When we knew the census was in trouble

  • Regulate the toilets, regulate the wash basins
  • Volatility set to soar…or not?
  • In the mailbag

We knew the online Census system wouldn’t be able to cope.

We knew it as soon as we read this comment in the Age last week:

Asked about the ability of the online census database to cope with such high traffic numbers, an ABS spokesman said online could handle “1,000,000 form submissions every hour. That’s twice the capacity we expect to need.”

Hmmm. So, the Australian Bureau of Statistics (ABS) only expected 500,000 form submissions each hour. That would mean a total of just three million Census surveys completed between the hours of 6pm and midnight.

Assuming that there are around nine million households, it would have meant six million Aussies would decide not to complete their Census surveys until at least the following day.

Remember, by and large, Aussies are a law-abiding lot. Aussies trudge to the polling booths to cast their compulsory vote at elections. And when it comes to completing the Census, Aussies obediently, erm, obey.

If the ABS really wanted to make sure the system could handle the traffic, they would have needed a system that could cope with more than two or three million submissions an hour.

Alas, it seems the bureaucrats aren’t quite as smart as they’d like you to think. Given that, do you now have more or less faith that your personal data is safe in the ABS’s hands?

Just asking. On to the markets…

Markets

Overnight, the Dow Jones Industrial closed up 3.76 points, or 0.02%.

The S&P 500 gained 0.85 points, or 0.04%.

In Europe, the Euro Stoxx 50 index added 46.26 points, or 1.55%. Meanwhile, the FTSE 100 gained 0.62%, and Germany’s DAX index added 2.5%.

In Asia, Japan’s Nikkei 225 index is up 24.81 points, or 0.15%. China’s CSI 300 is down 0.21%.

In Australia, the S&P/ASX 200 is down 11.5 points, or 0.2%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$42.69 per barrel. Brent crude oil is US$44.98 per barrel.

Gold is US$1,341 (AU$1,749) per troy ounce. Silver is US$19.94 (AU$26.01) per troy ounce.

The Aussie dollar is worth 76.7 US cents.

Regulate the toilets, regulate the wash basins

Your editor is in the southern Irish city of Waterford for a business meeting. We return to Dublin Wednesday afternoon, local time.

Here’s the view from our Waterford hotel window, looking out onto John’s River, which flows into the main River Suir, which itself flows into the River Barrow, and from there into the Celtic Sea (in Gaelic, Muir Cheilteach):





Source: Port Phillip Insider
Click to enlarge



Our hotel information book tells us that Waterford is Ireland’s oldest city, founded by the Vikings in 914.

We’ll take their word for it.

Waterford is, of course, famous for its crystal glassware. As tempting as it may be to buy a vase or two, we’re not confident that it would get home in one piece, after our friends at British Airways and Qantas have had their way with it.

But our hotel information book tells us more about Ireland. Or rather, the regulation of Irish hotels. Welcome to the world of Fāilte Ireland, the National Tourism Development Authority.

According to Irish law, the maximum our hotel here in Waterford can charge ‘per person sharing’, with bath/shower and toilet facilities, is 129 euros.

The maximum the hotel can charge for a continental breakfast is 7.50 euros. And upon pain of death, the hotel must not charge more than 12 euros for a full Irish breakfast.





Source: Port Phillip Insider
Click to enlarge



But that’s not all. Without the interference of the Irish government, two hours up the road in Dublin, the hotels of Waterford (and elsewhere) would clearly be incapable of knowing how many toilets to install on the premises.

Regulation 9.3 of the Hotel Classification Scheme, advises that a one-star hotel with a capacity of 51–100 people, must have a minimum of two WC’s, two urinals, and two WHB’s in public areas.

(Before you ask, no, we don’t know what a WHB is.)

In order for a hotel to achieve five-star status, it must have a ‘Wash basin area [that is] fitted with shelving or have ample flat surfaces for toiletries’.

The good news is, if a hotelier only wants two, three or four-star status for their hotel, they don’t have to worry about meeting this stringent regulation — wash basin area with ample flat surfaces be damned.

[Phew!]

Volatility set to soar…or not?

So, are stocks about to crash…or will they keep going higher?

Bloomberg has the answer, according to this story:

Professional speculators are making record bets in volatility markets that U.S. stocks will keep rallying.

