A recent FT article about ‘Disaster Economics’ by Gillian Tett caught our attention. We’ve been fans of Ms Tett’s work for a while, especially her excellent book ‘Fool’s Gold’. This article was about the bond markets, but it was some interesting financial history and commentary that caught our attention.
Amidst a discussion of bizarre behaviour in the bond markets, we hear again of recent analysis from Fulcrum Asset Management. Fulcrum have been arguing a generational shift in the perception of, and planning for, disasters amongst investors. As one generational cohort of money managers yields control of the world’s portfolios, a new one is emerging that perceives disasters as more frequently occurring than their predecessors.
Tectonic shifts in investment portfolios
Fulcrum point to a contemporary, but possibly previous, tendency (last few decades) of investors to act against a backdrop of disasters and crises as irregular and infrequent. This contemporary investor behaviour is contextualised with reference to the work of the economist Professor Robert Barro. Mr Barro’s work finds that although there have been 58 ‘disasters’, a drop in GDP of >10%, in the 20th century, only two occurred post 1950. During this time portfolios positioned for the good times, heavily allocated towards yield and productive investments, have reaped a fine harvest.
But today is different, continue Fulcrum, and investors are changing their perceptions and ultimately their asset allocation. We would urge this phenomenon has a role to play in a 12 year gold and silver bull market.
Investments can indeed be split into two categories; ones that produce returns and ones that offer protection. Or in another way, investors are either worried about the return on their investments, or the return of their investments. Different financial eras reward different investment biases, and investors act accordingly, allocating capital more heavily in one direction or another.
Coming home to roost
This is something we have talked about in these pages before. Our world view, including a perception of an overly leveraged banking system and politically mismanaged national currencies, means we are in favour of safe haven assets, especially those that lack counterparty risk.
Ms Tett finds some weight in the arguments of Fulcrum and draws a number of potential implications. One of these implications being that the need for safe havens may not be a short…
