Not worth the price of a box of cereal

  • Rich
  • Not so rich
  • Happy half-a-trillion

The doors are now open.

Port Phillip Publishing’s most radical, exciting, and unorthodox investment advisory is accepting members now.

Details are here.

The game is cryptocurrencies. It’s a subject that your editor freely admits he has close to zero knowledge about.

However, don’t mistake a lack of knowledge for stupidity or ignorance. Just because we don’t know the ins and outs of a subject, doesn’t mean we don’t know an opportunity when we see one.

Over the past few weeks, your editor has spent hours trying to familiarise ourselves with the subject matter.

What we soon realised is that as much as we think we know, it’s still barely 1% of the full story.

The good news is, we have someone on staff who can fill in us and you on the remaining 99%. That person is Sam Volkering. And starting today, his declared mission is to help ordinary Aussie investors to navigate the extraordinary world of cryptocurrencies.

If you’re even vaguely interested in this sector, you need to check out Sam’s latest work. You can do so here.


Overnight, the US markets were closed in observance of Independence Day.

In Europe, the Euro Stoxx 50 index closed down 12.34 points, or 0.35%. Meanwhile, the FTSE 100 fell 0.27%, and Germany’s DAX index lost 0.31%.

In Asian markets, Japan’s Nikkei 225 index is up 7.84 points, or 0.04%. China’s CSI 300 is up 0.34%.

In Australia, the S&P/ASX 200 is down 16.42 points, or 0.28%.

On the commodities markets, West Texas Intermediate crude oil is US$46.99 per barrel. Brent crude is US$49.55 per barrel.

Gold is trading for US$1,225.81 (AU$1,609.46) per troy ounce. Silver is US$16.16 (AU$21.23) per troy ounce.

The Aussie dollar is worth 76.16 US cents.


From Bloomberg:

A single buyer snapped up all A$800 million of Australian government bonds sold Wednesday, the largest ever amount bought by one bidder in auctions that date back to 1982.

The sale of a nominal bond to just one entity hasn’t happened since August 2013, according to data from the Australian Office of Financial Management, government funding arm. The 3.25 percent notes maturing in April 2029 went off at a yield of 2.72 percent, attracting a bid-to-cover ratio of 4.47, the AOFM said on its website, without identifying the buyer.

We’ll hazard a guess at the buyer — a central bank.

Specifically, two spring to mind. The Bank of Japan, and the Swiss National Bank (SNB).

We can’t say for sure, but we’ll keep an eye on the SNB’s quarterly and annual reports.

At the end of the first quarter of 2017, of the 747 billion Swiss francs the central bank held in assets, 7% of this was in currencies classified as ‘Other’.

That includes the Aussie dollar, Chinese renminbi, Danish kroner, Korean won, Swedish kroner, and the Singapore dollar.

That means just over 53 billion Swiss francs are apportioned across those currencies. Adjusted for the exchange rate, that works out to around AU$72.1 billion.

Furthermore, given that the Swiss can just create francs out of thin air, and then convert them into Aussie dollars, it would be quite simple for them to stump up the AU$800 million to clean up the Aussie government’s latest bond offering.

No effort required…except for the simple push of a button. Hey presto! Free money…with which to buy an asset with an effective yield of 2.72%.

Who wouldn’t do that if they had the power to do so?

Of course, those wily foxes at the SNB don’t just buy bonds. They love stocks too. 20% of the SNB’s balance sheet is comprised of equities.

That’s 149.4 billion Swiss francs. That’s over AU$203 billion. Enough to buy the whole of Commonwealth Bank of Australia [ASX:CBA], and still have change left over to buy Telstra Corporation Ltd [ASX:TLS] outright.

The canny Swiss don’t reveal the yield they’re making on their stock portfolio. But given the origin of the cash to buy those stocks — free money — anything better than zero is a good return.

The most interesting thing to note comes when you take a closer look at the SNB’s balance sheet. And we can do so, because — unusually for a central bank — the SNB is a listed entity.

To give it it’s proper title, it’s the Schweizerische Nationalbank [SW:SNBN]. If you’re so inclined, you could buy shares in it today.

If you had had the foresight to do so 12 months earlier, that would have been even better. The stock price is up 71.4% since then:

chart image

Source: Bloomberg
Click to enlarge

Again, isn’t it amazing what the ability to print one’s own money can do?

But back to the balance sheet. Given that the Swiss National Bank is the central bank…the purveyor of the national currency…the printer and minter of its notes and coins…you’d think it would carry a few bob on its books.

Alas, not.

The last time the SNB reported ‘Cash & Cash Equivalents’ of greater than zero was in 2013.

Makes sense. What’s the worth of cash held as bank notes and coins anyway? Nothing. Not if the seemingly sole purpose of the bank is to devalue its formerly revered currency into the ground.

In contrast, the SNB has seen the value of ‘ST and LT Investments’ (that’s short term and long term) investments rise. In 2011, these stood at 348 billion Swiss francs. As noted earlier, it’s more than double that today.

What’s our point with all this?

To be honest we’re not sure. Much smarter folks can likely give you a better explanation.

For a start, we don’t even know that it was the Swiss National Bank that swallowed up the latest Aussie debt issuance. If it wasn’t then the last 700 words or so have been a complete waste of your and our time (but boy, it was good space filler).

Well, not a complete waste of time.

Regardless of who’s doing the buying and who’s doing the selling, there’s still the whole point that what central banks are doing all around the world is mighty dangerous.

Capital and investment should be the result of the exertion of physical or mental power.

It should be the result of thoughtfulness, trial, error, derring-do, innovation, disruption, creative destruction, and all sorts of other elements of human action.

What capital and investment should not be is a dull, grey man (or woman), sitting at a keyboard in Sydney or Geneva, entering a 10, 11, or 12 digit number into a computer, and as a result ‘creating’ new wealth.

Because it’s not creating wealth. Maybe for some. For those in government, who get their hand on the newly printed readies. But for everyone else, it creates inflation. It creates poverty. It creates misery.

And, ultimately, it will create the mother of all financial collapses.

On which note. Make sure you tune in to a special event we’re holding on the evening of 20 July. Details will be available next week.

Not so rich

And on a not entirely unrelated note, the following story from the Financial Times struck us as interesting:

Three-quarters of UK university leavers will never pay off their student loans, even if they are still contributing in their 50s, according to the Institute for Fiscal Studies.

Graduates in England were saddled with the highest student debt in the developed world, the IFS said, adding that the benefits of earlier reforms to the tuition fee system — which took pressure off the lowest-earning students — had been wiped out by subsequent changes such as the replacement of maintenance grants with loans.

The IFS said that because graduates repaid their student loans at 9 per cent of their earnings, above a certain threshold, and over a 30-year period, in many cases interest accrued on their debt too fast for repayments to keep up.

One key finding is that because interest rates on student debt are very high — up to 3 per cent above RPI — the average student accrues £5,800 of interest while studying, meaning they borrow £45,000 but have a debt of £50,800 on the day of graduation.

Again, we have no idea whether that’s relevant to anything. Except for the fact that the Swiss National Bank seems to have done quite well from nearly 10 years of money-printing, while students appear not to have fared quite so well.

Happy half-a-trillion

Finally, happy half-a-trillion to you. The following image shows the Australian federal government’s debt balance. Drinks all round.

chart image

Source: Australian Office of Financial Management
Click to enlarge

On that note, see you tomorrow.