Banking Crisis Stay Ready For Trouble

Global Shock Events: Banking-Crisis Unpredictability Highlights Importance of Staying Ready for Trouble

Precious metals have been on a bit of a tear since the failures of Silicon Valley Bank and Signature Bank generated broad anxiety about the stability of the banking system. Strategists have said the strengthening we’ve seen in gold and silver over the last couple of weeks is a clear example of their potential as safe-haven assets being fulfilled.[1]

Will the upward price momentum generated by safe-haven reactions be sustained over a longer period? That may depend on how fiscal and/or monetary policy evolves. For example, the introduction of quantitative easing during the 2008 financial crisis helped to keep gold and silver running hot for years.[2]

Today, there’s a growing belief that the financial system can’t tolerate much more in the way of rate increases and that the Federal Reserve will pause rate hikes soon.[3] Some even suggest we’ll see rate cuts in the not-too-distant future.[4]

But let’s say it turns out that broader, metals-friendly changes to either fiscal or monetary policy do not result and the quick-reaction surge in metals prices we’ve witnessed recently does not translate to a new bull market for gold and silver. Would that mean there’s no value in owning metals beyond the current tensions?

To casual observers, that might seem like a reasonable conclusion to draw. But it could, in fact, be a very flawed assessment – for two reasons.

One of those reasons has to do with the steady stream of “global shock events” we’ve had to endure for more than two decades now. The current turbulence generated by anxiety over the banking system is just the latest. Since the beginning of the millennium, there have been a large number of shocks to the economic and geopolitical foundations of our world.

Viewed separately, each of these global shock events could be viewed as stand-alone justifications for owning perceived safe-haven assets such as gold and silver. But given that these shocks came as though they were being fed on a conveyor belt, it might seem even more prudent to own precious metals as a core asset through the entire period. That approach looks even better when you recognize the impressive performance logged by gold over the past two decades.

To better illustrate this idea, we’re going to look more closely at the history of global shock events since the beginning of the millennium as well as the performance of gold over that same period. But there’s an important “Part B” to the onset of these global shocks that – in my opinion – additionally strengthens the case for making risk-mitigation strategies a core component of a savings protocol.

It’s this: The evidence further suggests that even if we have reason to believe global shocks will be a regular feature of the economic and geopolitical landscapes, there isn’t a reliable way of knowing what they’ll be, in what way they’ll manifest, or their ultimate degree of impact.

In other words, if all someone does is assume global shocks will be visited upon us with some frequency, that alone may be more than enough justification for keeping in place a risk-mitigation strategy such as owning precious metals. But when you additionally consider that every key characteristic of those shocks is largely unknown before they materialize – hence the fact they are “shocks” – it makes the case for keeping such a strategy in place even more compelling.

Let’s talk about all of this in more detail.

COINCIDENCE? GOLD HAS CLIMBED 600% THIS MILLENNIUM AS GLOBAL UNCERTAINTY HAS STEADILY INCREASED

When it comes to global uncertainty – including global “shocks” – it’s been quite a millennium so far. As it turns out, that’s not just my opinion. There appears to be some evidence the last 20 years have handed us more than our share of political, geopolitical and economic difficulties.

This is a look at the World Uncertainty Index, going back to 1990. Even a mere casual review of the chart reveals that global uncertainty – as measured by this particular index – has been trending upward since 2000.

World Uncertainty Index, 1990-2022

(Chart Courtesy of Federal Reserve Bank of St. Louis)

The broader rise in uncertainty typically is fueled, in large part, by increases in both the frequency and intensity of more singular, discrete global shock events. A careful examination of the chart reveals several points along the trend line where uncertainty spiked on the basis of the sudden emergence of one or more of these shocks.

For example, while you will notice a more gradual uptrend in 2000 and heading into 2001, the trend line spikes sharply in 2001 and stays elevated through the outset of 2002. This spike corresponds with the 2001 U.S. recession, the 9/11 attacks and the obvious and expected rise in tensions immediately following those attacks.[5]

Shortly thereafter, another even-bigger spike in uncertainty occurred during the latter half of 2002 and going into 2003. This jump corresponds to the outbreak of SARS (severe acute respiratory syndrome) – the first pandemic of the 21^st century – as well as the beginning of the Iraq War.[6]

Uncertainty appears to subside for several years following those events. But it doesn’t return to its pre-2000 levels. A “new normal,” it seems, had been established. And then, in 2007, another broad upward trend in global uncertainty begins, marked by several dramatic spikes that represent the advent of numerous global shocks.

The rise in uncertainty from 2007 through 2011 coincided with the evolution of the Great Recession. The year 2012 saw a big jump in uncertainty on the strength of the European sovereign debt crisis, a consequence of the larger financial crisis, as well as concerns that the U.S. would fall off of the so-called “fiscal cliff” that was an issue during this period.[7]

The next instance of a sharp spike in global uncertainty comes in 2016. That proved to be a monumentally symbolic year in terms of a big shift toward populism and deglobalization with the vote by citizens of the United Kingdom to leave the European Union (“Brexit”) and the election of Donald Trump as President of the United States.[8]

Unsurprisingly, the latest particularly large spike on the chart corresponds to 2020, a year that saw at one point more than half the global population under lockdown out of deference to the pandemic.[9]

But even where outsized spikes are not in evidence, other global shocks have kept uncertainty elevated. Among them: A marked rise in trade tensions between the U.S. and China beginning in early 2018, as well as Russia’s invasion of Ukraine two years later.[10]

Rise of Gold Since the Beginning of the Millennium

Coinciding with the steady stream of global shock events and the broader rise in global uncertainty that has been in play since the beginning of the millennium, gold has strengthened substantially. As the chart below illustrates, gold appreciated roughly 600% from January 2001 through the present.

Performance of Gold, January 2001 to March 2023

(Chart Courtesy of StockCharts.com)

Let me be clear: It’s not possible to “prove” in an absolute sense that a rise in global uncertainty over the past couple of decades is responsible for the overall impressive increase in the price of gold over the same period.

At the same time, however, it’s not unreasonable to acknowledge that the increases in uncertainty and the price of gold have come at the same time. And you should feel free, as well, to draw your own conclusions about what relationship, if any, there might be between the two – particularly given the longstanding reputation of precious metals as safe-haven assets, which I wrote about in some detail last week.

The knowledge that gold has appreciated alongside a rise in global uncertainty may cause some people to consider adding precious metals to their savings or adopting any other risk-mitigation strategy as an ongoing component of a retirement-savings regime.

But there’s another feature of these shocks – beyond the expectation that they will keep on coming – that for some people could underscore the importance of being prepared for them at all times. I’m referring to the unpredictability of both when these global shocks will strike as well as how intense they ultimately will prove to be.

Let’s talk about that next.

FORMER TREASURY SECRETARY ON GLOBAL SHOCK EVENTS: CRISES CAN BE “UNPREDICTABLE” IN EVERY WAY

The architects of the World Uncertainty Index said last year that “global shocks are here to stay.” In their assessment, there is no sign that the trends toward deglobalization and populism that have played such a big role in the rise of uncertainty over the last two decades are going to reverse anytime soon.[11]

What makes that outlook especially concerning is that there often is little or no forewarning as to when a global shock event will strike or how intense it may be.

Some of the biggest global shocks of this millennium were, for the most part, complete surprises. 9/11, the SARS outbreak and the COVID-19 pandemic are three of the more obvious examples of shocks that hit with no real warning beforehand.

The Brexit vote is another example of a global shock event that “struck” without warning, in the sense that although the referendum election itself obviously was not a surprise, the results were. Even well into election day, the consensus view was that a decision by U.K. voters to remain in the European Union would win by a landslide.[12]

The election of Donald Trump in 2016 provides yet another example of a global-shock surprise (at least to the extent one considers his election to be a “global shock event”). As was the case with the Brexit referendum, the 2016 presidential election clearly was not unexpected – but Trump’s victory was, in terms of consensus projections. Shortly after the results were known, Politico declared Donald Trump’s win over Hillary Clinton to be “the most stunning upset in American history.”[13]

The 2008 financial crisis was a surprise to “experts” and policymakers, as well. Although a prophetic few had been warning that big trouble was just ahead, no one in positions of real authority at the time seemed to be saying it.[14]

In fact, Hank Paulson, who was Secretary of the Treasury when the crisis hit, said during a reflective moment in 2018 that “my strong belief is that these crises are unpredictable in terms of cause or timing or the severity when they hit.”[15]

As for the current turmoil plaguing the banking system, that certainly can be called a surprise, too.

