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LONGWave - OCTOBER

WHAT COMES AFTER A VACCINE AND COVID-19?

Though Covid-19 may finally be in the rear-view mirror sometime in 2021, the devastation, lessons and emotional scars will be lasting. New attitudes will be deeply rooted, similar to those left to the generation who experienced the 1929 market crash and the subsequent Great Depression of the 1930's. The Global Recession however may still not be over in 2021 as world-wide economic growth recovers at a slower than expected rate.  Intractable, slow economic growth and mounting Inflation pressures are the hallmark of Stagflation. Stagflation has historically ushered in periods of strong Hard Asset returns, which gives further support to our video - "Will 2021 Be The Year of Hard Assets?". 

But why would we see Inflation?

We have answered the question of growing inflation in prior videos and newsletters. As we identified, it will come from many unexpected sources which either gives you less for the same amount of money or the same for more amount of money.  Either way it is Inflation though governments statistical methods of substitution, hedonics and imputation will effectively obfuscate it. We can expect:
  • Increased taxes at all levels of government (income, sales and property taxes, fees, tolls, licenses),
  • Higher import costs,
  • Rising financing rates, 
  • Coming Covid-19 retail and services 'surcharges'.
  • Higher food costs.
Already food inflation is spiking. This week the U.S. PPI and Core PPI (two key metrics of inflation) recorded a 0.4% increase in inflation for the month of September. This sounds like a very small move until you consider that it was largely due to just one component (food inflation) surging 1.2% over the same time period. Why does this matter?  According to the Fed's own research, food inflation is the single best predictor of future inflation in the U.S.  A 1.2% increase in a single month for food prices across the board (not just one area like meat or dairy) is a BIG deal. This tells us point blank that higher inflation is already seeping into the financial system.
We laid out in the August LONGWave video the case for "The Coming Era of Stagflation" (video). We will likely see it evident in late 2021 but markets will begin pricing it in sooner.

GLOBAL SUPPLY CHAIN DISRUPTIONS
One of the underlying drivers of potential import and domestic goods inflation is likely to be a major reversal from advancing Globalization to growing Nationalism. This will be markedly disruptive to Global Supply Chains! We can expect this to bring disruptions, shortages and breakage within fragmented, fractured and more expensive supply chains. 

THE NEW BUZZ WORD: "RESHORING"
Both US parties in the US Presidential campaign are talking strongly of bringing jobs back from China. President Donald Trump said this week that if he is re-elected, his administration will attempt to reduce U.S. dependence on Chinese manufacturing and bring those jobs back to the United States.

"We will make America into the manufacturing superpower of the world, ending reliance on China once and for all," Trump said Wednesday during an event with the Economic Club of New York and other chapters. In his remarks, the president said he would reward companies that move their jobs to the United States and punish firms that oppose the measure.

"We will keep taxes low for companies that move jobs to America, and we'll impose steep tariffs on any company that leaves," he said. "They want to leave? They want to make our product and then sell it back after firing everybody? Not going to happen. They will be tariffed," Trump added.

Remember how Globalization has contributed to containment of Inflation Pressures while the US Expanded Money Supply
  • IMF: The International Monetary Fund estimates that almost three-quarters of the increase in trade between 1993 and 2013 was due to the growth of supply chains. With trade rising fivefold in those 20 years, the chains helped power global economic expansion.
  • BIS: The Bank for International Settlements estimated that global inflation would have been about one percentage point higher were it not for the supply-chain enabled efficiencies of global production.
CORPORATE BANKRUPTCIES & MERGERS

Covid-19 has left major industries such as travel, leisure, hospitality and dining barely hanging on. Small business have only just begun to fail in mass. We can expect bankruptcies and mergers to soon sweep the economic landscape despite government bailouts. Prices will rise as a consequence.   

"A RETURN TO 1970'S STAGFLATION IS ONLY ONE BROKEN SUPPLY CHAIN AWAY!"

"Consumer retrenchment will persist only until a Covid-19 vaccine arrives. If this takes another 12 to 18 months, as scientists believe, pent-up demand will build as never before. Assuming that governments continue to support worker incomes in the meantime, the release of this pent-up demand could spark an inflationary spiral that markets are not expecting. The seeds for such an outcome are also being sown by the disruption of global supply chains."      
Stephen Roach - Yale University Prof., Former Morgan Stanley Asia Chairman. 
  • GOLD PRODUCERS - BARRICK GOLD (GOLD)                                   SUBSCRIBER LINK
  • SPECIAL GOLD REPORT                                                                        Pay-Per-View Link (see Bottom of Newsletter)
OCTOBER  LONGWave Video
  • VIDEO: 18 Minutes with 37 supporting slides.                       Will 2021 Be The Year of Hard Assets? (Promo / Pay-Per-View)
ADDENDUM TO THE OCTOBER LONGWave VIDEO

THE "AGE OF DISORDER" WILL BE GOOD FOR HARD ASSETS
We have seen five distinct global economic eras since 1860, and are now entering a sixth, which Deutsche Bank labels the "Age of Disorder".  We most likely looking forward to a period that combines elements of the Bretton Woods era (when equities had average performance while bonds did terribly), and the messed-up decade of the 1970s between Bretton Woods and Volcker (when stocks and bonds both did badly). Commodities did well in both eras.

