Competing for Inflation Honours

This week’s Daily Reckoning starts with something a little different.

It’s more of a story than anything. Not one that you’ll really be able to emulate. But it’s worth considering in the ‘anything is possible and doesn’t the world work in a weird way’ sort of story.

It came to mind last week. Bill Bonner wrote in one of your Markets and Money essays that the sale of a Paul Gauguin painting had just set a new record in the art world. The painting below, the 1892 Nafea faa ipoipo? sold for $300 million.

The $300 million Gauguin painting

I had no idea about Gauguin’s story until recently. Sure I’d heard the name before, but I never knew about the extraordinary background to his famous paintings.

It started with a lunchtime visit to the local bookstore in Albert Park, just down the road from DR HQ. It’s one of the few places not selling overpriced food or coffee on Bridport Street.

I had never read any of Somerset Maugham’s novels, so when I picked up The Moon and Sixpence and read the back of it, I thought it would be an interesting read. It’s a fictionalised story of the life of Paul Gauguin, and what a story it is.

Although the fictional story was based in London, it turns out that Gauguin was a middling stockbroker in Paris up until the age of 40. That’s when he decided he’d had enough. He left his wife and kids and kicked off a career as a struggling artist.

And struggle he did. Gauguin’s paintings never really gained any great celebrity while he was alive. He painted because he needed to, not because he wanted to. He was driven by an ideal, and it was in Tahiti that he finally found it. That’s where the inspiration for many of his works came from, including the one above.

As so often happens with great works of art and literature, Gauguin’s paintings started to gain prominence after his death. On reflection, the art world realised there was something incredibly unique and ground breaking in the works.

His paintings, which he hardly even exhibited or sold while he was alive, suddenly became feted. And Paul Gauguin became known as a famous artist.

So great, in fact, that his works are now prime beneficiaries of the great global inflation of the early 21st century.

Make no mistake — we are in a massive inflationary period. All this hand-wringing about deflation is just a smokescreen for central bankers to continue a disastrous experiment with monetary policy.

RBA boss Glenn Stevens is the latest to get in on the act. In a speech to the House of Reps on Friday, Steven’s made it pretty clear that he’s more concerned about short-term economic growth considerations than the growing financial instability caused by prolonged historically low interest rates.

Developments in the Sydney market remain concerning, but in the end we did not see these trends as overwhelming a case for a further easing in monetary policy that was made on more general grounds.

In other words, a house price bubble in Sydney is the price we’ll have to pay for a general decrease in borrowing costs around the country…which isn’t really working all that well anyway.

Steven’s did ‘note’ that APRA, the banking regulator, was thinking about doing something if lending standards got out of whack.

Needless to say, APRA hasn’t formally announced anything. Whatever they’re contemplating, you can clearly see the hoof marks in the ground from the barn door all the way to the horizon.

If APRA wants to emerge from this unique period of monetary history with a shred of credibility, they need to do something NOW. Interest rates are going lower and everyone knows it. That’s why the stock market jumped 2% on Friday…it was in response to Steven’s comments that the punchbowl is due another bottle of liquor.

This will lead to an absolute frenzy on the east coast (well, Sydney and Melbourne) housing market unless APRA takes aggressive steps to rein in the speculation. So far, all you’re getting is ‘APRA is working on doing something at some point…’

Until then, party on!

Chris Joye at the Financial Review is one of the few mainstream journalists talking sense on the topic of interest rates. If you’re an asset owner, you might like the thought of lower interest rates. But it’s going to cause untold damage to the financial system and economy in the years to come.

From Joye:

Central bankers are taxing future generations to superficially stimulate the present. It’s classic human hedonism or, more technically, hyperbolic discounting. The economy is like a human body. If you fall sick, there’s a case for temporary medicine to mitigate the malaise and facilitate recovery. The policy analogy is lower interest rates and budget deficits. But if you dope up the patient on extreme quantities of drugs for long periods, you actually start damaging the body’s capacity to heal itself. Rather than relying on its innate ability to repair, the body becomes addicted to external bailouts. And the medicine morphs into the problem.

Imposing excessively stimulatory interest rates for unnecessarily long periods (it is eight years since the GFC first hit) undermines the regenerative qualities of the economy that are the cornerstone of long-term productivity growth. Ridiculously cheap money inflates the value of leveraged assets to unsustainable levels, sucking scarce people and capital away from other businesses. Debt-laden firms are rewarded while the prudent are punished.

In this desire to keep everything afloat, Australia’s economic mandarins ignore or try to fight the one constant of economic evolution — periodic recessions — which as Joye says are ‘precisely what the economy requires every so often in order to replace bad businesses with good ones’.

Where is this craziness leading us? No one really knows. But history tells you that monetary inflations always lead to social upheaval, revolution and, in many cases, war.

The mainstream media and the bureaucrats they serve constantly warn about the dangers of deflation. But asset price inflation is the biggest risk to the global economy. And it looks like Australia is joining the asset price rush, with the stock market now competing with the property market for asset inflation honours.

If the belief in low interest rates as being the elixir for everything holds, then we could be in for another year or so of seemingly endless growth in ‘wealth’.

Join in if you want to…but remember to have an exit plan. You’re going to need it.


Greg Canavan+
for Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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