followed by the depressionary 1930s, and the inflationary 1970s were followed by the disinflationary 1980s. The assets and liabilities that you would most like to have, and those that you would most like to avoid, change with the paradigm that exists at the time. For example, in the Roaring ’20s you’d want to own stocks and avoid bonds, while in the depressionary 1930s it would be the opposite; in the inflationary 1970s you’d want to own hard assets like gold and avoid bonds, while in the disinflationary 1980s you’d want to own financial assets and avoid hard assets.
For reasons explained in this report, I believe the current paradigm is a classic one that is characterized by the leading empire (the US) 1) spending a lot more money than it is earning and printing and taxing a lot, 2) having large wealth, values, and political gaps that are leading to significant internal conflict, and 3) being in decline relative to an emerging great power (China). The last time we saw this confluence of events was in the 1930-45 period, though the 1970-80 period was also analogous financially. In this piece, I will explain my reasoning and show charts that display these things happening. (For a much more comprehensive description, read Principles for Dealing with the Changing World Order.)
What should one do in this new paradigm? This paradigm is leading to a big shift in wealth and power. Naturally, as a global macroeconomic investor, the economic and market behaviors in this paradigm are top of mind. I think one should consider minimizing one’s ownership of cash and bonds in dollars, euros, and yen (and/or borrow in these) and putting funds into a highly diversified portfolio of assets, including stocks and inflation-hedge assets, especially in countries with healthy finances and well-educated and civil populations that have internal order. These things are especially important in this paradigm. In brief, I think one’s assets and liabilities should be well-balanced with minimum exposures to dollar, euro, and yen currency and debt assets. During this time, I also think it will pay to be short cash (i.e., borrow cash). Of course there will be corrections during the several years in the paradigm—for example, in central bank tightenings. But I don’t see any sustained period in which the government will likely allow cash returns to be better than the returns of a well-diversified, non-cash portfolio (e.g., All Weather) geared to the level of risk you’re comfortable with because that would cause terrible problems. These circumstances also have big geopolitical implications, which I will touch on here.
Now I will show you the reasoning behind my conclusions. Please do not just believe my conclusions because I don’t want you to blindly follow me. I urge you to challenge my reasoning and see how it goes. I hope the picture comes through clearly in the charts and text that follow.
THE FOLLOWING ARE THE THREE BIGGEST ISSUES THAT I WANT TO FOCUS ON
1) Big Debt and Debt Monetizations,Particularly in the World’s Leading Reserve Currency
2) Internal Conflicts over Wealth and Values Gaps
3) External Conflicts,Most Importantly the Rise of a Great Power (China) to Challenge the Existing Great Power (the US)
The confluence of these three issues is shaping the type of paradigm we are in. While I can’t cover them in depth in this brief report, I can hit the most important aspects of them, particularly of the debt/money/investment issue because that’s an area I have devoted my life to. All three issues transpire in cycles driven by cause/effect relationships that are logical and can be understood. It is important to understand how these cycles work and where we are in them.
1) BIG DEBT AND DEBT MONETIZATIONS
The three major reserve currency empires—the United States, Europe, and to a lesser extent Japan—are in poor financial shape. The top chart shows for the US how debt levels (black line) are high today and were high in the 1929-33 and 2008 periods. In both cases, interest rates hit 0% (blue line), and the printing of money and buying of financial assets began in a big way (red line). More recently, the COVID-triggered downturn and the political move to the left has led to a massive increase in debt creation and debt monetization in the US (and other countries). There is no doubt that this will continue even after COVID disappears, as large deficits that have to be monetized will exist. This makes everyone financially rich (i.e., they have a lot of money) and devalues money, which takes away much of this newfound wealth.
Continue reading here.
