On Target Newsletter

In This Issue: 

  • Roubini on stagflation,
  • Resolutions for 2023,
  • Investing in China,
  • Weaponizing the dollar,
  • Gold,
  • Global economy,
  • Saudi Arabia,

Coming: The Mother-of-All Stagflationary Crises

High debts and stagflation have set the stage for the mother of all financial crises, says well-known economist and commentator Nouriel Roubini.

The end of the easy-money era rips the mask off the insolvent zombie economy. The world economy is lurching toward an unprecedented confluence of economic, financial, and debt crises, following the explosion of deficits, borrowing and leverage in recent decades.

In the private sector, the mountain of debt includes that of households (such as mortgages, credit cards, auto loans, student loans, personal loans), businesses and corporations (bank loans, bond debt, and private debt), and the financial sector (liabilities of bank and non-bank institutions).

In the public sector it includes central, provincial, and local government bonds and other formal liabilities, as well as implicit debts such as unfunded liabilities from pay-as-you-go pension schemes and health-care systems — all of which will continue to grow as societies age.

Just looking at explicit debts, the figures are staggering. Globally, total private- and public sector debt as a share of gross domestic product rose from 200 per cent in 1999 to 350 per cent in 2021. The ratio is now 420 per cent across advanced economies, and 330 per cent in China. In the United States, it is 420 per cent, which is higher than during the Great Depression. 

Debt can boost economic activity if borrowers invest in new capital (machinery, homes, public infrastructure) that yields returns higher than the cost of borrowing. But much borrowing goes simply to finance consumption spending above one’s income on a persistent basis. That is a recipe for bankruptcy.

Moreover, investments in “capital” can also be risky, whether the borrower is a household buying a home at an artificially inflated price, a corporation seeking to expand too quickly regardless of returns, or a government that is spending the money on “white elephants” (extravagant but useless infrastructure projects).

Such overborrowing has been going on for decades, for various reasons.

The democratization of finance has allowed income-strapped households to finance consumption with debt. Centre-right governments have persistently cut taxes without also cutting spending, while centre-left governments have spent generously on social programmes that aren’t fully funded with sufficient higher taxes.

Tax policies that favour debt over equity, abetted by central banks’ ultra-loose monetary and credit policies, have fuelled a spike in borrowing in both the private and public sectors.

Years of quantitative easing (QE) and credit easing kept borrowing costs near zero, and in some cases even negative (as in Europe and Japan until recently). By 2020, negative-yielding dollar-equivalent public debt was $17 trillion, and in some Nordic countries, even mortgages had negative nominal interest rates.

Zombies plumped up by unsustainable debt

Understand how today’s global business practices, market dynamics, economic policies and more, impact on you.

The explosion of unsustainable debt ratios implied that many borrowers — households, corporations, banks, shadow banks, governments, and even entire countries — were insolvent “zombies” that were being propped up by low interest rates (which kept their debt servicing costs manageable).

During both the 2008 global financial crisis and that of Covid-19, many insolvent agents that would have gone bankrupt were rescued by zero- or negative-interest-rate policies, QE, and outright fiscal bailouts. But now, inflation — fed by the same ultra-loose fiscal, monetary, and credit policies — has ended this financial Dawn of the Dead.

With central banks forced to increase interest rates in an effort to restore price stability, zombies are experiencing sharp increases in their debt-servicing costs.

For many, this represents a triple whammy, because inflation is also eroding real household income and reducing the value of household assets, such as homes and stocks. The same goes for fragile and overleveraged corporations, financial institutions, and governments: they face sharply rising borrowing costs, falling incomes and revenues, and declining asset values… all at the same time. The worst of several worlds.

These developments are coinciding with the return of stagflation (high inflation alongside weak growth). The last time advanced economies experienced such conditions was in the 1970s. But at least back then debt ratios were very low. Today, we are facing the worst aspects of the 1970s (stagflationary shocks) alongside the worst aspects of the global financial crisis.

However, this time, we cannot simply cut interest rates to stimulate demand. After all, the global economy is being battered by persistent short- and medium-term negative supply shocks that are reducing growth and increasing prices and production costs.

These include the pandemic’s disruptions to the supply of labour and goods; the impact of Russia’s war in Ukraine on commodity prices; China’s disastrous anti-Covid policies; and a dozen other medium-term shocks — from climate change to geopolitical developments — that will create additional stagflationary pressures.

Unlike in the 2008 financial crisis and the early months of Covid-19, simply bailing out private and public agents with loose macro policies would pour more gasoline on the inflationary fire.

That means there will be a hard landing — a deep, protracted recession — on top of a severe financial crisis.

As asset bubbles burst, debt-servicing ratios spike, and inflation-adjusted incomes fall across households, corporations, and governments, the economic crisis and the financial crash will feed on each other.

To be sure, advanced economies that borrow in their own currency can use a bout of unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, central bank deficit monetization will once again be seen as the path of least resistance.

But you cannot fool all of the people all of the time. Once the inflation genie gets out of the bottle — which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash — nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided. Trade hostilities will be far-reaching.

Roubini, now an asset manager at Abu Dhabi’s Atlas Capital, says that because of high inflation, common investment hedging strateges have failed. Last year “you lost more money on bonds than you did on equities.” Where can investors find safety? He recommends short-term US Treasury bonds or inflation-linked bonds… and gold. Property prices have fallen, due to rising interest rates, so land is a good hedge, as are selected real estate trusts.

Resolutions to Make a Better 2023

By Chad & Peggy Creveling

As another new year begins, it’s a great time for expats to re-evaluate financial positions and to make positive changes. Improving our circumstances largely requires instilling good habits, being consistent, getting started early, and possessing a basic understanding of finance and investing concepts.

To help you thrive in 2023, here are some financial resolutions to consider. If you start at the beginning and aim to knock off at least one each month, by the end of the year you’ll be on much firmer financial footing.

Set up or replenish your emergency fund. This should be one of your first priorities. Unexpected things happen to everyone, maybe more so to those who live outside the safety nets of our home countries.

Job loss, forced repatriation, loss of expat benefits, illness – these are all things that can happen to expat families. An emergency fund helps insulate you from some of life’s curbed balls.

Plan on setting aside enough for living expenses of six months or more. Don’t get clever with these funds; put them in risk-free deposit accounts in the currency you will probably need.

If you’ve had to use some of your emergency funds in the past year, don’t sweat about it – having funds set aside will have helped prevent an emergency from spiralling. Instead, aim to replenish the fund as soon as you can.

Create or update your budget. Expats typically operate in a currency other than their home country’s, which can cause a loss of perspective when it comes to spending. Many of us spend in foreign currency amounts we would never consider if priced in our home country.

For your long-term financial wellbeing, it’s vital that you figure out how much you’re spending, and on what. For most of us, a significant amount is wasted on impulse purchases, avoidable fees, poor planning, and inappropriate use of debt.

Use a multi-currency personal financial planning software program like Quicken to help you translate your finances back to a currency that has meaning to you. If needed, consider taking the on-line Quicken course to learn the program.

Set up or update your financial goals. Where do you want to end up? What are your life’s dreams?

If you’ve asked yourself these questions before, you may find the answers will change over time. Remember this should be a fun exercise. But if you don’t know where you want to go, you’re not likely to get there.

Toward this end, set specific, quantifiable financial goals that answer questions like who, what, when and where.

Goals don’t necessarily have to be so daunting that you never get started, such as save $5 million for retirement in 30 years.

Set near-term goals that support longer-term desires. For example, create a family budget and save $10,000 for retirement this year, or open a plan to pay for your child’s education.

Change your mindset: learn to enjoy saving. This is critical and where many well-intentioned New Year’s resolutions get derailed. While forming habits such as saving may be difficult at first, once you get started, it becomes much easier. Learn to enjoy paying yourself first.

Pay off debt. The inappropriate use of debt is one of the quickest ways to jeopardize your financial security. Use cash or a debit card for purchases, not a credit card.

Pay off or consolidate consumer debt to lower your interest charges. Look into refinancing mortgage debt or swapping variable-rate debt to fixed-rate, if you haven’t already.

