I've been thinking quite a lot lately about whether the western economies are facing a Japan-style decade of grinding deleveraging, deflation and slow economic growth.
If we are it has huge implications for what you invest in. If you expect a Japan-type situation then you want to be holding bonds. Even at pathetically poor yields, Japanese bonds have provided pretty good real returns (i.e. interest and the impact of deflation) because a given sum of money will buy more each year than it did the previous year.
But Japanese equities have done rather poorly over the past two decades. This is partly because companies have had a hard time. But it is also because in a period of deflation then you would expect the prices of most things, including assets, to fall. This includes property prices as well as the prices of shares.
So the question of whether we face a Japanese situation is basically trying to decide whether investors in Europe and America should be buying bonds or shares.
So I was interested in a recent piece in the FT by Merryn Somerset Webb, a personal finance writer who used to be a stockbroker and knows Japan particularly well.
Her thinking is that we face inflation and not deflation.
"Europe is going to have to. If the ECB and Germany want to keep the euro together under the current circumstances (no growth, high debt and an angry market), they are – as Société Générale’s Albert Edwards puts it – going to have choose between their “two most cherished ideals: the euro or hard money principles”.
Either they print oodles of money and use it to buy up every European sovereign bond in sight, or they wave goodbye to their dreams.
Might this eventually lead to very high inflation and even hyperinflation?
It could do: the history of huge fiscal deficits being dealt with by huge money printing programmes is not a happy one – which of course is why the German authorities aren’t that into the idea, and why they will want to demand a promise of fiscal union before they agree to it.
However, in the meantime, it should probably make you feel reasonably bullish for the prospects for the European market a year or a two out – and much more bullish than you might have felt about Japan in, say, 1993."
I have to say, I tend to agree with her that the bigger risk in Europe in time will be inflation. But we may still face a deflationary few years, especially in property and stock markets.
'via Blog this'
Either they print oodles of money and use it to buy up every European sovereign bond in sight, or they wave goodbye to their dreams.
Might this eventually lead to very high inflation and even hyperinflation?
It could do: the history of huge fiscal deficits being dealt with by huge money printing programmes is not a happy one – which of course is why the German authorities aren’t that into the idea, and why they will want to demand a promise of fiscal union before they agree to it.
However, in the meantime, it should probably make you feel reasonably bullish for the prospects for the European market a year or a two out – and much more bullish than you might have felt about Japan in, say, 1993."
I have to say, I tend to agree with her that the bigger risk in Europe in time will be inflation. But we may still face a deflationary few years, especially in property and stock markets.
'via Blog this'
No comments:
Post a Comment