It’s the end of the world as we know it … and I feel fine


My business partner Paul Gambles, who is a guest speaker on CNBC, has been told on many occasions that his demeanour is much too upbeat for someone with such a negative view when referring to the global economy and global equity markets.

The likes of Marc Faber or Nouriel Roubini deliver their doom-laden pronouncements with much more severe, resonant gravitas that they apparently fit this role much better. Paul is quite happy for them to be seen as doom-mongering economic undertakers for, despite having co-authored such cheery little works as “The Four Horsemen of The Economic Apocalypse” and “Broken China is Turning Japanese”, he sees his role as quite different to theirs. Dr. Roubini, in particular, has the sobering job of trying to change the hearts and minds (such as they are) of politicians and central bankers and get them to do the right thing. Whereas Paul and I simply have to observe that they are palpably not doing this and look how to turn that into an advantageous position that our clients may be able to benefit from.

If it does seem we are more positive now than we have been for a long time then it is because we are more optimistic for the long term. The short term is still a very rocky road. However, it is a fact that markets have tended to rise and to fall, to boom and to bust. If we could not see where the next bubble was coming and what the next collapse would be, we would be extremely worried and probably would sound more like Messrs. Faber and Roubini.

Investors have to make sure they can see what is coming and how to handle it. They need to be able to know how to avoid the pitfalls and how to exploit them, i.e., how to carry on making money from these situations. Without doubt, there will be pain and a lot more than even more than the most bears think.

As stated recently in the Nation, by the excellent Pichaya Changsorn, despite the rocky road there are opportunities that await investors. Another Great Depression is indeed coming but the world and the global economy will survive intact and will start to grow again and with the right measures so will your portfolio.

There will be victims and we should all do what we can to support the less fortunate but one of the most helpful things that anyone can do is to position themselves among the more fortunate. Fortunes can be lost in economic dislocations such as that which currently has endured since 2007 but fortunes can be protected too and opportunities can be seized. Wealth advice is easier at some times than others but there always comes around the times that separate the men from the boys. Make sure that you are ready for the next Great Depression because failure to do so could be either the most expensive mistake that you will ever make or the greatest missed opportunity…until the next one comes around!

Some of the key points:

“Our best case is that stocks will fall 30-40 percent from where we are now. The worst is hard to predict, but during the Great Depression in 1930s, US stocks dropped by over 90 percent. Unless you are prepared to lose 40 percent of your assets, which you might not ever be able to recover, you should completely avoid equity exposure right now.”

It is not possible to predict the exact time of the global economic collapse, as it would depend on what financial event triggers it which would very probably be a political decision.

Nonetheless Nouriel Roubini or ‘Dr Doom’ believes that 2014 is the maximum point we can get to without some event triggering a major crash.

“The four horsemen” comprising the United States, the United Kingdom, Japan and the euro zone are getting close to the “apocalypse” or “the [economic] end of the world”. Governments are repeating the mistakes they made in the 1920s that led to the first Great Depression, such as accumulating huge public debt, distributing wealth poorly, and tolerating low productivity. “China is now exactly in the same situation.”

No central banks would be able to stop a recurrence of the Depression.

To protect their wealth from the expected economic crash, investors with medium-term risk profiles and medium-term time horizons (five years or more) should allocate half of their portfolios in cash, 20-25 percent of in gold, 10-15 percent in government bonds, 10 percent in selected types of hedge funds such as long-short equity and managed-future funds, and about 5 percent in “tactical investments” such as “shorting” Australian property.

“One of the best opportunities to make money right now is to exploit the most overvalued asset in the world, Australian property. Some of our managers are just now starting to ‘short’ Australian property. In real terms, it must fall by 60-70 percent.”

Investors at any risk profile should now overweight on cash, which currently can offer an expected annual return of 3-4 percent for Yen and Singapore dollars, and 6-7 percent for Baht, and US dollars.

After the expected financial crisis, gold is predicted to rise to US$2,500-$3,000 an ounce, from about $1,600 at present. This may be too much but there is little doubt it will get to $1,900 without too much difficulty.

When the crisis starts, the US dollar is expected to shoot up to Bt35-Bt36, though the long-term trend is for the greenback to fall to Bt25 eventually.

Asia would not be immune to the coming global economic collapse, though some economies with low debt levels will bounce back faster.

Thailand is still in a good position, and it would be better for the country if the global depression occurred now rather than later, as the Kingdom is piling up debt and weakening its economy.

The US presidential election or the political handover in China could be the catalyst for the next global crisis, but as evidence throughout history shows, it is usually not the big-headlines event or the expected thing that triggers a major crisis.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]