The Real Threats

For some time, I’ve been trying to stay away from writing year-end reviews. Typically, the moment when I feel I have something to say doesn’t coincide with the end of the calendar year. Still, this is early January and I ask myself whether there is anyone out there who isn’t thrilled that 2022 is finally behind us. After all, the past year was strikingly different from what we got used to during the preceding decade or so—in a most negative way.

I’m not just talking about the damage to financial markets and soaring inflation rates. You could even argue that those are a mere inconvenience, and after five decades of unsustainable policies not much of a surprise. Yet, when we consider that one in six residents of Illinois receives food assistance* or that large numbers of Brits or Germans can’t pay their utility bills, the spectre of rising prices takes on more urgency. Even so, first world problems are hardly comparable with the unending misery that prevails in numerous African, Asian or Latin American countries. Worse, there are the hard combat zones themselves, with Ukraine front and centre.

But there are forces at work that far surpass the accustomed menu of financial volatility, political corruption and never-ending proxy wars. They’re threatening to upend the geopolitical balance, the social order, and the way we’ve lived and related for the past many decades.

If I had to identify the past year’s most visible gamechanger it would be the war in Ukraine. Russia’s invasion, the U.S.-led Western response to it has irreversibly impacted economic, fiscal, monetary, trade and social policies—not just in what we consider the first world, but in places like India, Nigeria, Brazil, Saudi Arabia and, of course, China. By convincing Europe to join the sanctions regime and directing massive military aid to Ukraine, Washington has effectively prolonged the tenure of its post-war supremacy, which was starting to wobble on numerous fronts. Yet, at the same time, the White House plotters have also served notice to numerous unaligned nations of what might happen to them if they didn’t dance to America’s tune. Since spring, a number of pivotal players have markedly distanced themselves from the US-EU axis, typically seeking closer relationships with the BRICS block.

One highly interesting aspect is the speedy evolution of supra-national alliances which are, in spirit, accountable to their members, but in practice are controlled by a major power. American- controlled military mechanisms like NATO or its Indo-Pacific partnerships like AUKUS (currently Australia, UK and US, with Japan considering membership) are a superb example. Washington controls the agenda and pays the lion’s share of these alliances’ expenses, provided its defense contractors get to supply most of the weapons. A neat, but utterly callous business model.

Conversely, without China’s consent new directions for the BRICS group are unthinkable, although much of the recent thinking about building trade patterns, establishing settlement alternatives that are outside of U.S. control and creating a commodity-backed currency, have clearly come from Russia.

Nor are the military or trade spheres the only example of the gradual subversion of national sovereignty. Arguably the most offensive example of the new dynamic is the European Union, run by a bloated bureaucracy whose key agencies are manned by unelected politicians.

On the corporate side, too, the trend toward centralistic models is firmly underway. The much- maligned World Economic Forum, with its vision of ‘stakeholders’ (think monopolies) being the guardians of the global socio-economic order is rapidly gaining ground, as are corporate- government alliances such as the worldwide effort to advance the surveillance state through digitization and other technological means. Let’s face it, quests for monopolies and centralization have historically boosted wealth and income disparity. After seeing a significant shrinkage of the middle class, particularly in America, it’s the last thing we need more of.

Investment Update

We entered 2022 with a substantial cash reserve and a significant holding of physical gold, feeling that bonds held no appeal whatsoever and equities were overvalued. Within the equity space we focused primarily on companies capable of generating strong and sustainable cash flow, but also held overweight positions in commodity-based selections. Those bets paid off. Our performance for the past year came in at a negative 3%, compared to a loss of roughly 18% in the S&P500, a whopping 30% drop in the Nasdaq, and the worst bond performance in recent history.

Looking at the period ahead, we remain concerned. While we’ve invested a small percentage in top-quality, short-term fixed income instruments, we believe the odds of a deep global credit crisis are still rising, which means that major segments of the bond market are still flashing red. Stocks, meanwhile, are a mixed bag. The current posture of central banks heightens recession risks and the odds of a shrinkage in corporate earnings. That, in turn, may lead to at least a retest of the 2022 lows.

What more is there to say? Our comments labelling cash as a highly important asset class were often ridiculed last year, as was our insistence that gold is a superb portfolio stabilizer. Yet, the record speaks for itself. To be sure, cash-like holdings yield little and lose value to inflation, but the “cash is trash” mantra can once again be dismissed—at least as a permanent guiding principle.

Gold did well too, ending the year where it started, but up 21% for the past three years and 45% for the past five years. The yellow metal’s 2022 performance is even more impressive when looked at in the context of the strong U.S. dollar. In Canadian dollar terms, gold rose 8.5% in the past year. In Euros it gained 9%, in British Pounds 16% and in Japanese yen 16%. Looking ahead, our expectations for gold continue to be at the high end.

Best regards,

Peter Cavelti