Ortel warns that unacceptably high levels of government debt plus a global surplus of cheap labor will continue to depress economic activity in the developed world, including the United States and the European Union.
He concludes that the U.S. and EU are likely to see an increase in economic rioting, especially as the unraveling of the eurozone gains speed and tensions between young workers and retired seniors intensifies.
Governments increasingly face fiscal insolvency as the elaborate social welfare states are required by law to provide an extensive and growing range of government-funded entitlement benefits to various political constituencies, regardless of the economic burden paying such benefit levels puts on taxpayers.
Avoid investing in fiat money securities
Ortel is concerned that “quantitative easing” programs in which the central banks engage in buying billions or trillions of dollars of government debt result in an artificial lifting of the values of securities.
Stock indices such as the Dow Jones Industrial Average, for example, are kept artificially high by the massive infusions of liquidity central banks such as the Federal Reserve pour into purchasing U.S. Treasuries and other debt issued by the federal government.
“Decisions by central banks to reduce benchmark risk-free government bond yields have certainly propped up quoted prices for securities,” he writes.
“But other government decisions and difficult-to-reverse, long-time demographic trends constrain fundamental growth in demand per household within Gray Zone nations [i.e., developed nations with aging economies], where economic activity remains concentrated for the moment.”
He argues that government policies worldwide have significantly destroyed financial wealth since 1999, a trend he expects to continue.
“A weaker U.S. dollar, higher interest rates and price inflation will likely continue to reduce the value of fiat-denominated investments,” Ortel cautions.
“We believe that investors should take steps to reposition their liquid portfolios immediately to protect against further destruction, to consider taking advantage of expected declines in the value of certain securities and to profit from heightened volatility.”
Specifically, Ortel urges investors to consider the following general investment strategy:
- Liquidate portfolio positions in: (1) long-dated U.S. Treasuries and other sovereign debt; (2) any fixed income obligations of highly leveraged companies; and (3) equity in financial companies and industrial companies that do not own precious metals, natural resources, or strategic minerals.
- Deploy proceeds in short-dated holdings of more responsibly run currencies such as the Norwegian krone, the Canadian dollar, the Swiss franc and the Singaporean dollar.
- Increase holdings of physical gold and other precious metals to as much as one-third the value of an investor’s total portfolio.
- Employ “short” investment strategies for special situations: (1) purchase credit default swaps (paying careful attention to counter-party and contractual risks) on sovereign debt, including U.S. Treasury obligations; and (2) take positions on overleveraged financial and industrial companies whose cash flows will be significantly and adversely affected by rising nominal interest rates.
- Purchase securities in underleveraged companies that have legally enforceable interests in scarce commodities such as precious metals, natural resources and strategic minerals.
- Consider allocating capital to professional investors who are equipped to trade volatility.
“Busy chasing profits calculated in nominal terms, most investors have failed to discern their ‘real’ after-tax wealth is being dissipated in a treacherous, unregulated global market that encourages devaluation of paper money.”