The first real domino to fall was the collapse of Silicon Valley Bank two weeks ago. Yet just a month before its failure, Silicon Valley made an appearance on Forbes’ 2023 list of “America’s Best Banks.”[16] Just four days before the bank officially fell, Silicon Valley crowed about the Forbes ranking on social media.[17] Also a month before the bank collapsed, CNBC personality Jim Cramer was recommending Silicon Valley stock on his popular Mad Money television show.[18]

I could keep going – but you surely have the picture by now.

Insofar as there’s a potential lesson in this week’s article for retirement savers, I would suggest that former Treasury Secretary Hank Paulson expresses it the best in the quote I shared a minute ago: Crises are “unpredictable” in essentially every way – “cause, timing” and “severity.”

Reasonable people may disagree as to whether that’s really true in every case of a crisis. As I mentioned earlier, there were a handful of people who essentially predicted the financial crisis that Paulson says couldn’t be predicted.

Even at that, however, I actually think the historical record largely validates Paulson’s view. And for those retirement savers who agree, it suggests the most prudent way to prepare for global shock events of any kind, of any severity, at any time…may be to keep risk-mitigation strategies – such as owning precious metals – in place, rather than simply trying to anticipate when it is necessary to re-employ them.

…….

[1] CNBC.com, “Gold, silver soar as Silicon Valley Bank collapse spurs flight to safety” (March 13, 2023, accessed 3/23/23).

[2] Kimberly Amadeo, The Balance, “What Is Quantitative Easing (QE)?” (October 25, 2021, accessed 3/23/23).

[3] Todd Campbell, TheStreet, “The Pause That Refreshes” (March 22, 2023, accessed 3/23/23).

[4] Joy Wiltermuth, MarketWatch.com, “Powell says no rate cuts in 2023, but the bond market doesn’t agree” (March 22, 2023, accessed 3/23/23).

[5] Hites Ahir, Nicholas Bloom and David Furceri, International Monetary Fund, “60 Years of Uncertainty” (March 2020, accessed 3/23/23).

[6] Ibid; James LeDuc and M. Anita Barry, National Library of Medicine, “SARS, the First Pandemic of the 21st Century” (November 2004, accessed 3/23/23).

[7] Ahir, Bloom and Barry, “60 Years of Uncertainty.”

[8] Ibid.

[9] IEA.org, “Context: A World in Lockdown” (accessed 3/23/23).

[10] Jacob Pramuk and John Schoen, CNBC.com, “US and China agree to continue tariff talks. Here’s a timeline of how the trade war started” (June 29, 2019, accessed 3/23/23); Associated Press, “Key moments in a year of war after Russia invaded Ukraine” (February 21, 2023, accessed 3/23/23).

[11] Nicholas Bloom, Hites Ahir and Davide Furceri, Harvard Business Review, “Visualizing the Rise of Global Economic Uncertainty” (September 29, 2022, accessed 3/23/23).

[12] Nate Cohn, New York Times, “Why the Surprise Over ‘Brexit’? Don’t Blame the Polls” (June 24, 2016, accessed 3/23/23).

[13] Shane Goldmacher and Ben Schreckinger, Politico, “Trump pulls off biggest upset in U.S. history” (November 9, 2016, accessed 3/23/23).

[14] Jon Birger, CNN Money, “The woman who called Wall Street’s meltdown” (August 6, 2008, accessed 3/23/23).

[15] Nicola Gennaioli and Andrei Shleifer, World Economic Forum, “Two myths about the 2008 crisis” (October 1, 2018, accessed 3/23/23).

[16] Andrea Murphy and Hank Tucker, Forbes.com, “America’s Best Banks – 2023” (February 14, 2023, accessed 3/23/23).

[17] Chris Pandolfo, Fox Business, “Silicon Valley Bank touts Forbes ‘best bank’ nod days before becoming largest failure since Great Recession” (March 11, 2023, accessed 3/23/23).

[18] Business Insider, “EXCLUSIVE: Jim Cramer Recommended SVB Financial In February, An Example Of ‘His Reverse Midas Touch’” (March 10, 2023, accessed 3/23/23).