French financial powerhouse Societe Generale has dubbed the new world that begins in 2017 “The Age of Entropy.”
What that name achieves in brevity, it may not achieve in clarity. Basically, SocGen has declared that things in the markets and global economy are going to get more unpredictable from here.
Technically, the concept of entropy comes from the Second Law of Thermodynamics — thermal energy that over time loses its ability to be converted into mechanical energy.
But outside of the world of the white lab coat, the law of entropy means that everything tends to gradually break apart or break down over time.
In 2016, Brexit and the election of Donald Trump were watershed events for change. They caught off guard those who weren’t paying attention to the sentiments of the regular folks and only to the proclamations of the media.
They made sure no one was prepared or expected these events, so that both have spread their change more like tsunamis than ripples.
Brexit has inspired a great deal of nationalist parties in Europe to rethink their participation in the European Union. Remember, the refugee issue is a huge weight across Western and Eastern Europe right now, with Germany and France footing much of the bill and citizens wanting refugees to just go back where they came from, whether that’s possible or not.
Also, European economies are still flagging. Germany’s exports are slowing and that is not a good sign for the rest of Europe because many of the products exported from Germany are built in Eastern and Southern Europe. Germany catches a cold and its satellites get pneumonia.
With China, Trump is already taking an aggressive stand.
First, there is the incredibly low valuation of the Chinese renminbi (aka, yuan). A cheap currency means exports become more attractive for overseas companies and countries. The problem is, the Chinese government is manipulating the currency and the Trump administration has threatened to label China as a currency manipulator on Day One in office.
That would not sit well with China… even though they are indeed propping up their own currency whether they admit it or not. And remember, Trump has already gotten under China’s skin on the whole One China policy. Trump’s recognition of Taiwan’s leadership as separate from China’s undermines the idea that Taiwan is simply an estranged territory of China, rather than a self-governing nation.
Trump is also looking to flip the table on the entire international trade system that has been in place since the end of WWII.
By renegotiating trade deals and imposing tariffs — a border tax — on overseas products, Trump is taking on the International Monetary Fund as well as the World Trade Organization.
This is a significant shift in decades of go-along-get-along trade deals that kept things on an even keel for international trade even if it hurt American workers. The IMF and WTO in particular are groups that do not have the U.S.’s best interest at heart, but they drive the politics of international trade deals and influence whether or not they are hammered out. By changing America’s relationship with these organizations the entire global economy is changed.
Countries with large exports to the U.S. like South Korea, Canada, Mexico, Japan, China and Taiwan could be looking at changing playing field in 2017 and perhaps an entirely new one in 2018.
This reshuffling will also hasten the demise of the petrodollar, which I spoke about specifically in a recent article. China and Russia have already started to look for opportunities to trade commodities like oil and gas in their local currencies. That would mean less need for countries to hold dollars or, more accurately, U.S. Treasuries. Russia and China have begun dumping huge sums of Treasuries in recent months.
True, the People’s Bank of China blew right through $800 billion in foreign-exchange reserves in 2016 and $3 trillion recently in total, plus it has instituted capital controls to try and stop the bleeding of billions of yuan leaving the country. This would cause the yuan to drop like a stone if it weren’t for all the manipulation… but don’t think this means there’s no effort to price dollars in something other than dollars. It’s happening.
There’s also a major shift in the global consumer market where people are shying away from global brands and moving toward local ones. This repatriation of consumer spending will mean big global brands like McDonald’s (NYSE: MCD), Coca-Cola (NYSE: KO), AB In-Bev (NYSE: BUD) and Starbucks (NASDAQ: SBUX) may end up getting hurt.
But as some of these things fall apart, remember that they won’t stay that way.
Nature abhors a vacuum and so do the markets.
Where there is loss someone will find gain. Where old patterns crumble, new patterns will emerge.
Our job isn’t to curse the darkness, it’s to find the companies that are making lights for the new reality. There is no good and bad in the markets, only change and opportunity.
For example, for years to come, products that will be made “locally” in Asia will still need American support, innovation and American technological know-how in order to make things run, and you’ll be hearing more about how to profit from that trend in an upcoming special report.
But as we are now at a moment of massive change that we haven’t seen in generations, there is great promise as well as great risk for gold, silver and to a lesser extent lithium and uranium, which are the good strategic plays.
In a transition from the petrodollar, it’s a good bet that China and Russia will be major buyers of gold to shore up their currencies during and after the transition.
As the U.S. furthers its goal of energy independence, the Middle East will also start to reevaluate its relationship with the U.S. and the dollar.
Without a major currency to trade goods, stores of value like precious metals will be the great hedges in the world economy, and great stores of value and in particular trading value as a currency of trade.
Once the rally begins in earnest, gold and silver will be hot, and the miners will move higher as well. You don’t get to own the metal with them, but you will get to make the trend your friend and ride them to profits on the way up.
— GS Early
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