It’s a tightrope act. Global central bankers are wobbling back and forth between inflation and deflation. Every time reality begins to set in and prices fall, they print more money to push them back up.
In the last few weeks alone, the Americans, the Europeans and the Japanese have all upped their efforts.
But just like a budding tightrope walker, the central bankers will overcorrect. They’ll feel themselves falling into deflation and print so much money that they will fall off the other side.
You can usually tell when someone is beyond the point of no return on a tightrope. They begin flailing their arms around madly and stick their rear out. Back when we were a tightrope instructor (yes, you read that right) this display was our cue to grab the terrified victim’s hips.
If you ever give it a go, the secret to tightrope walking is in the hips. Keep them in line between your shoulders and feet. Use only your forearms and hands to balance by waving like the Queen does. It looks a lot more dignified than waving your hips about too.
Please don’t try this at home and then email us with your hospital bill.
As for how to invest for the coming inflationary face plant, it’s even more difficult than tightrope walking. Especially for Australian investors…
That’s because we’re in a different point of the economic cycle to the rest of the world. If you were American or European, you could just buy property, gold and gold stocks to protect yourself.
But here in the lucky country, our money printers have barely stepped onto the high wire. We may be in for a deflationary shock before the Reserve Bank panics and begins to print money. That means investment prices could tumble before they soar.
Today’s Money Morning is about what Australia’s unique position means for investors. It’s a crucial point to understand.
Peter Schiff, who warned about the financial crisis in 2007, was right about nearly everything. Dozens of ‘Peter Schiff Was Right’ videos have made it onto YouTube with millions of views. But Peter was also wrong about one crucial thing. He failed to anticipate that people would rush to the US dollar as a safe haven.
It seemed impossible, considering the problems that sparked the crisis originated in the US. Anyway, the US dollar soared during the crisis. There’s some controversy about how that impacted Peter’s clients.
But it can’t have been good for those who held foreign shares to protect themselves from the unfolding mess in the US. Not that the fat lady has sung yet. Many of Peter’s favourite countries to invest in have done very well. And he stands by his original prediction of a collapse in the US dollar.
Why the Aussie Dollar Matters for Your Investments
Australian investors face a similar risk today. We don’t know whether money printing overseas will send the Aussie dollar soaring, or if our domestic economic problems will unleash the exact opposite. If our housing bubble bursts, or the commodity boom and China implode, we could see the Aussie halve against the US dollar within months.
On the other hand, the seemingly strong Australian government bond market may be seen as a safe haven, and our lack of money printing may make our currency look safe. Those factors would create demand for our currency, driving it up.
Why does the Aussie dollar matter to domestic investors? Well, you might want to take advantage of a coming plunge in our currency by buying foreign assets. If the Aussie halves, you’re sitting on a 100% gain just from the currency alone. But, more importantly, some Australian businesses benefit and some lose from currency moves.
An exporter could be double its revenues in the same way you benefit from the falling Aussie. Of course, our domestic prices can change a lot too if importers have to pay more for foreign goods.
That holiday in Hawaii may turn into a holiday in Noosa if the price doubles thanks to the drop in the Aussie. (You can have a supervised go on the tightrope at Twin Waters if that happens.)
Diversify Your Crisis Bets
The point is you might be right about 99% of what happens over the next few years of economic turmoil. But that 1% can trump your wisdom. Currency moves are just one way this can happen.
You might be expecting Europe to implode, but Australia fares worse. You might expect your American assets to rise as the Aussie plunges, but what if inflation breaks out in the US?
So what’s the solution? Well, it pains us to say it, but you’ve got to diversify your crisis bets. Usually, diversification just ends up giving you average performance. And over the past five years, average performance has been rubbish.
But if you stick to a diversified set of crisis investments, it could be safer than by focusing on a select few. There are so many crises waiting to break out, it’s just a matter of time before one does. Whether it’s our property market and the banks, sovereign debt in Europe, or inflation in the US, something will go wrong.
But if it isn’t the crisis you expected, your undiversified wealth could suffer.
Nick Hubble
Editor, Money Morning
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