Malmgren: Investors Must Factor In Geopolitics

Geopolitics are key to understanding capital markets and forecasting what investor behaviour might look like in the future, argued leading economist and former U.S. government adviser Pippa Malmgren.

Malmgren, founder of geopolitical advisory firm DRPM Group and part owner of drone manufacturing firm H Robotics, said at the Inside ETFs Europe conference on Tuesday that geopolitical events explain everything from Greece not being able to hash out a deal, to why investors will ignore U.S. Treasuries and why we might have more inflation than official data suggests.

Turn Off The Money Taps

In Greece, Malmgren said the European Union, the International Monetary Fund and the Troika are not prepared to lend any more money – given Greece has already defaulted on 90 percent of its debt – because it threatens to turn into a dependency state. Such a weakened state would not be able to afford to keep its immigrant detention centres open, buy printer ink or hold an election. But Russia is stepping into the fray and offering Greece cash flow as it wants to ensure it still has access to one of the main shipping refuelling stations in the Mediterranean.

“One way this gets resolved is financial repression – where central banks say that pension funds and banks should really only do safe things with their [public’s] money,” she said. “And that is buy our own sovereign debt. Governments will require them to do that. That will have a huge replication for financial markets.”

Malmgren also said investors will not buy U.S. Treasuries and this will mean U.S. Federal Reserve chairman Janet Yellen can achieve 4 percent inflation without provoking a bond market sell-off.

Innovation Equals Inflation

The economist pointed out that asset prices are at an all-time high – city apartments are the smallest they have ever been, London theatre tickets have tripled this year alone and steaks in the Midwest have fallen to just 8 ounces – yet inflation is at an all-time low in the Western world.

Alternative financing is increasingly important, such as crowdfunding, which allows people on the street to raise money online. Malmgren used crowdfunding website Indiegogo to sell her book on economics, raising close to 300 percent of her target.

“I wanted to measure the velocity of money,” she said. “Maybe we have more inflation than we thought but we are not looking at the right signals and sources.”

True Diversification

Malmgren added that investors should not think about their portfolio on a country-by-country basis, as that strategy has stopped working since the fall of the Berlin wall when countries ceased to only create GDP within their own borders.

“In that world you could do things on an index weighted basis. But in the world I’m describing, you should think about that: it’s a splitting process, assets are jumping up, the cost of living is rising and the standards of living are falling. You can see that in China [as they are moving factories to the U.S. and the UK],” she said.

“Geopolitics may not always move indices but I don’t think that means we can afford to ignore it,” she added.