It was a race to reach the border.
On one side were the Austrian police and army. Their job was to seal every road and rail track in and out of the country.
Against them were ordinary citizens. They needed to get their cash – their life savings and their life’s work - out of Austria-Hungary before the security forces executed their blockade.
When the Austro-Hungarian currency went down after World War I, it took savers with it. All the contingency plans and bail-outs and money printing came apart on one fateful day - the day Yugoslavia decided to quit the currency union.
Then all hell broke loose. Savers raced across fields in the dead of night with wheelbarrows full of cash. One by one the other nations fell out of the currency union. Savers rushed from one country to the next across the old empire, in the hope of recovering some of their paper’s value.
The collapse of the krone tells me something very important about currency crises - they develop slowly at first, then very suddenly. So how can you protect your wealth if the euro goes the same way?
European stocks look cheap – but they could get cheaper
My colleague Seán Keyes wrote in more detail a couple of weeks ago about the currency crisis in the Austro-Hungarian empire.
There are some interesting parallels between what happened then and what’s happening now. My concern is that if Greece is finally forced out of the euro, the crisis will burn quicker and brighter than ever before.
Like Austrian and Yugoslavian savers in 1918, there’ll be a race to evacuate wealth from the periphery before it’s too late. Indeed, money is already fleeing the area. Spain is the latest country in the market’s crosshairs.
However, it isn’t all bad news. We are now at a stage where European stock markets seem to be sensibly valued. A lot of the bad news is already priced in. SocGen analysts Albert Edwards and Dylan Grice recently compared US stocks to European ones.
The cyclically adjusted price/earnings ratio (CAPE) smoothes out profits over the economic cycle, Europe is much cheaper than the US. On this measure, European p/e ratios are now at a level they last saw in 1982, at the dawn of the last great bull market.
That doesn’t make them outstandingly cheap. I still expect a correction in stock markets courtesy of the debt crisis. But they are starting to look attractive. As Edwards and Grice suggest: “Investors are reluctant to invest amid all the ongoing chaos in the eurozone. But the macro backdrop always looks awful when the market is this cheap.”
So although I don’t think the timing is yet right to be plunging into European stocks, it may well soon be time to start investigating some of the more compelling opportunities available in the eurozone.
The best way to build equity exposure is by taking the long view. Use ‘pound-cost averaging’ as a way into the market that doesn’t put you at the mercy of vicious price swings.
Hang on to gold
Equities, of course, are only part of the bigger picture. Gold remains attractive. Although it has had a less than stellar year so far, I’m willing to be patient. Consider what asset manager Simon Mikhailovich said during a recent interview with US financial newspaper Barron’s.
When asked if he could imagine another Lehman Brothers-style event, he responded: “It’s just a matter of time. This financial system is completely unsustainable… The ability of governments to sustain the unsustainable ultimately rests on their ability to maintain faith in their creditworthiness…
“If this devaluation of financial assets proceeds apace and the moment of clarity comes for many investors in the West who realise they need to diversify into assets that can protect against devaluation, demand for physical gold has the potential to rise dramatically.”
The beauty of gold is that it offers a chance to protect against both deflation and inflation. It’s difficult to point to gold’s credentials as a deflationary hedge because prior historic periods of deflation occurred when its price was fixed. The most recent deflationary period was limited to Japan, at a time when the rest of the world economy was booming.
But as deflation (in financial asset terms) is associated with acute financial stress, it seems reasonable to expect gold to provide some diversifying relief from that stress. Particularly because (unlike sovereign debt, for example) it is nobody else’s liability.
And as an inflationary hedge, it is worth noting that gold has remained a store of value for literally thousands of years.
Gold is also now getting attention from the unlikeliest of sources. Bond fund manager Bill Gross of Pimco recently wrote: “As [investors] question the value of much of the $200 trillion which comprises our current [monetary] system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible.”
In short, investors are faced with a choice between vast abundance (in paper assets and all things debt-like), and genuine scarcity (tangible and real assets, especially gold). In a deleveraging world and in light of the ongoing financial crisis, it makes sense to vote for scarcity.
• Tim Price is director of investment at PFP Group. He also writes The Price Report newsletter. To find out more about Tim’s current views on the eurozone and the wider markets,
watch this presentation
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
Our recommended articles for today
With returns from the conventional finance industry so low, investors are turning to more exotic products in search of higher yields. But while rates may be higher, the risks are too, says Bengt Saelensminde.
The Alternative Investment Market (AIM) is a great place to find growth stocks, says Tom Bulford. But there are still things to watch out for. Here he gives his top tips for AIM investors.