Be careful of the amount of debt-financed consumption. Remember the words of Charles Dickens in David Copperfield: “Annual income twenty pounds, annual expenditure nineteen-and-six, result happiness; annual income twenty pounds, annual expenditure twenty-and-six, result misery.”

Contribute to your employer’s retirement plan. This can be one of the best deals out there, assuming you get a tax deferral and your employer matches your contribution.

If you don’t have a company retirement plan, look at other tax-advantaged options. In Thailand, for example, provident and retirement mutual funds can be useful. Depending on their situation, Americans may be able to contribute to individual retirement accounts (IRAs), even in some cases non-deductible ones.

However, beware of many offshore investment-linked insurance schemes, often billed as savings plans, pension plans, or education funds. These are not the same as company or national retirement plans. Their high fees will quickly erode any long-run investment returns you can hope to achieve and will subject Americans to complex tax and reporting requirements– or worse.

Read a good book. There’s a lot of “noise,” conflicting advice, misconception and faulty “market wisdom” surrounding investing. Investing doesn’t have to be complicated, but many people lack the knowledge and context to make informed decisions. As a result, they often get drawn into the type of short-term, emotion-driven decision-making that destroys wealth.

Do yourself a favour and read a book on investing. Some time-tested ones to consider are: The Investor’s Manifesto, Preparing for Prosperity, Armageddon, and Everything In-Between, by William Bernstein; and A Random Walk Down Wall Street, the Best Investment Guide that Money Can Buy (50th Anniversary Edition), by Burton G Malkiel.

Develop an appropriate investment strategy. Once you’ve read the book, either on your own or with the advice of a competent unbiased financial advisor, create an appropriate long-term investment plan that is suitable for your unique situation and financial goals. Strive for consistency and do your best to avoid the classic investment mistakes that many expats make.

Review your insurance coverage. Review your need for insurance as well as your existing policies. Look at health, life, disability, home-owner or renter, auto, liability and, if you are over 55, home-term-care, insurance (if available).

Make sure that you have adequate coverage, but don’t buy what you don’t need. Also, make sure you understand your coverage – not all insurance policies do the same. Generally it’s best to buy each type of coverage separately and not lumped in with some other financial product.

If you can’t evaluate your insurance needs yourself, seek out an unbiased advisor to help. Ideally, that is someone who is not compensated based on the insurance product sold to you.

Simplify your financial affairs. Keep your financial life as simple as possible. It’s easier to manage and you’re more likely to keep up with it, It’s also easier to safeguard your accounts from cybercriminals if you have fewer of them.

Close unneeded bank accounts, limit the number of credit cards, use an on-line broker, have your statements delivered on-line, and use multi-factor authentication. Keep good records.

Get or update your will and other estate planning documents. Most people don’t have wills, and for those who do, it’s unlikely to be up-to-date.

An up-to-date will is especially important for expats who may be involved in dual-nationality marriages and have assets spread across several countries.

While you’re at it, review beneficiary designations on all insurance, pension and retirement accounts. Ensure your spouse or other appropriate person has access to the financial accounts and knows where the records are kept. Consider whether a financial or healthcare power of attorney is required.

Get competent advice when you need it. Don’t be penny-wise and pound foolish. The level of complexity and financial sophistication of financial products has increased immensely in the past few decades. So has the slickness of the marketing.

In today’s world of specialization, it is impossible to keep up with it all. You don’t have to do it all yourself, It can often be cheaper and more effective in the long run to get competent, unbiased advice when you need it rather than attempting to go it alone. Just ask any wife whose husband tried to save a bit of money by refusing to call the plumber!

This new year resolve to bid farewell to bad financial habits, instill some good ones, and get started on creating your own financial security.

The Crevelings are Thailand-based CFAs who advise expats on personal financial planning. To learn more, visit their website: www.crevelingandcreveling.com.

Investing in China

The world’s second biggest stock market – China — is looking like an investor darling again, Bloomberg comments, Optimism about the eventual benefits of Beijing’s abrupt end to Covid curbs outweighs concerns over the short-term pain it inflicts.’

