Bitcoin & crypto interview: “Nothing can stop an idea whose time has come”
2020 was a great year for precious metals, but it was also an exciting time for Bitcoin and for the crypto space in general. We saw remarkable price gains and a surge in institutional interest, reflecting the renewed enthusiasm and overwhelming optimism about the prospects of cryptocurrencies and of Bitcoin in particular.
At Global Gold, we’ve long opposed the view that cryptocurrencies and physical precious metals are somehow in competition or that the rise of Bitcoin would threaten to displace gold. On the contrary, we saw the potential synergies very early on and we realized the two asset classes could complement each other and together render a portfolio even more robust and resilient. Given the latest developments in the crypto space and the investor interest they’ve garnered in recent months, we decided to take a closer look at the forces driving the crypto rally and shap- ing the future of cryptocurrencies.
To help us understand these drivers and to really appreciate the full potential of Bitcoin and the crypto sector at large, as well as to get to the bottom of questions we often hear from clients, we turned to Jeff Nabers, a long-time friend and close partner of Global Gold, and the BFI Capital Group in general. He has founded multiple success- ful companies in the US in the fields of mort- gage brokerage, real estate investing, pension consulting, and crypto-asset investing. Jeff has extensive and direct experience in the crypto space, combined with a deep understanding of economics, monetary his- tory, and financial markets, a combination that makes his insights particularly valuable, especially for the more conservative, “traditional” investor. Jeff also serves as an Advisory Board member to the BFI Capital Group, where he supports BFI in the realm of alternative investments and crypto assets. I’ve personally known Jeff since 2010, when we started helping mutual clients not only access physically allocated metals storage with Global Gold in Switzerland, but with other wealth management and wealth pres- ervation tools for US investors.
In the interview that follows, Jeff’s point of view focuses on the practical advantages and the straightforward investment impli- cations of the “rise of crypto” and addresses the core concerns that every responsible investor has about the current financial and monetary system.
Scott Schamber: Jeff, our relationship already predates when I first joined the Global Gold team in 2017, although I knew you obviously before that while working for the BFI Capital Group. As a bit of intro, can you give us a brief his- tory on how you started offering Global Gold to your clients?
Jeff Nabers: In 2006, I started a consulting firm to help investors prepare in advance for the crash that came in 2008. My clients and I were largely invested in real estate at the time. We were reducing our exposure to real estate and holding large positions in cash. I was surprised by the magnitude of the money printing and bailouts that occurred. We were all concerned about inflation and even the potential for hyperinflation. All of my research led me to pre- cious metals as a hedge. The problem I was aiming to solve was to protect wealth for the worst-case scenario of hyperinflation. That sent me on a search for international jurisdictions and led me to Global Gold in Switzerland. Through multiple trips to Zurich, I became confident in the Global Gold team and have introduced many mutual clients to the program. We all sleep better at night.
SS: Obviously, our main theme today is Bitcoin and cryptocurrencies. How did you get started on the whole subject of crypto and what led to this focus you now have in it?
JN: I’ve been an early adopter of computer technologies from childhood onward. I started out writing computer programs to play pranks on family members, but since, have observed how innovation pro- gresses. I’ve noticed patterns of what works and what doesn’t. Bitcoin was launched in 2009, as a response to the financial crisis and bailouts. At first, I thought it would never work and that the hyperinfla- tion problem was fully solved by precious metals alone. In 2013, the topic of suspected manipulations in the supply of the gold market caught my eye and caused me to take a second look at Bitcoin. I was surprised to see Bitcoin not only had not been hacked or destroyed by governments in its first 3 years, but that the price had appreciated by over 50,000%. That’s when I suspected something much bigger was going on and began investing in Bitcoin with a long term buy and hold strategy. I expected that if it hadn’t completely failed and gone to zero in another 3 years—which would be in 2016—it would confirm that something truly paradigm changing was in fact occurring. Of course, that confirmation did come, the price has appreciated by another 67,000% and I do believe the paradigm has changed. Behind the attention-grabbing outsized capital appreciation there is a much bigger story of the restructuring of society.
SS: Over the last few months, we witnessed spec- tacular moves in the Bitcoin price, including the recent shattering of the $20K ceiling. As a result, the cryptocurrency is making headlines again and attracting mainstream attention, much like it did during its first big rally in 2017. Should we expect a massive correction to follow, like it did back then? Or is this time different?
JN: In my view, there is a high probability of a major correction after a much higher new all-time high is hit, perhaps around $50,000-$100,000. One of Bit- coin’s novel properties is the network reduces its inflation rate every four years, predictably increasing its scarcity. This appears to create a four-year cycle that results in a bubble and subsequent correction. The trick to see the cycle is to view the BTC chart on a logarithmic scale plotted over at least 8 years, which covers two cycles. In light of that, the question becomes “where are we in the 4-year Bitcoin cycle now?” The answer is we are in the “2016” phase of the cycle. If the analog completely held up, we would be in a big bubble at the end of 2021 at a price of approximately $250,000. What is different this time is institutional adoption amid radically experimental fiscal and monetary pol- icy. This increasing demand could make the bubble occur at a much higher price point and lead to a cor- rection period that is shorter.
