The world of money should be in the crosshairs this New Year as wheels of change have been set in motion that cannot be reversed. The global pandemic forced governments to open the stimulus floodgates to prevent the economy from fragmenting. Government coffers stabilised the Australian economy to some degree and gave the people a safety net on which to rely. Not all countries were as fortunate, and as a result, the global economy contracted by 3% as published by the IMF. To that end, it is fair to say that a portion of the Australian economy and parts of the global economy currently play a role in the false economy.
The False Economy
What is a false economy? A false economy is “an action that saves money initially but, over a longer period of time, results in more money being wasted than saved.” (Cambridge)
On the African Savannas’ grass planes or under the oceans, the natural order of life plays out. Predators target the sick and the weak, and there is a natural process of elimination. The survival of the fittest rules the natural world; however, politics, money, and power dominate in the human environment. The importance of the analogy above is not for humans to predate on their own or to take advantage of the weak. It is to explain that for all things there is a time, season and purpose. In 2020, some companies could grasp onto ropes of survival, even though they have no future after the pandemic. They were disrupted by automation, for example, and regular business evolution cycles. Nevertheless, government stimulus packages and protection measures provided temporary security blankets for distressed companies.
Moreover, some businesses were already part of the zombie economy and on their last legs. The issue of saving companies was the right gesture, and it did prove that the Australian government does take care of its own. The underlying problem is that the support is of a blanket nature has not been targeted enough to make a real impact to aid economic recovery. Jump-starting dead or dying horses will not prove profitable in the long run, and it will only take longer to realise growth across all sectors if precision is not adopted early.
Targeted Capital Expenditure is Required
There needs to be a quicker process to analyse potential and target capital, where it has the greatest potential to generate adequate returns. There will continue to be job losses through this challenging period, and humans will never return to some jobs once automation fully kicks in. However, new jobs will be created, and there is already a shortage of skilled professionals within the technology and medical sectors. New jobs have been generated within the Fintech environment, and blockchain implementations across transportation, freight, and logistics have given rise to even more unique roles.
Post-COVID, there will be many changes made in the local sphere and on an international front too. There will be currency fluctuations, currency wars, trade wars, further supply chain disruptions, and unfortunately, the gap between rich and poor will widen even further. Further loss of life is inevitable, and life will remain the core focus for most nations’ governments. The wealthy will have the opportunity to expand their wealth dramatically. In contrast, most of the small business segment that accounts for 35% of all the value generated in Australia will have to be extremely innovative to survive through the next few years.
Sweeping new laws have come into effect on the 1st of January 2021, that target debt. The protection measures that the Australian government provided to small businesses amid COVID-19 has just fallen away. A similar model engineered from the American model of Chapter 11 has been implemented. There will be restructuring required for companies carrying more considerable debt burdens, or businesses will have to file for bankruptcy if unable to pay their debts.
Nothing is as it Seems (The Matrix)
Warren Buffet indicates that the U.S stock market is overvalued by approximately 200% yet, most large financial institutions believe that 2021 will see a positive return to a form of normalcy. “The U.S. federal government spent $6.55 trillion in 2020, while tax receipts and other revenue trailed at $3.42 trillion.” (New York Times).
Morgan Stanley’s sentiment is that the global economy will realise GDP growth in the region of 6.4% when economies gain stable footing and reopen. The prediction is that emerging markets will lead the way to growth followed by the economies like the U.S., Europe and Japan to close off the year on a positive note. The economy may very well grow in 2021 and prove sceptics wrong. However, this time around, there are too many adverse conditions to consider. Shocks in the market amplify amid the pandemic and contrasts between the 2008 recession, and the 2020 downturn are far more apparent. The next financial crisis will make the 2008 recession look like a blip on the radar as governments increase spending and expand deficits. To date, the world is in debt closer to the tune of USD 260 trillion, which is an enormous bubble waiting to burst. A debt burden of astronomical proportions yet the financial elite call for calm as things find a ‘new normal.’
When COVID struck the world, there was panic buying of medicines, PPE equipment, food and toilet paper. Borders were closed, and the world became more isolated, even states closed off their boundaries within the same country to prevent the spread. The COVID induced recession caused pension funds to focus on liquid assets when the Australian government allowed individuals to draw down a portion of their superannuation. Nevertheless, there is still not much clarity to the state of well-being of the local and global economy. The current economy is based on assumptions, projections, sentiment and overly masterminded calculations. The truth is that the world was already treading deep water before the pandemic arrived. We were in a much better position before central banks abandoned the gold standard in the 1970s, and the most significant fraudulent activity of our time was to allow money printing from thin air. Quite the opposite of spinning straw into gold (Rumpelstiltskin).
The 2019 & 2020 Gold Rush
Market uncertainty perceived to be fuelled by the COVID-19 pandemic began in 2019 when central banks added 650 tonnes to their reserves. The pandemic’s unpredictable movements and barriers have seen most asset classes affected. Geopolitical reasoning, currency fluctuations, and economic strategies are the unlined reasons behind the quest for gold and gold repatriation from offshore vaults.
Gold has weathered the storm and has performed outstandingly throughout history, which is why we used the ‘gold standard.’ Gold jumped 11% in 2020, which is a worrying sign. Overpriced stocks and the inability to accurately predict outcomes is pushing investors toward gold in droves. Amid the pandemic, currencies are expected to fluctuate further from normality, and the security and liquidity of gold is a strong allure. Volatility across all asset classes and global equities see investments gravitate toward safe havens but none as unique as gold. Gold has stood the test of time and is considered a procyclical and counter-cyclical asset class. Gold is also a highly liquid asset that helps to balance out risk in portfolios. For the last 20 years, gold has outperformed most major asset classes, including emerging market stocks and the U.S. bond aggregate. From the perspective of holding value and the high liquidity of gold, nothing is quite like it. However, gold is not the solution to the problems the world faces. In light of political aggression and China’s emerging power’s assertiveness, the issues are only exacerbated.
The contingent factor is the COVID vaccine that is the hope of nations and is depicted as the catalyst that reactivates the economic engine’s vibrancy. Whether or not the vaccine is accessible to the masses and remains useful as time passes is left to be determined.
The outlook for 2021 is centred around public health, economic recovery and policy drafted to improve opportunity and regain stability. Suppose your business is not in step with the economic cycles and has not put protective measures in place to ensure continuity and risk mitigation. In that case, your risks are even higher.
Strategy Hubb can assist with planning, restructuring, financial modelling and business strategies to limit your risk exposure. The world is in the hands of the ones who are best prepared.
Disclaimer: Please note that the information provided in this article is not to be considered as financial advice. Please seek advice for your personal or business matters from a qualified professional or make contact with myself or one of the team at Strategy Hubb to tailor custom solutions to accommodate your circumstances.