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Most conferences are so boring the back of the room is brighter than the stage due to the glare of mobile phones being scrolled. Younger colleagues wonder why such gatherings even exist. Until they have kids.
But I have just returned home from a fabulous investor conference in Norway, although two speakers have me worried that my portfolio is wrong. One recommended almost exactly the same allocations — always a warning. The other foretold world war three.
Russell Napier is a well-known economic historian and was a brilliant analyst back when I ran global funds. He reckons the only way countries can lower their absurd levels of debt is to deflate them.
I half agree — though there are three other options, of course. Austerity is one. But we know how much voters like to suffer these days, particularly post-Covid when even returning to an office is beyond us. Default is another.
The best debt killer is faster economic growth, requiring a leap in productivity. As I have written previously, this should not be discounted, especially given that wage rises have correlated with productivity gains in the past.
Napier is probably right, though. Few governments have the guts to cut spending radically, while investors have dreamed of a productivity renaissance for decades. And besides, debts are simply too big. Total advanced economy non-financial debt to output is more than 250 per cent.
So inflation could well be the solution, as part of a broader policy known as financial repression. Reducing debt requires inflation to exceed interest rates for a prolonged period, which in turn means state control of monetary policy and bank balance sheets.
For repression to work, governments must also direct the country’s savings institutions — including asset owners and those managing your pension — to buy domestic assets, particularly their own bonds, to make sure yields remain below inflation.
Sounds nuts, eh? But it’s what happened in many countries immediately after the second world war. In the UK, for example, the policy resulted in public sector debt to gross domestic product dropping from 340 to 50 per cent over the following 35 years.
Great if you have a mortgage. It doesn’t grow while your wages do. Not bad also if you own equities. Tangible asset values, as well as dividends, rise with inflation. But man, you want to avoid bonds — coupons are fixed.
Holders of UK government debt between 1945 and 1982 saw 90 per cent of their money repressed down the loo. Hence why Napier recommends having no fixed-income securities in your investment portfolio whatsoever.
He does like short-term government bonds this year, however, as policy rates are most likely coming down — Thursday’s US inflation report notwithstanding. I agree, which is why I bought a 1-3-year Treasury ETF last year.
And the rest of my portfolio is nicely positioned for a world he describes too. Japan, with total debt to GDP exceeding 400 per cent, will force its huge savings institutions to sell overseas stocks and bonds and buy domestic ones instead.
Happy times for my equity ETF, which is up 13 per cent over the past 12 months. And it’s an added bonus that Japanese shares are still cheap. Indeed, the Topix index is not even a third higher than it was when I joined the Morgan Grenfell Japan Team out of college in 1995.
Speaking of attractive valuations, that’s also why Napier is drawn to emerging market stocks — excluding China — as well as the UK. And the former has much lower total debt levels compared with developed nations.
What is more, many Asian, Latin American and central European countries have superior debt servicing ratios to developed markets. We wrongly think the lot are basket cases.
Far from it. With the exception of Brazil and China (26 per cent and 21 per cent respectively, according to BIS data) many emerging private debt to income ratios are mid-to-low teens — Indonesia and Mexico are single-digit.
Compare that with a 20 per cent average for western countries. The notable exceptions include the UK and Japan, at around 15 per cent. Germany and Spain are lower still, which makes me ponder my lack of European equities.
The US’s debt service ratio is fine too. But Napier recommends no American equities or bonds because its absolute borrowings are 250 per cent of GDP and foreign institutions would mostly be selling US assets if told to by their governments.
The S&P 500 is also expensive relative to other markets and history — the reason I sold all my shares three months ago. That trade was early, but at least I knew that if the rally continued my other equity funds would follow — which they have.
Trouble is, the other amazing presentation at the conference has me in two minds between 100 per cent US equities or swapping all my ETFs for weapons and ammo. Chris Miller is a geopolitics expert and winner of the 2022 FT Business Book of the Year Award for Chip Wars.
He reckons the world is in an arms race to make advanced processing chips, mostly because the artificial intelligence they power is needed to win modern wars. The west is ahead, for now, with the US far out in front.
China is struggling to catch up, but it is close to Taiwan, where TSMC currently makes 90 per cent of the chips every four-star general wants. If the status quo holds, US tech stocks are the winners, and I don’t have any.
If it doesn’t, well, you won’t be reading this.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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