SS: A lot has happened in the crypto space between the 2017 peak and this year’s resurgence. There were countless startups, initial coin offer- ings (ICOs) and new concepts popping up amid the first rally, but after the collapse, we saw inves- tor interest subside quite dramatically, especially on the retail level. Did that dry spell help purge bad ideas and bad actors from the crypto space, leaving mostly more sophisticated investors and solid companies behind?
JN: Yes, many bad ideas and bad actors have been purged. There have been winners and losers. Bitcoin won the digital hard money contest. Remaining crypto assets, often called “altcoins”, are in two camps: one is crypto projects trying to create finan- cial instruments that work with stablecoins, which are crypto equivalents of dollars, euros, etc. The sec- ond camp is that of zombie coins whose long-term value is zero.
SS: For a lot of conventional investors, this crazy volatility can be off-putting, too reminiscent of past frenzies and bubbles. Many have a hard time understanding what the intrinsic value of Bitcoin and similar cryptocurrencies is, or even if they have any at all. Apart from enthusiasm and specu- lation, what is driving the price? What sets this class apart from common fiat currencies that are unbacked and run on faith and trust?
JN: This is a truly great question and gets into the meat of the topic. Most cryptocurrencies do have a long-term value of zero. Bitcoin stands alone in the digital hard money category. Its intrinsic value comes from its scarcity, security, liquidity and divisibility. Scarcity: Its value is determined—just like all com- modities—by supply and demand. The supply of Bit- coin is capped, and its inflation rate is 1.78% and decreasing. Unlike a political promise that can be broken, Bitcoin’s supply cap is hard coded and immutable. The certain supply cap itself generates demand. Any asset with a capped supply and increasing demand increases in price. This leads to a positive feedback loop, also known as reflexivity. Monetary expansion is fuel on the fire of demand for Bitcoin, which accelerates the positive feedback loop. One interesting possibility is that we may already be in the early stages of hyperinflation and Bitcoin is unique in its hardness. Amidst monetary expansion, scarcity captures value.
Security: It’s important to highlight here that, while exchange companies have been hacked, the Bitcoin network itself hasn’t. This is just a sign that BTC shouldn’t be stored on exchanges. When handled properly, Bitcoin is an asset that cannot be seized. Every Bitcoin address has the equivalent of a highly sophisticated foreign trust asset protection strategy natively built in. Bitcoin exists in a digital domain where physical force cannot coerce the network to stop processing transactions or freeze someone’s funds, even if ordered by the most powerful person or group in the world. This is truly novel and in increasingly high demand. Liquidity: Bitcoin is traded digitally, 24/7/365. A per- son can execute a $100 million transaction in Bitcoin in a matter of minutes for a fee of $6.80 (as of 12/27/20), even on a Saturday night. No other asset or financial system comes close to this. Divisibility: This topic is often overlooked and underestimated. Even though there is a hard cap of 21 million BTC, there is more than enough Bitcoin for everyone in the world to use. In fact, every BTC is actually 100,000,000 transactable units called Satoshis, or “sats” for short.
This is the first time in history we’ve had a hard money that has a capped supply and infinite divisibility. Everyone in the world can get their hands on BTC by simply accepting BTC as payment for the products and services they sell to the marketplace. One sat is currently worth $0.0002715230 (as of 12/27/20).
Now let’s talk about faith and trust. 2020 was the year that a lot of trust was lost. Banks, government, and big tech have invaded our lives in ways we never thought possible. Trust in large industrial-era institutions is waning. Bitcoin represents a trust in hard coded promises that can’t be broken, backed by the same cryptographic technology that secures our nuclear weapons.
Volatility: So how can an investor come to terms with the volatility? Understanding Bitcoin volatility starts with properly viewing a chart. This involves a logarithmic scale and one-week (or one-month) candles that allow all of the price history to be viewed in one picture. That shows a long-term trend that looks nothing like a bubble.
Most Bitcoin charts you see on TV are of too short a time frame or plotted on a linear scale, or both. That creates a distorted picture that suggests the volatil- ity is equally up and down.
The corrected chart shows the upward volatility has far outweighed the downward volatility. In this sense, investors want this volatility. There is also the bias of awareness. For most inves- tors, 2017 was the first time Bitcoin entered their awareness, so they view $20,000 as Bitcoin’s start- ing point. Of course, the full picture is that over 24,000,000% price appreciation occurred before the 2017 high that was the attention “starting point.”
The lesson investors are waking up to is that Bitcoin may be best held for multi-year periods, or even indefinitely.
Institutional investors have learned to holistically look at the effect of Bitcoin added to a portfolio of other assets. In that view, Bitcoin often reduces the volatility of a portfolio because it is an uncorrelated asset. Uncorrelated assets are in high demand and low supply. This is why we see increasing institutional adoption of Bitcoin.
