Adapt or Die
Updated: Apr 28
Inflation is a clear and present concern, but it is also a way (and arguably the lesser of all evils relative to a crash) for governments to deal with the explosion and unsustainability of debt that the "great moderation" in rates has birthed. This is part of the financial repression argument discussed in BLOG 5, where arguably the loudest voice has been Russell Napier who shocked the financial community when, two years ago, he made the call for a regime change. After almost thirty years in which the global economy was characterized by deflation, Russell has proved correct (certainly to date) that a phase of structurally rising inflation is beginning. As Russell noted last year: "I agree that a lot of the inflation we see today is caused by the supply side, which will adjust. That element of inflation will come down again, hence we can say it’s transitory. I would put one red flag over the supply side issue though, and that is China. Remember, in 1994 China devalued its currency, as I show in my upcoming book «The Asian Financial Crisis 1995-1998», and this triggered a wave of cheap exports from China. For years, we had a massive deflationary wind coming out of China. That isn’t going to happen again for two reasons: One, labour prices in China are up significantly. And two, we are entering a new cold war, which means we won’t be buying as much from China. But let’s leave this issue aside and assume that the supply side will adjust. In the longer term, inflation will be driven by the growth of money in circulation. My bottom line is we have an exceptionally high growth in broad money at the moment. The US got to 27% year-on-year growth in M2 at one point. That’s coming down now, given the base effect, but I think M2 growth in the US will settle at around 10%. In Europe, it is about 10%, and even in Japan it’s well above its post bubble-era average. So I think we will settle down with broad money growth at close to 10%, persistent, over several years. The consequence of this kind of broad money growth is an inflation rate above 4%.
Over the next ten years, I’d forecast something between 4 and 5,5% in terms of the rate of inflation in the developed world. But mind you: The most important part of my forecast is not the inflation rate per se. It’s that interest rates will not be allowed to reflect that rate of inflation. That is what changes the entire structure of finance. This is the key question: Will interest rates, short and long, be allowed to reflect 4% inflation? My answer is No. This is because we will be entering a period of financial repression, where governments keep interest rates below the rate of inflation, just like after World War II." Nifty fifty stocks were killed during the last such regime change - repression and inflation. They were the tech (growth) stocks of their time and value stocks trounced them, performance-wise. If inflation is here to stay, then this will have implications for investments in general - a case of adapt or die. Stores of value act as a hedge against inflation, they were the outperforming assets during the prior period of inflation/repression. As we have argued and informed, our forthcoming digitalised (NFT) real-world assets are stores of value. While part of their attraction is and should be the fact they change or disrupt the traditional (and ineffectual) market dynamics for such collectibles, they do NOT affect the real-world demand and supply equilibrium as the physical asset remains in lockdown in perpetuity, and cannot be sold. As our WP highlights, and indeed promises, we will be issuing digitalised collectibles at a fixed heavily discounted price to ensure there is real value for buyers, the market in general, and room to grow as a store of value (inflation hedge) should. Here is a WhatInvestment article from March this year, asking and addressing the question: Can naturally coloured gemstones beat inflation? (https://www.whatinvestment.co.uk/can-naturally-coloured-gemstones-beat-inflation-2620643/)
"Not only does inflation chip away at real savings, investment returns, and purchasing power, but it is normally accompanied by higher central bank rates, which leads to increased rates on newly issued bonds. So what can investors do to mitigate against the negative effects of inflation and continue growing their investment portfolios? Enter alternative investments. Alternative investments like gold, wine, art, and real estate are examples of options that have for many years been used by investors as a hedge against inflation. Referred by many as “inflation-proof” these alternative investments, alongside commodities and cryptocurrency, have proven to yield higher returns despite financial crises. For example, between December 2020 to December 2021, inflation grew by 7%. Meanwhile, wine grew by 19.10%, art by 58.81% and ethereum by a whopping 2724%. So, it is understandable why during times of crisis, financially savvy investors turn to these options for investing and to safe-up their portfolios. However, there is a less talked about option that has been going through a revival, despite being one of the oldest forms of investment assets – coloured gemstones. In the last decade, coloured gemstones have experienced some of the biggest price jumps in history. In 2015, the world’s most expensive ruby sold at auction: a 25.59-carat gem, known as the Sunrise Ruby, for over £22m. Just two years later, the world’s most expensive emerald The Rockefeller Emerald, weighing an impressive 18.04 carats, was sold for just over £4m. Many people aren’t as clued-up on these unsung heroes of the alternative investment world, and their lucrative yields. Compare it to one of the more known alternatives, gold. One kilogram of gold has a value of approximately £50,000, whereas one kilogram of fine rubies are worth upwards of £150,000,000, making it 3000 times more valuable. Leading the gemstone space in terms of value and growth potential, are rubies, sapphires and emeralds, who have increased in value by 5-8% per annum since 1995.
And their upward trajectory continues. When re-certifying our own gemstones through Gemological Lab Austria (GLA), reports for one ruby was valued over 19% higher in November 2021 compared to its initial valuation in September the same year. Similarly, upon re-certification in 2021 a selected sample of sapphires experienced an average increase of 15,7% compounding annually, with a 6.1 carat Sri Lankan Sapphire at the top end of the spectrum, which had a total increase of a staggering 194,1%. Much of the rising popularity of coloured gemstones is due to the growing awareness – primarily via the internet, social media and marketing – but also due to developments in recent years that have boosted consumer confidence, such as widespread certification, further industry transparency, and gemmological analysis. And as a result of the Covid pandemic and the economic uncertainties that have followed, more people are seeking ways to make smart investment choices that will strengthen their portfolio and make more lucrative returns in the long run. Crypto has become one of the more popular alternatives for financially ambitious investors during this time, but it’s a highly volatile space and therefore comes with a lot of risk.
But the initial charm and excitement of investing in this space is beginning to wear off – Bitcoin for example has lost half of its value since hitting a record high in November 2021. Taking coloured gemstones’ growing popularity in the last couple of decades and combining it with more financially curious and risk-averse investors entering the market, we can only expect these precious gems to increase even more in value over time and become a leading alternative investment option. They really are called precious for a reason."
For a short overview of the FIX00 project 🙂 please use this link: The Start of something new