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Luthman’s survival tips for a financial meltdown

The Liontrust manager says investors should look at the Weimar Republic’s implosion for lessons on how to cope with a eurozone collapse.

By Jan Luthman, Liontrust
Thursday July 19, 2012


We cannot create or replace wealth by printing money. If we could, we'd all stop working today and simply ask the nice people at De La Rue to send us over a packet of foldy stuff every Friday and an extra big parcel at Christmas and holiday time. ALT_TAG

When Money Dies, by Adam Fergusson, is an account of the collapse of the Weimar Republic into hyperinflation, destitution and chaos. 

It is heavy going, with lots of fairly heavyweight economic and financial content, but, for those who can stay the course, it makes deeply disturbing reading. 

The parallels with today are clear: Germany in the 1920s had debt obligations in the form of war reparations that were economically impossible for it to meet and politically impossible for France to forgive.

It also had high levels of unemployment because of demobilised troops. The solution was to print money.

Today, southern peripheral eurozone states are the ones with the debt obligations that are economically impossible to repay, but politically impossible for northern core states to forgive.

Meanwhile, southern states desperately need to create employment. 

Historically, printing money has tended to feed through into inflation – in extreme cases, to hyperinflation.

This hasn't happened in the UK, US, Europe or Japan yet, for two reasons: 

Firstly, all high-cost economies of the world are engaged in one form or another of quantitative easing (QE), so all of our currencies are sinking together relative to emerging market and resource-based currencies. 

Secondly, we, the high-cost economies of the world, are still one another's major trading partners. 

Because our currencies are sinking together and because we trade principally with each other, we are not yet importing inflation.

Indeed, this may just be the one time in history when major economies get away with printing money.

By devaluing our currencies relative to those of low-cost economies, we should be able to price ourselves back into the global economy and re-create at least some of the jobs that we have lost. 

China and other rapidly growing emerging market economies will increasingly become consumers of what we produce, rather than low-cost producers of what we consume. 

We have already seen substantial depreciation of all high-cost currencies (yen, US dollar, pound, euro) against emerging market and resource-based currencies. 

An implosion of the pound, dollar or yen could only realistically be brought about by sudden repudiation of sovereign debt and that seems to me hugely unlikely.

Instead, I suspect we'd see sovereign debt mopped up by central banks through further QE, just as we have seen in the UK.

The euro, however, is different, for it is not the currency of a sovereign state. It is the creation of a motley collection of fractious states, whose people neither like nor trust the political web in which they increasingly feel that they have become ensnared, every one of which must use a currency that none of them controls.

This situation is exacerbated by language barriers that prevent effective communication.

Frankly, it is difficult to see how at least a partial default of a eurozone country could be avoided without massive buying-in of peripheral sovereign debt by the ECB via QE. 

So what should investors do?

Buy earnings or assets denominated in appreciating currencies, not sterling, euros, US dollars or yen.

Ferguson's tale tells us that scavengers from the UK, US and France swept through the Weimar Republic like locusts, buying up priceless antiques, furniture and works of art at prices that were staggeringly low in international terms, for their prices in domestic currency had failed to appreciate in proportion to the currency's depreciation. 

Eventually, as the country collapsed into destitution, treasured family heirlooms were bartered for a few bags of potatoes or sacks of coal.

The first eventuality has already come to pass here in the UK: top-end London houses are traded internationally and their price has risen strongly in sterling terms.

However, prices of houses that trade only in the domestic market have not. 

To get access to these appreciating currencies, invest in companies that generate significant and growing proportions of their earnings from consumers in emerging markets and rapidly growing economies.

Businesses such as Unilever, Nestle, Heinz, Kimberly-Clark and Pepsi fit the bill, plus global pharmaceutical companies that are doing the same, such as GlaxoSmithKline. 

Jan Luthman runs four funds at Liontrust, including CF Liontrust Macro UK Growth and CF Liontrust Macro Equity Income. The views expressed here are his own and not necessarily those of Liontrust.  



 
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Theo Jul 19th, 2012 at 07:25 PM

Thank you for an excellent analysis of the global economic situation and logical conclusions. I have not heard a better one for a long time.

In place of the companies recommended for investment, such as Unilever, Nestle, etc, why not invest in Asia Pacific and Emerging Markets funds?

Reply
Paidupmember Jul 19th, 2012 at 04:35 PM

You say that printing money has tended to lead to inflation in the past, for two reasons. I believe there is a third and that is, during the investment banks' orgy years they manufactured a lot of 'off the books' money, which was destroyed when the bubble burst. The first rounds of QE were effectively absorbed, as the bubble was reinflated and the lost money officially reinstated.

Reply
Steve Jul 19th, 2012 at 12:39 PM

The book "When Money Dies" was written by Adam Fergusson, not by historian Niall Ferguson!

Reply
FE Trustnet team Jul 19th, 2012 at 01:10 PM

Thankyou for pointing that out; the error has now been amended.

Regards,

The FE Trustnet team.

Reply
 

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