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Published 15 September 2011 05:02, Updated 22 September 2011 04:17
When people start making comparisons between now and the 1970s, I always hope they’re talking about some great new retro-sounding band, not about the financial markets.
We all know that popular music reached its creative peak around 1973, with the likes of Led Zeppelin IV and Stevie Wonder’s Talking Book.
Unfortunately the ’70s were not so good on their economics as they contained the last great period of global “stagflation” – that terrible situation between 1973 and 1975 where economic growth was tanking, yet inflation remained stubbornly high.
So when a Brisbane-based hedge fund manager mentioned the magical decade in an update to financial planners last week, I was crossing my fingers that he’d start raving about Wolfmother (Led Zep Lite) or the new LP by Lenny Kravitz (Wonder wanna-be).
Alas, no. He thinks stagflation might be back.
The hedgie in question, Dave Hobart, is the portfolio manager for the Blue Sky Apeiron Global Macro Trust.
But Hobart doesn’t see a lot of blue sky in the combination of extremely inflationary monetary policies and austere fiscal policies put in place by developed country governments around the world.
The combination of weak growth and high commodity costs, driven by incessant developing world demand, will create a situation where the prices of “necessities” such as energy and food rise, while “stuff that’s typically debt financed goes down”.
It will worry the many property developer readers of these pages, but Hobart thinks bricks-and-mortar will suffer in this correction. “Property used to be a real asset but the loan-to-value ratios have turned it into a financial asset,” he says.
In a stagflationary environment, the standard share investing strategy of “buying the dip” probably won’t work, he suggests.
His global macro fund, which uses futures contracts to go “long” or “short” on entire asset class markets, is now short on equities everywhere. He’s hoping to profit from “put options” on Japanese government bonds, which will be in the money if the bonds get cheaper – although it may take a return to the 1980s, when Japan actually had some inflation, for that bet to pay off.