Gold bugs harbingers of a massive flight towards safe havens?
"But all I hear is doom and gloom
With all is darkness in my room"
Rolling Stones – Doom and Gloom
If we are to believe Donald Trump and Keir Starmer, this song by the old rockers reflects today's world. Trump said, "our country has gone to hell," and the British Prime Minister declared: "Things are worse than we ever imagined. That's what we have inherited. Not just an economic black hole. A societal black hole."
Pessimism is also abundant outside politics. The head of the International Chamber of Shipping stated: "The world order has never been under such threat since before the Second World War." Political risks are clearly a priority at the executive level; from nerve-wracking U.S. elections to an igniting Middle East and rising tensions around Taiwan.
Concerns about protectionism, populism, and geopolitical clashes make it clear that the impact of governments on business is growing. This significantly changes how companies are managed. One example is the shift from efficiency (principles like Just-In-Time) to building more certainty into supply chains.
With such a shift in the relationship between politics and economics and rising global tensions, it seems a wonder that many stock markets are still hovering around record levels. Are markets looking through rose-colored glasses, or do investors have Superman's X-ray vision, seeing through the noise and apocalyptic predictions, with positive outlooks ahead?
Many analyses suggest that politics and economics have never been so intertwined. This reflects a faulty memory. Disagreements between the U.S. and the Soviet Union were often economic in nature, partly because leaders realized how much security, political, and economic power are intertwined. Even though the trend after World War II was primarily toward economic integration and globalization, the Cold War created artificial, but no less real, economic divides.
Those divides are far less clear today; supply chains span the globe, capital flows (mostly) freely, migrants travel across the planet, etc. To illustrate, Apple relies on more than two hundred companies across dozens of countries for its iPhone production.
The global economy is still built on economic and financial integration—despite growing resistance to migrants and free trade. But the unraveling of the current system is a real scenario through:
Fragmentation of the Global Economy: Geopolitical rivalry leads to steps towards fragmentation into regional blocs. Through decoupling/friendshoring/onshoring/de-risking, countries and regions become more economically self-reliant.
Disrupted Supply Chains: The COVID-19 crisis exposed how vulnerable supply chains are. Disruptions in production chains and transportation problems contributed to very high inflation.
Debt junkie: The world economy is addicted to debt. Imagine investors beginning to distrust the U.S. government if tensions with China escalate because they suspect Washington can't manage huge extra defense spending on top of the costs of, for example, aging populations. The house of debit and credit cards built on the assumption that U.S. government bonds are (almost) risk-free could collapse. The consequences would be disastrous.
Transnational Issues (such as Climate Change): Insurers, (central) banks, and investors struggle with climate risks. The transition to a more sustainable economy requires massive adjustments and investments. International cooperation is essential for this, which is precisely what comes under pressure due to geopolitical tensions.
Financial markets seem, for the time being, to assume that businesses, the financial system, and politics will somehow manage a soft landing when geopolitical or related crises arise. But Financial Times journalist Alan Beattie writes what we have long been stating:
“The medium-term future for globalisation seems set: a struggle between Washington and Beijing for pre-eminence…which continually threatens to override economic efficiency with national security. The counterweight will come from geopolitical agnosticism among other governments and the endlessly inventive supply-chain managers of multinationals. Those countervailing liberalising pressures have won in the past. But the centrifugal forces pulling the trading system apart are by far their fiercest opponent yet.”
Are financial markets too complacent about dismissing political risks? Perhaps the strong rise in the price of gold over the past two years is just a prelude to an imminent mass flight towards safe havens. As the Stones sang:
"Ooh a storm is threatening
My very life today
If I don't get some shelter
Ooh yeah I'm gonna fade away
War, children, it's just a shot away."
Stay tuned for more insights in my next Global Political Analysis report.
Kind regards,
Andy
