Everything You Thought You Knew Is Wrong

Monday, 28 September 2020
Melbourne, Australia
By Greg Canavan

A big thanks to Woody for filling in for me on The Insider last week.

As he mentioned, I was in week one of hotel quarantine with the family and needed some respite while I focused on getting the monthly issue of Crisis & Opportunity out to subscribers.

We’re still in quarantine in the Sydney CBD. It’s very boring, especially for the kids. But there are family, beaches, and no face masks on the other side, so worth the idleness.

On the plus side, the weather is nice and sunny, and we have a balcony to enjoy fresh air and city views. It could be far worse…

In last Friday’s Insider, Woody quoted from the upcoming Bonner-Denning Letter report. Here’s the key snippet:

The expansion in credit begins to change inflation expectations held by the public. As Austrian School economist Ludwig von Mises pointed out in Human Action, the increased inflation expectations in the public are based on a simple, visceral, psychological observation that money is losing value. The inevitable result is what Mises called “The Crack Up Boom,” where a spike in inflationary expectations leads to a system crash. That “system crash” includes the breakdown of civil decorum — and even civilization itself.

This is basically what the last few issues of The Rum Rebellion were about. That is, a debased currency leads to debased morals…not least amongst our elected leaders and unelected bureaucrats.

I included this chart in today’s issue of The Rum Rebellion. It shows the ASX 200 denominated in an ounce of gold over the past 10 years.

Source: Optuma

[Click to open in a new window]

This tells you the REAL performance of the Aussie stock market (denominated in sound money) has been abysmal. It’s lost nearly half of its value since the GFC. In other words, the rise in the Aussie market since 2009 is just a monetary illusion.

In my view, this is a result of what happens AFTER the crack-up boom.

We had one from 2005–07, with the worldwide inflation of property prices. People saw property prices inflating drastically. This led to a huge inflation of credit to obtain land (property).

It clearly led to a system crash in 2008/09.

The global financial system hasn’t recovered since. It’s needed constant government and central bank support.

In my view, this system is irretrievably broken.

The prospect of another crack-up boom, driven by banks creating huge amounts of credit, is years away.

That’s because the global economy is in varying degrees of recession/depression. Banks are in no mood to take on additional risk. Loan growth is shrinking or at extremely low levels.

You don’t go from this to crack-up boom overnight. It takes years for the psychology of borrowers and lenders to change.

That’s why I think you should take last week’s news of the relaxing of ‘responsible lending’ laws with a grain of salt. Yes, the banks all rallied very strongly on the day. But my guess is a lot of that was due to short covering. This is where those betting on the banks going lower decided to buy back their short position.

It’s going to take time for economic conditions to produce aggressive borrowers.

But give it a couple of years and things will look very different.

This is why I think the banks are in a bottoming process. The chart below shows the ASX 200 Financials Index in a downward trend. They made a major bottom in March. A recovery and period of consolidation followed, but the index broke down out of that consolidation period in early September.

The big question is whether the index made a ‘higher low’ last week, or whether further falls are ahead? Either way, based on consensus forecasts, banks are reasonably good value here. I’m keeping a close eye on them.

As I say to subscribers of Crisis & Opportunity, the time to buy banks is during a recession. It’s really just a matter of getting the timing right.

Source: Optuma

[Click to open in a new window]

Getting back to this crack-up boom theory…

I think it, and the inflation that it produces, is still some years away.

But what about central banks and their unending QE programs? Won’t they create runaway inflation?

The answer is no.

Here’s why…

The Fed (or any central bank) isn’t printing money. They just tell you they are because they desperately want you to believe it.

Central banks buy government bonds (or other assets) off banks and credit their accounts with bank reserves…not cash. The Fed holds these bank reserves in an account, they are not available to buy other assets with!

If QE really was money printing, don’t you think it would have created inflation by now? Don’t you think bond yields would be much higher, especially in the face of so much issuance by the government?

QE is a scam to make you believe that the Fed can create money and therefore inflation. It can’t. Only banks can, by lending to individuals and businesses. QE is simply an asset swap. That’s it.

I’ve been guilty of calling QE money printing in the past.

I won’t do that again. As astute investors, we need to reject falling into the trap of believing something because everyone else believes it.

The reason everyone believes it is because it makes so much sense…on the surface. But after studying this for months, and listening to some very smart people who know the financial system much better than I do, I know it’s wrong.

Perhaps you disagree?

If so, or if you have any questions about this very important financial issue, I’d love to hear from you. Email me at letters@portphillipinsider.com.au.

Continue below for Murray Dawes’ ‘Week Ahead’ update. In it, Murray looks at a biotech company that wants to use synthetic CBD to treat acne and why he thinks they are heading higher.


[WATCH] Buyers Returning to This Synthetic Pot Stock
By Murray Dawes


[This biotech company wants to use synthetic CBDs to treat acne and they’ve bounced from 2.3 cents to 9 cents in the last few months. Click on the picture to find out why Murray thinks they are heading much higher.]

I have been showing you a few interesting exploration companies lately and a couple of them are up more than 50% in a matter of weeks.

I start today’s video by looking at the technical situation in each of the stocks I have mentioned over the last few weeks. I look at Czr Resources Ltd [ASX:CZR], Dreadnought Resources Ltd [ASX:DRE] and Nova Minerals Ltd [ASX:NVA].

I then show you a little pharmaceutical company that is testing out different uses for its synthetic cannabinoid (CBD) product.

They are testing out the antibacterial properties of the synthetic CBD and are approaching phase 3 for an acne solution.

They also released some results from tests on human skin explants that looked very promising for dealing with golden staph during operations. Another area they want to look into is the possibility of helping sufferers of rosacea.

The addressable markets for their products are large but this is a high-risk stock. It recently sold off from 25 cents to 2.3 cents, and has since bounced back to 9 cents with strong buying evident over the past few weeks.

If a monthly buy pivot is confirmed this month I will be eyeing off any retracements as a buying opportunity.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader