Fairfax: So it's worth owning bonds, not equities this year? With bond prices sky high, will there be a day of reckoning as interest rates normalise?Minack also seems to be a Euro sceptic.
GM: I can't see a day of reckoning any time soon. The forces of disinflation still have the upper hand. Last year, in terms of equities, certainly the S&P was the stand-out performer, but you'd have been much better off holding a 30-year bond in the States. It would have given you a better return.
You can't look for bonds to give you the same returns as the past couple of years, or the past 30 years, but as we saw in Japan for over a decade, there's a time to own bonds not because of what they were but because of what they weren't: they weren't things that were going down. Investors want a premium return to own a riskier asset. If bonds are flat this year in price terms you'll get a pick-up of 2 or 3 per cent, which would imply you need to expect 6 or 7 per cent from equities just to compensate, and if you can't see 6 or 7 per cent, you should be in bonds or something safe like cash.
Fairfax: So the biggest risks are in Europe?Minack thinks the next downturn is still a little way off. But he's not confident that the world will whether it well.
GM: Yep. The problem is the next crisis will not be in the periphery and it will not be in the banks; it will be economic and it will be in the core.
The big problem is the internal competitive imbalances in Europe. The problem's not [that] the euro is too high against the dollar, it's not that the euro is too high against the yen. The problem is that the French franc is too high against the deutschemark, and Mr Draghi can't fix that. From the resulting economic stress you're getting political blowback. You're getting fringe parties flourishing everywhere. There are whole landmines of elections coming up in the next 18 months, any one of which could throw up a result that could get the crisis back as front page news.
Fairfax: So you still don't believe the euro can survive?
GM: That's still the case. You can't restore your competitiveness in a fixed-exchange-rate regime.
The solution is simple, and it's what the periphery has done: it's called having a depression. It's 20 per cent unemployment and large nominal wage cuts. The trouble is that the small economies can be bossed around, but you can't see the French taking the same medicine.
But what's quite clear is they will not take the action pro-actively. Mr Draghi bought them time with "whatever it takes", but they sat back and twiddled their thumbs. They need the cattle prod of crisis to get them to react.
I actually think that the next crisis – which is inevitable over a two or three-year horizon – will be a great buying opportunity for euro equities because they will get very cheap.
Now, we've shot a lot of bullets in the global financial crisis and the next downturn I think will reveal most other people are turning Japanese. Unfortunately the one policy that blindingly obviously works is fiscal policy, but it's very unlikely to be doable in the next downturn; in the US due to congressional gridlock, and it will be disabled in Europe because they won't have a centralised fiscal authority.
So you're left response-less when you enter the next downturn, with monetary policy that is ineffectual, unconventional monetary policy that's just embroidery, and very close to deflation.