Hedge funds and other big traders tracked by the Commodity Futures Trading Commission have pushed net short positions on CBOE Volatility Index futures to 115,000 contracts, the most since 2013, data compiled by Bloomberg show. Shorting volatility is effectively a bet equity prices will rise since the VIX and stocks move in opposite directions 80 percent of the time.

Interesting.

You may be familiar with the CBOE Volatility Index — VIX.

The VIX measures the change in value of options prices against the US S&P 500 index.

The greater the perception of risk in the market, the more investors and traders will pay for an options contract. This feeds into the implied volatility of options contracts, which affects the level of the VIX.

According to Bloomberg, speculators believe the VIX will fall further. That’s why they’re selling short the VIX.

They may be right. Who are we to argue? However, to satisfy our curiosity, let’s check out the 10-year price history of the VIX in the chart below:



chart image

Source: Bloomberg
Click to enlarge


Right now, the VIX is at 11.66. Over the past 10 years, it has been lower…twice. From late 2006 to early 2007, it fell to 9.89. In July 2014, it fell to 10.32.

Could the VIX fall further? Of course it could. It could fall to or below the lows from 2007 and 2014.

Looking at the chart above, it would be easy to say that the low level of the VIX can’t last. It would be easy to say that if history repeats, the VIX will soon rebound and soar higher — that would be a result of slumping stock prices.

However, what have we learnt in recent years? That’s right, just when we think central banks can’t suppress or repress interest rates any further…they suppress them further.

Who would have thought Spanish 10-year bond yields would today be lower than 1%? Or that Swiss 10-year bond yields would be minus 0.587%?

Or that German 10-year bonds would yield minus 0.08%?

If central banks can squeeze bond yields lower, who’s to say that central banks won’t manipulate the market, so that volatility stays lower for longer?

We’ll see. Given a choice, we’d still bet on volatility shooting higher sooner rather than later.

We’re sure the central banks believe they can control the market on a whim. They’ve shown that with the way they’ve played with interest rates.

But their luck can’t last. Professional speculators could be right. But if it’s a choice between backing pro speculators or backing history, we’ll take the side of history every time.

Volatility is near a long-time low point. Keep watch for its next move.

In the mailbag

The letters on digital money continue. And one subscriber, Daniel, appears to be from the younger generation, who understands what is really going on in the world’s economy. But more on that in a moment.

First, this letter from subscriber, GL:

Just wanted to add.

Would it not be a good idea for everyone to keep some spare coins, either Silver or Gold and use that as the new substitute for cash.

People just going back to creating THEIR OWN MONEY (OLD FASHIONED BUT STILL USEABLE).

Yes. Yes it would.

An anonymous subscriber writes:

I have no doubt at all that the intent is to eliminate cash. It sounds o-so-sensible and most people have largely done so themselves anyway. The problem is that the average man in the street simply cannot conceive of a world (irrespective of how many times history has shown us it) where governments are malicious and are constantly working at stealing your money. Sadly, they don’t even realise they already live in that world, they don’t know that inflation is a deliberate government construct which is constantly doing that now, and they haven’t travelled to the places I have where bad governance has completely ruined nations and totally wiped their populations savings.

I expect cash to go, gold to become illegal in private hands (yes, I bought all mine anonymously and no, I won’t be handing it in if required to) and anything they can’t steal to be taxed punitively.

Last time I came back from a stint of [work] in the middle east, my counterparts asked me what I had learned. I told them “trust no one, buy guns, buy gold…”, and I wasn’t kidding.

Subscriber, Brett, writes:

Like your work. With the eventuality that the RBA follow the rest of the world and move to a digital currency, you have said that gold will be a good hedge. I fully agree, but I am not clear on how we would transact with gold and silver in a digital economy. Would we sell our gold in exchange for the digital currency or trade outside of it? I would like you to expand on that further if you would.

Gold aside, given human nature, if digital currency was introduced into Australia, would we not transact in say NZ dollars similar to that of Thailand where Baht is the official currency and US dollars are more sort after?

We can’t say exactly how it would work, that would be for the market to decide. But in short, it wouldn’t be difficult to create a gold-backed digital currency.

Banks would take deposits of gold, depositors could then transact electronically. The bank would then adjust account balances to reflect whether you had increased (saved) or decreased (spent) the amount of gold in your account.

