Dark days ahead, warns finance guru

Financial market guru and acclaimed author Satyajit Das paints a gloomy future for global economics in which debt-ridden governments start raiding pension funds, living standards fall by 30% and food, energy and guns become the investments of choice.

Speaking at an event held by Investec Structured Products, Das, author of the international bestseller Traders, Guns and Money, said that as governments worldwide run out of funds to prop up their widening deficits, they would expropriate funds to allow them to create more debt.

Governments would consider pools of savings such as pension funds, in which they could limit investment choice and pass regulations to force them to purchase government debt. Alternatively, they would simply nationalise pension funds and private assets.

That time has already come.

The Portuguese government met its 2010 budget by shifting three pension plans from Portugal Telecom on to the public social security system and, in December, the Portuguese Cabinet agreed to transfer the assets of four of Portugal’s biggest banks to the state balance sheet. Earlier this year, Argentina nationalised oil company YPF.

Great saviour of the West
This scramble to fund debt will be necessary as Europe and other countries continue their attempts to revive their ailing economies through further fiscal and monetary stimulation. Das joins the many economists who believe that “spend your way to growth” will not succeed.

However, unlike some economists, Das does not believe China will emerge as the great saviour of the West, arguing that the country is not the engine of growth it is perceived to be.

China has its own debt problem brewing as it spends an estimated $70-billion to $100-billion a month to stimulate the economy. Directed lending is 30% to 40% of gross domestic product and estimates of bad debts are in the range of 8% to 16% of GDP. China’s credit levels (including off-balance-sheet lending) have reached nearly 160% of GDP, up from 100% in 2009.

 The problem is that the Chinese are not spending the money. Rather than driving consumption, savings have increased from 35% to 43% of GDP over the past 10 years and investment has increased from 37% to 55% of GDP.

Stepped on a Bouncing Betty
As a result, about 600 to 700 shopping malls stand empty and there are about 60-million empty apartments. China’s excess cement capacity is greater than the total cement consumption in the United States, Japan and India and its idle steel production capacity is greater than the total production of Japan and South Korea.

Das said the world should also not take comfort in China’s $3.2-trillion in foreign reserves. These funds are largely in dollars and euros and China could never realistically monetise them. They are just paper that China needs to continue to buy to allow the United States and Europe to keep printing money. “China has stepped on a Bouncing Betty [bomb] and it does not know how to get off,” said Das. He argued that the world was facing Japan-style stagflation, in which nominal GDP would return to levels of 17 years ago and the number of employed people would be exactly the same as 20 years ago. Japan was fortunate to have an ageing population, high savings and a stoic culture, but the rest of the world might not fare as well.

Economic growth over the past 30 years in the developed world has been driven by credit rather than by growth in the real economy. US real wages (after inflation) are below the levels of 1972 and the only thing boosting the economy has been the ability of American households to leverage their income through access to credit, usually through their mortgages. The value of the US economy is back to pre-2002 levels and the value of most of Europe’s economy is below that of 2004.

Das believes that living standards in developed economies will fall by 30%. In this environment, food and energy security will become critical, as well expenditure on defence and security.

Africa’s future will depend on closer relationships to the East.

Risk of government bonds
As South Africa undergoes an overhaul of the pension industry with the introduction of a national social security fund, we need to consider Satyajit Das’s views on how governments will treat ­pension funds in the future.

The treasury, in its paper “Strengthening Retirement Savings”, stated the need to consider social and environmental factors when making investment decisions.

But Ismail Momoniat, the treasury’s deputy director general of tax and financial sector policy, has made it clear that directing private pension fund asset allocation is not a strategy and pension-fund members have the right to have  their assets invested in their best interests. The Public Investment Corporation, which manages R1-trillion of government pension fund money, already aligns its investment mandate to “advance an economic agenda of this country”. It is the largest investor in South African National Road Agency (Sanral) bonds, to the value of R17.7-billion.

In defending its holding in Sanral after the e-tolling debacle, chief executive Elias Masilela said that investors’ money was safe because there was no risk to government-backed bonds.

Das would disagree and so would many professional investors who believe that, globally, government bonds will move from providing risk-free returns to becoming return-free risk. – Maya Fisher-French

Where should you invest?
Satyajit Das makes the following recommendations:

  • Flat is the new up. If you can obtain a return of two or three percentage points above
  • inflation, you are doing well.
  • Learn to live with volatility.
  • Focus on income streams rather than capital gains. Use hedges to protect your capital and include alternative assets.
  • Make capital preservation the focus of your strategy. It is about the return of money, not just the return on money.
  • Avoid unit trusts with limited mandates, such as being 90% invested in equities. You need to be able to move across different asset classes at different times.

In his own words
On Greece: “If Greece achieves the International Monetary Fund’s growth forecast, it should be renamed Lazarus.”
On government bonds: “Government bonds are no longer risk-free returns but return-free risk.”
On investing: “Invest in food, energy and guns.”
On the stimulus: “We are ­creating a Botox economy: cheap ­printing of money with some immediate impact, but temporary, with toxic side effects.”
On China: “China has stepped on a Bouncing Betty [bomb] and it doesn’t know how to get off.”

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Maya Fisher French
Guest Author

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