EDITOR'S LETTERMerryn Somerset Webb
Expect more volatility
At the MoneyWeek conference a few weeks ago, we spent a lot of time on financial repression (where interest rates are lower than inflation) and the best asset classes to hold to survive it. I looked in particular at some research from Tim Bond at Odey Asset Management. One thing is pretty clear: you might want to hold cash for short periods (it gives you the option to pick up other assets on the cheap), but you don’t want to hold it for the long-term during periods of repression. Say you can get 1% in the bank, but inflation is 4% – keep your money in cash and you’ll lose 25% of your purchasing power in just ten years.
You also want to avoid gilts. Bond looks back to the aftermath of World War II, when Britain had a government debt-to-GDP ratio of 250%. Britain kept rates at 2% (the previous record low) from 1940 to 1950. That was well below the rate of inflation (and rates only turned positive in ‘real’, after-inflation terms in 1956). If you’d ignored the low-rate environment and persisted in thinking that gilts offered you safety, you would have faced a loss of 5.5% a year in real terms. By the end of the decade, 46% of your wealth would’ve been gone. If you’d been fool enough to hang on until the 1970s, you’d have lost over 70%. Nasty. The same happened in the US from 1933 to 1951 when the Fed “operated a semi-formal cap on bond yields at 2.5%” (this was a bit like today’s Operation Twist). Investors lost a total of 41% of their wealth – and that was even with inflation averaging under 4%.
So no bonds and no cash. What of property and repression?
• Read the full editor’s letter here: Expect more volatility.