In a previous article, we have explained that the developments which have taken the world by storm in 2020 will inevitably alter consumption trends, both in China and abroad. The same way, the “medicine” prescribed quasi-unanimously by central banks from all around the world (unprecedented monetary as well as fiscal stimulus, unprecedented both in terms of measures/amounts and in terms of the widespread nature of the phenomenon) inevitably alters… of course, investment trends, even if the effects aren’t as immediately obvious as with the consumption trends dimension.
From China to the United States and from Japan to the EU, “more of the same” is being prescribed with each financial/economic calamity that emerges: lower and lower interest rates, direct injections of liquidity into the financial system (monetary easing) and (especially as of 2020) also direct injections of liquidity into the real economy.
Imagine a house of cards and think of the various developments which have taken place over the years as additional cards being added, with the elephant in the room being represented by the fact that sooner or later, the entire structure will most likely collapse. Will the post-2020 measures end up facilitating just that? Realistically speaking, as any intellectually honest economist can confirm, nobody knows and it ultimately depends on whether or not the market keeps accepting the status quo by maintaining its confidence in today’s currency framework.
After the Dot-Com Bubble burst, the market accepted the then-unprecedented measures implemented by central banking decision makers such as Fed Chairman Alan Greenspan, who lowered interest rates all the way down to 1% in the United States. The same way, markets accepted the even higher dose of “medicine” prescribed in the aftermath of the Great Recession, with interest rates further reduced (even into negative territory in some cases) and furthermore, a new central banking weapon added to the arsenal: direct injections of liquidity into the financial system.
Fast-forward to 2020 and once again, the market seems to be demanding an even more aggressive dose of medicine. Lowering interest rates is no longer enough and the same principle is valid with respect to injections of capital into the financial system… in 2020 and beyond, Main Street (small business owners, the average employee, etc.) wants a piece of the pie as well and governments along with central banks are left with no choice but to comply.
How have they done that? Through measures which result in not just the financial system but also the “real” economy receiving ample liquidity, from small business loan guarantees in the hundreds upon hundreds of billions of dollars to (arguably) the beginnings of Universal Basic Income for the average person, with individuals receiving cash payments over in the United States in an effort to help them cope with the economic consequences of the very aggressive quarantine measures which have been implemented, measures which essentially resulted in a complete shutdown when it comes to various key sectors.
An important question arises: will the market be satisfied with the post-2020 status quo?
Pretty much everything depends on the answer to this question because if the market will decide that no, it has nothing against these measures, we are good to go for yet another cycle. At the end of the day, whether we are referring to anything from currencies to society as we know it, far more than meets the eye revolves around one key term: confidence.
As long as confidence in the status quo remains intact and individuals keep being content with the idea of being paid for their time, products and/or services through the current monetary vehicles, absolutely nothing has to change. But what if, eventually, the market decides that enough is enough? That so much money keeps being thrown at whichever problems pop up that it is time to think about just how sustainable this modus operandi is?
In such situations, aggressive “paradigm shifts” are to be expected, with investment trends being quickly altered. To understand these trends, it is important not to allow yourself to be so caught up with whichever bias fuels your current narrative that you miss the big picture that is right in front of you. For example, like a gold investor who believes the end of fiat currencies is near and that the only asset that can protect them is gold… that is most definitely not true.
It’s not that gold isn’t a logical hedge in such situations but rather the fact that by choosing to be a one-trick pony, you are missing the big picture, which is not the allure of gold but rather the fact that fiat currencies have lost their luster. Pun intended. As such, investors quickly flock toward… well, anything else, especially assets that are considered scarce. Gold is indeed such an example but let us not forget about anything from real estate to bitcoin.
While individuals who invest exclusively in gold will most likely do considerably better than those who remain passive, they tend to under-perform in the long run compared to genuinely diversified market participants. There is a reason why we dig so deep here at ChinaFund.com and that reason does not revolve around us loving to hear ourselves speak or see ourselves type. Instead, the name of the game is meaningfully “getting” the realities that are shaping up so that you can be not one but multiple steps ahead of other investors. Predicting the future is impossible, as we keep explaining time and time again, but being prepared is anything but. Not only is preparing through a smart diversification strategy possible, it is downright mandatory, especially in key situations which risk bringing about one of the greatest transfers of wealth in the history of mankind. For reasons that pertain to pragmatism more so than hyperbole, the 2020 scenario might indeed facilitate just that… ignore this threat at your peril.