I’ve come across a few sad situations lately. Guys in their 40s to 60s having heart attacks. In two cases, fatal. One was a model of fitness, healthy-eating and exercise.
It’s hard to reconcile. Good guys. Family men. The old pump of the heart just fails.
The economy works the same way. It pumps money and goods around like blood. Any constriction can slow it down or risk vital areas. And right now, if I was measuring the heartbeat of the global economy, I would say the risk of a cardiac has never been greater.
Hundreds of years ago, people were more self-sufficient. Agricultural production was the order of the day. And, depending on your station, you produced enough for your family or earned rent from those who farmed your lands. At least in Europe.
Nowadays, we’re dependent on jobs. Which depend on business.
For jobs and incomes to keep growing, businesses have to keep growing. For businesses to keep growing, their markets need to keep growing.
They can aim to get smarter, more productive and offer new technological innovations. Or they can rely on a population increase to create constant demand.
In 2008, the Global Financial Crisis was a mini heart attack.
That came out of a debt bubble. When the economy realised millions of home loans were toxic, it escalated into panic. Which led to a stroke, which paralysed the whole system.
Fortunately, recovery was rapid. Central banks flooded the money supply with new cash, thanks to low interest rates and buy-ups of debt. It was like a triple bypass.
And, since 2009, the global economy went into overdrive. There’s been a bull market in stocks. Property has started to falter, but it’s also had a great run.
Unfortunately, once the heart has been messed with, it’s not quite as strong as it was before. Very low interest rates has put the economy on an artificial steroid. And now I’m worried about some new blockages threatening to put it back on life support.
Where are the blockages?
For the past few decades, one of the chief dynamics has been very cheap consumer goods and electronics. Well, take a guess: who had the mass cheap labour force and lowly valued currency to supply all of those?
That’s right — China. Today, it’s the world’s largest exporter.
But what has that meant for the old manufacturing powers like the United States?
A massive trade deficit. Jobs have been ripped away. Leaving rust-belt districts hungry for change.
Meanwhile, China is wisely looking to move up the value chain. It’s reverse-engineering Western technology and improving it. All the while, the whole machine is steered by a totalitarian communist government.
Donald Trump has proclaimed he is ‘the chosen one’ to take on China.
He has a point. Factories in America and Europe have no hope of competing with Chinese manufacturing cost structures. And their economies will continue to ramp up debt to fund trade deficits in goods.
But this also poses a threat. Global supply chains have become dependent on cheap goods from China. So have consumers around the world.
By slapping tariffs in the world’s largest consumer market, Trump is blocking up the veins. Not only will it take a long time for local factories and other manufacturers around the world to fill the void, it will be more expensive.
And the whole global economy will slow.
China will get hit the hardest. The big country making all that stuff is in the firing line.
But that has major downstream impacts. If Chinese factory output slows — as it has been doing — so will demand for all the materials it imports as part of that process.
Countries like Australia and New Zealand are in a very risky position. For years, China has been the major export partner for raw materials like logs and iron ore, plus consumer items such as dairy products.
We’ve feasted on the opportunity. Not saving or investing in it. But ‘putting it on the house’. Throwing the proceeds into property. Notching that asset class up further via money-spinning migration, and creating a dangerous house of cards.
Then there’s the poster child for an old weak heart — Europe.
Ageing populations. Declining social structures. Welfare systems struggling to cope. Mass refugee and migrant movements from the volatile periphery beating on the door.
It’s been largely treated with very low interest rates. In some cases, negative rates. But in countries like Italy, the cracks are starting to show.
Unemployment is high. One in four young people between the ages of 15-34 are neither in work nor training. The old family businesses that ran the Italian manufacturing dynamo are also struggling against the Chinese machine.
So the population is in decline. How can you have children when you don’t have work?
Italy is where the desperate and penniless migrant ships first make landfall.
It’s also where the ever-present euro is both a blessing and a curse, since the large government debt the country now faces is denominated in that currency — controlled by the European Central Bank.
So can you blame greyheads in worrying countries like the UK for wanting to leave the EU and go it alone? No, they’re right to escape while they can.
Can you blame Italy for giving rise to the likes of Salvini? Turning his back on the EU to lower taxes? Rejecting migrant ships? Returning Italy to its Catholic values?
In their defence, the Europeans are not the kind people to go down without a fight.
Yet, Brexit and the European economic slowdown will mean further constriction to the world’s economic blood flow.
In particular, businesses are worried about Brexit and the future of Europe. People stop investing. They wait and see. And within such a bureaucratic machine, you can end up ‘waiting and seeing’ forever.
Where to invest?
Despite the denouncements of the mainstream financial commentators, despite all the doom and gloom, the numbers reveal lessons.
First, the American economy has been growing jobs and ramping up GDP.
It’s a simple old-fashioned formula. Make it easy for people to do business. Cut business taxes and reduce compliance and regulation. In your local body, get the heart healthy and the money pumping.
Second, all the predictions that the UK will die without the EU are out of step.
Unemployment is the lowest it’s ever been. The growth in stocks and the currency is not exhibiting signs of distress. Rather, they’re exhibiting a holding pattern. Waiting to escape. And then waiting to see if Boris Johnson’s new leadership can unleash growth through a Trumpian-style attack on inefficiency and taxation.
We observe the same in Italy. The mainstream financial press will tell you that the country is now due to slide into debt-ridden chaos; that the collapse of the government is imminent. In fact, the numbers seem to suggest another wait-and-see holding pattern.
Maybe Salvini’s promise to cut taxes and red tape will unleash the same take-off we saw in the Dow after 2016?
Now, of course, all these forces bring threats. But they also offer unique opportunities in economic history that may not be repeated in your lifetime.
You will need to be brave of heart to embrace them.
So, every Wednesday, I produce my most detailed research and specific recommendations in our premium newsletter — Lifetime Wealth Investor.
Here, we’ show you the opportunities we see around the world — and how, from Auckland, Sydney, London or Waipukurau, you can grab hold of them.
Now, that’s something to get the blood flowing.