I do love a bit of good old-fashioned gold-bug prognostication. Clearly, gold bugs have a particular way of looking at the world which I think is a bit bi polar, and if I’m honest, a tad binary. It’s either the world is going to hell in a handcart (smiles) or the world is ignoring the pressing balance sheet problems and will be shortly going to hell in a handcart (frowns). The entire middle ground which suggests that gold can sometimes be a good idea and sometimes a bad idea, eludes the diehards. I happen to think that gold’s days may be close at hand but I retain a long term suspicion of the shiny stuff as an asset class.
But gold bugs also serve a use as balance sheet Jeremiads. While the rets of the world binges on yet more debt, gold fans remind us that eventually all debts must be repaid. And more importantly that the process of ‘normalisation’ will usually involve a high degree of market volatility. So, its in this vein that I started reading the excellent In Gold We Trust report by those sensible chaps at Incrementum. This is a regular compendium of superb charts, many of which I take with a huge pinch of salt but the two featured today tell what I think is a compelling story. The first starts with a quote from David Rosenberg to the effect that the “ The next recession by definition will happen with income and wealth disparities at their highest levels ever, and the unrest will likely be a tad more forceful than the well-behaved Occupy Wall Street movement was nine years ago”.
I think he’s probably right. Capitalism will have real problems when the next Big One comes along. Anyway, the core observation though from Incrementum is that “the vast majority of rate hike cycles has led to a recession. Moreover, every financial crisis was preceded by rate hikes… The historical evidence is overwhelming – in the past 100 years, 16 out of 19 rate hike cycles were followed by recessions”. Maybe this time it will truly be different but I wouldn’t want to bet against this probability. The chart below tells the story of the last hundred years of macroeconomic policy using interest rates.
The second Incrementum observation is that most financial analysts and strategists (Albert Edwards noisily excepted) tend to be overly bullish. Again, it’s a statement of the obvious but the numbers are terrifically scary. Of 78 analysts surveyed by Bloomberg, not even one is expecting US GDP to contract in 2018, 2019, or 2020. According to Incrementum, the median of the expected growth rates for those three years falls in a bandwidth of 2.1% to 2.8%. Maybe the collective gaggle of analysts is right but one can’t help wondering whether the small matter of rising rates, toppy M&A prices, and rising default rates might suggest some caution! The last observation – the NY fed seems the recession risk at 12.5%. My own finger in the air estimate would be an order of two to three times greater in the next two years.