What goes up when others must go down

What goes up when others must go down

They’re all at it now. Warnings are coming thick and fast. From every corner of the world. About every conceivable topic.

Inviting a crash,’ said Prime Minister Scott Morrison.

Former UK Prime Minister Gordon Brown says the world is ‘in danger of sleepwalking into a future crisis’.

Bank of England Governor Mark Carney is worried about a 35% tumble in UK house prices after Brexit.

Gary Schilling, an economist who predicted the 2008 crisis, says, ‘The ultimate thing that brings down financial markets is excess leverage. So, you look where’s the big leverage, and right now I think it’s in emerging markets.

Trump’s trade war could spark a ‘global economic crisis’, says former Singaporean Trade Minister George Yeo. The Reserve Bank of Australia adds the Aussie dollar could jump 6% and crush our economy in the process under this scenario.

JP Morgan analysts are warning about a ‘great liquidity crisis’ as central banks reverse loose monetary policy.

IMF boss Christine Lagarde, who recently had to apologise to Greece and previously apologised to the UK for incorrect economic forecasts, said ‘Let me be clear, compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the economy and, to a lesser extent, as well for the EU.’

The Italian government came to political prominence by considering a default and departure from the euro. To them, a financial crisis is practically policy!

Steve Keen and Nouriel Roubini are predicting a US recession in 2020.

In the midst of all these warnings, what could possibly go wrong?

With so much doom and gloom coming from political and business leaders, you can’t help but feel optimistic.

The question is, about what?

What goes up when others must come down

Many of the institutions and people I’ve just listed predicted a crisis if the UK voted for Brexit in 2016. Instead, the economy and financial markets have done quite well there.

Only London property prices are falling, but they’re up elsewhere in the country. That’s just the sort of rebalancing Brexit voters might hope for.

Can we learn anything from this? Does it tell us how to invest during a crisis – when everyone is gloomy?

Perhaps Brexit just wasn’t bad news at all. But given the hysteria, I think that’s unlikely. Instead, what happened is fairly simple. And useful to anyone who’s worried about the next crisis in global financial markets.

The pound tumbled on Brexit. This spared the country the forecast recession. Just as a falling Aussie dollar spared us a recession in 2008. The poor countries stuck in the euro didn’t have the same pressure valve to rescue them, though.

So, lesson one is that a floating currency is important. It protects your economy during a crash.

But that’s also a potentially profitable trend to invest in. In two ways.

You can invest in foreign assets and capture the currency gains.

Alternatively, you could invest in Aussie stocks that might stand to benefit from a plunging Aussie dollar.

If you’re expecting a crisis in Europe, you may want to avoid stocks that sell to Europe and deal in euros. Commodity stocks sell in US dollars, for example. And Australia has plenty of those.

If you think there will be a debt crisis, you’ll probably want to stick with big, established companies that can withstand short-term funding pressure.

If you think our own property bubble is popping, you may want to consider getting out of real estate and moving your money overseas. The banks are not safe, as other countries with bloated property and banking sectors discovered in 2012 and 2008.

The trouble with all this is that the stakes are so high these days, thanks to the financialisation of everything, that governments will be forced to step in when a crash does come. Trying to predict their rescue attempts will be as important as trying to predict a crash.

Used up their powder?

Could the Australian government rescue our banking sector in a property crash?

You might feel like touting our government debt as nice and low, at 42%. But a few European countries had low debt to GDP until they had to bail out their banks. Ireland was one of the PIIGS that struggled in the European sovereign debt crisis. But it started the financial crisis with about 25% debt to GDP.

At least we can set our own monetary policy, though. The RBA can do some work to help the country, right?

True, but that comes at the expense of interest on savings and the value of the Aussie dollar.

Interest rates at the European and Japanese level would decimate our savers. People would be pressured into higher-risk investments.

Artificial currency manipulation is a zero-sum game. Do we really want to go back to Currency Wars?

The point is, rescue efforts have costs too. But at least they’re predictable.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia