Global Growth Is Back as Fiscal Reckoning Looms in 2025

Hello, this is Jan van Eck with our Q2 2024 Outlook. In the next couple of minutes, I'm going to expound on two basic insights that came out of Q1.

Number one is the world economy is now on a growth trajectory after being stagnant for the last couple of years. We focus on the U.S. economy and of course it's been booming, but the global economy now is in growth mode as well. And that means that you should have a healthy commodities allocation if you do that in your portfolio. Point number one.

Point number two is there is a potential fiscal crisis happening in 2025. And because the investors around the world are worried about US government spending, gold and, to a certain extent, bitcoin as well are important hedges to have in your portfolio in that 10-20% likelihood that there is a fiscal crisis in 2025. In the rest of this brief video, I hope to expand on those two points.

Global Growth Picking Up

So let's look a little bit at what is causing a couple of different things to move. First of all, in the world economy a big change in global growth.

And if you look at this chart of global PMIs over the last three years, so I like PMIs, Purchasing Managers’ Index, as the best indicator of economic growth on a global basis, and if the number is over 50, we're in expansion. So first of all, in Q1 we first regained 50 after not being there for a year or so. So the world is now in economic expansion.

Number two you can see there's a nice upward trajectory for that growth. So that's what's been driving commodity prices higher – copper, oil, and other things.

Yes, they're affected by the Mideast and geopolitical tensions, but I think this is the underlying force that people need to focus on.

China Back in Expansion Mode

Of course, one of the biggest drivers of global growth over the last couple of decades is China.

And here as well, I think the PMI is the best statistic to look at in China. So there are two lines here.

The economy in China and the US is composed of two parts. Number one is services and number two is manufacturing. Services is smaller in China. Manufacturing is more important than it is in the United States. So services, the dark blue line, has always tended to be an expansion zone because that services sector in China is catching up. And that's a multi-decade trend.

So I like to look at the manufacturing line of PMI in China to indicate is China in an expansion mode on a cyclical basis—meaning short term economic cycles—rather than this big trend of services growing? And you'll see that lighter blue line does drop below 50 from time to time. Well, it was partially because of the property markets, but also for a variety of other reasons below 50, which was a little bit surprising because China only kind of came out of COVID and opened up to the world about a year ago. And a lot of those travel indicators are now normalized. And what you see is that China is in expansion mode.

So, big change happened in Q1, the global growth, which is one of the big three things that I look at from a macro indicator perspective is supportive of financial markets and commodity prices in particular. So this would argue that if you do allocate to commodities, this is a time to be allocated because probably this cycle will last for a longer period of time with growth being diversified more. And so now with India and Latin America and the Mideast being increasingly part of this picture, not just China. So that's number one.

US Debt-to-GDP on Track for New Highs?

Number two.

Gold hit all-time highs in the first quarter of this year. And so the question is, what is it signaling? I think that gold is signaling is, again, what I started with, which is 2025 is going to be a big fiscal problem for the United States.

Let's look at the charts that describe the fiscal problem in the U.S. First of all, as people well know, we are on an unsustainable path of very high debt to GDP ratios. So depending on your assumptions, we'll get you on the different color parts of this chart to relatively irrelevant where you think it is. It will be at all-time highs in American history at this level.

US Budget Deficit Never So Large During Economic Boom

More interesting is, that our deficit, as you can see in the red line here going back to the 1930s, is the highest it's ever been given that we have full employment. So 6.5 % budget deficit of GDP is an extremely high level. And I think future generations will look back, and I realize that this is not particularly new news, but the market impact is, but I think future generations will look back saying, what were we doing in 2023 and 2024, spending that much money and borrowing so much money when the economy was doing well?

So why do I think 2025 is the big year of indicators?

So in the United States, it's typically the year after a presidential election when major fiscal decisions are made. And there's two things forcing decision-making in 2025. Number one, the Trump corporate tax rates are rolling off in 2025. So those tax cuts will be either extended or they won't be,

Number two, Social Security is going bankrupt in 2033. And we are very close to that in sort of retirement plan funding years. The only other time if we don't fix that problem in 2025 would be 2029. That's the next presidential election cycle. And that's really too late. You can't fix a multi -decade problem in the span of just a couple of years. So that's why I say 2025 is going to be a big pressure year. So you have the big budget deficits, you have the Trump taxes, and then you have Social Security.

Are the markets starting to anticipate this fiscal crunch in 2025? I think so. First of all, you had gold hitting all-time highs in prices.

US Treasury Credit Default Swaps Show Elevated Deficit Concerns

There are also two other indicators that I like to look at that are not necessarily indicating crisis right now, but they're a little bit worrisome. And they are these two things.

Number one, credit default swaps, which is basically insurance on whether the United States will pay its bills, spiked up last year during the budget standoff and is staying at relatively elevated levels. Back here on the left-hand side of the chart is the global financial crisis in 2008, 2009. So after being low for a while, you can see the markets are pricing in some risk of a default on U.S. debt.

EM Local Currency Debt Outperforming Despite Strong USD

So that, all time gold prices, and then the other indicator that I look at is the bottom green line, which is, again, since 2020, this is local currency emerging market debt outperforming the dollar. And you can see, even though the price of the debt has gone up and down radically since 2022, but EM debt is being rerated against U.S. government debt, which is just another sign that the markets are concerned about this 2025 problem.

So what to do? I said before, global growth should make you rethink your commodity allocation and make sure that if you have it, it's in place. And I would say at your maximum allocation because of the inflection point that the economy hit in Q1. And then secondly, if I'm right that the market is starting to get worried about 2025, you want to have a gold allocation. I'll say Bitcoin as well, depending on your investor preferences. But those two assets are the ones that will perform well. Again, maybe it's only a 10 or 20% chance that we hit a crisis in 2025. And if you think about, what scenario will they not be in a crisis? Well, the markets could force the politicians to reach some kind of deal. And while government spending could go down, it could be that the Fed then uses that as a reason to cut interest rates and expand monetary policy as an offset to fiscal policy. So, big picture, we're spending too much money. I think it also explains why the economy is stronger than people have expected, why inflation is higher than people have expected. And those two scenarios are now takeaways for your portfolio.

Thanks very much. Good luck for Q2 and beyond investing.