EDMONTON - The theme for this year's annual forecast dinner put on by the Edmonton CFA Society of financial analysts could have been dubbed "gloom, boom, doom and kaboom."
Marc Faber, who writes the Gloom, Boom & Doom investment newsletter based in Hong Kong, delivered the message that intervention by governments in economic policy intensifies volatility. And things aren't about to get any better.
Helima Croft, a director of commodities research with Barclays Capital in New York, and former senior economic analyst with the Central Intelligence Agency, gave her top five list of military hot spots in the Middle East and North Africa that could explode, taking the price of oil skyward with them.
Faber, famed for his "glass half empty" viewpoint of investing, hammered away at his theme that "continuous government interventions in the free markets through mostly monetary and fiscal policies have actually, instead of smoothing out the business cycle, led to more economic and total financial volatility, and have numerous unintended and unfavourable consequences.
"When you drop the dollar bills into the system you don't know where they go, and this time around they went to the housing market. The destructive nature of dropping dollar bills is you create bubbles in one sector of the economy."
The pumping of cash into the system came at the same time central banks were keeping interest rates forever low, exemplified by the U.S. Federal Reserve's announcement that it plans to keep rates near zero through 2014.
"With negative interest rates, your money in the bank doesn't give you any return, and it forces people to speculate, on things like real estate, equities and government bonds," Faber said. "That creates bubbles. And in a bubble, the majority of people lose money, but the insiders make money."
A new study by CIBC World Markets shows that the percentage of Canadians aged 45 and older who they measure as heavy borrowers rose from 36 per cent in 2007 to 44 per cent in 2011, while overall, 34 per cent of Canadian households hold three-quarters of total debt.
"Until a few years ago, nobody paid attention to excessive credit growth," Faber said. He cited a major difference between the Great Depression and the recent recession: "In 1929 we didn't have social security, Medicare, Medicaid and the unfunded liabilities we have now. The U.S. will print money, the ECB (European Central Bank) will do the same, and that will have an impact on the purchasing power of paper money. And that has an investment implication for bonds and equities."
Looming inflation will only stir up the Occupy movement more.
"Every society that went through high inflation rates, whether it was the U.S. in the 1980s or Zimbabwe or Germany, it always benefits people with a lot of assets, and people without assets are hurt. So inequality increases. That leads to a redistribution of wealth through taxation, or through social revolution it leads to poverty for everyone."
The global saving grace during the past decade has been growth in China.
"It has never happened before that a country's share of commodity consumption for aluminum, copper, zinc and nickel goes from 10 per cent in the year 2000 to 30 or 40 per cent in just 10 years. It's an unbelievable change in the balance of demand for raw materials.
"A consumer-driven economy is much less cyclical than a capital-spending economy. If the Chinese economy experiences a significant slowdown, it will have a huge impact on the demand for commodities."
Looking forward, Faber stresses the importance of diversification in investing, spreading your assets among cash, bonds, real estate, precious metals and equities, the latter especially in Vietnam, India, all of Southeast Asia, Latin America, Africa and Russia.
Oh yes, "as a hedge, I would own some weapons industry stocks."
"You can't invest based on World War III, but the tensions are rising very rapidly and I'm very concerned about this for long-term spending. Whatever happens in the Middle East, future regimes will not be as Western-friendly as the current regimes."
That dovetails with the viewpoint of Croft, who sees oil prices rising due to geopolitical uncertainty, with West Texas Intermediate going from the current $99.13 US a barrel to $110 at year's end, while Brent Crude rises from $109.73 to $115.
Her list of potential military hot spots this year includes, in order: Libya, Saudi Arabia, Iran, Iraq and Nigeria.
She said the power vacuum in Libya could prevent the resumption of oil production halted during the recent uprisings.
"If we do get some kind of nasty situation, production will suffer and Western oil companies will take their work out of the country," Croft said.
She said Saudi Arabia pumped oodles of cash into its system, through a first-time unemployment insurance program, 500,000 new housing units, and scholarships.
"In 2009 we saw the Saudis take four million barrels off the market in an effort to boost oil prices," and now they face concerns about domestic unrest and a potential looming political succession issue."
Iran is threatening to cut off oil transportation routes.
"If things go wrong, if we get military confrontation in the Straits of Hormuz, that could push oil prices north of $150 very quickly. The last couple of months we have seen a serious deterioration in U.S.-Iranian relations. I think certainly you could see a tit-for-tat ratcheting up over the course of this year, between Western nations and Iran, that will keep the oil price elevated. The chance of military confrontation is 20 to 30 per cent."
She said Iraq has the potential for significant oil production gains, "but this will all be contingent on having a stable security environment in Iraq."
And Nigeria has a "history of targeting oil companies."