Martin´s Capital Market Observations
The developments of the past two to three years have prompted me to put my thoughts on paper and make them available to you. This “brainstorming” is, of course, in no way a recommendation for action; rather, from my perspective it is intended to shed light on a few aspects that generally (and across Europe) receive little attention.
At the start of 2020, when we were all confronted with a new personal and economic reality, many people’s worldview changed drastically. At this point I deliberately refrain from inserting my individual opinion, and instead focus on the actual economic conditions and the conclusions to be drawn from my personal point of view.
I was demonstrably one of the first economists/market observers who, as early as mid-2020, pointed out with data and facts the highly likely economic scenario of stagflation. Unfortunately, this found a hearing neither among the political elite nor among professional asset managers. Back then, owing to the supply-chain problems that were clearly emerging (not just toilet paper, but specifically computer chips, raw materials, etc.), I expected a stagnation in the economy. Quite simply because products cannot be manufactured or completed if even a single small component is sitting on a ship at berth 100+ in one of the world’s ports, waiting weeks to be unloaded.
Yes, economic theory can be that simple!
This situation has not improved since then; on the contrary, it has been considerably aggravated by the Covid issue and a zero-Covid policy in China, by now the most important economic region.
This means that, on the one hand, goods and services are in demand, while on the other hand, owing to bottlenecks (personnel, goods stuck on ships, etc.), that demand cannot be met even remotely. According to the old and well-known model of supply and demand, this alone drives up the price of basic essential goods.
This even culminated in the rumour that the tractor manufacturer Fendt had bought up refrigerators in order to obtain the chips installed in them, which were more urgently needed in agricultural machinery. I was unable to verify this, but it shows me the strange forms the economy is currently taking.
To provide a factual assessment of the overall situation, I have compiled a number of charts below.
The stock market has been moving almost exclusively upwards since 2009 at the latest (among other things, following the collapse of Lehman Brothers):
Despite significant new economic events arising from crises such as Covid and the Russia/Ukraine war, the DAX (and other major indices as well) is up by roughly 200%. Is that normal, and why, of all moments, should a stagflation scenario set in right now?
At the same time, interest rates for financing the economy (companies, but also residential property) have become ever cheaper. This is very pleasant when you need a loan, but it also leads to (mal-)investments by firms or private households that, under normal (far more expensive) conditions, would not or could not undertake such financing.
As you can see very clearly in the following chart, interest rates have fallen steadily since the mid-1990s.
In the chart above you can see that, in the years 2019 to 2021, yields were even negative.
Now you will say that this is bad for your savings deposits (overnight money, fixed-term deposits, etc.) at banks and insurance investments, and you are absolutely right. But if, at that time, you had already invested your assets in (international) bonds, you would have profited from enormous price gains, since when interest rates fall, the prices of bonds already issued rise continuously.
However, these long-dated bonds (usually at least 10 years) also have an “expiry date” and are repaid to investors at the agreed point in time. But since, in the meantime, reinvestment is no longer possible at, say, 6 to 8%, but only at around 2%, you as an investor have a problem with the (now almost non-existent) compound interest effect.
What does this mean for your wealth?
If you invest €10,000 (you are welcome to add a few more zeros) at an interest rate of around 7.2% and reinvest those interest payments year after year over 10 years, then on paper you will have doubled your invested capital. Why on paper? Well, because in the meantime there is usually also inflation (that is, rising prices). So if inflation were simultaneously running at around 4%, your €10,000 would have grown to only around €13,700 in real purchasing power, which would still be quite good.
But for many years now we have been in a new (financial) world, because the central banks have actively pushed interest rates down globally in order to supply investors and market participants with ever cheaper money. Yet since there are no free gifts on the capital markets, you can perhaps imagine that the real problem is about to be revealed.
With an official inflation rate in Germany of 7.3% in mid-April 2022 and a negative interest rate of usually 0.5%, the so-called real interest rate is not, as above, plus 3.2% (7.2% − 4%), but minus 7.8%. This means that in 2022 alone your monetary assets lose almost 8% of their purchasing power. The longer this situation persists, the more your monetary assets lose in purchasing power. If this were to continue for 10 years, as above (which I do not believe it will), only around €4,700 would remain of your invested €10,000.
I deliberately illustrate this so clearly because it is not addressed at all by official quarters – and if so, only in passing – because otherwise the population would not be happy about it…
This example, however, applies not only to your savings deposits, but also to the money you have paid in over many years into insurance policies, pension funds and pension entitlements.
All the more important, then, are professional and realistic life-stage analyses and calculations.
To mitigate these effects (you cannot avoid them, even if advisers try to tell you otherwise with “wonderful – possibly even tax-optimised – structures”), tangible-asset investments are recommended. Their performance is usually tied to the development of the real yield and is thus intended to ensure capital preservation.
The classic tangible-asset investments are considered to be:
- Real estate (houses, flats, etc.)
- Land (including forest and agricultural areas)
- Shares or equity funds
- Precious metals such as gold, silver or platinum
- Diamonds
- Art
- Rarities such as classic cars
But with tangible-asset investments, too, important aspects must be observed. These naturally depend on the investor’s mindset, but also on the features of the investment. A very important role is played here by fungibility, that is, the tradability of an investment. A gold coin, a silver bar or a share (via the stock exchange) can be liquidated more quickly than a flat or a plot of land. With shares or equity funds, however, it must also be borne in mind that, while this investment does move strongly in the right direction, it is ultimately also paper money. Here a pure equity stake in a business could be better, but that is precisely what you cannot build up with a savings plan of €50; meaning that such investments will remain reserved for very wealthy investors.