Another critical piece is understanding the “network effect” on value, known as Metcalfe’s Law. In a network, for every node or user added, there is an exponential increase in the value of the network. If you had the first telephone, but nobody to call, it isn’t worth much. But as users are added to the telephone network, the value grows. What’s counterintuitive is that the value doesn’t grow proportional to the user growth—it’s exponential. This was discovered by Bob Metcalfe, who is also the inventor of ethernet (that cable you plug into your computer to hard wire into the internet).
Metcalfe’s Law is observed in the values of Google, Facebook, and other big tech successes that harness network effects. Now Bitcoin is harnessing the network effects of the biggest network on earth: money. Our brains don’t grasp exponential increases very well. Any asset that captures network effects tends to be undervalued during its growth of adoption. This means that if the Bitcoin network market cap becomes $20 trillion, it will be highly doubted every step of the way, just as it has been every step of its past.
SS: Ever since cryptocurrencies entered the main- stream, a lot of experts and insiders have been stressing the importance of the blockchain itself as a revolutionary technology, rather than its more well-known individual applications, like Bit- coin. Do you agree with that view and do you think we can expect to see more use cases in more industries, well beyond currencies and payments applications? Could you give us a few examples?
JN: I think there will be quite a bit of success and innovation in the blockchain technology space. It’s still very early to tell where the success will be, but Bitcoin’s success provides a few hints, which we can now explore.
Bitcoin is successful because people trust it. People trust it as an (indirect) effect of being open to the public and open source.
Open/public networks: When a network is open, the security is outsourced to volunteers (miners) who are compensated in the native crypto asset (e.g. BTC). This is basically a game of incentives. Against all odds, it has produced a superior security model that is highly trusted and virtually unbreakable.
Open-source software development: When soft- ware is developed open-source, volunteers from around the world contribute to building it. Anyone can submit code, and the community operates as a meritocracy to select which contributions get pub- lished into production software. Because anyone can see the software code, “white hat” (e.g. good guy) hackers can try to poke holes and discover vulnerabilities so they can be patched.
There are 12 million open-source developers in the world. When a strong developer community emerges around a project, development and debug- ging can happen much more rapidly than with traditional development.
Bitcoin, being an open network run by volunteers and built by volunteers, has created a system of incentives very different from the corporate struc- ture of a company. A typical software company is built and run by employees who are vetted and managed in a conventional hierarchy.
These differences are expressed in four quadrants, as shown in the diagram. I believe there will be successes in all four quadrants. Quadrant 1 is often called “blockchain.” Quadrant 4 is “crypto.”
Closed networks, also known as private blockchains, rely more on trusted parties. Private blockchains are attempting to prove their security models, and only time will tell. This represents a smaller step of inno- vation but may benefit from the familiarity of using trusted intermediaries.
Closed source blockchain projects may build great things, but they will find it hard to do so at the speed of open-source projects. As a result, closed source projects’ success will come down to the team and execution.
That said, Bitcoin stands in its own category. It is an alternative to central banks. Money is the largest human network on earth and harnesses network effects. That’s why I’m particularly excited about Bit- coin. I think it’s the biggest innovation the world has ever seen, and the world is waking up to that realization.
Beyond Bitcoin, Ethereum is currently the leader as measured by development progress and total value locked in crypto financial instruments. Early use cases in Decentralized Finance (DeFi) include borrowing and lending, prediction markets, and other instruments such as decentralized insurance.
Will private blockchains disrupt Ethereum? Only time will tell. I suspect much progress is being made on private blockchains, but it is done behind closed doors and may surprise us when revealed.
SS: While mainstream coverage of the crypto space has been obsessed with price moves, there was another huge shift in the sector over the last year, namely institutional adoption. There were massive investments from large banks in Bitcoin and other crypto and digital currencies and a great increase in governmental interest too, especially in the underlying technology. Is this a sign that crypto is “maturing” and could that translate to a future decline of the volatility that is characteristic of this asset class?
JN: Yes, we are witnessing a maturing process with Bitcoin specifically. If the USD or gold had as small a market cap as Bitcoin and tradeable 24/7/365, they would be as volatile.
As the market cap grows, the institutional interest is expected to increase. This is because the larger the market cap, the better it can absorb large institu- tional allocations without price slippage.
Lower volatility over time also has second-order consequences. Money has three functions: store of value, medium of exchange, and unit of account. Right now, Bitcoin adoption is progressing primarily on store of value. There is supreme cost effective- ness as a medium of exchange for large transactions, but not for small, daily transactions. A future larger market cap with lower volatility might encourage adoption of Bitcoin (or sats) as a unit of account, which would be a further paradigm shift. Imagine pricing your products and services in sats. There may come a day where this is our reality.
In crypto (distinct from Bitcoin), decentralized finance is largely based on stablecoins that are fiat money equivalents and have no volatility. On that front, it is still experimental and early, but exciting. One day in the future we may see in place of an insurance com- pany, an insurance network that runs itself based on software code. Lower costs and faster under- writing would be a well-received benefit.
