- Fed will continue to print, no exit strategy
- Effectiveness of QE diminishing, but Fed won’t/can’t stop monetizing debt
- China is at risk from real estate bubble, but still growing, relatively strong
- Global economy isn’t growing much
- Remains positive on gold (since ’99)
- Indonesia, Philippines, Thailand stock valuations “in the sky” at 20-25x
Guest post by SovereignMan.com
[Editor’s note: Tim Price, Director of Investment at PFP Wealth Management in the UK and frequent Sovereign Man contributor, is filling in for Simon this morning.]
As Ben Graham, the father of value investing, observed, an investment operation “is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Challenged to distil the secret of sound investing into just three words, he advocated: “Margin of safety”. Unfortunately for all investors today, the margin of safety has all but disappeared.
To appreciate just how far away we are from normality or any remotely normal “margin of safety”, consider the chart below:
Click to view:
10-year US Treasury yields are at their lowest levels in more than two centuries. Even stranger is that these low yields exist when the US has never been deeper in debt (nearly $17 trillion for the on-balance sheet liabilities) and thus when the supply of Treasuries has never been as large.
Have the laws of supply and demand been repealed ?
If the US bond market is in a bizarre bubble, it is hardly alone. Consider the even longer data series below, a favourite of MoneyWeek’s Merryn Somerset-Webb, via Church House Investment Management.
Click to view:
In the more than three centuries’ history of the Bank of England, the base rate has
never been this low.
Right now, these western government bond yields are so low because western governments and their central banks are rigging the market in their own debt.
Governments issue debt, only to have their central banks buy it right back. This creates liquidity for commercial banks that can put that money to more productive use– like artificially inflating their stock markets.
Because market manipulation is normally illegal, the monetary authorities have coined a phrase to give their market rigging an air of technical sophistication: quantitative easing, or QE.
Look back at that chart of US Treasury yields. From the austerity post-war years through the go-go years of the 1960s and the stagflationary disaster of the 1970s, T-bond yields rose from roughly 2% to a grotesque 16% in the early 1980s.
But we are now back to 1945 era yields. Do we think the future outlook is for higher yields, or lower ones ? What does the chart suggest ?
This is a nightmarish environment to be practising Ben Graham-style value investing – because the margin of safety has been destroyed by central bank market manipulation.
Western government bond yields are widely held as the ‘risk free rate’ against which other investments can be assessed. Now there is no longer a risk free rate, only the yield available on hopelessly rigged government bonds.
The manipulation of bond markets has inevitable effects upon stock market valuations too; everything is relative. Cash as a meaningful investment choice has also been destroyed by central bank action (see, again, that chart of the UK base rate).
This means that we – and in turn our clients – are forced to take more risk than we would prefer even if our intention is simply to keep our heads above water.
Investors are now obsessed about the prospect of the Fed “tapering” down its bond
Having painted itself into such a corner, having become the prime mover behind both bond and equity market momentum, the Fed may never be in a position to taper anything.
Nevertheless, this is the hand we’ve been dealt and which we must play. We think there is now a significant risk that QE ends (whenever it does end) in a currency crisis.
Since central banks can barely afford to let market interest rates rise any time soon, they will keep the printing presses rolling instead– and most fiat currencies will be printed toward destruction.
So the fundamental rationale for holding gold is as robust as ever in this hopelessly distorted world. But as Pimco’s Mohamed El-Erian now asks, are the markets now beginning to lose confidence in central bankers ? We certainly have.
Courtesy of Sovereign Man.
According to BLS inflation statistics, the price of new/used cars is virtually unchanged since 1982. How is this possible, when the real price has multiplied? Through the miracle of hedonic adjustment, where the quality/features of a product affect the manipulated “price”. For example, if a 2013 Ford sedan has airbags and air conditioning standard, and the ’82 version didn’t, the price of the ’13 model is adjusted downward.
The manipulation of inflation data began in the 1980’s, accelerated in the 1990’s, and continues today with new initiatives such as a chained-CPI calculation of payments for social security. For more on this topic, see ShadowStats.com, which calculates current inflation as it was measured in 1980 and 1990.
All these changes result in a artificially lower view of inflation. And regardless of whether you agree with these changes or not, you should at least acknowledge that they make all comparisons to previous inflation data near meaningless.
Back in 2010, when the mysterious founder(s) of bitcoin, known as Satoshi was still active in forums, he/she/they had some interesting things to say about gold/PMs as currency, and how the metals compare to their new digital creation:
It’s the same situation as gold and gold mining. The marginal cost of gold mining tends to stay near the price of gold. Gold mining is a waste, but that waste is far less than the utility of having gold available as a medium of exchange.
I think the case will be the same for Bitcoin. The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used. Therefore, not having Bitcoin would be the net waste.
In another thread from August 2010, Satoshi posted the following:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
boring grey in colour
- not a good conductor of electricity
- not particularly strong, but not ductile or easily malleable either
- – not useful for any practical or ornamental purpose
and one special, magical property:
- can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.
Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.
I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.
(I’m using the word scarce here to only mean limited potential supply)
More on the founder, Satoshi Nakamoto, in the poorly-titled 2011 piece “The Rise and Fall of Bitcoin“.