The World Becomes Disorder
By Donald G.M. Coxe, Chairman, Coxe Advisors LLC
The post-Cold War era that brought unprecedented global cooperation and economic growth is now in jeopardy. As the world faces shifting geopolitical landscapes, many are left wondering if this period of prosperity is truly coming to an end.
Since the collapse of Bolshevism, we’ve enjoyed significant and prolonged growth in global collaborations driven by freer trade and technological advancement. Financial markets have largely thrived, lifting the prosperity of millions around the world. The journey, however, has seen its share of turbulence, specifically with the tech downturn in 2000 and the financial crisis in 2008.
The global economy warmed significantly following the Cold War, with commodity prices witnessing remarkable increases, alongside some notable corrections:
- Oil surged from $15 per barrel to peaks of $140, only to fall during market crashes yet rebound swiftly near $100.
- Corn prices rose from $2 to as high as $8 before retreating to $3.60.
- Copper experienced growth from 80 cents to $4.30, then settled around $3.
- Gold’s ascent was breathtaking, jumping from $350 to $1,900, before pulling back toward $1,200.
So, what lies ahead for commodity prices? Are we witnessing just another correction, or is something fundamentally changing?
Bond yields tell another story. The US ten-year Treasury yield reached as high as 8 percent in 1994 but dropped to 2.1 percent during the financial crisis. Recently, targets hovered around 4 percent before fears of deflation dragged it down to 2.4 percent. Bonds from southern Eurozone countries now offer yields akin to those of US Treasuries.
These low yields persist despite escalating geopolitical tensions that threaten the stability fostered during the post-Cold War period. The foundations of economic advancement are being shaken by conflicts spanning from Ukraine to Syria and Iraq, where a new caliphate has emerged.
Past is Prologue
Strangely, the world seems to be drifting towards a revival of both the Cold War dynamics and the Ottoman Empire.
Regrettably, this resurgence occurs as the leaders of key democracies are starkly different from those who once facilitated the end of the Cold War and championed global cooperation and trade: Ronald Reagan, Margaret Thatcher, and George H.W. Bush. President Obama ascended to leadership by opposing the Iraq invasion and campaigned on a platform to end conflicts rather than escalate them. Now, amid declining popularity and looming elections that could hand Republicans full control of Congress, he grapples with the challenge of involving America in the chaos of ISIS or Ukraine.
Compounding the situation, Obama’s once ambitious foreign policy initiative—the reset with Russia—has unraveled. Recently, President Putin intensified his threats against Ukraine, asserting that Russia is a significant nuclear power with an expanding arsenal. This echoes the memories of Khrushchev’s infamous UN outburst proclaiming, “We will bury you!”
In Western Europe, leadership appears unprepared for the current crises. Angela Merkel’s cautious approach, shaped by her upbringing in East Germany, has drawn criticism. Meanwhile, British Prime Minister David Cameron faces challenges over potential Scottish secession and the return of foreign fighters trained by ISIS—returnees deemed more dangerous than those affiliated with Al-Qaeda, raising alarms about security in Britain.
The investment landscape has undergone a dramatic shift from hopeful to precarious, with wars and threats casting shadows over markets.
Additionally, an unexpected concern has surfaced: deflation.
Deflation?
How can this be, especially when central banks have been printing money around the clock?
Most economists and investors would have considered deflation nearly impossible with record-high government debts and rampant money printing. Who could have anticipated the Federal Reserve would quadruple its balance sheet, let alone maintain such measures for six years while Europe struggled with deflation and the US experienced minimal inflation?
Why, then, have Brent crude oil prices plummeted from $125 over two years, especially given production disruptions in Syria, Libya, and Nigeria? Are electric vehicles claiming dominance?
The reality is that the US has regained its position as the world’s leading oil producer, largely due to advancements in fracking techniques—where allowed. President Obama often touts the surge in US oil production, yet he remains a bystander in this energy revolution. An oil executive recently noted that without fracking, global oil prices could very well exceed $200 per barrel, pushing the economy into a recession. While this statement carries some exaggeration, its core truth is valid.
American frackers, employing cutting-edge science and techniques, have successfully prevented fuel inflation. Similarly, farmers using modern agricultural tools—including GMO seeds, GPS-equipped machinery, and optimized fertilizers—have produced record harvests of corn and soybeans, quelling food inflation as well.
Capitalism is performing its essential function: boosting the production of goods and services, preventing shortages that could derail recoveries through inflation. This success enables central banks to continue their expansive policies.
So, what actions should investors consider? The sustained rally in the S&P has been fueled by near-zero interest rates, leading companies to buy back stock to benefit insiders and please activist hedge funds that have heavily borrowed to invest. This strategy has repeatedly paid off, even when borrowing costs fall below dividend yields. As Stein’s law aptly notes, “If something cannot go on forever, it will stop”—although it’s unclear when.
Gold tends to lose its attractiveness when: (1) inflation appears as distant as a mythical treasure at the end of a rainbow, and (2) even amidst a barrage of crises, investors fail to flock to this historically time-tested asset.
As we predicted earlier this year, 2014 has unfolded as a period characterized by escalating geopolitical risks that challenge traditional asset allocation strategies. We foresee these risks expanding further and urge caution regarding the current valuations within the stock market. Investors looking to protect against potential adverse developments have various options available.
Incorporating gold into a risk management strategy is vital, along with holding long-term government bonds.
Crucially, we’ve entered an era where savvy investors will allocate as much time to understanding international affairs as they do to analyzing financial markets.
Sincerely,
Donald G.M. Coxe
for Economic Prism
[Editor’s Note: For deeper analysis, consider taking a 90-day risk-free trial to The Casey Report. The article The World Becomes Disorder was originally published at caseyresearch.com.]
