The shocks won’t end with the summer
The world’s stock markets have had a pretty gruesome August. Listen to most of the financial press and you might think the reasons for this are hideously complicated. Not so. It boils down to the simple truth neatly summed up by Tim Price, director of investments at PFP Group: ‘What is unsustainable by definition cannot indefinitely last.’ If there isn’t enough real money around to repay debt, be it Greek, Irish and US sovereign debt or next door’s mortgage, it won’t get paid back. As every day goes by it becomes increasingly obvious to everyone that the West will never be able to generate enough income to service its debts and its welfare promises. It will have to default on its obligations to its creditors or its citizens or both.
Spending cuts and credit freezes aren’t much good for growth, so all this might look likely to drive down prices. But the end game has to be inflationary. Conventional debt default, refusing to pay up, doesn’t work for the governments of complicated economies. So they try to wriggle out of it another way: print more money, which reduces the value of their currency and, of course, the value of their debt. Either way it is bad for markets.
What should an investor do in the face of this ghastly macroeconomic environment? Hold gold. It has gone up a lot in price — now over $1,900 an ounce, up from $275 when Gordon Brown sold Britain’s reserves ten years ago. But given that it is the only insurance most of us can get against long-term inflation, that doesn’t make it expensive. Hold some cash. Then when equities get properly cheap you can buy lots of them. Finally, hold the kind of funds that have proven they can protect your capital in bad times as well as good.