On the Ethereum network, the concept is still being proven. It works but is not yet scalable. A series of software upgrades over the next few years promise to bring scalability. There are also several other Ethereum competitors, but each with a developer community that is much smaller to date.
Ethereum volatility is more like oil volatility, as it is used as fuel to process transactions for smart contracts. Ethereum is akin to the oil industry before cars and plastics were widely adopted, so it is more bleeding edge and still early in development.
SS: Even though there’s been a remarkable increase in acceptance and interest by institutional and large investors, there hasn’t been a corresponding surge in mainstream, daily use of any cryptocurrencies, not even Bitcoin. Of course, there are more shops and online vendors that accept payment in it, but as you mentioned, we’re not seeing a great surge in BTC use for small, everyday transactions. Why is that?
JN: Nobody wants to spend $100 worth of BTC on consumption if it involves losing one’s claim to a potential future value of $1000. Deflation incentivizes saving over spending.
As a result, Bitcoin is being increasingly adopted as a store of value that is scarce, secure, liquid, and divisible. It was actually never designed to be a global currency. The mysterious inventor intro- duced the world to Bitcoin with his white paper in 2008. Reading that paper, you can see it’s all about a system of value storage and transfer that doesn’t rely on financial institutions.
Ultimately, calling Bitcoin a cryptocurrency is a misnomer. I call it a crypto asset. I believe it’s on a long-term trajectory to become a global reserve asset. Other instruments, like stablecoins, are more suited to become currencies. They are backed by and pegged to fiat currencies currently, but we could later see those instruments backed by Bitcoin. I expect we will eventually see sovereign nations adopting Bitcoin as a reserve asset.
SS: Regulation has long been seen as a threat to innovation, investment and mass adoption of cryptocurrencies and the media coverage has fanned these flames. We often see stories about money laundering, tax evasion and even terror financing, portraying cryptocurrencies as the “bad guys’ money” and thus, justifying a regulatory crackdown. What are the most important regulatory changes you’ve seen since 2017 and do you expect governments to become even more aggressive going forward?
JN: The OCC clarified that banks can custody crypto assets this year. They further clarified that this even applies to stablecoins. This is a big deal. This banking regulator in the U.S. just told U.S. banks they can hold BTC as well as Ethereum-based coins for their customers.
I’m a rational optimist. I believe nothing can stop an idea whose time has come. I think this extends to crypto innovation. Any government that suppresses the technology will simply be giving competing governments an advantage. If one government backs their currency with Bitcoin, competitive forces will lead to other governments following suit.
At a scale never seen before, I expect we are about to see competition among governments. In the short term, there will probably be a few heavy-handed moves to try to restrict the movements of crypto assets. The U.S. government has to be careful in this regard, as such moves could create big opportunities for the Chinese government to seize power by giving the world market what it wants in the form of welcoming innovation.
SS: Many conservative investors, including us at Global Gold, see privacy and the idea of decentralization as the primary attraction of Bitcoin and other currencies like it. In a world that is increasingly connected and centrally controlled and monitored, do you expect these “selling points” to become more appealing to mainstream inves- tors and even ordinary citizens?
JN: Yes. In a way, 2020 has been a giant counterexample to statism. Whether or not they label it as such, billions of people are having libertarian thoughts. Competitive markets have a way of turning self-interest into the greater good. Bitcoin brings competitive markets to money.
People don’t genuinely pursue a solution until a problem is too painful to bear. The current economic environment is likely to lead to strong infla- tion or even the maximum pain of hyperinflation. If we look at recent cases of strong inflation, such as Venezuela or Argentina, nobody had to be talked into adopting Bitcoin there.
They “got it” very quickly because it helps to relieve their pain by storing the value of their savings and thus avoiding a total loss. It also facilitates trade in an environment where nobody wants to use the fiat currency anymore. If the world reserve currency (USD) goes into strong inflation, there will be billions placed in a scenario not unlike people in Argentina.
Even without hyperinflation, the pain of missing out on the capital appreciation of Bitcoin will continue to push more people over the line of adoption. The political and economic climate we are seeing is a perfect storm for Bitcoin adoption. If we end up in a mega bubble in Bitcoin, I see it being above the $5,000,000 price level in current dollars. Due to the nature of inflation, that bubble may be nominally priced into the quadrillions of dollars at which point the use of USD as a unit of account will break down.
"If we look at recent cases of strong infla- tion, such as
Venezuela or Argentina, nobody had to be talked into
adopting Bitcoin there."
In other words, the “selling point” for Bitcoin isn’t the details of how it works... it’s relieving the pain of the growing problems it can potentially solve.
SS: Apart from the huge financial and economic implications of a shift towards digital and crypto- currencies and away from fiat money, do you also expect to see a wider political and social effect through decentralization?
JN: Yes, but I’m unsure in what time frame. There are some very interesting aspects of crypto governance that have emerged. For example, Bitcoin had a major community disagreement in 2017 that resulted in a “hard fork,” which is a software equivalent to secession.
