Gavekal-IS

The 16th BRICS summit, held in Kazan, Tatarstan two weeks back, saw much talk of a new BRICS currency and related banking payments system, which could challenge the US dollar’s supremacy. Didier seeks to decompose what the underlying basket for such a diffuse currency would look like.

Innovation thrives when individuals have freedom, but too much can lead to chaos and therefore authority is a necessary constraint. The interplay between these factors shapes the economic systems of today, as they once influenced family structures before the industrial revolution. Didier examines what this can tell us about how to drive economic growth, and where to allocate various asset classes.

What is the link between housing, milk and paper toilet rolls? For Didier, the answer lies in pricing distortions created by the administrative state that have led to too much, or too little, of such basic items being made available to consumers. Investors need to beware the hand of such interventions.

A decade or so ago, Professor Nassim Taleb introduced the concept of antifragility, whereby a small number of financial assets thrive under stress. Gavekal-IS has taken Taleb’s idea further, developing models and algorithms to measure an asset’s ability to do well even in extremely volatile times. Among the world’s fiat currencies, it turns out that the yen is the most antifragile, while Chinese stocks have also acquired this trait over the past five years. In today’s report, Didier explains why this might be the case.

In January this year, the global economy entered a rather unusual phase that now demands close attention. Since the US dollar was floated in August 1971, this type of economic configuration has occurred more than a dozen times, says Didier. The important thing for investors is that it has led to dramatic stock market rallies, especially in emerging markets, alongside strong gains in their currencies and in the gold price.

For years, Gavekal-IS has focused on the strong connection between three key forms of money: fiat currency, gold and primary energy. For a portfolio manager, juggling between bonds and gold on the defensive side of a portfolio poses no problem. However, investing in oil on the futures market, for example, presents a big risk—prices could drop as has been the case this week or, in extreme cases, even go negative. So what to do, asks Didier.