A recent Bloomberg Opinion piece by Matthew Brooker caught my attention. Its title read: Women's Football Is Just Starting to Roar. According to Brooker, “Australia’s semi-final defeat was the country’s most-watched television show on record, with 11.15 million viewers at its peak" - astonishing in a nation where rugby union, rugby league, Australian rules football and cricket are all far more popular sports.
What is interesting is that while soccer is becoming a truly global game, played and followed across the globe like no other sport, more and more countries are eager to join BRICS, which are considered the foremost geopolitical rival to the G7 bloc of leading advanced economies, announcing competing initiatives such as the New Development Bank, the BRICS Contingent Reserve Arrangement, the BRICS payment system, the BRICS Joint Statistical Publication and the BRICS basket reserve currency.
Since 2022, the group has sought to expand membership, with several developing countries expressing interest in joining. “Full membership has been approved for Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the UAE. The new group of eleven countries will account for 46% of global population, 37% of global GDP on a PPP basis, 68% of coal production, 42% of oil production and 38% of natural gas production.”
From its first formal meeting in 2009, the BRICS bloc has grown substantially – from about 25 per cent of global gross domestic product in 2010 to around 32 per cent this year in purchasing power parity terms – though almost all of this growth came from China and India. The six new members will lift this share to 37 per cent. This increase in economic significance has been mirrored in developing economies worldwide. “In 1992, advanced economies accounted for 57.8 per cent of global GDP and emerging markets 42.2 per cent but, by 2023, this balance had flipped: emerging economies account for 58.9 per cent and advanced economies 41.1 per cent.”
According to the historian Will Dunant, “In progressive societies the concentration may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation re-distributing wealth, or by revolution distributing poverty.”
I suppose that we could argue that the strength of the number of the population in the many (relatively) poor emerging economies rivals now the strength of ability in the few rich Western countries and that this unstable equilibrium is creating enormous tensions, which could lead to wars that would distribute poverty, and in the process, decimate the value of the US dollar and of financial assets.
Recently, Jim Bianco noted that just 8 stocks including Meta, Apple, Amazon, Netflix, Google, Microsoft, Nvidia, and Tesla had increased year-to-date in value in 2023 by 10.24% while the S&P 500 Index was up by 11.94% and the other “492” stocks’ market cap only increased by 1.69%. Bianco further added that T-bills have posted a total return of 3.08%. “This is thinnest stock bull of all time, very vulnerable to a sell off once the ‘trend’ following Bots go the other way on the ‘Elite Eight'". Collectively these eight stocks represent just under 29% of the index’s market capitalization.
The question is however this: What catalyst could trigger the shift out of the Elite Eight stocks? Given the extremely high valuation of the Elite Eight stocks even a minor unfavorable event could lead to a significant sell-off in this sector and possibly take down the major indices. One such event could be the realization by investors that bonds are now reasonably good value since (assumed) real interest rates have moved up strongly since early 2022. [I used the term “assumed” real interest rates because I believe that inflation is far higher than what the government tells us, and that therefore, real rates are lower than is calculated by the governments.]
Nonetheless, I believe that for the first time in several years, corporate bond yields and money market funds have become a real competition for equities. Within my bond allocation (25% of total assets) I have now close to 40% of the bond allocation in 12-months deposits, which yield 6% and in three to five-year bonds yielding around 6% (some more and some less).
I want my readers to understand that we may have to contend with complex stock markets around the world with some groups and sectors entering upward trends while other stocks, sectors and entire markets are turning down. If we compare the performance of Real Assets (Commodities, Real Estate, Collectibles, Precious Metals, etc.) versus Financial Assets (Large Capitalization Stocks, Long-term Government Bonds) from 1925 to 2023, what is noteworthy is the underperformance of real assets versus financial assets over longer periods of time and especially post 1980. In fact, just a cursory look would reveal that real assets are extremely depressed compared to financial assets. This would certainly apply to energy and to agricultural commodities.
Also, should real assets begin to outperform financial assets, it is likely that rural properties would outperform urban property prices. Similarly, emerging markets would likely outperform developed markets because they tend to correlate closely with commodity prices.
In general, I agree with Grant Noble who opined recently about the US that, “We are near the start of a final phase of a stock top that started in November 2021. First bonds, then stocks and finally the economy will once again be the sequence for an economic downturn.”
On this optimistic note I send my readers
Kind regards
Yours sincerely
Marc Faber
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