The following article is based on our recent Big Picture podcast: Big Moves in Precious Metals, Crypto, and Oil.
To navigate the uncertainties of the current economic landscape, it is helpful to understand the long-term themes driving the markets today. Jim Puplava, Founder of Financial Sense Wealth Management and host of the Financial Sense Newshour, recently discussed the big macro trends that are likely to shape the economy and markets for the remainder of this decade and how they are leading to large capital shifts in a number of key assets and sectors, namely precious metals, crypto, and energy.
US Debt and Fiscal Dominance
One of the most important mega-trends that will impact the investment landscape over the coming years and decades is the rapid rise in US debt levels, Puplava explained. Though concerns over this issue are not new, starting in 2020, spending levels have risen dramatically. As well, with the rise in debt levels and interest rates, the cost to finance this debt has also skyrocketed, now exceeding $1 trillion as of last year in 2023.
US Debt Servicing Costs Spike, Surpassing $1 Trillion
The rise in US debt and debt servicing costs is problematic for a variety of reasons but here is how a 2023 research paper posted at the St Louis Federal Reserve explained the issue as it relates to “fiscal dominance” and the problem this poses in tackling inflation:
“Fiscal dominance refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that ‘dominate’ central bank intentions to keep inflation low... [T]he prospect of this occurring soon in the United States is no longer far-fetched. Indeed, if global real interest rates returned tomorrow to their historical average of roughly 2 percent, given the existing level of US government debt and large continuing projected deficits, the US would likely experience an immediate fiscal dominance problem.”
As the paper goes on to note, once a government gets into a situation where funding large and growing deficits is the dominant concern, “inflation taxation” via money printing is often the most relied upon strategy historically to try and reduce the value of outstanding debts. Given the clear risk this presents to large US Treasury holdings held abroad, governments and central banks around the world have responded by diversifying their reserves and purchasing record amounts of gold.
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None of these concerns are exactly new, Puplava noted, but the immediacy of the issue and the need to take action has risen dramatically since 2020. Furthermore, as the trajectory of US debt levels is likely to continue due to structural factors like demographics, entitlement spending, and rising geopolitical conflicts, Puplava said investors should prepare for higher-than-average levels of inflation for the remainder of this decade, something he also warned about in 2020 when the US dropped the “mother of all stimulus bombs” (as he called it then) and Modern Monetary Theory fully took root.
“Things are not returning to the way they were before the pandemic,” Puplava said, and he is positioning around these long-term trends through a variety of ways, not the least of which is by maintaining exposure to precious metals, commodities, and energy. When it comes to bonds and fixed income, Puplava said he prefers short-term individual bonds from high quality companies vs. bond funds.
AI and Green Energy
The ongoing shift towards green energy and the rapid adoption of artificial intelligence are two powerful investment themes impacting the markets, Puplava explained. Policymakers around the globe, particularly in the Western world, continue to push for a reduction of fossil fuels (namely, coal, oil, and natural gas) in favor of wind and solar. What this means is that cheap baseload sources of power able to operate 24/7 are increasingly replaced by intermittent sources, which leads to less grid reliability and higher electricity costs. This is also inflationary. At the same time, we are witnessing a continual growth in electricity demand, set to reach new record highs. AI is very energy intensive due to the large data centers it requires to train and operate, not to mention the growing use of cloud computing, crypto-mining, and the digital economy, all of which consume surprisingly large amounts of electricity.
Both of these themes are coming together in a way that provides a number of investment opportunities, Puplava explained.
Reshoring/Friendshoring of US Manufacturing
The reshoring of manufacturing and supply chain operations is another trend that will shape the investment landscape for the coming decade. With the COVID-19 pandemic and zero Covid policies in China highlighting the vulnerabilities of global supply chains, many companies are bringing their manufacturing and supply chain operations back to their home countries (reshoring) or to more geopolitically-secure areas (nearshoring or friendshoring). This should make the global supply chain more robust in the face of shocks but will likely lead to ongoing inflationary pressures as companies diversify away from China, which has long been the lowest-cost provider of goods. To mitigate this, the robotics and automation sector should continue to see growth for the years ahead as companies look for ways to reduce costs, particularly in labor, Puplava said.
War Cycle and Proxy Wars
The ongoing war cycle and proliferation of proxy wars are another trend that will shape the investment landscape for many years to come. With geopolitical tensions rising and conflicts erupting in various regions around the world, this also presents another source of inflation but has implications for companies exposed to aerospace and defense. Additionally, as cyber warfare and cyber attacks on critical infrastructure continue to increase, which have more than doubled since 2020, Puplava has identified a number of ways that investors can hedge this risk through their portfolios.
In conclusion, the coming decade will be shaped by numerous long-term trends that will have a significant impact on the investment landscape. By focusing on long-term themes and macro trends, investors can position themselves to capitalize on these trends and protect and grow their wealth in an increasingly complex and uncertain world. Puplava emphasizes the importance of not solely concentrating on the risks but also recognizing the opportunities that these shifts can offer.
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To listen to this full podcast interview, see Big Picture: Big Moves in Precious Metals, Crypto, and Oil for audio.
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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. Investing involves risk, including the loss of principle. Past performance is not indicative of future results. This material has been provided for informational purposes only.
