Positioning Your Investments
for Unfolding Mega Trends
In the years ahead, we are likely to witness global realignments in politics, currencies, and wealth accumulation as the West declines and emerging superpowers rise. The reshaping of the global economic landscape will be driven not by particular personalities or news events, but by overarching mega trends that are years, even decades, in the making.
Back in 2008, Independent Living ran a four-part series of stories called “4 Overarching Mega Trends for the Next 10 Years.” The four trends we identified were: changing global demographics, the
unwinding of unsustainable debt, resource scarcity, and growing political threats.
The main idea was that your investments should square with these fundamental realities. In this story, I’ll update each of those trends, still very much in progress. I’ll also highlight ways you can avoid threats to your wealth and take advantage of profit opportunities in your investments in consideration of these continued mega trends.
Congress Capitulates on Debt
On February 7th, the government once again reached its statutory borrowing limit, amassing an official debt of $17.2 trillion. Republicans feigned putting up a fight over raising the debt ceiling, but leadership
ultimately caved to the Democrats. Congress suspended the debt ceiling through March 2015, giving the Administration a blank check to run up more debt and kick the can further down the road.
If the fiscal irresponsibility in Washington continues, the U.S. will be headed the way of Greece and other bankrupt nations – deteriorating credit quality, rising interest rates, collapsing economy.
Obama Ratchets Up Political Threat Level
Little did we know in early 2008, when our “Mega Trends” series launched, that far-left Illinois Senator Barack Hussein Obama would ascend to the presidency and nationalize the healthcare delivery mechanism in the United States. During the George W. Bush years, the trend of government growth and shrinking civil liberties became well established. That mega trend, already in place, appeared destined to continue or even accelerate.
And accelerate it has. “The U.S. under President Obama, who once promised to run the ‘most transparent’ administration in the country’s history, fell from 32nd to 46th in the 2014 World Press Freedom Index, a drop of 13 slots,” according to the Washington Times.
Obama seems intent on ruling through executive orders and outdoing President Bush on aggressive citizen surveillance programs despite the lack of any major new national security threats.
Meanwhile, Attorney General Eric Holder is steadily dismantling the principle of equal protection under the law. He has turned the Department of Justice into a hotbed of cultural Marxist activism that extends to extracting racial reparations through such rationales as “disparate impact” and “hate crime” charges.
The Justice Department and the IRS under Obama have been totally politicized and are being used to intimidate and silence political enemies of the Administration. Under new IRS regulations,
it is now virtually impossible for a U.S. citizen to open a foreign bank account. Little wonder that record numbers of Americans renounced their citizenship in 2013.
It’s time to at least consider obtaining a second Passport, while that option is still available. You need not give up your U.S. citizenship. Having a country where you can flee to on a permanent basis, should conditions in the U.S. deteriorate to the point of being unbearable, is a prudent form of political insurance.
Demographic Shifts to Drive
Rise and Fall of Nations
If demographics is destiny, then the future is destined to be marked by decline throughout the West as well as in Japan and other advanced industrialized nations. Their native populations are set to shrink due to chronically low birth rates.
Absolute population declines will be averted in countries with high rates of Third World immigration – which presents its own set of problems. Immigrants from poorly developed countries tend to possess lower IQs and pose higher risks of crime and terrorism as compared to the native populations.
In Japan, where drastic population declines are projected in the coming decades, young people have all but lost interest in sex, let alone starting families. The U.S. and Europe may be following Japan’s lead. Becoming wealthy and acquiring gadgets seems to act as a powerful disincentive for having kids. According to data published by Harris Interactive, U.S. adults now regard having cars, computers, televisions, and cell phones as more essential to their lives than making love.
Talk show host and former National Organization for Women member Tammy Bruce notes that the rise of radical feminism at colleges and universities has made it socially unacceptable for young, intelligent women to pursue marriage and motherhood. They’re supposed to pursue careers and defy traditional gender roles if they want to be thought “progressive.”
Ergo, world population growth going forward will come almost entirely from people who are poor and uneducated and hail from regions that could be described as culturally and economically backward.
The opportunity for investors is that many countries will emerge from their backwardness, at least to some extent, and post high rates of economic growth.