Adding to that is a series of policy developments signalling the return of economic pragmatism, including plans of fresh support for the property sector, discussions of ending a ban on Australian coal imports, and progress toward concluding a crackdown on Jack Ma’s financial-tech behemoth, Alibaba.

The euphoria has spread beyond equities. The offshore yuan has strengthened against the dollar, while dollar bonds of some of China’s distressed developers have seen sharp gains.

“These directly remove some of the pillars of risks for China – property, geopolitical and regulatory headwinds” – says Marvin Chen, a Bloomberg Intelligence analyst, referring to the slew of “active” policies.

Concerns over a further worsening of China’s property debt crisis are receding as authorities are weighing new measures to ease the cash crunch plaguing some systemically important developers. The resumption of approvals for private equity funds to raise money for residential housing developments also lifted sentiment.

Using the Dollar as a Political Weapon

Tired of a too-strong and newly weaponized greenback, some of the world’s biggest economies are exploring ways to circumvent the US currency, Michelle Jamrisko and Ruth Carson report for Bloomberg News. Smaller nations are also experimenting with de-dollarization. Big companies, wary of dollar strength, are selling an unprecedented portion of their debt denominated in local currencies.

Not long ago it was unthinkable for countries and corporates to explore payment mechanisms that bypassed the US currency or the SWIFT network that underpins the global financial system.

Now its use as a weapon to impose sanctions – in particular against Russia – and new technological innovations such as cryptocurrencies, are encouraging a chipping away of America’s global financial hegemony.

Russia and China are intensifying their efforts to try to manage their part of the world economy without the dollar. Zoltan Pozsar of Credit Suisse says the first-ever China/Arab states’ summit marked the birth of a “petroyuan” as an alternative to the dollar as the measure of global trade in oil.

Commentator John Mauldin says the US was foolish to use its currency as a political weapon: “That will force non-US investors and nations to diversify.”

The Gold Price Is Soaring

Central banks are adding to their stocks of gold at the fastest pace for more than half a century as China and Russia seek to diversify their reserves from the dollar. Other keen buyers have been Turkey, Uzbekistan and Qatar.

Adrian Ash, head of research at the dealer Bullionvault, says the flight of central banks to gold suggests transformation of the world’s geopolitical backdrop to one of “mistrust, doubt and uncertainty” after the US and its allies froze Russia’s dollar reserves. Nicky Shiels, another strategist, says many countries are now asking “should we have exposure to so many dollars” when the US and other Western governments can confiscate such assets at any time.

Another reason for the flood of money into gold, it’s believed, is that because of the mounting ideological war against fossil fuels Mideast governments are opting to convert their oil and gas riches into precious metals.

Central banks and other official agencies bought 675 tonnes of bullion last month.

The World Economy

Investors are becoming too optimistic about the global economy, says The Economist, reacting to positive developments such as falling inflation in America, plunging natural gas prices in Europe and loosening anti-Covid policies in China.

“Yet as inflation subsides, it will get harder to fight. American wages are growing at an annual rate above 5 per cent, because the labour market is still exceedingly tight.” The central bank is likely to continue raising interest rates until the labour market is much cooler.

Europe’s energy crisis is going through a similar illusory reprieve. It is only at the start of an energy crunch that will span at least two winters.

China is easing its zero Covid policy and helping a property sector crushed by anti-speculation measures, “but on both fronts the road ahead will be long and hard.”

The world economy’s “problems are still severe.”

Saudi-Arabia and China

At the lavish three-day meeting between leaders of the two increasingly-friendly countries wide-ranging economic and trade agreements were signed worth more than $30 billion as well as pledges to expand military co-operation.

Missing from their public statements were any mention of the more controversial aspects of the developing relationship such as advanced military sales, expansion of 5G and 6G telecommunications networks, and pricing more of Saudi oil sales in Chinese currency.

The Saudis are setting up a cloud-computing region based on technology of Huawei, the prime target of America’s global trade sanctions policy aimed at China, an electric-vehicle manufacturing plant in Saudi-Arabia, and another based on Chinese technology to make green hydrogen batteries using solar power.

