Another Great Depression 'a sure thing'

Economy August 14, 2012 00:00


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Well-known regional financial expert Paul Gambles expects the world economy to fall into another "Great Depression" any time between now and 2014, and that it will last for five to 10 years.

The MBMG International managing partner who appears frequently on CNBC and other media and at financial events said: “Our best case is that stocks will fall 30-40 per cent from where we are now. The worst is hard to predict, but during the Great Depression in 1930s, US stocks dropped by over 90 per cent.” MBMG is a global financial advisory service.

Speaking to The Nation in an exclusive interview, Gambles said it was not possible to predict the exact time of the global economic collapse, as it would depend on what financial event triggers it, which would be very much a political decision.

Nonetheless, he said, “There are two economists who are the most influential on my economic thinking: One is Adam Smith, and [the other is] Nouriel Roubini or ‘Dr Doom’ … he believes 2012 or 2014 is the maximum point we can get to without some event” triggering a major crash.

“Unless you are prepared to lose 40 per cent of your assets, which you might not ever be able to recover, you should completely avoid equity exposure right now,” Gambles said.

A professor at New York University and chairman of a consulting firm that bears his name, Roubini earned the nickname “Dr Doom” for correctly predicting the financial crisis in 2008.

Gambles said MBMG had predicted since last year that “the four horsemen” comprising the United States, the United Kingdom, Japan and the euro zone were getting close to the “apocalypse” or “the end of the world”. Governments are repeating the mistakes they made in the 1920s that led to the first Great Depression, such as accumulating huge public debt, distributing wealth poorly, and tolerating low productivity. Therefore, he said, no central banks would be able to stop a recurrence of the Depression.

“Now we have changed that view slightly. We think it will happen for sure. And China is now exactly in the same situation,” he said.

China reported last Friday that its exports grew by just 1 per cent in July from a year earlier, raising deeper concerns on the possibility of an economic hard landing in the world’s second-largest economy, after years of rapid growth.

To protect their wealth from the expected economic crash, Gambles said investors with medium-term risk profiles and medium-term time horizons (five years or more) should allocate half of their portfolios in cash, 20-25 per cent of in gold, 10-15 per cent in government bonds, 10 per cent in selected types of hedge funds such as long-short equity and managed-future funds, and about 5 per cent in “tactical investments” such as “shorting” Australian property.

“One of the best opportunities to make money right now is to exploit the most overvalued asset in the world, Australian property. Some of our managers are just now starting to ‘short’ Australian property. In real terms, it must fall by 60-70 per cent.”

He said investors at any risk profile should now overweight on cash, which currently can offer an expected annual return of 3-4 per cent for yen, and 6-7 per cent for baht, Singapore dollars and US dollars. After the expected financial crisis, gold is predicted to rise to US$2,500-$3,000 an ounce, from about $1,600 at present. When the crisis starts, the US dollar is expected to shoot up to Bt35-Bt36, though the long-term trend is for the greenback to fall to Bt25 eventually.

Gambles said Asia would not be immune to the coming global economic collapse, though some economies with low debt levels will bounce back faster. Thailand is still in a good position, and it would be better for the country if the global depression occurred now rather than later, as the Kingdom is piling up debt and weakening its economy, he said.

The upcoming US presidential election or the political handover in China could be the catalyst for the next global crisis, but as evidence throughout history shows, it’s usually not the big-headlines event or the expected thing that triggers a major crisis, said the MBMG executive.||