Simple.

Then this letter from subscriber, Frank:

We all know what money is, or do we?

Most people think that money is merely an accepted form of easily transferred value which enables trade, but money is not money. Money is power.

Consider this, you work to get money so that you can live, pay your mortgage, go on holiday etc.

You work because you don’t have enough money at hand to do as you wish and as long as that is the case you don’t have complete control over your life. Someone else has power over you, but if you had, say, ten or twenty million you have quite a lot of power over your life if you didn’t squander it. Gone is the bank’s power over your mortgage, gone is your boss’s power of employment. You have independence, security, and power. Ask yourself, why do the world’s richest people keep trying to accumulate more wealth? They have far more than they could ever spend in several lifetimes so just having more money seems pointless, but in terms of power, now that’s an entirely different matter.

Seen in that light it becomes obvious that no government can exist if the population is independently wealthy. They would have no control, no power over people. In this context digital money must seem a wonderful proposition to those in power.

All I know is that it scares the hell out of me.

Finally, let’s get to that letter from subscriber, Daniel:

I’m young and generally fit into the age bracket that many (older) generations like to say “work hard, stop partying and stop complaining”.

I work really hard both paid and volunteer, don’t party/drink/smoke, and try to get ahead (hence, subscriptions to services including yours and investing).

But something doesn’t seem right. I have looked at my “borrowing capacity” and it is far, far worse compared to what my parents had to do to get into property 30+ years ago (note, we would fit somewhere into the lower half of middle class – not well off by any means). That is despite me working harder for a better education and better employment (comparatively) to them at the same age.

I can’t remember where I read it, but the opinion certainly rang true to me that the baby boomers have engineered a Frankenstein’s monster economy, ridden on its’ coat tails, and then as it all starts to implode they blame the next generations saying “work hard and you can have it too”, all while effectively pricing us out of most wealth creation tools.

I don’t want to scream “it’s not fair” — because I’m not afraid to work hard — but to get ahead at all these days seems downright impossible, unless you are gifted a large, rapidly inflating asset (like a property funded on the backs of rich mum & dad). Yes, there are exceptions to every rule, but I know that I am not the only person in my age/background struggling. So how politicians of the majors think they will get my generation to vote for them, after screwing us over, is beyond me. You see that with the recent election outcome — split down the middle, with swings to each extremity.

While digital money does sound far-fetched, I wouldn’t put it past the central banks and politicians of the world to try and get it up. Whether they succeed though, or (as one reader put it) blood ends up in the streets… Well that’s another thing. Could it be the straw that finally breaks the back of the 99%? Sadly, forcing people to spend or effectively be taxed simply will force people out onto the risk curve – either through riskier investments that lead to capital destruction anyway, waste money on purchases that they can’t really afford, or by buying gold and hiding it in the house…which will lead inevitably to crime…bigger police forces…more rioting…more violence…thought-crimes…Newspeak…starting to sound a little 1984-ish.

One more — if people are discouraged from saving, they may no longer save money for a rainy day. With automation on the rise consuming more jobs, and with full time employment stagnating (or even dropping in some cases), more people could be more reliant on welfare as they no longer have savings for the rainy day. I am a fan of having a safety net for legitimate needs — but digital money in my mind will actually force more people onto it.

The economy — both here and worldwide generally — to me has may alarm bells ringing, and I think it will not end well. How to read it… I’m lost, but trying my best.

While I don’t always agree with your views of the world (of course, it is good to have my beliefs challenged regardless), I do enjoy reading your economic analysis — I have learnt a lot about how things fit together economically in a short space of time thanks to your newsletter and that of The Daily Reckoning. Thanks!

Keep going with your thought process Daniel, you’re getting it.

The last 40 years has seen a huge bubble in various asset prices — house prices, stock prices, bond prices, and more.

It’s as a result of central bank manipulation of the money supply.

Baby boomers themselves aren’t to blame. They were simply in the right place at the right time to take advantage of the circumstances.

Anyone would have done the same in their position.

The trouble is that the long boom will fade, and a long bust will emerge. In our view, that outcome is inevitable. The only issue is that we don’t know who will suffer and who will benefit from the long bust.

For those in the wrong place at the right time, it will be devastating. However, it will also likely create opportunities…but for whom?

We only wish we could give you the answer.

Cheers,
Kris