It’s growth that drives investment returns, not standards of living per se. Japan still enjoys a high standard of living, but its economy and stock market have stagnated for 25 years. Poor countries that are becoming less poor may never become wealthy by Western standards; but their stock markets can boom as their economies grow.
Identifying the World’s Top Growth Markets
The U.S. stock market’s rough start in January came as no surprise to Independent Living readers. We had warned, as the year began, that the U.S. stock market was due to pull back and perhaps even begin a new bear market. It’s still too early to tell whether a bear market is in the process of unfolding.
Regardless, there are good reasons to underweight the U.S. stock market at this point in time. If the bear does take hold, you’ll be better off hiding out in gold and other alternative assets. If U.S. stocks push higher, you’ll likely see better returns from foreign emerging markets – maybe not right away, but almost certainly in the long term.
According to the International Monetary Fund, emerging markets now account for 40% of the world’s gross economic output – up from less than 25% just a decade ago. This is where the growth is and will be for some time to come.
Yet these economies are grossly under-represented in most equity portfolios and undervalued versus the stock markets of developed countries. Bank of America estimates that emerging markets account for just 10% of global stock market capitalization. That figure is destined to rise.
Ride this mega-trend by owning emerging markets that are in demographic ascent. Besides emerging markets index funds, consider Guggenheim Frontier Markets (FRN) – and, if you have a bigger appetite for risk, Market Vectors Africa (AFK) and Market Vectors Vietnam (VNM).
Commodity Prices Headed Higher
Commodity prices have gone on a roller-coaster ride over the past decade – with crude oil prices surging to $147 per barrel in 2008, then collapsing back under $40 for a brief time before rising back to $100. Over the past three years, investors and consumers have gotten used to oil prices trading in a stable range around $100 per barrel.
But why are oil prices still at elevated levels? After all, the breakthrough U.S. fracking boom has seen domestic oil production unexpectedly surge.
The answer seems to be that the fracking boom has only mitigated the consequences of peak conventional oil production. Gregor Macdonald of PeakProsperity notes that “the global natural resources sector now requires significantly more investment to extract the same units of oil, copper, iron ore, coal, natural gas, and potash, and requires more expensive technology and more human labor.”
We’re not running out of resources, but they are becoming costlier to produce. Just 12 years ago, an ounce of gold cost less than $300 on average to produce. Today it costs around $1,200 all-in. It wouldn’t take much for oil prices to break out of their current range and start moving toward new record highs.
In December, we presented a chart of the Continuous Commodity Index (CCI). We stated, “The CCI has been consolidating in a huge triangle formation since reaching a cyclical high in 2011. Prices are nearing the apex of the triangle and can be expected to soon break strongly either to the upside or the downside.”
In February, the CCI broke out strongly to the upside. This signals a trend of higher commodity prices – likely for many months to come.
Silver also broke out strongly from a major bottoming pattern. The precious metals bull run appears set to resume in earnest.
Natural resource stocks, which had badly underperformed the market over the past two years, now appear poised to outperform. The iShares Global Materials (MXI) is a broadly diversified play on energy, mining, and agribusiness packed with big dividend payers. So is Blackrock Resources & Commodity (BCX), a closed-end fund that currently trades at a significant discount to net asset value.
Meanwhile, higher food costs are showing up in the supermarket. As Bloomberg (January 30, 2014) reported, “The cattle herd in the U.S., the world’s largest beef producer, probably fell to the smallest in 63 years, a Bloomberg survey showed.… Fewer cattle will mean production in the $85 billion beef industry drops to a 20-year low in 2014, the U.S. Department of Agriculture said. Retail costs for the meat are at an all-time high…”
The commodity super-cycle isn’t over, so get your hedges in order!
Coming Up in April’s Newsletter
In next month’s issue I’ll introduce a fifth mega trend: the promise and peril of increasingly intrusive high technology. Technological advances are quickly taking us toward a day when we won’t interact with our devices; our devices will interact with us. From mindreading machines to implantable microchips that alter thoughts to synthetic biology to unfathomable advances in nanotechnology, a sci-fi future is – for better or worse – getting closer by the day to becoming reality. Stay tuned…