In April 2018 we wrote a newsletter titled “A Paradigm Shift” followed by another one in January 2019 titled “A Paradigm Shift Part 2” – both can be found on our website. These newsletters were written as we were disturbed by the manner in which the economies were being managed, the rising government debt globally and that wage inflation would come to the USA and thereby possibly create general inflation.
Fast forward to September 2021 and our concerns pre Covid are now real in the post Covid scenario. We have been very concerned about global economics, geopolitical events and the nonstop printing of money that it makes forecasting the future increasingly more difficult, especially in a COVID world.
Now that the fog is lifting as global economies will partially exit a COVID world over the next year or two, we need to rethink and reset our beliefs over the next decade. The changes in the world economic environment over the past few years are so vast and so dangerous that we once again need to reassess the situation.
Throughout history, significant life changing circumstances appear every so often, for example, the Industrial Revolution, the First and Second World Wars, the Cold Wars, the Growth and Dominance of the USA between 1930 and now, the growth of China in the last 20 years, the oil crisis of 1974, the rise of terrorism, and so on. All have had an effect on our lives directly and indirectly.
There is no question that we today are living through an environment of rapid changes.
At the age of 14, my school set book was “They Seek a Country” by Francis Brett Young. The story takes place in 1836 and the gist of it is about an Englishman, John Oakley (who later changed his name to John Grafton) who is arrested and sentenced to Van Diemen’s Land (now Tasmania). He jumps ship off the coast of South Africa where he is befriended by a family of Dutch origin who are about to leave their homestead in the Cape to escape from English rule. In essence, it is the story of people who are surrounded by hardship and who never lose hope even though they encounter many difficult situations while trekking through South Africa in search of greener pastures. I learnt from this book that adversity can be overcome but one has to make it happen. Through life we encounter many adverse changes, both personally and generally and most of us are able to find the greener pastures as referred to in this book through sheer determination, drive and some luck.
So as one door closes, another opens, and using the analogy above, we need to recognise where we are today and what we need to make happen to survive the changes of tomorrow.
The first thing is to recognise that changes are taking place in front of our eyes and the changes have both positive and negative connotations. The economic paradigm shift which we are encountering will have one or two results for you – either you will watch it happen and not participate, or you will make things happen to protect your wealth.
For the past 20 years one could have been an active or a passive investor. Most people were passive – that is, “buy and forget.” However, the changes in global economies and in geopolitical situations are all-consuming and dangerous and to survive the next decade or two, one has no option but to be an active investor.
Let me explain why.
- The global debt created by most governments cannot be repaid, at least for decades if at all.
- The US National Debt in the past 18 months has increased by USD 5.2 trillion – total US Debt now stands at over USD 28 trillion.
- The US stock market is extremely expensive relative to history.
- The US Dollar will likely bear the brunt of a lack of fiscal discipline over the long term.
- Demographics in the West are changing – baby boomers’ spending will curtail in this decade.
- Automation and Robotics will dramatically alter the allocation of labour and productivity.
- Inflation, firstly wage inflation, and then from the lack of supplies, may become part of our lives in the future. We need to hope that hyperinflation is not going to visit us.
- Geopolitical events are taking place – US effectively pulling out of the Middle East, China’s growth in military and economic power, the positive demographics of the broader Asia region compared to the West, the possible break up of the European Union, and we in Australia in the immediate future are not able to defend ourselves against aggression!
- The changes in medicine and genomics, in innovation, in financial technology (Fintech) and next generation internet are extremely powerful.
- Possible taxation increases around the world – both USA and the UK this month have announced substantial increases.
Some of the above can lead to the confiscation of wealth. In Ernest Hemingway’s novel ‘The Sun Also Rises’, Bill asked “How did you go bankrupt?” Mike answered “Two ways, gradually, then suddenly.”
The changes we are experiencing today in all forms of life as we know it are challenging and confronting. We need to participate and ensure that we are protected by being healthy and that our wealth is also maintained at a minimum to outperform inflation.
It is common to the human experience that we are rarely motivated to act unless a crisis is upon us.
