Sometimes you find an article that is just too good not to share, and I believe this is one of them. Enjoy the read.

With the current financial crisis still reverberating around the world, along with fears and anxieties appearing to grow daily about the ultimate outcome, it is still nonetheless possible to peer into the crystal ball and get some sense of how this is all likely to end—and what it means for investors.

Over the past week the markets have caved in after realising yet again that there is no light at the end of the tunnel. Here we are 4 years after the crisis started in the subprime market, and we still find various trouble spots around the world where massive uncertainty reigns. This is despite the developed world maintaining a ZIRP (zero interest rate policy) since the end of 2008; despite unbelievable amounts of fiscal stimulus and other more arcane means of stimulating an economy, such as quantitative easing.

Herein lies one very important lesson for investors and it is possibly the single most important piece of advice we can offer right now: There is no quick fix to this crisis.

This is despite the soothing words and actions of central bankers. Do not believe them when they tell you over the course of the next 12 months that things are getting better. They were telling us this for the last 3 years already. Rather, our current advice is to listen to the gold price, there is a message there.

We do not proclaim to have a gold price model and we do not vouch for its true monetary value, but we do know that investors around the world WILL use gold as a safe haven. For that reason, when the gold price finally starts falling back sustainably, then you can believe that the crisis is over. Until then, do not believe what central bankers tell you.

So how do we make sense of what is going on in world financial markets? Are we implying a doomsday type scenario that lies in wait, or are markets “an accident waiting to happen?”

We cannot tell for sure, and yes there is a non-zero probability of a major dislocation in markets somewhere down the line. And we may even come awfully close to disaster. But there is too much vested interest for markets to capitulate completely and become completely dysfunctional to the extent that all assets go to zero.

The backstop for much of the thinking requires us to understand the fundamental nature of financial assets – they represent a contractual claim upon assets and the cash-flows of underlying economic entities. We then need to understand what drives the real economy in order to ascertain whether there is value or not in those financial assets.

But before we do that we need to truly understand the nature of the crisis. At the heart of the issue we have incredibly high debt levels. Not that those high levels of debt in absolute terms are necessarily a problem – it is about the relative size of debt, in particular to the revenue-generating capacity of an economy, usually measured by the size of GDP. Thus, the outlandish debt-to-GDP ratios of many Eurozone economies have come under the spotlight – Greece for example stands at around 140%, Italy at 120%, and Ireland at roughly 100%.

But it is not the first time that Governments around the world and through the ages have survived high debt to GDP ratios. Most interestingly is the fact that the UK survived through most of the 1930’s and 1940’s with a debt:GDP ratio of well above 150% - peaking above 200%!

If we can work out how they did this we may have some idea as to how the world will emerge from the current crisis. After all, unless one makes the debt disappear (by defaulting) it must be repaid at some point. So how do governments pay off debt? Through using tax revenues? This was the UK’s solution in the Post WW2 debt crisis. Notably, in the USA, higher taxes were also used to bring down debt. Be warned then that the big picture view on this is then either higher taxes, or higher inflation........or both.

So the answer is that ultimately in order to escape the noose, economies have to find a balance in the combination of higher real growth and pushing out the term of their debt. Of course, there is a trade-off to this – there is no free lunch! Longer average terms to maturity of debt mean higher interest rate costs overall, which only exacerbate the budget shortfall in the short term. Of course the other side of the coin is to allow one’s currency to depreciate or devalue, which will also reduce the real value of one’s debt as well as hopefully provide some stimulus to exports and thus increase GDP growth.

Thus, it is the economic leaders’ quest to provide a believable package that induces long term sustainable growth, caps debt and, in the face of a disbelieving market, prevent disbelievers from continuing to short the market. But how do you provide a believable growth plan when austerity implies a lack of spending (and thus leading to slower GDP growth)? And thus they face possible default if the plan doesn’t work.

GDP growth according to the economists is a function of many things, but when faced with serious demographic problems in the form of declining and ageing populations, this only adds to the woes. It is for these reasons that, in our mind, given the constraints, these highly debt-laden countries will have no choice but to default at some point. The price of austerity in our belief is too high a price for politicians to stomach. For the time being though, they are kicking the can down the road, but Mr Market is not stupid.

The end of the crisis for peripheral Europe will only truly be in sight once we see the actual defaults…

We believe that the end of the crisis for peripheral Europe will only truly be in sight once we see those actual defaults – whereby actual debt levels are reduced relative to the size of the GDP. For the developed world as we noted it will require higher inflation and/or higher long term inflation.

So what does that mean for investors in practical terms?

Firstly, the euro. As this area’s currency is constrained and likely to remain weak relative to the other major currencies – even the US dollar. Secondly, until the debt overhang is removed, growth is also likely to be constrained, taxes are likely to be increased over time and it is only Germany that is really in a position to benefit in growth terms from a weaker euro. These point to avoiding Euro-zone corporates for the foreseeable future, but high quality large cap German multinationals may of course be a sweet spot.

Further to that, if default woes still hang around, then gold will remain in its upwards trajectory towards (inevitable) bubble status as the best crisis hedge out there. If a large seller of gold emerges of course, such as the USA – to help balance the books – then all gold bets will be off!

Emerging Markets will continue to attract inflows in such an environment, and will maintain higher growth rates.

Emerging markets will continue to attract capital flows in such an environment and will maintain higher growth rates. So look to growth companies in Emerging Markets as the source of safer and higher quality growth relative to that of Developed World.

Lastly, demographics again come into the equation in the form of what is happening in Emerging Markets – theirs is a growth story and this feeds into one line that we have long held in that a suitable long term investment play on this will be in the agricultural space. Yes, it has become somewhat of a cliché, we know, but there can be little better in the long term than an African farm! Even if just to escape the volatility!

Let it be said though, a productive African farm – not just one where you can kick your feet up and enjoy a drink on the stoep! That is of course, if one can see through all the smoke, mirrors, greed, corruption and investment noise. Who said investing was simple or easy?

There are no free lunches remember! For the time being, we must view the world through Japanese-coloured spectacles – low interest rates and anaemic growth for quite some time to come.

The opinion and comment in this newsletter is opinion and comment only and does not constitute in any way financial advice. Please consult a professional financial adviser for any investment and financial decision.