Ben Hunt: Politics, Policy and Investment Markets (Part 1)

Date: Sep 21 2012

Stuart Fairclough, Director of Global Perspectives

Ben Hunt is portfolio manager of the TIG Procella Fund, a long/short equity hedge fund focused on the political, legal, and regulatory events that influence security prices. He is also the author of two books on international politics, including one on the European coalition. We are delighted to have Ben speaking at the 2012 FOX Fall Forum about his area of specialization: How global politics shape investment markets. 

Recently we discussed some key trends to watch out for in the near term. In this first of a two-part interview, Ben discusses the future of the world’s reserve currency and medium-to-long-term trends investors will want to watch. In part two, Hunt discusses the influence of politics on investment markets and the policy options available to a future Obama or Romney White House.

Are there any circumstances under which you could foresee the U.S. dollar ceasing to be the world’s reserve currency? Is this an ‘exorbitant privilege’ that the U.S. can do without or is it integral to the U.S. remaining an economic superpower?

Frankly, it’s very hard for me to imagine a scenario where the U.S. dollar is no longer a reserve currency. I can imagine a world where it is no longer the reserve currency (and China is taking steps to make the yuan a competing reserve currency, although – in typical Chinese fashion – these efforts have a 40 year time frame), but even then I would think that the US dollar would be seen as first among equals. 

Are there advantages to maintaining reserve currency status? Sure. But it’s by no means a sine qua non for remaining an economic superpower. What is absolutely critical, however, is to maintain a truly independent and sovereign currency (and by extension, monetary policy). This is why I believe that calls for a return to the gold standard are very misguided. 
What are the dominant medium-to-long-term investment themes and how should families leverage them? 
As Mark Twain supposedly said, “history may not repeat itself, but it sure does rhyme a lot.” Right now we are enduring a very common response to a global debt crisis, which is financial repression imposed by the sovereign. For example, throughout the 14th and 15th centuries, the Medici’s and other European banking families wrestled constantly with sovereign pressures to extend more and more credit. This is not meaningfully different from the pressure that the modern Italian and Spanish sovereigns place on Unicredit or Santander today to utilize the 3-year LTRO to purchase state-issued debt, and I suspect the outcome of this sovereign extortion will not work out any better for Unicredit in 2013 than it did for the Peruzzi Bank in 1343. 
What the Fed is doing with its monetary policy of financial repression may not be as egregiously aggressive as that employed by Edward III or the Papal States, but it’s a form of sovereign extortion all the same. The Fed wants to make it so painful for you to own safe haven assets that you are forced to buy riskier assets than you would otherwise think prudent. My advice? Don’t take the bait. I understand the pressure for yield. I live with it every day in my Fund and speaking with my investors. But this, too, shall pass. There will be a political reaction to the current global policies of financial repression, and there will be a re-set. In the meantime there are discrete opportunities where safety and return are reasonably priced.

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