With classic cars or works of art, the pool of potential buyers is also reduced, because these things simply do not genuinely interest every investor.
Furthermore, monetary investments must also be diversified regionally, i.e. internationally, and not all investments and assets should remain in one’s own country or the euro area.
An intensive engagement with this topic is all the more important given that the monetary assets of private households in Germany are rising ever faster and more strongly, reaching a record high in 2021.
Despite the enormous price increases in shares and investment funds in recent years, around two-thirds of monetary assets are still allocated to insurance (almost exclusively invested in bonds), cash and savings deposits. I have already addressed the “risks” to these investments.
On the final pages I will therefore turn to a topic
that receives very little attention in the wider public but
which, precisely in the current (and coming) economic environment, can represent a
clever diversification of your investments.
Is now (at last) the time for physical precious metals?
Within the tangible-asset investments outlined above, I have, since 2015, increasingly focused my research on physical precious metals without neglecting the more established asset classes.
One important reason for this was that the counter-argument (storage costs and no interest income) against an interest-free investment lost ever more relevance during the prolonged phase of interest-rate cuts, and that with physical precious metals (primarily gold and silver) one can set a counterweight to the burgeoning quantity of paper money. What will pay off, when and how, even I cannot judge, but alongside shares and real estate, physical precious metals play a very important role in professional asset allocation (e.g. the “spoke” theory).
Further above I illustrated the loss of purchasing power of paper money, which I would like to underpin with the following chart:
Falling real interest rates, rising gold price
The real devaluation of the euro against the gold price can be seen very clearly here:
This means that the euro in cash has lost 85% of its purchasing power since its introduction. With the USD it does not look much better.
I do not wish to claim at this point that an investment in physical gold and silver would be a panacea but, in view of the long-persisting negative real yields and the oversized (paper) monetary assets – and hence also debts (it has to balance out) – one must now also engage with it.
In so far as an investor engages with it at all, the focus in the past was always on gold. In this study, for various reasons (described below), I will focus on silver.
“…metals are the new crude oil, a fund manager announced at the beginning of April…”:
Commodities expert: “This will be more serious than many think” | Markets | 01.04.2022 | FONDS professionell
Building on the key statements made there
- …European heads of state underestimated how high the metal demand will be in electric vehicles, wind turbines, solar installations and hydrogen plants…
- …low-CO2 technologies such as wind, solar, nuclear and hydropower – without which the Paris climate targets cannot be met – are said to be extremely metal-intensive…
- …An electric car needs six times more of the critical metals than a conventional car. And entirely different metals are required – not only copper and manganese, but also lithium, cobalt, nickel, graphite,” Louvet explains. Precious metals such as silver (for instance to connect the battery boxes in electric cars) are also needed in large quantities…
- …In 2019 the automotive industry required up to seven percent of global silver production – and that with a share of electric and hybrid vehicles in the vehicle market of only five percent. To stay within the Paris-Agreement limits, that share would have to rise to 60 percent by 2030. E-mobility will be a real game changer…
- …Silver is among the metals that are also needed for solar power. An average-sized solar panel contains five grams of it. Every year, 3,142 tonnes of silver (twelve percent of global production) are needed for solar technologies. “In 2020 we had a record with installed solar capacity of 120 gigawatts. If we stick to the Paris Agreement, we will have to install 620 gigawatts worldwide every year up to 2030. That is five times more than the current record…
- …The situation is similar for new wind-power capacity, where one would have to install four times the value of current record levels each year…
…I come to the conclusion that one absolutely also ought to be invested there.
The following chart shows that the silver yield – per tonne mined – has been declining continuously for years. Whereas in 2005 it was still possible to extract 13 ounces of silver per tonne of ore, since 2019 it has been less than half that.
In view of the potential increase in demand described above and the simultaneous decline in the yield of mined ores, one should ask oneself where silver prices might stand in 5 to 10 years’ time. Valuing current silver prices against future prices is very difficult and cannot be done seriously at this point.
Whether the silver price, currently at around $25, will at some point stand at $50 or $100 seems possible but not foreseeable.
Earlier I also spoke of local diversification. By this I mean that assets must, or should, also be invested outside our economic area, in order to diversify domestic economic problems locally.
For this purpose, about 30 years ago I identified Canada and built up a broad and professional network (banks, chambers of industry and commerce, real-estate agents, precious-metal dealers, lawyers, etc.).
There you have an Anglo-Saxon legal system, I understand the language quite well (fluent enough to negotiate), and Canada possesses all the essential raw materials (hard and soft commodities). The latter has taken on an entirely new significance since February. Opening an account for liquid flexibility can likewise be arranged and should absolutely be considered for a global investment diversification.
Dr. Martin Dilg – 0172 / 86 11 97 8
This study claims neither completeness nor does it constitute a call to action.
The information provided is likewise not part of any investment advice!
For personal questions I am very happy to be available on an individual basis.
19.04.2022
