Dr. Mark Farber discuss the goal of government and keeping interest rates low and how that encourages speculation.  He mentions Switzerland as a specific example that even outstrip earnings and cash in order to discourage deposit.  This has been government policy since 2001.

Other points to note, he is long Hong Kong REIT’s but expects dividends to be cut.  It is his alternative cash. He suggests it because in the end at least have an asset.  If governments continue to print money and asset value should rise.  You need to compare this investment to cash which is being main undesirably governments who are trying to force you to speculate.  Yes you may have a falling dividend that lowers your income however you will probably benefit from rising asset prices.  Interest rates are being kept artificially low or fees are being charged essentially make holding cash very undesirable.  So if they cut dividends by 50% you are still ahead of the game.  Over time that asset will appreciate and given that the worst economy becomes and more money will be printed and hence asset prices will rise.

He went into great detail about how the deflationists are discussing output gaps and how that will be a driver of deflation.  He finds it difficult to accept and wrong.  He points out that Zimbabwe has an output gap up 99% and yet inflation is the problem and not deflation.  Generally low inflation rates in any country reflect fiscally responsible government.  The opposite of that or the weakest governments generally have the highest inflation rates.

At what stage will the US reduce their deficits?  In his opinion— it will never happen.  In two years the liabilities for Medicare etc. will cause them to increase the deficit.  This author notes that the current administration projections of economic growth over the next few years will almost be as high as China— and he makes no adjustment for recessions.  Very optimistic indeed and not “real life” as my four year old is wont to say.

I found his next statement interesting.  He believes that no one has the foggiest idea where the world will be in five years.  He himself is on the sidelines and is preparing for multiple scenarios.

I heard another interview of his recently and he proposes to the deflationists that if they believe they are right they should belong 30 year US bonds and long stock market.  If they are correct then this will be the place to be.  Given his story low 30-year yields and high stock market multiples this could be considered suicidal from an investment perspective.

What I get from this interview is to be prepared for inflation by being long commodities and hard assets and if you’re in paper assets and least have been backed by assets like the REIT’s mentioned above.