In 2008, the economic crash that I had been warning about for years and that had been predicted in stark detail in my 2007 book Crash Proof, finally began in earnest. In many speeches and media appearances in 2006 and 2007 I laid out the reasons why the crisis was inevitable. More importantly, I forecast the policy mistakes that the government would make in its aftermath.
For a while, at least, the illusion looked real. The surge in real estate prices made possible by non-existent underwriting standards, the wave of mortgage securitizations and, most importantly, by the ultra-low interest rates provided by the Federal Reserve (and the regulatory incentives provided by Federal housing programs), had convinced economists and investors that rising home prices would lead to permanent prosperity. But when the tide rolled out, millions of home borrowers defaulted on their mortgages, sparking a credit crisis that threatened the country's entire financial edifice. The panic and uncertainty led to a crash on Wall Street and a near doubling in the unemployment rate from 5% to 9.5% by mid-2009. In short, the nation found itself in the most severe economic crisis since the Great Depression.
In order to prevent the economy from spiraling further downward, the Federal Government and the Federal Reserve unleashed a series of unprecedented financial and economic measures. While those steps were actively debated at the time, they are now widely considered by economists to have been necessary. We disagreed then and we disagree now.
By 2010 the fury of the storm had apparently passed. And although most economists have celebrated the turning of the page, after four years of "recovery" the United States has not nearly returned to the semblance of economic health that it had shown before the Great Recession began. By many measures, we are worse off. According to the Bureau of Labor Statistics, in 2014 fewer Americans are working than in 2007 (many that still are have settled for lower-paying, part-time jobs), wages haven't kept pace with inflation, and real purchasing power is down. Americans seem to have come to accept that the glory days of the American economic miracle have passed.
But amidst the economic stagnation for the middle and lower income classes, there has been an apparent miracle of wealth creation and asset price gains for the wealthy. We see this as a sign that our economy remains fundamentally unhealthy and unstable.
Euro Pacific Capital does not construe the appearance of health with actual health. We see our current economy as a one-way experiment in monetary and fiscal stimulation that will end badly. We know that our economy is now addicted to cheap money, zero percent interest rates, and a backstop of Federal Reserve support. We are convinced that can't last forever and we are preparing investors for this eventuality. This does not mean that we advise Americans to avoid the stock market. To the contrary, we believe that the market offers one of the few pathways that may allow savers to preserve and expand their wealth in the times that we see ahead.
The governmental response to the last crisis has proven that the authorities will do anything and everything to keep asset prices from falling. This idea was not as widely accepted before the 2008 crash. Unlike the pre-crash era, the Fed's asset price protection arsenal is now more clearly defined and available to be deployed at a moment's notice. New Fed leadership under Janet Yellen is likely to be even more supportive than her predecessors under Ben Bernanke. So we do not expect a stock market crash like we had in 2008.
But while the Fed may be able to keep a floor under asset prices through additional floods of liquidity, it can only do so by debasing the dollar in the process. Americans unfortunately have become fixated on the nominal value of their assets and have forgotten that U.S. assets are priced in dollars, which we believe will become increasingly less valuable as a result of limitless debt and stimulus.
Over the last few years the level of support that the dollar has required from foreign governments has increased. If that support were removed, the dollar could have a very uncertain future. So while the current increases in stock and real estate prices may likely continue, albeit at a slower pace, the real value of these assets could fall if the U.S. dollar loses international support.
We believe that the next great economic realignment will occur when the world's creditor nations finally fully enjoy the fruits of their labor and the world's debtor nations suffer from their profligacy. The mechanism by which this change would occur will be a realignment of currency values. Although the fact is often ignored by mainstream analysts, an investment is only as good as the currency in which it is based.
As such, we believe American investors, for whom it is suitable, should seek greater non-dollar diversification. We continue to take comfort in the value and income we find overseas, and we prefer countries that are embracing free market capitalism and rejecting the socialist ideas that are gaining traction in Washington. We choose to invest in countries that do not follow the U.S. example of growth through debt. More importantly, we believe capital should go where it is treated best. That means we have a preference for countries with low taxes and a respect for corporations and shareholders.