21st Century Investing NOT Business As Usual
By Staff News & Analysis - April 21, 2011

The challenges facing investors and investment professionals … Personal investment is a goldmine for some but a minefield for most. The decade ahead is going to pose tough challenges for both personal investors and the investment professionals who serve them. There will always be some shares that deliver spectacular returns to their shareholders, just as there are always winners of the Grand National, but picking them can be very difficult. – Roger Bootle, UK Telegraph

Dominant Social Theme: It's a tough time in the markets but this too shall pass. Just don't do anything rash.

Free-Market Analysis: Fund manager Roger Bootle is back in the Telegraph with another article on investing (actually it appeared a few days ago) that predicts rather gloomily the upcoming difficulty in making decent returns in the ongoing low-inflation climate.

He explains that most investors are unrealistic because for the past 40 years, until fairly recently, "high" price inflation was normal and this allowed investors to achieve gains that at least looked good on paper even if at the end of the day, price inflation and taxes meant there was really very little profit at all. We'll note here by the way that Bootle does not (as most in the mainstream press do not), differentiate between price inflation and "real" monetary inflation, which is based on the quantity of money circulating in the larger markets. We do, though.

The larger difficulty that we have with these kinds of "investment analysis" articles is they completely overlook the large chaos that is taking place in Western society both economically and politically. Wherever once looks in the West (and the East as well) one is confronted by unusually challenging environments that seem to preclude business as usual.

Of course Western fund mangers thrive on business as usual, so it is no wonder that managers like Bootle return to paradigms that are profitable for them, even if they don't shed a lot of light on how radically different tomorrow's markets shall be from today's.

Bootle's main issue here is to deflate the idea that inflation is going to come to the rescue of performance. And by inflation, of course he means price inflation. In a higher-price inflation environment there are options other than equity markets. Price inflation provides a seemingly forgiving environment for investors. (It doesn't really because costs are going up everywhere, but it seems to anyway.) Higher rates boost profits in bonds and even in bank cash deposits. So investors have a broad panoply of potential investments that can provide fairly generous returns, even if they are only nominal.

But the bottom line for Bootle is not one focusing mechanically on price inflation. It one we have written about time and again and has to do with the proactive monetary polices that bankers will put in place once inflation begins to become a "problem."

If Western economies do recover as a result of the massive amount currency that has been stuffed into the larger markets – tens of trillions – really, incomprehensible and stupefying numbers, then central bankers will start to yank up interest rates hard. That will have a negative impact on the portfolios that people have assemble in the meantime. Here's how Bootle sums up his argument:

In a way, the modern investment management industry and the average private investor deserve each other. They are both too greedy. Over the next decade they will both have to learn to be less so. Investors will have to accept that getting 20pc, or even 10pc, returns is distinctly abnormal – unless you are taking huge risks. And the investment professionals will have to learn that earning huge fees from managing investments only makes sense if you add value by delivering above average performance …

I suppose that it is possible that both could enjoy a respite as a result of a surge in the world's investment markets. But I doubt it. Although I don't buy the idea that emerging markets are caught up in a bubble, equally, equity markets there do not look cheap.

At least Bootle is not painting an over-optimistic picture of what may be expected in terms of investing over the next decade or so. But as we indicated at the beginning of this article, we don't think Bootle goes nearly far enough. He seems to believe that markets won't offer business-as-usual because price inflation has been tamed. We think investing is going to be difficult over the next decade because the world's markets (and the world itself) are going absolutely bonkers.

There already IS inflation built into the markets – tens of trillions has been pumped into the market. And all that currency, like a ticking bomb, is just waiting to explode into price inflation. It hasn't yet because demand for money remains relatively low and thus the velocity of money has not generated high prices. But unlike Bootle, we believe those high prices may arrive sooner rather than later, at least in some Western countries. Additionally, we should point out that significant price inflation HAS arrived. Western government figures are specifically designed not to notice it below a certain pain threshold.

The problem that markets will have is what Bootle points out toward the end of his article. If Western economies do get back on track, they will be promptly be stuffed down by central bankers desperate to drain money from the markets before all that currency begins to ignite hyperinflation. It is this that will keep markets in check over the next five to ten years. There is no doubt that markets have already been ignited to some extent by all the quantitative easing and pump priming going on. The problem is not low inflation per se but central bankers perpetuating an investment environment over time that will not be conducive to high returns, certainly not in the equity markets.

But there is a larger issue here. The dollar-reserve system is dead from our point of view and this is surely a more important issue than the state of price inflation in the Western world. We think a new currency will eventually make its début; one possibly linked to gold and perhaps silver. Meanwhile before that takes place gold could run up toward US$3000 and ounce and silver toward US$100 an ounce. These are investment trends that are far more important than the state of the market as regards price inflation.

We also are not nearly so optimistic that the motors of the current global economy will continue to function harmoniously over the next decade. We have noted in the other article today that the serial wars the West has embarked upon, along with the strange push of Western elites for increased global governance, is itself going to cause significant upheaval in the world over the next decade.

Not only that but there is bound to be pushback to these plans, enhanced by the availability of information (thanks to the internet) that was not to be found in the 20th century. The result could be a good deal of civil unrest not just in the developing world but in the West, too. We would argue it's already begun.

On top of elite turmoil caused by a move toward one-world government we believe that the world's current engines of prosperity – the BRICS – will begin to sputter if not fail. China, India and Brazil are all suffering from high price inflation already and it usually takes a fairly significant recession or depression to wring inflation out of the system. The eurozone, too, is unhealthy and we may see a fragmentation of the union or at least the euro in the near or not-so-very-near future.

Bootle is right to point out the reality of a low-inflation future, not necessarily because of stagnant economic growth but ironically because of excessive monetary stimulation that will demand that governments and bankers react with higher rates. The larger issues however have to do with what we believe is the ongoing collapse of the West's 20th century economic and financial system – and the determination of elites to pursue this loony goal of global government. These are the trends, not inflation that will pose the greatest challenges to investors in the 21st century. It will also provide some investors with terrific rewards, no matter the state of price inflation.

After Thoughts

There are great challenges ahead. Investors who understand how to navigate them – and who also understand the potential price action of gold and silver – may do very well over the next five to ten years. The markets themselves in the narrowest sense of the word may not provide opportunity but there will be plenty of other venues that will offer significant upsides. There will be chaos, yes, and also opportunity.

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