As more of the world’s financial data and financial instruments migrate onto crypto networks, “we the people” gain the power of self-governance. This may be further down the road, but it’s coming, and I welcome it.
Imagine a Constitution that can’t not be followed. Imagine a court that can’t reach an unfair verdict. Imagine an industry where systemic corruption is impossible. Imagine books that can’t be cooked. And imagine all of this happens seamlessly, auto- matically and instantaneously. This is our future.
These are the implications of crypto expansion in the decades to come.
In the medium term, I also see decentralized disrup- tion of Google, Facebook, and Twitter. They have taken a turn toward censorship and manipulation of public opinion. People don’t like that. We will eventually have social networks that run on algorithms we control as users. On those networks, censorship of information will be just as impossible as stopping a Bitcoin transaction. I also welcome this type of decentralization, but from a computer engineering perspective, it will take perhaps five to ten years to build.
SS: A lot of commentators, especially during the 2017 highs, rushed to declare Bitcoin “digital gold” and claimed that it would overtake precious met- als and make them obsolete as investments. So far, we’ve seen nothing of the sort. Quite the opposite, we’ve seen more of a symbiotic rela- tionship between physical gold and Bitcoin, rather than a competitive one, as they coexist in many conservative investors’ portfolios. What is your take on this, and do you think precious metals, especially in their physical form, still have their place in a modern and forward-looking portfolio?
JN: If you’ve seen the Netflix documentary The Social Dilemma, you know that social media has been pitting everyone against each other and cre- ating a false sense of a zero-sum game. Capitalism creates a positive sum game. One can win without another losing. This is life, not the Super Bowl. Every year since 2013, I’ve held Bitcoin and gold in my portfolio. They are definitely symbiotic and complimentary. The risks to each are different and I think it’s a mistake to view them as mutually exclu- sive. Conservative investors should be concerned first with capital preservation. Bitcoin and gold are both tools for the job.
The conservative investor’s guide to 2021
Around the world, the new year was welcomed with an incredible amount of optimism, hope, and a universal sigh of relief as the “annus horribilis” that was 2020 finally came to an end. When it comes to projections and expectations about the economy, those hopes are even more bold, with institutional figures, political leaders and mainstream commentators forecasting a sharp recovery.
While we certainly hope for such scenarios, it is also clear that one cannot build a sound investment strategy based on wishful thinking. One must respond and adapt to the conditions, challenges and risks as they are, not as we all hope they would be.
The "snap back" hypothesis
As we never tire of highlighting, at Global Gold, we are always skeptical of, or of put- ting too much faith into, forecasts and predictions. The idea that one can fully know and understand every little cog and moving part of the spectacularly complex machine that is the global economy already appears dangerously hubristic. Thus, the even bolder claim that the intricate interactions of all these forces and their outcomes can be foreseen and suc- cessfully bet on really stretches credulity.
That said, a solid understanding of eco- nomic principles, historical patterns and cycles, as well as an accurate and unbi- ased reading of the present conditions can certainly be very useful in identifying the most likely direction in which we’re headed, and along with that, the key risks and opportunities that lie ahead. In this “big picture” context, it is apparent that there are considerable challenges and obstacles in the path of the recovery and the return to growth that many mainstream analysts see as a foregone conclusion. Over the last year, we certainly witnessed an unprecedented, global and concerted campaign of fiscal and monetary support, with historic “relief” packages, money printing and official assurances that “lower for longer” interest rates are a policy that will stick around for the foreseeable future. This enormous support and the pledges for its continuation, as well as the hopes of a swift and effective vaccine rollout, were the main reasons behind the widespread optimism and the seemingly paradoxical stock market rally. However, without sum- marily dismissing the impact of these policies, we must also acknowledge the opposing forces from the real economy.
Unemployment continues to be at extremely high levels across most West- ern nations. Despite broad government support, salary subsidies, loans, and other incentives to prevent mass layoffs, the toll of the lockdown and shutdown orders was still very high. The wave of bankrupt- cies and permanent business closures that they triggered quickly translated to permanent job losses. In the US, Chapter 11 filings hit their highest point in over a dec- ade in 2020, demonstrating just how extensive the damage has been. And we don’t even have the full picture of this damage yet.
The various “relief” payments widely dis- tributed in some form or another to busi- nesses affected by the lockdowns are still masking the real state of the private sector and small and medium sized businesses, in particular. Many remain active on paper only to con- tinue collecting state support for as long as this is given out, without the intention, or in fact, the capac- ity to reopen once the lockdowns and restrictions are lifted. In other words, they are de facto already bankrupt, but don’t show up in any official data yet. Such distortions that can lead to overconfident pre- dictions are especially worrying in EU member states. There, the incentives to postpone declaring bank- ruptcy and to try to recuperate some of the losses though the state subsidies and the relief checks were much stronger, as was the impact of the pro- longed and strict lockdowns themselves.
Another issue of grave concern is, of course, the massive borrowing that exploded in 2020. The pre- existing and already giant mountains of debt were a heavy enough burden to darken the economic out- look even before the pandemic, but the record-shat- tering surge we saw over the last year moved this issue much closer to the top of the list of risks and challenges for the months and years to come. Throughout this ordeal, central bankers and govern- ment figures have insisted on highlighting how necessary it was to provide a “bridge” over the eco- nomic devastation and the plunge of global output, channeling the former ECB head, Mario Draghi, and his (in)famous “whatever it takes” stance. In fact, judging by all the political speeches and the prom- ises of more spending and more support, it might appear as though debt and deficits, once seen as sure signs of irresponsibility and mismanagement, have now become a kind of “patriotic duty”. Encouraged, applauded, and widely expected, debt accumulation is now perceived as a “medicine” rather than the terrible disease it really is.
It’s an interpretation that certainly matches the big- ger policy shift that’s underway: the move to embrace “Modern Monetary Theory” and bring it into mainstream, and into commonplace fiscal and monetary practices. Yet, as mentioned in the begin- ning, one cannot build an investment strategy on wishful thinking; the same is true of economic and fiscal policy. Choosing to believe or trying to con- vince other people that “deficits don’t matter” and that a developed nation “can never go bankrupt” does not change the fact that neither of these things is actually true. And while the “borrowing, printing and spending” strategy can probably be sustained for some time - at least as long as interest rates remain artificially suppressed - it can certainly not be sustained forever.
A crisis like no other
All economic crises and recessions tend to have a much more pronounced impact on those at the lowest income levels. This is true in a practical sense, as the losses, even if they look “evenly distributed” in theory, are felt much more directly by those already struggling and with little to spare in the first place. What is different this time is that this effect of unequal distribution of the damage was baked into the crisis itself from its very beginning, something that immensely amplified the disparities and the gap between “winners and losers” that the covid crisis produced.
Right from the very start of the lockdowns and the shutdowns, it was clear that it would be the low- income, low-skill and low-education jobs that would vanish first. Millions of low-wage workers in the hos- pitality, entertainment, retail, transportation, and travel industries have been rendered unemployed by those policies. The poor, the marginalized and the vulnerable have suffered disproportionally. Their jobs can’t be done remotely, and they don’t have the required degrees or skillsets to jump between sectors or join the now boosted “digital economy”. That’s a sharp contrast to other segments of the workforce. IT professionals, for example, actually saw pay bumps since the lockdowns began. On average, corporate executives, managers, and other white-collar professionals who were already in higher income brackets were also minimally impacted. This striking divergence can be clearly seen to its extremes in the developing world, where poverty rates ballooned. But this “great divide” and its socio- political implications are also becoming painfully apparent in the West too.
This overwhelming and widespread sense of unfair- ness, the fear over lost jobs and incomes that aren’t coming back, and the pent-up anger and the “cabin fever” after a year of lockdowns and isolation created a perfect storm for social unrest. With the “public square” having moved entirely online and under the control of algorithms designed to maximize tribalism and division, justified concerns and complaints soon turned into bitter resentment and often to blind hate and an appetite for destruction. As we saw after countless protests and riots in the US and around the world in recent months, anything can serve as a trigger, while preexisting tensions and long-standing grievances can be supercharged and explode in dangerous, destabilizing and often fatal ways.
This is a risk that we definitely haven’t left behind in 2020. While it remains a concern for most Western nations, it is arguably most acute in the US. Contrary to the projections of mainstream commentators and political pundits, the recent election did not bring about a sense of unity, nor did it “heal old wounds”. Those predictions were entirely and spectacularly wrong, as evidenced by the extreme public polariza- tion following the election and its violent escalation with the dramatic events at the US Capitol on January 6th. At this point, there’s no reason to believe anything will change after the inauguration, apart from a possible further deterioration in national and social cohesion.
Apart from social and internal frictions in the US, there’s also reason to fear instability and turbulence over in Europe too. With Brexit finally done, this year could already provide some hints as to how accurate all the doom-and-gloom predictions of the UK’s fate really were. Before the referendum, but also for the years thereafter, the domestic “Remain” camp, along with most EU leaders, relentlessly threatened “Leave” voters and supporters with imminent and absolute economic ruin. According to that worldview, Britain had everything to lose and nothing to gain by leav- ing the European family.
While it is certainly too early to tell who will actually win or lose from this historic “divorce”, there are some initial clues we can gather from comparing both sides’ management of the pandemic. The vaccination drive is a good, recent example. Not only was the UK first to approve and procure the first doses, but its rollout has so far been a lot smoother than that of the rest of Europe.
The EU's decision to handle this entire process in a centralized manner quickly translated into delays and a Union-wide logistical mess. The doses that were eventually secured were nowhere near the number that was promised and almost all member states had to revise their goals and timelines. Meanwhile, that “united front” that the collective approach was meant to project was severely damaged by the news that Germany, the de facto “head of the European family” had actually conducted its own negotiations with vaccine manufacturers and secured extra doses for itself.
'Discontent with the EU has been brewing for years and
the current crisis could very easily ensure it boils over.'
