Carmen Reinhart and Kenneth Rogoff, in their recent book, This Time is Different, make a case that because of high levels of debt, it is far more likely that a crash will occur in the currency and bond markets than in the equity markets. The US bond market is in a bubble, extremely overbought and overvalued, and may be venerable to a collapse. A collapse of currency and bond markets could occur just as quickly as the stock market crash of 1929 or the real estate meltdown of 2008, and many investors would be devastated.
In addition, Reinhart and Rogoff point out that, over the past eight centuries, when nations are confronted with the high levels of debt currently maintained by developed countries, nations resolve the problem by monetizing the debt. That means central banks "print" new money out of thin air (thereby debasing the currency) in order to buy bonds that can never be repaid. Historically, that is the only way out of such a debt crisis. Sooner or later, massive debt monetization (money printing) results in high and rising inflation and a mass exodus of investors out of bond markets.
A collapse of the Eurozone, a default by Greece, Spain or any other large debt-ridden sovereign entity could spread the financial crisis globally through interconnected finance, banking and trade channels. Precise timing is uncertain, but there can be no doubt that global currencies and bond markets will eventually come crashing down.
As inflation accelerates, many assets denominated in dollars increase in value. These include a few equities (though many will go down as they did in the 1970s), art, numismatics, real estate and commodities. Although not all are investments in the conventional meaning, specific considerations include:
· Selected equities: if you decide to buy equities, focus on large-cap, blue-chip stocks with pristine balance sheets and business models that have no reliance on government contracts or government spending.
· Art: if you decide to buy art, focus on moderately priced works of established artists that have critical recognition and that have a personal appeal to the investor.
· Gemstones: if you decide to by gemstones, focus on the highest quality mid-priced gemstones.
· Numismatics: if you decide to buy numismatics, focus on specific dates and types of coins that have both a metallic value and a numismatic value.
· Real estate: if you choose to buy real estate, invest in properties that can be purchased with cash or paid off quickly and are not dependent on the public sector, but rather are dependent on private markets that will grow regardless of the economy, such as medical office buildings, warehouses, timber and food industries.
· Commodities: focus on food commodities that are always in demand and precious metals that have industrial uses (e.g. platinum, palladium) and will not lose value in an inflationary environment.
