Alchanati Campbell & Associates
2020 and Beyond. A few economists have started to raise the possibility of our next industrial revolution occurring in the next decade. This would mark the 4th industrial revolution we have seen as mankind. WeWork released a bold statement in early 2016 stating, “We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before”, this comment was almost instantly disregarded as marketing towards the shared economy. Four years later, in early 2020, I believe WeWork was correct, and we are standing at the brink of our next great industrial revolution, one that will disrupt almost every industry. We have the onset of quantum computing, which will change how and industry based on complex physical systems operates; biochem, Pharma, physics. We are very close to seeing industrial implementations of augmented reality and autonomous vehicles (cars, drones). We saw the rise of the sharing economy and gig economy with the introduction of WeWork, Uber, GrubHub, and this industry is only getting bigger. We are heading towards an age where 3D printers are becoming cost affordable where a mechanic can purchase a blueprint and instantaneously start printing the part. We have started to see the rise of permissioned blockchain (corporate chains), this is basically blockchain V2. We will start seeing central governments testing to see if this technology is viable to launch their next central currency on. IBM just recently revised the Buckminster Fuller knowledge doubling curve, to give a short summary of this, Buckminster, a futurist of his time in the 1900s, released the idea that knowledge doubles every 100 years. This was then changed in 1950 to doubling every 25 years, in 2015 it was updated to doubling every 12-18 months, and just recently IBM revised this to doubling every 12 hours. I believe we are heading into a new age, which will be marked with rapid growth in both human capital and technology.
Gold. Gold is a precious metal, something to make rings and jewelry out of, and it’s a beautiful accessory and is a hallmark of wealth. However, it is exponentially more important as an investing asset. There a few ways to invest in gold. You can buy Exchange Traded Funds (ETFs) that track gold, you can invest in companies that mine gold, and you can also buy physical gold (rings, chains, bars). Why invest in gold? Because it’s a safe hedge against inflation and deflation, it can combat currency volatility, and it has an intrinsic value.
One of the purposes of money is that it acts as a store of value. In times of inflation and deflation, regular fiat money such as dollar bills lose their value. This causes people to flock to commodity money, such as gold. In these cases, unlike dollar bills, gold can effectively hold its own value. Why? Because gold is a natural resource; it's impossible to make more of it. This means it is immune to the inflation risks that face traditional currencies. While the government can just "print" more dollars, which would increase the amount of money in circulation while also decreasing each dollar's relative value, they can't produce much gold. As such, this has led gold prices to soar when inflation rises. There is a similar effect with regard to foreign exchange rates. If the USD is losing value compared to, say, the Euro, people will buy gold as it can hold its value while the dollar falls. Why would the dollar fall? For the same reasons listed above. If the government introduces too much money into circulation, this will lead to inflation and the Foreign exchange rates of the dollar to fall. Finally, gold has an intrinsic value because humans have attached one to it. Warren Buffet has said, in paraphrased words, that idea of attaching a value to gold, something we dig out of the ground, is odd. Nevertheless, gold has value. This value leads to gold being an accepted currency everywhere. If the entire United States economy collapsed and the dollar was rendered absolutely useless, gold would be the most valuable currency. This is why Central Banks across the globe buy gold. If things go bad, gold is the place to start again. It backs the Central Bank's balance sheet and provides a measure of security to the country. While the prices fluctuate based on the economy, gold itself is not exactly a byproduct of the economy or any government body.
Liquidity and QE. At the end of 2019, the U.S Federal Reserve fought to keep the repo market running smoothly by injecting half a trillion dollars. Repo or repurchase agreements make up a crucial part of our financial system and that plays a key role in the Fed’s open market operations. That is why the Fed was quick to add as much as $99 billion a day, in reaction to the amount of cash in the market dropping as demand to borrow jumped leading to a spike in interest rates. New York Fed officials have indicated that these cash infusions may continue through April, but the Fed Chairman and several heads of major banks insist that this is not another round of QE. In October, Fed Chairman Powell stated that these actions are not designed to lower longer-term interest rates or ease financial conditions as was the intent of QE, but rather to ensure there is enough cash in the market to avoid another unintended spike in interest rates and avoid turmoil in short term lending markets. The distinction on whether or not this move can be considered as QE is significant because another round of QE would single a shift in monetary policy and while it's unclear the effects this would have on the market it may lead to risky assets climbing even higher or other unintended consequences as was the case when 10-year US Treasury yields initially dropped 2 basis points following the Fed’s cash injection. This topic remains a point of debate among financial analysts as some argue that the Fed is adding to the balance sheet and reducing rates which are telltale signs of QE, while others like Jamie Dimon, CEO of JPMorgan Chase & Co argue that this is simply open market operations and far from a return to QE. The repo market is not the only major liquidity issue present in the market today. Mr. Powell has been working closely with the U.S Treasury Secretary to mitigate intraday liquidity. Intraday liquidity occurs when large banks have a gap between payments and settlements during the course of a business day and run what is known as a “daylight overdraft” to cover the gap. This practice could result in major unindented consequences for the market, or even act as a catalyst for a recession which is why the Fed and U.S Treasury and acting to address this liquidity issue.
Act of War. An act of violence directed from one country to another in order to provoke a hostile response, often giving cause to initiate a war between the countries. Acts of War in the past have included Pearl Harbor in World War II, the assassination of Archduke Franz Ferdinand in World War I, and, in modern times, the 9/11 attacks.
The United States Assassinates Iranian General. On January 3rd of this year, President Trump ordered a missile strike on a convoy containing Iranian Major General Qassem Sulemani, leading to his death at the hands of US military personnel. The strike was ordered in retaliation for the General’s part in the killing of an American military contractor in late December, as well as his part in organizing the violent demonstration in front of the American embassy in Baghdad, where the perimeter of the facility was breached. General Sulemani, through both his direct orders and his support for terrorist and extremist militias throughout the middle east, is directly responsible for the death of hundreds of American soldiers and has played a major part in sustaining and prolonging the terrorist group Hezbollah, as well as the regime of Bashar al-Assad in Syria, and the continuing the Yemen civil war. However, while Sulemani’s death might very well have been justified, the manner of his death breaks with traditional American foreign policy and puts immense pressure on the Iranian government to respond against the United States in a hostile manner, possibly drawing the region into another war. The Iranian government is largely unpopular among its people, with numerous public protests leading to the deaths of thousands of Iranians in the last months of 2019. Its support largely comes from religious hardliners within the country, and those hardliners will demand an aggressive response from the Iranian regime, lest the government risk losing its support and collapsing. If President Trump’s strategy was to cause the collapse of the Iranian regime, and he was willing to risk a war to do it, then this strike makes perfect sense. However, President Trump has made it clear he does not wish another Middle Eastern War, confusing many experts and allies with this action. In response to the assassination of General Sulemani, Iran has ordered a counterstrike against a joint Iraqi-American military base, though it resulted in no casualties. Many experts have concluded that this singular strike is just the first in many future hostile actions, with more strikes, including possible terrorist actions, to come.
The Alchanati Campbell and Associates Team
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