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Colin Twiggs

Colin Twiggs

Colin Twiggs is Director: Global Markets at Porter Capital. A former investment banker, he combines economic and technical analysis in his Trading Diary, with 140,000…

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Gold, Stocks and Forex

To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.

Population growth and food resources

The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.

At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.

Global warming, whether man-made or a natural cycle, may also contribute to declining food production -- through droughts, floods and depleting fish stocks.

Depleting natural resources

We are also depleting global deposits of ferrous- and non-ferrous ores -- as well as energy reserves of crude oil and coal -- as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.

As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.

Global competition

Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence -- and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.

Trade wars

In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation -- initiated by Japan in the 1980s and perpetuated by China in the last decade -- is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.

Rise of democracy

Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth -- especially in countries with clear fault lines, such as language, religious, racial or cultural differences -- and can lead to decades of conflict before some degree of stability is achieved.

Decay of Democracy

On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources -- such as banks, big oil, and armaments manufacturers -- force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.

The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.

Global debt binge

The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.

The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.

Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.

Outlook for 2012

Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:

  • Further debt contraction
  • Contraction of private debt and constraints on government borrowing will strengthen deflationary forces.
  • Further QE
  • The Fed and BOE are likely to expand their balance sheets to support public borrowing. The ECB may make a limited response because of constraints imposed by member states such as Germany.
  • Low inflation
  • Deflationary forces will outweigh the inflationary effect of QE by central banks.
  • Low global growth
  • Debt contraction and a euro-zone banking crisis will ensure low growth.
  • Euro-zone banking crisis will require further bank rescues
  • Placing further stress on public debt levels, and pressure on the ECB to act.
  • China "soft" landing
  • A second massive stimulus focused on low-cost housing and quelling social unrest will restore economic activity, but export markets will remain flat and the banking sector inundated with non-performing loans.
  • Easing of commodity prices slows
  • Massive stimulus from China will support commodity prices.
  • Further social unrest amongst autocratic regimes
  • The Arab Spring will continue sporadically across a far wider area.
  • Crude oil prices remain high, aided by further conflict
  • High crude prices will also contribute to low growth.
  • US current account deficit shrinks as yuan rises
  • Increased pressure from the US will prevent China from expanding its Treasury investments causing the yuan to strengthen against the dollar.
  • Dollar strengthens against euro
  • A euro-zone banking crisis will ensure that the dollar preserves its safe-haven status.
  • Gold bull-trend when QE resumes
  • Resumption of QE by the Fed would ensure that gold resumes its bull-trend against the dollar.

I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.



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