Your new book is an absolute piece of art. It talks about 500 years of economic history. You have looked at the history of three reserve currencies. What is the basic message which you want to send across from that book? The video starts with a message that every time we see central banks go on a binge of printing money, it leads to asset price inflation and we have a problem after that. Am I right?
Well the cycle that I saw was brought about by seeing three important forces which I had not seen in my lifetime, but has happened many times in history. That is why I needed to study the cycle over the last 500 years. First, when governments run out of money, they need more money than they can get. They create a lot of debt and they print a lot of money.
We have had the largest debt increases and money creations particularly in the leading world reserve currency, the dollar, although that has been true in the case of Euro and it has been true in the Yen too and that has a big effect. The second of those influences is really a political and social influence which is the conflict between the left and the right populism. Typically, due to large wealth and opportunity gaps which exist in the United States, we are seeing a conflict.
We are seeing almost a civil war because there is populism. Populism consists of people who are representatives who will fight for their way of doing things, rather than compromise. So, we have ideological and economic differences. There are also political differences that you could see reflected in the news every day and we saw that on January 6, 2021 on the issue of losing the election. I think we are in a situation where we can have an election in which neither side accepts losing and we see that reflected all the time such as the Supreme Court ruling on abortion, the type of conflict and the measures.
Third, as far as the changing world order is concerned, the relative decline of the United States and rise of China and other countries like India for example. When the new world order began in 1945, after the Second World War, the victors in that war determined how things should go. In 1945, when the United States won the war, it was the richest country in the world; it had 80% of the world’s gold and gold was money and it had half the world’s economy, half the world’s GDP and it had a monopoly in military power.
It was the dominant world power and that is why we have the United Nations in New York, the IMF and the World Bank in Washington DC and that relative positioning, there has been a decline in that relative positioning and the emergence particularly of China as a great power and so there is a great power competition taking place and traditionally through history, that is resolved by conflicts.
We have five different kinds of wars happening now – a trade war, a technology war, a geopolitical influence war, a capital war and a military war. That kind of confluence produces these difficult periods, the last one was 1930 to 1945 and that is what we are in the midst of. It is very important for me as a global macro investor to understand those and that is why I did this study which I made into a book so everybody could understand them. It affects my positioning today.
A stagflation scenario is terrible for an investor; bonds will not make money, cash is a terrible idea and equity valuations will come down. What is the best way to protect the value of the money or your wealth?
Well the most important thing is to not own debt assets which are subject to inflationary pressures. If you are buying an inflation index asset that would be fine. They are inflation index bonds but do not own assets which will lose their buying price. There is a lot of debt.
The second is to create a diversified well-balanced portfolio of assets. If you diversify well and look at the correlations between asset classes, you will see that if one thing goes up, another thing goes down. For example, during times of greater inflation, commodity prices – gold, real estate prices – will perform better at the expense of other assets.
Also the stock market has parts of these different stock markets which are not primarily going to be benefited by investments. There are many that benefit from inflation. So to create a diversified portfolio, diversification is of paramount importance because it is the way that one can maintain a good return without as much risk. In other words, if one picks investments that have about the same expected return but are not correlated and put together, one can reduce up to 80% of risk without reducing the return. So how to create good diversification is very important and that includes country diversification.