"When banking dies: how to invest during a monetary endgame." That was the theme of this year's MoneyWeek conference, held in London this Monday just past (3 October). At a time when the deep faultlines in our banking system are threatening to wreak havoc in the markets yet again this time in the form of questions around Deutsche Bank's viability it seemed a particularly good opportunity to ask: can our current financial system survive? If not, what might replace it? And what does it mean for you as an investor?
The day began with a discussion of one of the most infamous examples of a monetary system collapsing the Weimar Germany hyperinflation. MoneyWeek editor-in-chief Merryn Somerset Webb interviewed Adam Fergusson, author of When Money Dies, a quite terrifying account of how unconstrained money printing by the German central bank (the Reichsbank) led to the destruction of both the German currency and the German middle class. How was it allowed to happen?
Ultimately, said Fergusson, it was because the Reichsbank's president, Rudolf Havenstein, didn't make the link between money printing and rising prices. Indeed, noted Fergusson, Havenstein seemed rather proud of the Reichsbank's ability to ramp up the printing presses parallels, perhaps, with today's quantitative-easing advocates, who argue that if bond purchases aren't working, you just need to buy even more.
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Hyperinflation or repression?
The good news is that our next speaker Russell Napier, one of MoneyWeek's favourite strategists doesn't expect hyperinflation. The bad news is that he still expects savers to suffer as governments employ a different tool to deal with their debts: financial repression. You can only deal with a debt problem in a few ways, noted Russell.
Grow your way out (highly unlikely, given our apparent inability to improve productivity in developed economies); default (again, highly unlikely, due to the sheer amount of damage it would do); or inflate your way out. The final option is the least painful, and the one that governments are trying to go for.
That involves keeping returns on savings below inflation, which, says Russell, it's easy for a determined government to do. We often view today's situation as unprecedented, but an environment where interest rates are kept artificially low by indebted governments is not new. Following World War II, governments on both sides of the Atlantic suppressed rates and prevented the free movement of capital using everything from restrictions on taking currency abroad to high taxes on dividend payments. Expect to see more of the same today, says Russell. Is there a way out?
Invest in economies where financial repression is not required. That means the least-indebted countries, which are mainly emerging markets. But you have to be picky. There was a lot more detail in his talk, which you can watch for yourself on DVD (find out how to order here).
Always look on the bright side
After all the talk of hyperinflation and financial repression, Charlie Morris of The Fleet Street Letter lightened the mood a little by presenting the case for optimism. Charlie may be unique among MoneyWeek contributors in that he actually thinks that the banks the "good" ones at least (so not Deutsche Bank as yet) are worth investing in.
That's mainly down to Charlie's thesis that the bond bull market is topping out. That means interest rates will gradually pick up. And rising rates are good news for banks it allows them to improve their profit margins. It would take a brave investor to put all of their money into the banking sector but perhaps a small punt, as a hedge against the "best-case scenario", might be in order.
Merryn introduced our next speaker, David C Stevenson, as another optimist, and to be fair, David typically has a more upbeat view than the majority of the MoneyWeek team. Not so much today. David warned that he doesn't expect to see significantly higher interest rates until at least the late 2040s, and that he's also exceptionally worried about the prospect of Donald Trump becoming US president.
On the upside, David did point out that the woes of the traditional banks have led to the rapid growth of a whole new sector of "shadow banks" that offer far better income opportunities than can be found elsewhere right now.
Gold, but not as we know it
The afternoon session kicked off with John Butler of GoldMoney comparing our financial situation with the film Apocalypse Now, with unhinged central bankers on the verge of unleashing monetary helicopters. That, says Butler, will result in the end of the financial system as we know it and usher in a new monetary regime. In anticipation of the next shift, his company has produced a payment card system that is effectively a gold-backed credit card marrying modern payments technology with the old reassurance of the gold standard.
By this point, we'd had several scenarios as to how the system might crumble (or persist). So MoneyWeek regular Tim Price came on to tell us how to prepare our portfolios for whatever might come next. Tim's not an optimist on the monetary system, but nor is he suggesting that everyone stick their cash under the bed. Instead, you need to build a "fail-safe" portfolio comprising a diverse range of assets with one thing in common they are chosen with "value" in mind.
Beware politics and keep costs down
In the final talk of the day, Merryn came on stage to talk about some of the main challenges facing investors today. There's politics for one thing cash-strapped governments are wielding their power more aggressively to label certain activities "evil" and target those sectors accordingly. Hence tax crackdowns on evil tax-avoiders such as Apple, or evil property speculators. But perhaps the most important reminder was to "be picky": whatever else happens, and however you choose to protect yourself during the monetary endgame, you need to watch your costs.
Too many active managers still get away with charging a fortune for mediocre performance, as Merryn demonstrated with a particularly galling anecdote about one manager who somehow managed to be among the top performers in her sector, yet still couldn't beat an equivalent passive fund.
Finally, various panellists returned for a Q&A session on everything from Brexit to oil prices to the role of timber in a diversified portfolio. One reader closed with the eminently sensible question: "What happens when the bond rout arrives? Where does the money go?" The panel debated whether equities might benefit as money rushed out of bonds. But ultimately, as MoneyWeek managing editor Cris Sholto Heaton pointed out, it depends on why yields are rising (and prices falling) is it because growth is recovering, or because investors lose faith in central banks, or something else?
And as Tim Price noted ominously: "The idea that a 5,000-year-old bubble in interest rates can reach its denouement without affecting the price of almost every other asset seems optimistic." That seemed a good point on which to head for a stiff whisky, courtesy of WhiskyInvestDirect. If you missed it, you can see the whole thing, plus behind-the-scenes interviews, on DVD order here.
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