What does Radical Britain mean for investors?

The West’s most daring government is how The Economist describes Britain under Prime Minister David Cameron. There is a radical agenda to address the debt and public spending deficit, arguably the most vigorous dose of classical economics about to be given to any major economy.

The Economist likes free markets and it likes what it hears from the new British Government. This is back to Thatcherism. All you have to do is press the fast forward button past the painful shakeout process and you skip from an age of austerity into a new golden age.

Miner’s strike

Ah but therein lies the problem. Thatcher’s squeeze of the early 1980s came at the price of three million unemployed and riots in the streets.

Investors should also think back. The best gains did not come from taking a position when Mrs Thatcher entered No10 and sticking with it. There was asset price deflation and the stock market bottom came in 1982, even house prices did not do so well.

The new British Government has an old trick up its sleeve. The pound is a free floating currency and can be devalued to ease the debt burden. One top forecaster has just suggested a 15 per cent decline by the end of the year. In normal times that would be highly inflationary, perhaps not so much with a deflationary spending squeeze in progress.

But devaluation is not good news for foreign investors. It is very bad news. You want to buy after the devaluation not before it. The art surely is to park your cash in an asset that will resist devaluation and possibly even gain from inflation, and then switch back to stocks and real estate later.

However, bonds, especially in a currency that has devaluation written all over it, are not a good buy either. Present low interest rates are obviously unsustainable. Indeed, they will have to go up sooner or later, guaranteeing further house and equity price falls. For bond holders that will also be a disaster.

Buying signal

Would-be investors in Radical Britain are therefore advised to wait until there is blood on the streets again before thay invest. Park you cash in foreign currencies or precious metals and wait for the bargains to appear.

That opportunity might come sooner than you think with a stock market crash that anticipates the bad times ahead. Then you can consider oil and gold stocks at bargain prices to profit from the inevitable inflation that the new government will have to tolerate in order to reduce the real debt burden on the economy.

For this is not the early 1980s in global terms. It feels far more like the inflationary late 1970s. Does that mean that Britain has the wrong government pursuing the wrong economic policies? Quite possibly. There is no Ronald Reagan to Mrs Thatcher this time. President Obama is on a very different course and his economy is ten times bigger.