BLOG:Investors are looking in the wrong places for returns
The critical problem of our time remains one of too much debt. There is more debt in the world than can ever realistically be serviced, let alone paid back in full.
The western economies have gone conclusively ex-growth, and austerity is now sitting uncomfortably with an electorate across Europe used to entitlement and that shows no special enthusiasm for higher taxes and lower government spending.
Thanks to the absurdity of the benchmarks involved, institutional fund managers and pension schemes have crowded into objectively one of the most unattractive and risky assets out there: UK (and, to be fair, also US) government debt.
There is something particularly grotesque about seeking safety in conventional gilts.
They yield next to nothing for a kick-off. More to the point, though, they offer investors unique threats to their wealth: the combination of currency risk and inflation risk.
Five year gilts, for example, yield markedly less than 1% to maturity. Official inflation is already running at more than twice that level.
State-sanctioned inflationism (money printing, if you prefer) also happens to be the only policy tool left in the Bank of England’s box. It is a racing certainty that the pound will continue to be devalued by a monetary administration devoid of ideas.
The only question in my mind is whether a colossal meltdown in the gilt market is accompanied, pre-empted, or followed by a sterling currency crisis.
Corporate debt is no palliative either. Corporate yields have been dragged down in line with the bull market in gilts – and corporate paper offers extra credit risk to boot.
But apparently “safe” stocks are also no solution. The stock market is unlikely to survive a rout in the government bond market entirely unscathed.
So what’s the solution?
In my view, extraordinary economic circumstances require unorthodox investment responses.
The true safe havens in the bond market are the road less travelled: objectively high quality credit issued by genuinely wealthy countries (the likes of Hong Kong, Singapore, Qatar, the UAE, etc). The same goes for their currencies.
Truly defensive equities (defined by both sector and valuation) have a role to play.
So too does gold and silver – real money that cannot be printed at will by desperate governments and Treasuries.
But as for gilts – they are a gigantic accident waiting to happen. So it is rather a shame that pension funds now hold more debt than they have ever done over the past half century.