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27 July 2020

The Zombie Apocalypse?

Money isn't worth a thing - blog image.

It’s carnage out there.

The world is reeling from the effects of coronavirus. We’re looking out on a world of ransacked grocery stores, cancelled sports events and empty streets.

And then, the financial markets… a look at global indices tells a somber story:

YTD (Year-to-date) returns:

DOW: -28.91%

S&P 500: -24.85%

FTSE 100: -30.85%

DAX: -32.82%

SHANGHAI: -11.01%

HANG SENG: -19.10%

JSE ALSI: -30.92%

Gold seems to have weathered the storm a lot better, still being +22.29% in ZAR and -1.01% in USD.

Is this the end of the world?

Well, not quite. But it got us all here at Troy Gold thinking…

“What happens to global financial markets and gold during a zombie apocalypse, (or any other world-ending event)?”

Interest Rates

Well, I guess you’d probably see a lot of red boards on stock exchanges worldwide.

But the really interesting topic, especially when juxtaposed against current events, is that of interest rates.

What happens to interest rates in an apocalyptic event?

As detailed in previous articles, interest rates are not just arbitrary numbers and convey important market information.

The first is that of society’s time preference.

Low interest rates mean that consumers are deferring consumption for the time being and saving resources for the future instead. The large supply of saved resources in society drive down the price of money.

On a micro level, it also conveys information about the risk inherent in a specific investment, with a built-in risk premium.

So let’s get to the zombies…

During an apocalyptic event, your future may be fairly uncertain (with zombies in the streets, and all). As such, you’d be far less likely forego consumption and save for the future.

Then when it comes to risk premiums, I think it’d be safe to say life in general will be a whole lot more risky.

So, in short, with society’s time preference focused on the present, resulting in a significant decrease in the supply of saved resources, and with risk premiums off the charts, interest rates would skyrocket.

What’s Happening Now

Now, let’s circle back to the world’s current situation. The world is not going to end, but perhaps the same crisis thinking applies?

Stock indices… Red. Tick.

Interest rates… Down. Wait, what?

That’s right – central banks worldwide are cutting interest rates, which is completely counterintuitive to the natural functioning of the market in this scenario.

And this basic example illustrates the enormous disconnect between natural market interest rates and interest rates artificially set by central banks. Monetary policy distorts reality – and that distortion has its costs.

You see, the coronavirus is not the cause of the global financial collapse; it is not the problem itself. The coronavirus is simply the pin that pricked the gigantic global debt bubble caused by inflationary monetary policies – this is the real problem.

Markets always correct for imbalances, and what we’re seeing now is the correction.

In 2008, falling real estate prices was the pin that pricked the debt bubble, which then lead to the Global Financial Crisis (GFC). Today, it is the coronavirus.

The Motherload of Money Printing

The difference between now and then is that global economies are more indebted now, with record trade and budget deficits. Any global economic “strength” was an illusion created by easy monetary policies and liquidity injections, which inflated financial asset prices globally.

So how are central banks and governments handling this crisis; the bursting of the bubble?

Well…

$1.15T in repo

$1.1T commercial paper relief

$1T in US fiscal stimulus

$750b QR from ECB

$600b QE from Fed

$600b bank loan guarantee (France/UK)

$500b in loan (Germany)

$300b in Japanese stimulus

$100b in fiscal stimulus across Europe

0% FFR by the FED

1% repo rate cut be SARB

and the list goes on..

They’re meeting the crisis head on with a printing presses, reacting to the consequences of inflationary monetary policies by introducing the motherload of inflationary monetary policies.

Other than the coronavirus, we may just have more to panic about, such as the collapse of the debt-based economy.

So what’re the consequences of this intervention?

What Happens Next?

The supply of money is going to go through the roof and the world flooded with paper money.

Physical gold will be the only safe have left standing.

Even though the gold price has fallen alongside equities in the opening phases of this bear market, we strongly believe in its medium- and long-term fundamentals.

In a panic, you don’t sell what you want; you sell what you can. Being a highly liquid asset, gold has followed the tide out, mirroring the initial phases of the GFC where gold prices initially dropped as investments were liquidated in favour of the USD – the USD acting temporarily as a perceived safe haven. Once investors’ trust returned though, gold surged.

So don’t fear the zombies. Fear is the mind-killer.

Buy gold. And wash your hands.

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