Global Investing

From whom would you rather take investment advice:  one of the thousands of bankers or wealth managers who did not see the financial crisis coming or one of the few economists who predicted it?

In his 2003 bestseller “The Dollar Crisis”, Richard Duncan forecast how the unbridled creation of liquidity was set to spark a financial crisis. Three years after the crisis unfolded, Duncan’s new book, “The Corruption of Capitalism”, paints an even bleaker future.

Duncan expects that, in the years ahead, governments will prop up economies with ever-bigger doses of fiscal and monetary stimulus, but that eventually the extreme imbalances in the world economy will be corrected by market forces.

This will probably involve a collapse of globalisation and a drastic reduction of the standard of living of almost everyone alive

So how can investors protect themselves from such a dire outlook? Duncan says that his books aim to give policy advice, not investment advice. In “The Corruption of Capitalism” he writes only one line, at the very end of the book, about how to prepare for lean years:

Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

Companies need to actively encourage dissent and aspire to heretical rather than consensus views if they want to avoid being as unprepared as they were for the financial meltdown.

Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute’s second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.

“This was not just a financial crisis – this was an existential crisis that exposed a faultline in the system,” she said. “The way we thought about the world was profoundly flawed.”