The summit was held against the background of increasingly strained relations between the Saudis and the Americans as the Saudis, who view the US as a superpower in decline, shift towards links with both Russia and China.


Artificial intelligence: A research lab in America known as OpenAl has launched an experimental program, ChatGPT, which has taken the machine learning community by surprise. Within a week, more than a million people were using it. It is designed to use human language and output conversational answers.  The FT says its astonishing ability to generate paragraphs of convincing text at remarkable speed has opened users’ eyes to the power of generating artificial intelligence large language models. In addition to answering basic questions accurately, it can execute a long list of tasks such as to solve engineering problems, write programming code… even compose songs.

Protectionism: Europe Union president Ursula von der Leyen has announced that the Union will relax its rules on how much member-states are allowed to offer to counter the US’s $329 billion package of green subsidies. Foreign governments are angry about its Inflation Reduction Act. They say it is a protectionist measure that will lead to unfair competition, closing down markets and fragmenting supply chains. It is starting to drive some major companies to leave Europe to switch operations to America to take advantage of green subsidies that are only on offer to US-based businesses.

South Africa: A Russian billionaire who has been visiting the country, Andrey Meinichenko, says it should upgrade its coal-fired power plants rather than focus on renewable energy. This would be cheaper, able to upgrade more speedily, and deliver less expensive electricity.

President Cyril Ramaphosa is under international pressure from the woke elite to invest in solar and wind power, but energy minister Gwede Mantashe, a former coal mine union leader, favours sticking with coal, which generates four-fifths of the nation’s power.

Oil in America: The federal administration’s regulatory attack has been blamed for higher fuel prices, but a decline in domestic production also reflects the geological fact that the best areas of shale deposits have been exploited. Another point is that in recent years oil and gas industry executives have focused on running their companies for cash flow and dividends rather than expanding output.

Europe: Its energy crisis, whose surging costs have already hit roughly a trillion dollars, has only just begun. After this winter the region will have to refill its natural gas reserves with little or no deliveries from Russia. Even with imports of liquified gas arriving by sea, the market is expected to remain tight until 2026, when additional capacity, particularly from the US and Qatar, becomes available. There will be no respite from high prices.

Immigration: Research by RealClearInvestigations shows that in Europe a wave of violent crime is strongly correlated with immigration. In Sweden the authorities have recorded some 500 incidents of terrorism using bombs since 2019. Gang shootings have become increasingly common.

Japan: The nation’s mothers produced only 811,622 babies in 2021, the lowest number a year since 1899.

Another interesting development is that since Haruhiko Kuroda took over as governor of the central bank and pursued controversial monetary policies, annual GDP per capita has fallen from the equivalent of $49,000 to $39,000.

Religion: Britain’s latest national census data shows that fewer than half the population of England and Wales describe themselves as Christian and only 1 per cent regularly attend weekly services. 37 per cent say they have no religion. Nearly 4 million say they are Muslim, a million are Hindu. Lesser faiths are Sikh (half a million), while 270,000 are Jewish or Buddhist.

Semiconductors: The Taiwanese giant TSMC says it is in advanced talks to set up its first plant in Europe, in the German city of Dresden. It will focus on 22 and 28 nanometre technologies, similar to those it plans to make in Japan. TSMC makes the world’s most advanced chips… as tiny as 2 nanometre (billions of a metre).

Weaponry: Half the German army’s advanced-version infantry fighting vehicles deployed in a training exercise for NATO’s German-led rapid response force broke down. The defence ministry says it won’t buy any more of these Puma vehicles, developed by two of the country’s leading arms manufacturers.

Lithium: The world’s largest producer, Albemarle, expects high prices for the key battery metal to persist for years despite development of new sources of supply in Chile, Australia and China. There is explosive growth in demand for electric vehicles.

Global markets: Stocks and bonds lost more than $30 trillion in value last year as inflation, interest-rate rises and war in Ukraine triggered the heaviest losses in asset markets since the financial crisis more than a decade ago.

Norway: The nation’s wealthiest citizens are emigrating to other countries such as Switzerland to escape the high taxes being levied by a centre-left government.

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