Demand for safe havens

Geopolitical environment and expectations of purchasing power drive demand for safe havens

My friend Miguel sent me some feedback for my post on productivity stagnation. I suggested that if we continue to see productivity stagnation in some sectors, demand for safe havens might rise:

you’d expect the price of services to continue to rise independent of inflation. This means the purchasing power of the average household goes down. Combine that with a low savings rates and more money printing and you might see more demand for safe havens (e.g. gold, bitcoin).

He reminded me that the rising wages in stagnant sectors implies a productivity boost in aggregate, which means the purchasing power of the average household goes up, which doesn’t necessarily mean demand for safe havens will rise:

Not sure about this one.  Baumol's cost disease (which is what H&T are really discussing) focuses on how productivity in sector X can raise wages in sector Y, even if sector Y stays inefficient.  However, this also implies a productivity boost to the entire economy, and so therefore the purchasing power of the average household goes up.  There are a whole bunch of reasons why Baumol's cost disease can co-exist with lowered living standards (war, crime, meteor strikes, bad policy), but if we're only looking at the effects of uneven productivity growth, the expected outcome is:  1) richer and productive engineers/managers 2) richer but unproductive teachers/nurses.

I think he’s right. So perhaps the possible outcomes are like this:

1. Continuation of Baumol cost disease (productivity up overall, stagnation in some sectors => average household purchasing power up)

2. Increase in stagnation (productivity flat or down overall => average household purchasing power down)

3. Runaway automation (productivity up => average household purchasing power unknown; depends on relative effect of decreased wages and decreased cost of goods and services)

Thiel seems to warn against 2. H&T observe 1. Musk, Altman, and generalized AI bulls expect 3.

How do each of these outcomes impact demand for safe havens? You probably cannot make good predictions without knowing something else: confidence in fiat regimes.

When confidence in fiat regimes is high, demand for safe havens tends to go down. From The Balance:

As a rule, when the value of the dollar increases relative to other currencies around the world, the price of gold tends to fall in U.S. 

But when confidence in fiat regimes falls, demand goes up:

The price of gold is often sensitive to the overall perceived value of fiat or paper currencies in general terms. During times of fear or geopolitical turmoil, the price of the historic metal tends to rise as faith in governments falls.

I see something like this:

Where the dominant force is geopolitical environment.

So when you see tweets predicting a currency crisis:

Raoul Pal @RaoulGMI

A Currency Crisis? When the long-term charts all start pointing to a single event risk, I pay attention. When those charts are at the KEY level, I focus. And when they break, it is time for action... Something really BIG is going on...

You can place yourself in the 2x2. Here, it’s clear the the geopolitical environment is turmoil. But is purchasing power up or down? If USD is gaining against other currencies, we might expect purchasing power to go up. But if USD gains against other currencies amidst inflation, purchasing power may go down.

This uncertainty is why we’re seeing flight to safe havens. The combination of geopolitical turmoil plus fears of decreased purchasing power (increased inflation).

When you see people say things like BTC is a hedge against a financial apocalypse, this is what they mean. Demand for safe havens is proportional to the probability of increased geopolitical turmoil and inflation.

Personally, I’d rather have a calm geopolitical stage than orange coin number to go up. But if we’re headed for turmoil, I’m happy to have some orange coins.