What’s an investor to do?
By Walter Wells, courtesy of University of Chicago Magazine
Photos by Peter Jones
William Browder’s quest for improved corporate governance in Russia has made him persona non grata in that country.
But Browder, AB’85, did not address the controversy when he spoke at the Europe inauguration of the University’s Distinguished Alumni Lecture Series. Founder of Hermitage Capital Management, one of Russia’s largest investment firms, Browder delivered, instead, a broader—and decidedly pessimistic—forecast for the world economy over the next several years, seeing no turnaround on the horizon. Speaking at the University’s London campus on March 26, he predicted a steep, continuing decline that will play itself out, in effect, as tumbling dominoes.
At first, with their presently low levels of capitalization (“precariously low,” Browder called them), banks will begin to “gate” depositors’ money—telling depositors, in effect, “Your money is safe. But you can’t have it all back.” In fact, deposits have already been frozen in Ukraine and Iceland, and withdrawals restricted in Latvia.
This “gating” will spread, Browder predicted. To forestall the process, government guarantees have increased in recent months; but these “guarantees dwarf the size of available resources.” They’re simply “not credible.”
Fearing that their funds will become inaccessible, investors will increasingly flee with their money to the perceived safety of U.S. Treasury bonds—this despite bond yields now near their all-time lows. But this flight to “safety” will in turn be compromised, says Browder, by the U.S. government’s simultaneously generating the largest budget deficit in history. “To finance it, they can issue still more bonds”—and watch their debt rise to over 100 percent of GDP by 2010. Or they can simply engage in what the government calls “quantitative easing.” That is, they can print more money. The implications were clear: either course of action is potentially disastrous.
Browder argued that the crash of U.S. bonds will then, in turn, “crowd out” the ability of other countries to borrow, jeopardizing America’s capacity to insure their bonds. This will probably lead, he argued, “to some defaults, even among the developed countries”—Greece and Ireland the most probable defaulters. “Gold,” said Browder, “therefore emerges as the ultimate safe haven in a turbulent time.” It earns no interest but, these days, neither does money. The dominoes have fallen. Real estate has crashed by an average of 23 percent, and continues falling. Banks, with low yields and fearful of bank runs, have lost their appeal to investors. With the skyrocketing debt, U.S. treasury yields are also “falling to zero.”
During question time, Browder was asked how best to ride out the storm. His answer came slowly: “Invest in what’s real …in gold, oil, agriculture—people always need to eat—even real estate, if a bottom seems to have been reached …then cross your fingers.”
Originally published on April 20, 2009.