The surest way to the asylum

  • The uncertainty of certainty
  • The reality TV candidate
  • In the mailbag

The world waits.

What will central bankers do next?

In Australia, it looks as though another rate cut is on the cards.

As Bloomberg reports:

Australia’s central bank is keeping its policy options open as it predicted the economy probably cooled last quarter, momentum in the jobs market has eased and inflation is set to remain weak.

The odds of an interest rate cut are increasing. Based on the futures market, there is a 64.1% chance that the Reserve Bank of Australia (RBA) will cut the Cash Rate to 1.5% at its August meeting.

If not August, then September. There’s a 61.4% chance of that happening. Again, that’s according to the futures market.

As for our view on whether the RBA will or won’t cut, we can honestly say that we have no idea.

We’re past the point where we’re prepared to guess on anything the central bankers will do next.

After all, attempting to predict the actions of madmen is the surest way to guarantee yourself a place in the asylum…

Markets

Overnight, the Dow Jones Industrial Average closed up 16.5 points, or 0.09%.

The S&P 500 index gained 5.15 points, or 0.24%.

In Europe, the Euro Stoxx 50 index closed down 9.48 points, for a 0.32% loss. Meanwhile, the FTSE 100 index gained 0.39%, while Germany’s DAX index fell 0.04%.

In Asian markets, Japan’s Nikkei 225 index is up 36.6 points, or 0.22%. China’s CSI 300 index is down 19.17, or 0.59%.

In Australia, the S&P/ASX 200 is flat, down just 0.07 points.

On the commodities market, West Texas Intermediate crude oil is trading at US$45.06 per barrel. Brent crude is US$46.80 per barrel.

Gold is US$1,327 (AU$1,758) per troy ounce. Silver is US$19.92 (AU$26.40) per troy ounce.

The Aussie dollar is worth 75.46 US cents.

The uncertainty of certainty

Speaking of central banks, we speak of gold.

Although central bankers (Western central bankers at least) no longer consider gold to be at the heart of the monetary system, it doesn’t mean that there isn’t a link between the two.

Gold has risen, strongly, over the past year. You can see this for yourself in the chart below.

The ascendency of the gold price is giddying. The climb is surely steeper than the climb up the Alpe d’Huez.



chart image

Source: Bloomberg
Click to enlarge


For your information (in case you wondered), the gold price is up 26.3% since the December low in the above chart.

That’s a spectacular return for what is really little more than a piece of shiny metal.

It’s even more stunning when you consider that an ounce of gold today is no different to an ounce of gold back in December. Yet, investors deem it to be 26.3% more valuable today than it was then.

How can that be so?

With shares or property, it’s easy to understand a rising or falling valuation.

If a company increases its revenue and profits over a period of time, it makes sense that a share price should increase. If a homeowner makes improvements to a home, it makes sense that the value of that home should increase too.

But a lump of gold is a lump of gold. Sure, it’s possible to turn the gold into a fine piece of jewellery. That can add value to gold. But we’re not talking about that here. We’re talking about the changing price of an ‘unimproved’ lump of gold — gold bullion.

The answer of course is that gold isn’t rising because the composition of a gold bar has changed. The gold price is rising because the value of money is changing. To be precise, the value of central bank and retail bank created money.

One of the old arguments against the ownership of gold was that it didn’t pay interest. That, apparently, made it a bad investment. An investment Wall Street and Collins Street would laugh at you for making.

Oh how things have changed.

Earning nothing on gold was a terrible idea.

But earning nothing, or less than nothing, on government-issued bonds, well, that’s a different story.

Wall Street and Collins Street, after exercising their fiduciary responsibilities to do the best for their customers, have decided that earning less than nothing on government bonds is a darned good idea.

Earning minus 0.09% on Swiss 30-year bonds makes complete sense…even though a Swiss bond today may not be the same as a Swiss bond at some point in the future.

Who can tell what the Swiss central bank will do to bonds in the years ahead? Even if you’re happy to accept a negative yield, in the argument that you’d rather have the certainty of that than the uncertainty of…erm…something else, there’s still no certainty about what that certainty gets you — if you get what we mean.

In other words, the 30-year Swiss bond promises to repay the face value of the bond in 30 years, assuming you hold it to maturity.

But what will that be worth?

30 years is a long time. Anything can happen.

For instance, over the past 30 years, the value of the supposedly stable Swiss franc has declined 46%. You can see this on the chart below. The chart is the Swiss franc against gold. It shows you how many ounces of gold you could get for each 1,000 Swiss francs:



chart image

Source: Bloomberg
Click to enlarge


30 years ago, a Swiss clockmaker could have gotten 1.43 ounces of gold for his or her 1,000 Swiss francs. Today, that now elderly clockmaker can only get 0.765 ounces of gold.

That’s the devaluation of money. Take the chart back to the early 1970s, and the clockmaker could have gotten six ounces of gold for his or her 1,000 Swiss francs.

It goes to show you, even a currency which many consider to be a ‘safe haven’, isn’t really a safe haven. The conservative and sensible Swiss have sat idly by as their central bank have devalued their currency by 87% since the early 1970s.

The prospect of losing what seems to be a small amount of interest on a bond each year because it’s ‘safe’ may seem like a sensible idea to some.

The reality will be different when, 30 years from now, those investors realise that the certainty of a return may not quite be what they expected.

The reality TV candidate

Today is the beginning of the Republican National Convention in Cleveland, Ohio.

During our recent visit to the US, we saw several ads teasing the convention. The one we noticed the most was on CNN.

The first few times we saw the ad for the convention, we noticed it seemed odd, but we couldn’t quite figure out what it was.

Then it hit us. Folks have made the comment that the US presidential election feels more like a reality TV show than an election race.

The ads bear this out. Instead of stately and restrained, the ads are loud and brash (somewhat like Mr Trump himself), with soundbites from Mr Trump that strongly resemble a teaser for a reality show.

Our favourites include Trump saying, ‘What the hell is going on?’ and, ‘If you think I’m gonna change, I’m not changing.

Not that we’re complaining. We find it all quite amusing. The small ‘l’ liberals and socialists seem to be appalled that Trump could actually become president.

We don’t understand their disgust.

What makes Mr Trump any less qualified to be a US president than a Chicago community worker (Barack Obama), a movie actor (Ronald Reagan), an oilman (George W Bush), a peanut grower (Jimmy Carter), or a university professor (Bill Clinton)?

In the mailbag

Subscriber, Richard, writes:

In response to your article “Rome on the Potomac…”

It would appear your extra time in Washington DC (two days walking about) has definitely been of value, if for no other reason than providing you with some excellent insight into what is actually happening throughout the economic world. These so called “PHD guru’s” that are playing around with the economic cycle and in the process causing us all to be headed for the “Mother of all Recessions/Depressions”. Once the dam wall breaks there’s no amount of QE or interest rate fiddling that is going to stop the “Wall of Monetary Water” from going straight down the toilet!

False economies are just that, FALSE. Let the economy play out its path – this will eventually happen, but look out when it does this time.

Enjoyed your article.

And this from subscriber, Laura:

I note Kris Sayce’s comment today that he would like to spend his life reading and writing history. That’s fantastic news.

Could I ask Kris to research some economic empire collapses apart from Rome and Weimar (which have been done to death). How about Spain, Zimbabwe, etc? And smaller places. We have a lot to learn, and Kris’ help is much appreciated.

It appears your editor may have fashioned a rod for his own back.

Laura is right, Rome and Weimar Germany have been done to death in terms of analysis of their respective economic collapses.

We shall take Laura’s advice. We shall do as we encourage you to do: dig deeper, and don’t accept what you see on the surface.

Stay tuned.

Cheers,
Kris