A deflationary bust, whenever it may happen, it may only happen in 10 years, but it would seem to me that this will be the eventual outcome. It could also happen tomorrow or in 10 years. It is the opposite of an increase in asset prices from inflation. If you look at how asset prices have increased since 1980, it has been highly irregular. Stocks rose strongly until 1987, then they had a setback. After ’87 some markets made new highs but others didn’t. Then you have some regions like Latin America doing particularly well between 1988 and 1994. Growth shifts around and asset prices rise, but with different intensity. We had a collapse in the NASDAQ, but other stocks continued to go up until 2007, whereas the NASDAQ was still 50% below its high and is still today even 40% below its high in 2000. So I think in a collapse what happens is that, over time, everything goes down but some things go down more than others. Traditionally I would say the best thing in a collapse is to hold cash. But then the question arises about what kind of cash you should hold and in what form. Because if you have bank deposits, and I think what happened in Cyprus is a blueprint, maybe you have bank deposits and maybe not all of it will be paid to you. In some sovereign countries, maybe it will be paid to you and in others not, depending on the quality of the banking system. But in general if there was a collapse, then I think all banks would suffer. Then I would imagine that cash would not be the safest investment. And then the currency choice is also important. Would you put all of your money into US dollars? Yeah maybe the US dollar will be strong for another 3 months, maybe another 3 years, but maybe eventually it will be a very weak currency as I expect. Then maybe you turn around and say, “Well, weak, but weak against what?” Maybe not against the others because all of the others also print money. The dollar, paper money, may be weak because they all print and purchasing power will all go down in concert. So maybe gold is part of the solution, and maybe you would need to own some real estate and then you have to think “OK, real estate, but where?” If you lived in Germany in 1900, and we are now 2013, if you had all of your money in cash, you lost your money 3 times: in World War I, then hyperinflation, then in World War II, so cash was not a desirable alternative nor government bonds which were also lost 3 times. If you owned shares in the leading German companies, most of them are still in business, they may not have been the best investments, but you still have these shares so you preserved your wealth. If you had real estate, then the question arises, if your grand-parents had the bad luck to own the real estate in East Germany, you lost it all after World War II, but if you have the fortune to have it in West Germany, then you are ok. So to people who say that real estate is safe, yes, to some extent, but you also need to diversify, it is like a stock portfolio. You should not necessarily put all of your money in one stock, but you should have a diversified portfolio because companies also die and go out of business eventually. When I started to work in 1970, 2 of the most respected companies to buy and put in a drawer and never look at again were Polaroid and Kodak and both are out of business. So there is the question of obsolescence and the same happens to real estate; for political reasons you may lose it.
So I would say we do not know how the world will look in 5 or 10 years, nobody has a clue. There are some people that will say that it will look this way or that way. I am very skeptical of any forecasts, especially long term forecasts. There are some trends that we can see about how society has changed in the last 30 years. I moved to Asia 40 years ago and I can see that Asia has developed a lot and grown a lot and we can see this. But I do not know if in 5 years or 10 years if Asia will continue to develop at the pace it developed in the last 40 years. I can see very clearly that until now, the middle class and the poor people admired the successful rich people. Now, partly under Western influence, there are some misgivings about the distribution of income and wealth. We see this very pronounced in Hong Kong and Singapore where there are a few families that own a great deal of the properties that are incredibly rich and the people pay very high rents and their real incomes, in other words incomes adjusted for inflation, have been going down. So these people ask themselves these questions and then go and demonstrate. So we have some social problems in Asia. Of course, as I have mentioned, we have some geopolitical problems in the world, obviously in the Middle East. We have this rise of the Chinese geopolitical influence in the world and the old masters, the US and Europe, they see their influence waning and they do not like it. So also there, tensions will arise.
- Source, The Prospect Group:
