As I contemplate the current social environment, some things amaze me a lot more than others. One is the brazen way in which politicians, corporate leaders and academia manufacture narratives. The other the willingness of the populace to accept even the most obvious misrepresentations, provided they are repeated often enough by a compliant media complex.
Is it possible that our fellow human beings are just disinterested? Can it be that no one cares about the threat to individual rights and freedoms that so many current developments pose? Perhaps. But there is yet another possibility: that a large number of people actually get it, but then conclude that speaking out would be inconvenient.
Is it ignorance or apathy that’s destroying the world today?
“I don’t know and I really don’t care.”
Intriguingly, the most recent issue of Lewis Lapham’s Quarterly, of which I’m a devoted reader, deals with this topic: humanity’s relationship with freedom. Drawing on insights from figures as diverse as Seneca, John Milton, Miguel de Cervantes, Thomas Payne, Will Durant, George Carlin and many others, the conclusions come down to two basic realities. First, there are considerable differences in how people define freedom. And second, the expressive pursuit of freedom seems to be a historical rarity.
In noting that people allow the world around them to overcome them and thus renounce their independence, the 19th century Russian writer Alexander Herzen, also known as the father of socialism, concludes that self-reliance is the only cure. The alternative, he writes, is to accept a state of childish submission, “in which the fatal power of the external becomes invincible.” Curiously, this recognition also dominates capitalist thinking. American culture, in particular, reveres economic individualism and self-determination.
Of course, both in today’s self-styled socialist order and corrupted capitalist system, those who practice individualism and self-reliance are scorned—unless they are part of the corporate, academic or political establishment. If you have social status or professional merit and dare question or even oppose the agenda of the elites, chances are you will be sidelined. The suppression of intelligent debate, the concealment of any viewpoint that is not considered correct, and the de-platforming and vilification of its author, are increasingly the norm.
The Covid pandemic was a parade-example of this approach, and ever new manifestations pop up around the globe. France recently resorted to “preventive censorship”, a process that prohibits events or protests before they occur, because, according to the government, participants may make hateful or inciting comments. At the moment, such actions are directed at far-right causes, but a future change in government will guarantee that whoever opposes official policy will be targeted.
France is not alone. Canadian Prime Minister Justin Trudeau sent in the troops and introduced the Emergencies Act, conveniently dismissing not just protesting truckers but thousands of peaceful protesters as “extremists”, a notion that was endlessly repeated by the mainstream media. British authorities, meanwhile, have started detaining and questioning journalists—predictably, all critics of official policy. What’s alarming is the speed with which such practices and statutes are adopted throughout the developed world. And again, how few people seem to care.
The Only Hope Left: Social Blowback
Why am I starting this update with a social commentary? Because it appears that the only hope left for humanity resides on the social front. The political, corporatist and academic constructs have lost their way and keep revealing themselves as callously unscrupulous. Of course, our corruption is more refined than that of the world’s manifestly dictatorial systems. For most of the past decades, it’s been less visible, too. But that is rapidly changing. I’d argue that our Western power structures are revealing themselves as narrative manufacturers like never before.
So what is it that keeps the people from rising? Apart from ignorance and apathy, the cleverly promoted notion that actors other than our corporate-political complex has been a factor. One of the most established ways to control the populace is the divide-and- conquer technique: create internal and external enemies and you shall reign supreme. Instead of deservedly blaming those who inflict misery upon them, the discontented will demand punishment of the scapegoats. Once more, a revisit of the Covid years provides perspective. As millions were caught up in unnecessary lockdowns and hundreds of thousands of small and medium-sized businesses were forced to close, governments almost everywhere quickly deflected criticism. Internally, the burden of guilt was placed on the unvaccinated, the new enemies of the state. Externally, the finger was pointed at China.
Will people see through all this? To be sure, incidents of broad social unrest are on the rise, but I believe the worst will occur once a recession hits. The dramatic rise in income and wealth inequality in much of the Western world and the growing possibility that rising interest rates will bring decades of excess consumption to an end, loom large. It’s not a scenario to which the masses will happily submit.
Back to Goldilocks
Meanwhile, financial markets have reverted to a “goldilocks” scenario—at least for now. Driven by a sharp decline in energy prices, headline inflation rates keep coming down, but some components (particularly food and housing) are still disturbingly high. The table below, courtesy OECD, reflecting year-over-year inflation at the end of June, tell the story better than words can.
At the same time, the overall economy has held up better than expected. But here too, there are contradictions. In the U.S., for example, industrial production is weakening, but consumer behaviour remains resilient. In Europe, massive divergencies are evident: Germany’s and Britain’s GDP is still at pre-pandemic levels, while much of Southern Europe is muddling along.
Wall Street, along with Europe’s and Japan’s stock markets, is back in ultra-optimistic territory, with valuations stretched and corporate profits vulnerable to economic realities. What worries me a lot are the three key inflation components we just looked at: energy, food and housing.
