The central banks of the world can counter a depression by printing money and know the quantity of money printed but they cannot predict where that money will go. Inflation increases the gap between the rich and poor, and makes life very tough for investors. This is the broad thesis that legendary investor Dr Marc Faber presented at the Hedge Funds World conference in Dubai this morning. He went so far as to blame social and political phenomena like the Arab Spring on the divisive effect of inflation produced by money printing.
Money printing side-effects
Higher food and energy prices are directly linked to the central bank policies to counter the global financial crisis, he said. This is arguably the root cause of the Arab Spring protests, revolutions and civil wars and so the divisive impact is clear.
Poorer sections of society spend a far greater portion of their wealth on food and energy than the rich and so feel a disproportionate impact when these prices go up. They don’t like it and rebel against the established order. Apart from underlining the importance of looking after the basic welfare of populations the world’s fifth wisest investor in a Bloomberg poll also had some thoughts on what this means for investors.
Basically increased volatility is unavoidable as money can flow quickly into any asset class. However, Dr Faber thought commodities like oil and precious metals would be big winners because the increased supply of money would chase the limited supplies of these commodities.
‘Equities will be OK, bonds less so,’ he added. ‘I don’t know when bonds will cease to be a good investment but it will happen. Yields on bonds are negative after inflation’. Dr Faber recalled how Mexican equities had held their value in a period of massive currency devaluation.
Golden asset
On gold Dr Faber asked his audience of 400 people, mainly investment professionals who had more than five per cent of their assets in gold and only a handful raised their hands. ‘How can gold be in a bubble if so few have bought it?’ he asked. ‘Where is the parabolic price spike like the Nasdaq in 1999?’
China is the culprit for rising oil demand with consumption up from three million barrels per day in 1996 to nine million barrels per day. That is a price pressure quite apart from the ongoing tensions with Iran and money printing.
Basically real assets and that includes equities will rise with inflation, it is those on fixed incomes and that includes bondholders who suffer. Currencies lose their value. Things are re-priced to accommodate inflation but some things do better than others.
It was a bravura performance from a conference favorite, and there is an exclusive follow-up video interview with ArabianMoney to come on this channel