For those who think longer-term, the latest Long-Term Asset Return Study by Deutsche Bank AG's veteran financial historian Jim Reid should be examined.  I highlight below some of the key charts and thoughts from his work:

Reid suggests we have seen five distinct global economic eras since 1860, and are now entering a sixth, which he labels the "Age of Disorder":
1. The first Era of Globalization (1860-1914)
2. The Great Wars and the Depression (1914-1945)
3. Bretton Woods and the return to a gold-based monetary system (1945-
1971)
4. The start of fiat money and the high-inflation era of the 1970s (1971-1980)
5. The second Era of Globalization (1980-2020?)
6. The Age of Disorder (2020?-????)
The two eras of globalization stand out in the following chart from Reid, which tracks trade as a share of GDP.
  1. At the point when President Nixon ended the Bretton Woods tie to gold, 50 years ago, trade was no greater as a proportion of the world economy than it had been on the eve of the First World War. It now makes up roughly double that share. 
  2. The collapse of the Berlin Wall and then China's entry to the World Trade Organization really made a difference.
relates to The Coming Age of Disorder Will Favor Commodities

The problem, as Reid makes clear, is that for the last two decades, the current order has required ever greater reliance on debt. If you want to include the Covid impact, then debt as a proportion of GDP would move to levels only previously seen to fight the Second World War.

Covid-19 is catalyzing a breakdown in confidence in the existing order. Critically, the pandemic forced governments across the world into expansive fiscal policy to match the expansive monetary policy that has lasted a decade. If we combine that spending with a huge increase in the money supply, inflation may at last be ready to take off:

relates to The Coming Age of Disorder Will Favor Commodities

Reid isn't the first to point out that inequality is reaching politically intolerable levels, but he illustrates the phenomenon well. Wealth has become far more concentrated in the U.S. since Volcker and Reagan. And lenient taxation of companies is common to all major developed economies. That means labor has lost out to capital to an ever greater extent.  Now, the power of capital may have been taken too far.

We can likely expect democratically elected governments to enact policies that favor labor at the expense of capital. Meanwhile, the fissure between the U.S. and China promises a retreat for globalization. That implies greater power for workers, as they no longer have to compete with cheaper labor overseas, and a return to inflation. The move toward a bipolar rather than a globalized world seems inexorable.

What does all this imply for asset returns? 

This chart smooshes together equity and bond returns for 15 developed markets since 1860. We most likely have to look forward to a period that combines elements of the Bretton Woods era (when equities had average performance while bonds did terribly), and the messed-up decade of the 1970s between Bretton Woods and Volcker (when stocks and bonds both did badly):

relates to The Coming Age of Disorder Will Favor Commodities

CONCLUSIONS

This isn't appealing. 

Betting on a return to inflation might be a good idea since the only period in which commodities outperformed was the Stagflationary 1970s. As commodities (excluding precious metals) have been mired in a bear market for more than a decade, and have a historical tendency to move in long waves, maybe that is one asset class to look at. 

Many trends of the last decade seem to have been taken as far as they can go, if not too far. Extrapolating them further into the future would be a bad idea.
MATASII'S STRATEGIC INVESTMENT INSIGHTS
Many Gold & Silver Mining Stocks are outperforming spot prices significantly!
Gold Producer May Soon See Their Day!

A new Bull market has started off with a bang for precious metal miners in 2020. Precious metal miners had their best quarter ever, beating the S&P 500 by 44% earlier in the year.
  • Gold miners are already 10%+ above their 2016 highs. 
  • Silver miners have huge potential for a possible catch-up trade.
  • From depressed valuations, junior miners are starting to outperform their senior counterparts.
In 2008, the Fed printed $1.2Trillion in four months and silver went parabolic over the next two years. It just created 2.3X the 2008 levels. There is the possibility of a timely and tremendous opportunity ahead.

RIGHT: Gold & Silver Mining stocks compared to Global Stocks are still near record lows!

BELOW: Gold & Silver junior mining companies have been leaving the broader stock market in the dust.


GOLD PRODUCERS - BARRICK GOLD (GOLD)

Barrick Gold (Symbol GOLD) is one of the most established Senior Producers. It additionally offers dividend earnings.

Barrick Gold IDEA published last year on March 17, 2019

MATASII published this Barrick Gold Investment Idea last year on March 17th, 2019. The Red Box indicates the potential move that was identified at that time.



CURRENT BARRICK GOLD CHART

The chart below shows the recent trading level of Barrick Gold. The Red Box matches the red box shown above. A move from $13.00/share to 27.61%/share is more than a double without leverage and dividends. This is significantly better than the major moves we witnessed in spot Gold during the same period.



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PROMO: LONGWave - 10-14-20 - OCTOBER - Will 2021 Be The Year of Hard Assets
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