I recently read an article by Egon Von Greyerz who is the Founder of Matterhorn Asset Management in Switzerland – Goldswitzerland.com. Below is an excerpt from the article.
“For 60 years the US has increased the Federal debt every year with the exception of 4 years. So the US is now living on not just borrowed money but also borrowed time.
Excessive debt has throughout history killed empires and the already dying US empire will be no exception.
It took 200 years for the US debt to reach just under $1 trillion. Reagan managed to treble that debt in just 8 years.
With debt on average doubling every 8 years since Reagan became President, my target, set 5 years ago, was that in 2025 the US debt would be $40 trillion. But with Biden’s profligacy I would now expect that to be at least $50 trillion!!! Just think about it, in 2025 US debt will be 50x higher than when Reagan took over and 100x higher since the gold window was closed in Aug 1971.
There is a more scientific illustration how these exponential moves occur and also how they end.
Imagine a football stadium which is (to be) filled with water. Every minute one drop is added. The number of drops doubles every minute. Thus it goes from 1 to 2, 4, 8, 16 etc. So how long would it take to fill the entire stadium? One day, one month or a year? No it would be a lot quicker and only take 50 minutes! That in itself is hard to understand but even more interestingly, how full is the stadium after 45 minutes? Most people would guess 75-90%. Totally wrong. After 45 minutes the stadium is only 7% full! In the final 5 minutes the stadium goes from 7% full to 100% full.
It is of course impossible to predict where we are in this debt explosion. If we are in the final 5 minutes then debt can still increase almost 15x. And if we get hyperinflation which is very likely, the increase could be substantially higher.
As debt will have grown 50x since 1981, by 2025 tax revenues will probably stay at a measly $3.5 trillion as the economy slows down or even collapses. The consequences are obvious. When the interest rates rise, which is guaranteed as the Fed loses control, the US empire can’t even afford to pay the interest and will default.
This is how all empires end, they lose not only wars but also total control of money.”
So, over the past 5 to 7 years, we have deliberately defined our investment thesis as to the make up of a portfolio in order to grow and protect it. Firstly, we ensure as much as possible that management of the Companies and the Funds are aligned with the assets they manage. We own every single investment recommended to our clients to ensure that we too are aligned. We travel globally as well as in Australia to meet and interview some of the best Fund Managers. We meet with some of the best Financial Advisers and Economists around the world and often go outside our comfort zone to explore new investment frontiers. Over the past years our portfolio results have been pleasing across well balanced portfolios.
We like the following investment criteria to protect our portfolios in an ever-changing environment. These can be explained in a face-to-face meeting if requested:
- Be diversified
- Have many custodians
- Have a sizeable position of the portfolio invested globally
- Invest in precious metals, such as gold and silver, both in bullion and equities
- Invest more and more in unlisted assets such as private equity
- Invest in future technologies such as Genomics, Fintech, Innovation and Disruption equities
- Invest in well located real estate that pays a decent yield and has growth potential
- Invest in Alternatives such as Long Short Strategies, selected Venture Capital Funds and Crypto/Digital assets
- Invest where there is value and in jurisdictions where value has been compromised for some time – the UK and Japan are examples
- Ensure the mix of assets in a portfolio is balanced to risk expectations
I could literally write a book on the paradigm shifts we are experiencing daily but have tried in this reasonably short letter to articulate the fact that we are living in permanent changing times.
We do not trust Central Banks or Governments generally.
Our Directors at BMF Wealth are all qualified to provide the best analysis of your portfolio and to create a strategy for your wealth, taking into account the risks around us. We are after all Custodians of our wealth for the next generation but unfortunately some of the next generation are not financially ready to take on this responsibility.
Why not give us a call on 02 9221 5111 to discuss our thinking outlined above – we have been doing this for 40 years!
This publication has been prepared by BMF Asset Management Pty Limited (ACN 092 277 971, AFSL 224035), to provide you with general information only. In preparing it, we did not take into account the investment objectives, financial situation, or particular needs of any person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information without consulting us or your financial adviser.