How Safe Are The Havens?

29/07/2011 at 4:16 pm 1 comment

For most of the last few weeks it was the Eurozone crisis. Now it’s the crisis in the US (debt or growth, take your pick). Whatever the reason, risk assets have been through panic after panic. And at the same time, certain assets, regarded as safe havens, have shot up.

The question is: how safe would these havens really prove in the face of a true financial catastrophe?

Government bonds are the classic escape for the risk averse. But in a world where the source of much of our panic is uncontrolled government debt – in other words, an embarrassment of such bonds – which ones to buy? The US has traditionally played the role of safest bond haven in the world, but a failure to raise the debt ceiling in a few days’ time, which would present the real prospect of an event of default, challenges this view. Likewise, the performance of the gilt market looks out of tune with an indebted, low-growth economy battling a deficit of 10% of GDP; and would those euro-denominated bunds really give investors such a smooth ride if the single currency were to collapse?

On the currency front, market behaviour is if anything more perplexing. One of the most notable beneficiaries of weak sentiment over the US has been the Japanese yen. The yen! Japan’s economy is contracting, its debt burden as a percentage of output is the highest in the world (it overtook Lebanon in 2008), it has terrible demographics and it has also experienced the worst nuclear accident for a generation and one of the worst earthquakes in living memory. Then there’s the Swiss franc – Switzerland’s fundamentals are enviable and it certainly has the benefit of a defensive location, but it would be far from immune to the effects of another financial crisis. Looking at the other top performers, Norway and Australia would surely be affected should a new recession provoke another slump in commodities – which leaves those economic superpowers, Canada and New Zealand.

We can write off equities while disaster has the upper hand; ditto, property.

Commodities too should suffer in a crisis, with the notable exception of gold and silver. Though even then, with precious metals prices where they are (in the case of gold, not much more than $200 off its all-time real terms high) and volatility high, the risk of sudden and painful capital loss should Armageddon fail to materialise takes the shine off them rather.

Which leaves cash. And with interest rates at record lows throughout the developed world, and inflation having picked up steam, investing in cash guarantees the erosion of your wealth in real terms.

In short, while there is the odd bond market, currency or commodity that might be expected to offer some upside in the event of another major crisis, investors need to tread carefully. What looks like a hedge at first can sometimes be the edge of a cliff.


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Benefit Of The Doubt Meltdown

1 Comment

  • 1. Ports In A Storm « The Blog @ Vigilant Financial  |  11/05/2012 at 3:06 pm

    […] havens – those assets that receive attention from time to time as possible ports in a storm. We last looked at this back in July 2011, covering various government bonds, currencies, commodities – and cash. Events since the […]

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