This time is different, and traditional investment principles — including even the hallowed precept of diversification — can no longer be relied upon in a “house of cards” financial structure that may soon “come down on the heads of investors.”
So says currency portfolio manager Axel Merk of Merk Investments in his latest investment analysis.
Merk argues that “instead of a rebirth following the global financial crisis,” we got a broad decline in economic and political stability across the globe. In the U.S. that is indicated by fiscal and monetary policies that kick the can down the road together with a rise in populist movements on the left and right, Occupy Wall Street and the Tea Party; Merk cites populist Abenomics in Japan and the revolts of the Arab Spring in the Middle East.
In this kind of “house of cards” economy, investors must recognize that their interests are not aligned with those of policymakers.
“A government in debt has an incentive to debase the value of its debt, whereas investors have an interest in earning a positive real return on their savings,” Merk writes.
Indeed, citing Stanford University economist Martin Schneider, Merk points out that both government and citizens would benefit from inflation today. That is because inflation would debase both government and consumer debt.
“If you are a consumer with savings, sorry, you are in the minority and your interests will have to take a back seat,” he writes, adding that the same subordination will apply to foreigners who own U.S. Treasuries.
Merk foresees continued political decline and a continued blowing up of bubbles, making bonds and the U.S. dollar particularly vulnerable.
Moreover, in today’s environment, “traditional diversification can’t be relied upon as asset prices reflect the next perceived move of policymakers rather than fundamentals.”
For all these reasons, investors need their own toolbox consisting of gold and currencies to counter the toolbox policymakers use to debase the currency and spur inflation.