Those frictions within the EU block are bound to intensify in 2021, as the full effects of the crisis become apparent. The members that were hit the hardest by the pandemic, like Italy and Spain, were already under severe economic pressure even before the virus emerged. Discontent with the EU has been brewing for years and the current crisis could very easily ensure it boils over. It is very ques- tionable if the bloc could survive another wave of Euroscepticism and the reemergence of populist and nationalist political forces as we saw in 2018. Those survival odds are even slimmer without Germany in its current role, i.e. the political and eco- nomic glue that holds the EU together. With the “eternal Chancellor”, Angela Merkel, set to leave office in 2021 after 15 years, uncertainly abounds not just for the future course of the largest European economy, but also for the future of the Union as a whole.
The shifts in Asia are even more profound and complicated. Having emerged comparatively unscathed from the covid crisis, China is set to play a key role in the new year, and arguably, in many more to come. Its economy recovered quicker than most, the dis- ease was seemingly contained, and life soon went back to normal, even in Wuhan, where the virus emerged. Overall, the impact of the crisis, juxta- posed to the damage suffered by the West, was remarkably light for China. Politically, it also suf- fered minimal blowback, at least on an official leadership level. While there were initial reports and misgivings about the country’s handling of this pub- lic heath disaster and about the timing and quality of the data it shared with the international community, they eventually amounted to nothing. If anything, 2020 was a good year politically, as Donald Trump, the Asian nation’s most vocal critic, was replaced by Joe Biden, whose stance will likely be much less confrontational.
As the rest of the world reopens and starts recovering, China also stands to gain a lot from the trade partnerships and international investment network that it has been building for years, especially in the developing world. At the same time, its de-dollarization campaign, together with Russia, could start bearing fruit this year in a meaningful way. In early January, the two nations already announced their decision to boost the share of settlements in local currencies to 25% in 2021, a dramatic increase from the agreed 2% seven years ago. Dethroning the USD as the world’s reserve currency is an objective that will most likely remain elusive for quite some time, but the decreased dependence on it can already offer practical advantages.
From all the points outlined here so far, it might appear that our outlook at Global Gold is grim and that we welcome the new year with trepidation and a mountain of concerns. However, this is not the case at all. We too share in the hopes of a robust recovery, and we do recognize some promising signs that could support a positive view. Yet, we believe that it is crucial for our clients and for our readers to have a balanced perspective. As most mainstream news outlets, financial publications, and market reports seem obsessively focused on the “best case scenario”, we felt obliged to provide a counterweight and to highlight the very real down- side risks. These are very strange, unique, and turbulent times, and there is no blueprint for how to handle this very idiosyncratic and extraordinary crisis. In our view, the best approach is cautious opti- mism, further tempered by an accurate recognition of the underlying risks.
This is why we remain very positive on the prospects of precious metals in the year ahead. The remarkable rally that began in 2020 had its roots in global uncertainty and a fear that stock markets would buckle under the pressure of the collapse of the real economy. For many, that fear might have been assuaged for now, by unprecedented fiscal and monetary support, but for responsible, discerning investors it should always inform their investment strategy. To any rational market observer, it is surely plain as day that at least some corners of the stock market are looking dangerously bloated, with valuations that simply make no sense. Even if another spectacular crash can be avoided, corrections are to be expected and precious metals are sure to benefit for them. What’s more, even if those rosy, best case scenarios do come to pass, and if the global econ- omy magically reopens and we all go back to business-as-usual tomorrow, there’s a strong case to be made for silver and platinum, as they have extensive industrial uses, on top of their investment appeal.
No matter what 2021 has in store for us, we expect precious metals to continue to play a key role in every portfolio that is designed to protect and pre- serve wealth over the long term. That is especially true for physical investments, stored outside the banking system and in a safe and predictable juris- diction, as they offer a much more robust kind of protection, not only against market fluctuations but also against the very real and direct risks that governments themselves can pose.
“Escape from New York”: How the covid crisis accelerated the domestic migration wave in the US
The covid crisis has brought with it incredible changes to our daily lives and inflicted massive damage to the economy on a global level. However, most of these changes have been initiated by governments, institutions, and other hubs of centralized authority.
From business closures and travel bans, to stay-at-home orders and remote work mandates, the vast majority of the great shifts we saw over the last year were the result of new laws, rules, and decrees that were summarily enforced in response to an “emergency”, without much political debate and even less consideration of the public’s position. And yet, a formida- ble number of citizens seem to have found a way to express their views and manifest their will by the most direct of means: by voting with their feet.
The great migration
Some jurisdictions were much harsher than others in their response, and the measures taken varied significantly, with a strong correlation between the political leanings of those in charge and the severity of the lockdown and economic shutdown orders. While this correlation can be found pretty much throughout the West, it is much more pronounced in the US.
With each state being able to chart its own course to a very large extent, and with local authorities having more leeway in the approach they adopt in response to the pandemic, the lines are more neatly drawn, and it is easier to identify this trend of political and ideological consistency in the handling of this crisis.