Let’s talk about food prices first. So far, the Ukraine War has not had the devastating effect on grain supplies most analysts feared, mainly thanks to an export deal negotiated with the help of Turkey. That arrangement has now been terminated, as Russia is pushing back against a variety of Western steps, including U.S. promises of cluster munitions, F-16 fighter jets, etc.
With things in Ukraine not going well for NATO nations or for Russia, the threat of further escalation is growing, an outcome which would almost certainly reignite energy prices. In short, inflationary pressures could quickly resurface—and if they do, central banks will be hard pressed to administer additional interest rate increases. Given the distressingly high levels of government, corporate and household indebtedness, such a dynamic would quickly terminate the goldilocks narrative and replace it with a recession consensus.
I’d like to make one final comment on the Ukraine situation. In my updates immediately following the Russian invasion I predicted that U.S.-inspired sanctions against anything Russian would have two key consequences:
- First, I thought that the sanctions would briefly reunite Europe under the American-led post war order, but would soon after create grave disagreements within the continent and within NATO. The most recent, thoroughly unproductive and quarrelsome NATO summit in Vilnius gave us a brief preview of what’s ahead. Here is a brief snippet from the BBC World News, commenting on just one discussion point: the U.S. decision to supply Ukraine with cluster munitions. One of the more propagandistic voice pieces of the transatlantic alliance, the BBC offered this view: “The immediate effect will be to knock away much of the moral ground Washington sits on in this war” and, “The U.S. move will inevitably place it at odds with its Western allies and any split in that alliance is exactly what Russian President Putin wants and needs.” I couldn’t have said it better.
I’d also add that all we need now is for the U.S. to escalate China tensions further, in which case the same kinds of splits will materialize with America’s Pacific allies. - Second, I expected that the hyper-aggressive sanctions regime, which included the effective theft of Russian gold reserves held in Western central banks, would cause key unaligned nations and even some former American allies to distance themselves from U.S. dominated trade and payment systems, as well as the U.S. dollar as a settlement and reserve currency. This dynamic is now well underway, with Algeria, Argentina, Bahrain, Bangladesh, Egypt, Ethiopia, Indonesia and Iran having formally applied for BRICS membership. A host of others, including India, Brazil, Saudi Arabia and the United Arab Emirates, are officially exploring it. The upcoming BRICS summit in South Africa will be revealing, especially since one of the bloc’s initiatives is to create an international trading currency, possibly backed by gold or other commodities. Considering the BRICS countries comprise more than 40% of the world’s population and control economic output equivalent to the of the United States, the consequences of such a step would be immense.
That much for my top-down socio-economic and geopolitical observations. Let me now turn to the topic of investing.
Investing Prudently
With stock markets frothy, bonds depressed but still confronted with the possibility of more rate increases, currencies in volatile mode and commodities still in a defensive posture, investing prudently remains a challenge.
Our approach remains emphatically focused on capital preservation. Thanks to yields of more than 4.5% on demand deposits and more than 5% on insured three and six months U.S. or Canadian term deposits, we can comfortably and profitably maintain our significant cash hoard.
Our intention is to redeploy a big part of it, once stocks are correcting and economic visibility improves. Most analysts take the view that equities will hold their own in a soft landing scenario and experience a manageable setback in the event of a recession. This is not how we see it. I believe that most stock market sectors are considerably overvalued and will undergo a meaningful correction even in the context of a modest economic setback. I should also add that most of Europe and much of Asia is in a weakened state, which adds to the risk of a global recession.
Typically, gold prospers during recessions, making the yellow metal a potent hedge and portfolio stabilizer. Given the recent selloff in the U.S. dollar and gold’s mostly positive commodity fundamentals, we see no reason to reduce our 15% allocation to physical bullion. As I’ve said before, I am also encouraged by persistent central bank gold buying, particularly by the BRICS nations.
I’m frequently asked what I think of other commodities, especially considering my recession concerns. In today’s environment, the commodity sector’s performance is driven by more than just the state of the economy. Geopolitics, the worldwide imposition of green targets and other factors also play a role. I also note that so far in 2023 commodities have been the weakest asset class, a fact that is reflected in historically low valuations in the stocks of numerous producers. While we are sticking to top-quality names, commodity related equities make up roughly 20% of our equity holdings. The rest of our stock portfolio targets mostly defensive choices, with balance sheet strength, sustainable cash flow generation and dividend appeal being our key criteria.
Are we overly cautious? Quite possibly, but remember that the systemic setups in most of the world are faulty and that governments have avoided addressing inadequacies for far too long. When monetary and economic policy errors are papered over and unsustainable practices in agriculture, health care, education, environmental management are blindly pursued over decades, the odds of collapse grow exponentially. We can also look at the same picture from a different perspective: when a society keeps living today at tomorrow’s expense, which we in the West have been doing since the 1970s, a serious adjustment becomes inevitable.
My advice: invest defensively!
Best regards,
Peter Cavelti