Economic Crisis

Gold pops, Japan drops, Europe strops

"No laughing matter" Charplin Dictator

The gold price briefly rose above $1,300 per troy ounce on Monday. Japanese stocks are down 8% in four trading days. Austria is the latest country in Europe to lurch to the far right. Is the “establishment” losing control, and how does it affect our investments?

As I write the price of gold is $1,294 per troy ounce. For now it appears to be holding firm. It bottomed out at $1,055 an ounce on 3rd December 2015 after a four year bear market.

That means gold’s up nearly 23% in just five months. This is a huge move in a short time.

There could be many reasons for gold’s recent pop. US dollar weakness…financial speculators…new physical demand in emerging markets…falling supply.

Or just simply that more and more people are noticing that the central planners who try to micromanage the economy – governments and their central banks – have lost control. That’s assuming they ever really had it.

Japan is one place where things aren’t going to plan. The yen was supposed to get weaker…inflation was supposed to tick up…wages were supposed to rise to stimulate consumption and economic growth…stocks were supposed to keep rising.

The Bank of Japan is now among the top 10 owners of 90% of the Nikkei 225 index.

All of this would be goosed along by money printed by the Bank of Japan and used to make asset purchases – initially of government bonds and now including Japanese stocks – and negative interest rate. The Bank of Japan is now among the top 10 owners of 90% of the Nikkei 225 index.

In Japan you lose 0.25% a year on a two year government bond. Buy a ten year bond and you’ll lose 0.13% a year. To buy such a bond you would have to be insane. Or a Japanese pension fund manager.

Despite Japan’s best efforts to weaken its currency, the yen – with a view to boosting export profits and price inflation – things haven’t gone to plan recently.

In fact the yen is up about 14% against the US dollar since the end of January, which is a huge move in currency markets. One dollar bought 121 yen at the end of January, but now only buys 106.

The Japan bulls have gone quiet recently, and with good reason. The Nikkei 225 index is down 22% since August last year, measured in yen. It’s at the same levels as the end of 2013. It’s dropped 8% in just the last four trading days.

Nikkei 225, past five years (Japanese yen)

I’ve long been sceptical about Japanese stocks (see here). I continue to be. Taken as a whole Japanese companies make low returns on their capital. Most of their profits are made in Japan in Japanese yen. And the government is bankrupt, but keeps digging an even bigger debt hole.

One day the whole Japanese house of cards will come crashing down. That’s yet another reason to like gold.

And then there’s Europe.

In Europe there’s a general groundswell of discontent with the faceless and unelected EU bureaucrats in Brussels.

In Europe there’s a general groundswell of discontent with the faceless and unelected EU bureaucrats in Brussels. Britain – the second largest EU economy after Germany – is holding a referendum in June on whether to leave or remain in the EU.

Despite ever more desperate scaremongering by the political, financial and business elite – in Britain and elsewhere – the vote remains on a knife edge.

But beyond that there is a far more worrying general political trend. This is surging nationalism in many countries – helped along by a reaction to mass immigration from the Middle East and North Africa. More and more Europeans are getting stroppy.

I counted eight countries in Europe where a right wing nationalist party has poll support running at around 20% or more. Poland, Switzerland, Austria, France, Hungary, Belgium, Denmark and Finland.

Given most of those countries’ systems of many political parties and coalition government, around 30% of the vote can be enough to take power. Some countries are already there. Others aren’t far away.

The latest manifestation of this trend is found in Austria. You probably know that this alpine country was the birthplace of the world’s most vicious vegetarian – a man who put Charlie Chaplin’s style of moustache out of fashion for a very long time to come.

In first round presidential elections on 24th April the candidate for the far-right Freedom Party, Norbert Hofer, garnered 35% of the vote. His closest competitor, Alexander van der Bellen from the Green Party, received just 21%. These two go on to the next round.

The final vote takes place on 22nd May. Hofer may or may not win, and the Austrian presidency is in theory a post with little actual power. But the point is a bigger one. The far right continues to gain prominence in European politics.

There may not be jack booted youth squads goose stepping down the streets just yet, or tanks rolling into neighbouring countries. In fact that may never happen, nor am I predicting it.

But, by definition, “nationalism” – which is about throwing up barriers – can’t be good for the European Union – whose mission is to break them down. One emphasises differences between peoples, the other emphasises similarities. They are diametrically opposed visions for Europe.

In the face of this you’d perhaps expect Brussels to do something to stem the tide, at least until things have calmed down. In fact the “eurocrats” seem to be doing the opposite, wedded as they are to their imperial ideals.

Consider this. The EU Commission is about to back visa-free travel for 80 million Turkish citizens within the EU’s passport free Schengen area. Turkey being the non-EU buffer country between the EU itself and troubled Syria and Iraq.

Is that likely to go down well with an EU population that already has concerns about mass immigration? Will it encourage more or fewer Europeans to seek solace from fringe movements that thrive on division and hatred?

The bottom line is that the chance of EU division and disintegration continues to grow. All of this uncertainty makes Europe a riskier place to invest.

The bottom line is that the chance of EU division and disintegration continues to grow. All of this uncertainty makes Europe a riskier place to invest.

I’d still buy European stocks. But they’d need to be really cheap, as Europe has a relatively grim future ahead of it due to deep structural problems. Those are principally high debts and dreadful demographics. Put simply, Europe is in long term decline.

Gold is up. Japan is down. Europe is rotting from within. Something tells me the global establishment is losing control of the agenda.

What do I think you should do as an investor? Stick with gold, US dollars, and emerging market stocks where you can find value.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.