For example, states like California and New York, among the most “progressive” in the nation, have also had the toughest and longest restrictions in place. That, in sharp contrast to conservative Texas or Florida, both of which opted for a much laxer strategy around lockdowns, mask mandates, freedom of movement, and business shutdowns. This also holds true on a city level too: Large, populous metro- politan hubs, on average leaning further left than rural areas, also generally embraced more aggressive approaches in their efforts to contain the disease.
Very early on in the pandemic, a shift became apparent. Official homes sales data captured an uptick in Americans sell- ing their primary residences in big cities and moving either to suburban areas or different states. Initially, this could have been explained as a result of fear of the virus and the perception that less densely populated areas might be safer. Then, as the “two weeks to flatten the curve” came and went and as lockdowns and business closure orders dragged on, more resi- dents abandoned urban centers, in a move that could be seen as an effort to escape the harsh restrictions. A few months later, this phenomenon intensified, as the “Black Lives Matter” protests and riots spread in major cities around the nation. Weeks of looting, vandalism, threats to life and property, and widespread violence were arguably another argument against the “big city life”.
There were many reasons that could serve as decent explanations for this domestic migration phenomenon. But now, we have accumulated enough data and clear evidence to paint a much bigger picture. The mass exodus from the cities has been ampli- fied by an even more consequential and much more telling flight away from progressive states that shows there are stronger forces at play. According to recent US Postal Service data, New York has lost at least 300,000 residents, while Cal- ifornia was hit even harder. In early January, mov- ing company U-Haul ranked California last on its list of “growth states”, sharing data that showed the state suffered the largest exodus, based on the net gain of one-way trucks entering a state versus those leaving. The Bay Area, and San Francisco in particular, saw the steepest surge in new depar- tures. The same report showed that Tennessee was among the top relocation choices, which con- tributed to its rise to first place in growth states in 2020, up from the 12th position last year. Second place was taken by Texas, followed by Florida.
Real estate data certainly bear this out: Palm Beach sin- gle-family property sales saw a record-setting surge with the largest mid-year dollar volume on record, while similar trends emerged in Austin, Columbus, and Denver.
This mass relocation of families and workers is an important development that has the potential to drastically reshape the political and economic land- scape. This outlook is further supported by the fact that both small- and medium-sized businesses, as well as huge corporations, have decisively joined the bandwagon out of progressive jurisdictions. Oracle, the second largest software maker in the world, recently announced its plans to move its corporate headquarters from Silicon Valley to Austin. The news came on the heels of a similar move by Hewlett Packard Enterprise and Tesla’s founder Elon Musk.
Killing the goose that lays the golden egg
To understand the whole story behind this exodus wave, one must consider the demographics and socioeconomic profile of the “lost” residents. The crushing majority of those who chose to leave in search of greener pastures are high earners, business owners or they are top executives, highly educated and high-skilled workers. This is evi- denced by the disproportionate growth in luxury home sales and the overwhelming real estate demand in upscale and expensive neighborhoods in the states that saw the strongest influx of new- comers. In other words, they mainly belong to that top percentile that is contributing the most and there is little doubt that the progressive states they are now abandoning in droves have been dispro- portionately reliant on that much-vilified “1%”. As H.D. Palmer, spokesman for the California Depart- ment of Finance, highlighted, ”just that 1% is responsible for generating over 45% of all the per- sonal income tax revenue”. However, it’s not just their tax dollars that they’re taking with them, but also their contributions in productive activity, entrepreneurship, job creation, as well as spending power and real, organic demand that props up the economy.
Of course, excessive taxation, over-regulation and red tape are straightforward arguments for leaving that aren’t necessarily new, which is why this migra- tion wave predated the covid crisis. According to figures by the US Census Bureau, the five states that lost the most residents between 2010 and 2019 were all Democrat strongholds, with a long tradition of government interference and aggres- sively redistributive tax policies: New York, Califor- nia, Illinois, New Jersey and Michigan (and they lost 4 million people collectively). What is different this time, however, and what probably accounts for the impressive acceleration of this trend, is the sudden evaporation of any and all counterarguments that might have convinced people to stay until now. For many, professional opportunities, cultural attractions, entertainment, and a vibrant social life were worth the steep price they had to pay to live and work in these locations. Now, all they get in return is mass unemployment, a surge in poverty and crime statistics, boarded up bars, restaurants and art galleries, as well as con- certs and sports events they can only experience through online streaming.
The implications of this shift are immense. It can reshape the electoral map, as there are legitimate fears that the newcomers might bring with them those very same ideas that rendered their own home states uninhabitable. There is, however, a more realistic counter-projection. Since those that left had not just the means, but also the good sense to do so, those that remained were either the most radical “true-believers” in leftist utopianism, or simply could not afford to relocate. This would translate to a historic redistribution of wealth and economic power in the nation, creating new hubs of prosperity, innovation, and eventually political clout. At the same time, it would force progressive states to face the consequences of their own political choices.
With their cash cows gone, those policies that penalized and demonized the productive class, once advertised as “social justice”, are bound to be exposed as economic cannibalism.