In a recent research release, Merrill Lynch has acknowledged the geoeconomic and geopolitical risks that we have been describing. And, they warn that traditional “safe haven” investments may not work in the future. This is a radical concept for American investors. But, it is also keenly insightful.
One of the purposes of this Blog is to expose the fact that a global economic war is underway and it has deep implications. One of those impacts is that investment strategies that have worked for over 60 years may need to be adjusted. This is essentially the message of the Merrill Lynch report as reported by Newsmax (http://www.moneynews.com/StreetTalk/US-West-g-zero-economy/2012/07/10/id/444884?s=al&promo_code=F6D5-1):
Merrill Lynch: US, Western World No Longer Call Shots for Rest of World
Tuesday, July 10, 2012 10:19 AM
By: Michael Kling
Merrill Lynch is urging investors to embrace a fundamental shift in their investing strategy as U.S. and Western economic domination crumbles. The company is pressing its clients to revamp their investing strategy — even their basic beliefs about how to choose investments — in the face of world geopolitical change, according to The Financial Times. In this new investing world, U.S. Treasurys and gold are out, or at least much less important. Investments now considered off-beat, like Australian sovereign debt and Singaporean bank bonds, are in.
For the past half a century, the U.S. and a small number of other wealthy countries ran the world economic order. But that’s over now. The Group of Seven richest countries, or G-7, expanded to the G-20 to include China and other emerging markets. But under the Merrill Lynch view, even that group is not inclusive enough, the Financial Times reports. The world is now without clear economic leadership, the company believes. It’s now in a “G-Zero world,” Merrill Lynch executives warn. The black-and-white distinction between developed and emerging markets is outdated. Some so-called emerging markets, like Indonesia and Ghana, will probably perform well, while others probably won’t. Plus, U.S. Treasurys should not be considered a special asset class or risk free.
“Unlike old U.S.-centric portfolios that called for nearly half of bond allocations being dedicated to U.S. Treasurys and municipals, [our] current models consider all bonds ‘global,’” Merrill Lynch states, according to the Financial Times. Merrill Lynch recommends lending to companies instead of governments, which are not as safe or transparent, and suggests ETFs as a protection against inflation and increasing taxes down the road. “Geopolitical instability is the new status quo,” states Merrill Lynch executive Lisa Shalett, in a company statement.
“As political powers shift and the global economy struggles to rebalance itself, investors might consider flexible investment approaches and a more globally diversified approach to their portfolio,” says Shalett, who co-wrote a white paper, “Seeking Growth in a G-Zero World.” “In this G-zero world, the economy and the way markets interact have become undeniably more complex,” says Eurasia Group President Ian Bremmer, the white paper co-author who coined the term, in the company statement.
In addition to Merrill Lynch, the CFA Institute has also acknowledged this changing threat environment. A very recent cover story of the CFA MAgazine (May/June 2012) was focused on Currency War III. While access requires a subscription, the article by John Rubino was particularly insightful. Here is a key quote:
“There have been two previous currency wars–during the Great Depression and the inflationary spiral of the 1970′s. Both conflicts began with too much debt and ended when currencies were cheapened enough to make the debt manageable. While the wars raged, they contributed to some of the worst financial episodes of the past century.”
An earlier issue of the same publication (July August 2011) written by Maha Khan Phillips essentially admitted that most of the Financial Industry has not been prepared to address the risks we are describing.
“The investment industry is not equipped to understand the impact of global political instability. What can investors do?”
Here are a couple of quotes from the story:
“So where does that leave investment professionals who want to understand the impact of geopolitics on portfolios? For (Tim) Hodgson (who authored a report for Towers Watson), the answer is simple. ‘We can’t do anything about them, but we do need to know what our response will be if events happen.’”
“No scenario, no matter how extreme, should be disregarded when forecasting.”
Although it is unstated, the message is clear. We are experiencing the effects of a global economic war. Clearly this is of the greatest importance to investors and the Advisor community is just now beginning to address it. In our book, Secret Weapon (www.secretweapon.com), this Blog, and our lectures across the country, we have driven this truth home. Soon, we will prepare an Advisor Training Program to teach financial experts how to deal with this new threat to your financial future. We strongly urge readers to seek out qualified investment advice to navigate the risks that are emerging. We urge advisors to begin thinking in these terms and to get as much training as possible.