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How to Trade Financial Repression

Tuesday, 24 May 2011 | 5:38 AM ET

Financial repression is a term that has been making headlines recently.

Macduff Everton | Ironica | Getty Images

Associated with default via forced lending to governments, low rates, cross border capital controls and high inflation, financial repression allows the indebted to lower the cost of their debt at the expense of creditors.

“We expect the only viable longer-term solution to the unsustainable debt imbalances of the old industrialized countries will be some form of financial repression,” said Beat Wittmann, the CEO of Dynapartners in an interview with CNBC on Tuesday.

While no one in Wittmann’s opinion will admit financial repression is actually taking place, it will happen and will probably be labeled as "macro-prudential policy and regulation."

The ongoing Greek situation is a strong case in point. History teaches us that there are the following debt exit options: growth, austerity, default/restructuring/re-profiling, inflation, financial repression,” he said.

“Growth, austerity and outright inflation are completely unrealistic options for Greece in our view, which leaves some sort of haircutting for private investors. We believe it is simply a matter of time before this happens,” Wittmann added.

With interventionist politics and economics set to stick around Wittmann believes negative real interest rates will also be here for some time.

Defaulting as Fast as Possible Best Solution?
"it's all about liquidity, solvency and competitiveness," Beat Wittmann, CEO of Dynapartners told CNBC. At the end of the day, countries like Greece and insolvent and uncompetitive, he said, adding defaulting as fast as possible would be the best solution.

“Long-only investment strategies will be replaced by investment objectives oriented on total real returns; cash and fixed income are structurally unattractive; actively managed equities and real assets including alternative investments and precious metals are structurally attractive,” he said.

With the monetary taps unlikely to be turned off soon, Wittmann is a bull, positive on risk assets such as stocks.

“What we like in particular from the contrarian perspective is that investors frightened by negative macro news flow still seem to prefer cash and bonds to equities and precious metals,” he explained.

“Our current net risk exposures include 52 percent in equities, with the largest sector weights in financials, technology, infrastructure, and Asian consumption.”

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