FRA is joined by Jayant Bhandari ad Ronald Stoeferle to discuss further repercussions of India’s demonetization and the results of Trump’s presidency on US infrastructure and pension plans.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

Ronald Stoeferle is a managing partner and investment manager of Incrementum AG. Together with Mark Valek, he manages a global macro fund which is based on the principles of the Austrian School of Economics. Previously he worked seven years for Vienna-based Erste Group Bank where he began writing extensive reports on gold and oil. His benchmark reports called ‘In GOLD we TRUST’ drew international coverage on CNBC, Bloomberg, the Wall Street Journal and the Financial Times. Next to his work at Incrementum he is a lecturing member of the Institute of Value based Economics and lecturer at the Academy of the Vienna Stock Exchange.

DEMONETIZATION OF INDIA

The situation in India is absolutely chaotic. People are getting desperate and every single small business is failing as anything between 20-80% of their revenue is down. Even a 5-10% drop in revenue leads to losses. People can’t find jobs and are being laid off, and a large proportion of the population has been taken out of the system. They have declared 80% of the monetary value of the currency in circulation illegal, and that has created all this desperation in the society today.

Most of the money that banks are issuing right now are 500 and 2000 Rupee notes. The smaller denomination bank notes have gone under the carpet right now because people perceive those to be the safest instruments. Bad money drives out good money from circulation, and that is happening. It is not necessarily causing inflation; there has been deflation in most of the things that we buy, and this is because poor people are not competitors in terms of buying, and people are mostly abstaining from buying things that they don’t necessarily need. This is only causing inflation in gold price, because savers want to buy as much gold as possible but that market has now gone underground because of the problem and risk associated with the government.

The government has imposed regulations on gold for many years now. Rich by implication means that anyone who owns more than 500g of gold can now be assessed for tax, which automatically means a huge amount of bribes to the government. There are many unintended consequences, and these consequences only hit us after a long delay. The war against cash is already going on, and the things going on in India are the most drastic measures, but we’re seeing so many similar measures going on around the globe. If people should lose confidence in fiat currencies, then there will be consequences for the holders of those.

At the moment, for some reason, the confidence in the US dollar and other fiat currencies are pretty strong. People will find ways around the black market and gold will be very strong. People have switched to silver in India, and BitCoin is making new records.

This will fail in India because India doesn’t have the infrastructure to go cashless in the first place. The government is trying to force as much cash as possible into the banking system so they can go more negative yielding by forcing the cash into the hands of the government and by forcing people to invest in two instruments the government likes. None of this will work; it will destroy the economy and people will find ways around it. The end result will be that the gold consumption will go up, it has already gone up, we just don’t have the real numbers because most of the gold market has gone underground. There is a huge demand for gold in the country.

US NEW PLANS ON TRADE AND INFRASTRUCTURE

It’s a huge divergence we’re seeing at the moment, meaning a significant increase in inflation expectations. Our inflation indicator switched to disinflation a couple of weeks ago. The enormous strength in the Dollar, the heightening of the Reserve and the significant rise in Treasury yields is incredibly deflationary. We should not forget that in the bond market, $1.8T USD in paper value was destroyed over the last few weeks. This is clearly deflationary, and all these Keynesian programs Trump wants to implement will be successful. He’s not a new Regan; the setup is completely different. The US will likely hit a recession next year.

What politicians say and do are two completely different things. Even if they want to do the right thing, the bureaucracy might not want to follow. The only thing that can reduce financial repression is by reducing regulations. Infrastructure spending won’t work because it’ll only be inflationary unless you reduce regulations. People in markets are overestimating the immediate effect of all those stimulus packages. It’s a bit naive to believe all the infrastructure packages will have an immediate effect on the economy. Confidence is getting better, but that’s on very thin ice. Looking at employment numbers, the US in the last four years created 430000 new jobs, mostly waiters and low paying jobs while in the manufacturing industry more than 70000 jobs were destroyed. The re-industrialization of the US is a nice story, but it just won’t happen that quickly.

So far what we’ve seen from Trump was very disappointing, because most of the things he promised in the campaign he broke in the first few days. There’s too much confidence in the market and greed is greater than fear at the moment.

THINGS HAPPENING IN EUROPE

Everyone is bullish on the US these days. You can make a case for a very strong dollar, but the consequence is that emerging markets will suffer big time. A strong dollar is pretty deflationary and no one wants a strong dollar. The whole 2017 year will be a very political year, and everyone will be busy promising things.

Emerging markets haven’t really done well. They’ve copied western technology over the last 20-30 years instead of developing their own technologies. The result is that these people consider US dollars to be gold, and this trend will likely continue. Trump may be positive in terms of controlling migrants flowing into the US.

POSSIBLE PENSION FUND CRISIS

Governments will try to avoid a pension fund crisis, but the question is whether or not they’ll be able to. There’s kind of an illusion that the politicians and central bankers can keep the market under control. The reality is that by manipulating the paper market to continuously create wealth, you actually destroy wealth as a consequence of it. What pension funds and the welfare system really needs is an increase in wealth and the paper market can’t create that, it only destroys that. The requirements of the welfare system are increasingly too big for the capability of the wealth creating aspect of the society to handle. They have to keep bringing in new people to support pensions, and if they don’t it’s a paper palace that will collapse at some point in time.

ASSET CLASSES TO PROTECT WEALTH

You should try to diversify out of the financial system. Counterparty risk will be more of an issue in the next crisis. It seems that gold has gotten very positive and robust aspects for every portfolio. So in the context of an anti-fragile portfolio gold definitely makes sense. Mining stocks are also good right now. People should follow volatility strategies going forward and from a strategic point of view, US 10-year Treasuries are oversold and there will be a bounce. Equity markets are massively overvalued and there will likely be a correction in the next year.

In terms of investment, East Asian markets are undervalued. Western people should look to China and Hong Kong for keeping some of their cash and wealth in. People should own a lot of gold and consider storing it in places like Singapore and Hong Kong because of the respect to private property these countries still offer. New Zealand and Australia are good places to diversify into, as they are western countries still unaffected by the social problems currently happening in Europe and North America.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.