If we didn’t have the Maginot Line as a metaphor for folly, we’d have to invent it.
During the 1930s, the French constructed an ‘impregnable’ series of fortifications along the German frontier to avoid a sequel to 1914. They probably figured good fences make good neighbours.
It was grand. It was costly. And it failed. Spectacularly…
The Hun simply bypassed the barricades in May 1940. When German armoured columns slinked their way through the Ardennes Forest — a feat that many professionals thought impossible — the Maginot Line proved as useful as a screen door on a submarine. France fell within six weeks.
The French were fighting the last war. Fritz was fighting the next one…
In the 80 years since the French unveiled their Maginot Line, you’d think soldiers, politicians, regulators and investors would have learned their lesson.
But Maginot Lines are everywhere in 2015. People still view past performance as a reliable indicator of future events…despite the plain fact that this attitude can leads to tanks through the Ardennes.
We can only hope that the security lines where you queue to board international flights don’t one day become a new Maginot Line.
Whatever devious plan terrorists are concocting right now, you can bet your bottom dollar that it won’t involve commandeering aeroplanes and flying them into buildings. But border protectors in Australia and around the world are still frisking old ladies in wheelchairs — fighting the last war.
Let’s turn this metaphor to a less menacing field of conflict — according to some, at least…
Crisis on the radar
Following the financial crisis of 2008, regulators in Australia and the US unleashed a blizzard of reforms. They sought, admirably, to prevent a repeat of the US subprime disaster.
They designed their own financial Maginot Line. And it was built to fight the last war — the war of the subprime mortgage.
But what if the next ‘attack’ simply bypasses this static line of defence? What if these defences prove as useless as the real Maginot Line against the next financial threat?
This risk has prompted me to join forces with Wall Street and Washington insider, Jim Rickards. Jim says regulators’ defences will prove useless — and the next major crisis is ‘already on our radar screen’.
What is this crisis? And how can you prepare for it?
The answer lies in the bond market…
A trillion-dollar dilemma
Many private investors ignore the bond market. To them, bond trades are deals that happen in the shadows…unknowable and arcane…but which have little bearing on the value of their portfolio.
This is a dangerous attitude. The size of the global bond market dwarfs the value of stocks.
And, as Jim explains today, very small changes in the bond market can lead to cataclysmic outcomes.
Recall your bond basics. When bond yields go down, bond prices go up. And vice versa.
This year, yields around the world for corporate and government bonds have hit record lows.
‘Investors across the globe,’ explains Bloomberg, ‘are facing a trillion-dollar dilemma: Either pay up for the safety of lending to nations like Germany and Switzerland or buy riskier debt at a time of faltering economic growth.’
Safety, in this context, can often prove illusory. Bonds are safe — until they’re not.
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Among other things, a lower bond yield means investors think the borrower is more likely to pay them back. Lower yields imply safety.
That makes the short list of governments you’re ‘safe’ lending to: the US, Germany, Switzerland, Spain, Italy, France, Japan, and the UK.
But it stands to reason that as these borrowers borrow more, the likelihood that they will be unable to pay you back goes up too.
That’s why — in two sectors above all others — trouble is brewing on the horizon.
We’re not talking about the typical fretting that sees markets ebb and flow every day. The threat that Jim identifies today is six times the size of the subprime mortgage meltdown.
You can’t afford to ignore this threat. It demands your attention. It’s the reason why Jim and I have just joined forces to bring you a brand-new investment advisory service.
The Maginot Line regulators will let this crisis blow up — but you can take specific steps now to bypass impending doom.
Read on for Jim’s prognosis…
Editor, Markets and Money