Central bank money-printing “will destroy the world”.
Contrarian investment expert Dr Marc Faber, who writes the Gloom, Boom and Doom Report newsletter, came out with that one in a recent interview with Bloomberg.
It sounds extreme. But he might just be right.
Here’s why – and what you should hold onto to protect yourself in the meantime…
A debased currency leads to social upheaval
The idea that central bankers could destroy the world might seem a little strong. But they can certainly do a lot of damage to our social fabric.
In recent decades, as central banks have slashed interest rates and blown bubbles, we’ve lived through what Dylan Grice of Société Générale describes as a “credit hyperinflation” – possibly the “largest credit inflation in financial history”. While this inflation may not have shown up in consumer prices (so far), it has certainly shown up in asset prices.
Who benefits from rising asset prices? The people who have the most assets – the wealthy. This in turn has driven up wealth inequality to historic levels. Record numbers of Americans are receiving food stamps, for example. Yet, as Grice notes, “the top 1% of income earners are taking a larger share of total income than since the peak of the 1920s credit inflation”.
This is a recipe for social turmoil. And central banks are aiding and abetting it by actively trying to encourage more inflation. They seem to believe that inflation can be controlled before it gets ‘out of hand’. The hope is that the likes of Mervyn King and Ben Bernanke, and whoever takes over from them, can conjure up ‘just enough’ inflation to make our debts go away painlessly, without ruining everyone in the process.
But central banks and mainstream economists don’t have a great track record on these things. They didn’t see the credit crunch coming. That suggests that they have no real idea of why it happened in the first place.
So why should we imagine that their solutions will work any better? Why believe that they can somehow work out how to unleash inflation, then put it back in its box at exactly the right moment? That’s not a leap of faith I’m prepared to take.
As Grice points out, inflation is very socially corrosive. At heart, “economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers.” So if people can no longer trust the value of money – the medium of exchange – how can they trust one another?
As a result, he fears that we could see “a Great Disorder” as inflation takes hold and people once again start to worry about the value of the pounds in their pockets.
That’s why he’s still very bullish on what he describes as “safe havens”. We’re not talking about government bonds here – they’d be hammered by inflation. Grice likes gold, which should do well if inflation runs out of control.
But he’d also stick with “high quality” stocks. These are the defensive blue chips we’ve been recommending for a while. Although their popularity now makes us slightly wary, Grice argues that these stocks are by no means overvalued. Indeed, based on the forward price/earnings ratio, ‘quality income’ stocks are priced in line with the historical average.
Why would these stocks do well if inflation picks up? Grice’s point is that inflation would be bad news for government bonds. If they are no longer seen as ‘safe’, then money will flood out of them into other ‘safe’ havens. And realistically, in such an environment, gold and resilient companies would be among the few things worth holding.
When will inflation take off?
So when might we start to see the impact of all this currency debasement finally feed through to the price of everyday goods? It could be sooner than you might think.
In the next issue of MoneyWeek magazine, James Ferguson explains why he thinks the Fed may now have gone too far. He believes that the latest batch of quantitative easing (QE) will be inflationary, even although the others apparently haven’t been.
Of course, many of us have long argued that you should avoid government bonds, because QE will ignite inflation and eventually burst the bond bubble. So what’s new?
Well, the difference is that James hasn’t. Since the financial crisis kicked off, he’s been bullish on gilts and Treasuries. That’s been a great contrarian call – developed world government bonds have been among the best places to have your money in recent years. So now that he’s decided the best of this trade is behind it, it’s worth paying attention.
You can read why James thinks the risk of a nasty inflationary shock has risen sharply in the next issue of MoneyWeek, out on Friday. Don’t miss it – if we’re approaching a generational turning point in the bond market, you don’t want to be on the wrong side of it. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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