One thing is certain: this year will go down in history. I try to anticipate how events will be assessed and justified in a few years’ time, and if I look at the last 25 years of my work, I have mostly been right. In about 14 days’ time, in issue 12, I will delve into the actual causes, but for now, I will simply state the following:
The Problems are Just Beginning to Show
Over the last 40 years, we have developed our economic system in an impressive way and achieved incredible prosperity, which has spread globally. Today, some Asian and Latin American countries enjoy a level of prosperity that would have been unthinkable 40 years ago. Technological progress in these regions is impressive, and shows no signs of slowing down. This is also a problem for the USA and Europe. The rest of the world is not only catching up; it is overtaking the West thanks to better demographic trends and impressive progress in applying manufacturing and IT solutions. These countries also have a solid foundation. Public debt is lower everywhere than in the USA and Europe, and the new debt trajectory is far less risky.
Self-Confidence Increases With Greater Economic Power
I expect Asian countries, in particular, to develop a growing sense of self-worth and mutual trust, strengthened by supranational cooperation. In view of the debt crisis in Western countries, I expect many countries to diversify their foreign exchange reserves more widely, and that this will increasingly take the form of purchasing bonds from Indonesia, Malaysia, Thailand, South Korea and China. This would also be in line with economic reality, given that these countries are trading more and more with each other.
Europe will Follow in the USA’s Footsteps
Over the past 15 years, defence stocks have effectively been uninvestable from an ESG perspective. Today, however, these shares are the main drivers of the rise in the DAX. The prospect of trillions being invested in the defence sector over the next five to ten years is causing investors to abandon their principles en masse and crave the associated returns. Over the next three to five years, Europe’s economy is expected to be stimulated by an increase in defence spending from 1.5% to 5% of GDP. This would also likely raise new borrowing from 3% to 5%, increasing overall debt. However, as can be seen in the USA, it is very difficult to reduce debt. Nevertheless, ever-higher debt leads to higher interest rates, which prevents long-term reductions in interest rates.
The USA is the World’s Most Important Capital Market
Over the past 15 years, a significant proportion of the world’s available free liquidity has been invested in US assets. Given the precarious financial situation in the US and the ever-increasing interest burden, a vicious circle is looming. Ultimately, there will only be one way out of this situation. The monetisation of debt through sustained bond purchases by the Fed, which will lead to devaluation of the USD. The USD will lead the devaluation and the euro will follow. Both currencies will come under pressure against Asian and commodity currencies. This process will begin this decade and transform hedging strategies. Even if your day-to-day business has other and seemingly more urgent requirements, do not let my warning about significant changes in currency and commodity prices go unheeded.
