Singapore dollars and gold are the only safe havens

Russell Napier, CLSA

This is a very pessimistic presentation so I’ll be brief, CLSA strategist Russell Napier said last week, before suggesting that the only two safe havens for investors are Singapore dollars and gold.

Napier’s talk at the CLSA Investors' Forum on Friday was followed by a lunch presentation by Marc Faber. The contrarian investor, who goes by the nickname of Dr Doom, was only marginally more positive than Napier and ensured that all those attending the final day of the forum went away on a sombre note.

Investors may have been on a high, literally and figuratively, after listening to Christina Aguilera perform several of her hits, including "Beautiful" and a reggae-styled version of "What a Girl Wants", at the CLSA gala on Thursday night. But they were reminded the very next morning that the current environment is presenting few opportunities for cheer.

The primary message that Napier conveyed in his address, which had stolen its apt title "Darkness on the Edge of Town" from another musician, was that the economic environment will get worse, much worse, before it gets better.

“Things in Asia will get better after 12 months,” he said. “The rest of the world will stay bad for 10 to 15 years.”

Napier also argued that the fact that some banks would be eradicated in the next few weeks was a given and beyond debate. “It is amusing when people talk about a double-dip recession,” he said. Napier himself believes the world has been in a recession since the financial crisis started.

In the summer of 2011 the burden of funding the US government shifted to the savers from the printers [of money], Napier said, reinforcing the point with a slide titled “Uncle Sam Needs You”. US Treasuries used to be a safe haven but this year the supply of US government bonds is at a record high. Foreign buyers are still picking up Treasuries, but more slowly. And the onus of funding the deficit is falling on, among others, money market mutual funds, which are dumping corporate bonds and commercial paper in order to do so.

“This represents a structural change, a change in world history,” said Napier. “There is a long, honourable history of running up government debt in the US.” Until 1932 the US government only borrowed money to kill people, he added, but since then it has been not to kill but to keep people alive. I think I should get into advertising, Napier said, noting that an apt slogan for the US Federal Reserve would be: "The Fed: Printing the American dream since 1913".

“I agree with Churchill who said: 'America will always do the right thing but only after exhausting all other options’,” Napier said, alluding to the fact that the US is soon going to have to support a generation of baby boomers unless the social contract in the US is renegotiated. Since Napier feels the US is going to be unable to solve the many problems that it is facing, including the social contract, in the near future, he is negative on any investments in US stocks.

He was equally bearish on the prognosis for Europe. Everybody at the conference thinks Europe will deflate, devalue and depreciate, he said, but it is worse than that – Europe will nationalise.

“Get your money into gold and Singapore dollars; keep your powder dry and wait in the next six to 12 months to buy Asian equities,” Napier advised, noting that he expects the Singapore dollar to become the Swiss franc of the 21st century. Napier’s bullishness on the Singapore currency is driven by the fact that the country has a capital account surplus and the government is also unlikely to impose capital controls on inflows and outflows -- something he predicts will happen in Europe very soon.

“Wherever Asia is on the spectrum of free-market capitalism and communism will not move much in the next 10 years,” he said as further support of his case that investments in the Singapore dollar and Asian equities are the way forward.

Napier conceded that his suggested investment strategy was inoperable for the majority of CLSA’s clients. The Singapore dollar market is not deep enough and simply investing in gold provides no diversification. But he suggested European and US investors should at least take their money out of existing investments and move it into an Asian currency.

“The biggest risk in Asia is Pakistan,” said Napier in response to a question about whether political instability in Asia could influence his recommendations. “The fact that it is a nuclear state is what keeps me awake at night.”

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