Controlled Monetary Chaos

Back in March, Port Phillip Publishing held a two day investment conference unique to Australia…the World War D conference . You just don’t see speakers of this calibre in one room in this country.


Well, the financial industry (think super funds, investment banks) usually put these things on. Their sole purpose is to peddle a ‘don’t worry, be happy’ line. ‘Invest your cash, leave it to us, it’s all under control.’

Well, it’s not all under control. The West is going at it against Russia, using Ukraine as a pretext. The US in particular is concerned about Russia and China joining forces, especially in an economic sense, which could undermine the power of the US dollar.

Actually, Russia and China are joining forces right now. The two nations, along with a number of ‘Stans’, are currently conducting the largest series of military exercises ever staged between the two nations. It’s happening in Inner Mongolia under the auspices of the Shanghai Cooperation Organisation.

But that’s not all. Tensions are heating up between China and the US in the South China Sea…the US deployed the USS Carl Vinson to the region on Friday. And, just like clockwork, the Middle East powder keg is in the ignition stage…again…

The biggest war of all though, the war against risk, is on in earnest too. Central banks the world over are doing their best Jedi Knight impression and telling the world not to worry about risk. They have eliminated it from modern financial markets.

If you think that line is rubbish, which it is, you’ll want to take a squiz at what the speakers at our conference had to say. We’ve just released our World War D conference DVD…you can watch a preview of it here.

Find out why one of the speakers expects a big correction in the third quarter (which is now) as the QE taper finally removes excess liquidity from the financial system. Or what Jim Rickards thinks will happen to the gold price when the global financial system inevitably explodes.

It’s not all doom and gloom though. Kris Sayce gives it to the ‘fake contrarians’ for ‘waiting for the crash’. Sam Volkering talks about the possibilities of technology. And Phil Anderson is wildly bullish based on his cycle analysis.

There’s plenty of food for thought in all the presentations. Get your copy here

Moving back closer to home, reporting season all but wraps up this week. Following the trend of the past few years, earnings this year have been OK but not great. Which is what you’d expect for an economy generating below trend economic growth.

I can’t see things getter better in 2014-15 either. Not from a fundamental perspective anyway. That’s because the 2014-15 financial year will bear the brunt of the sharp drop off in mining investment spending. Along with continued falls in Australia’s terms of trade (the iron ore price is back near its June low already…so much for the bounce), it doesn’t bode well for employment or economic growth.

It should go without saying that the end of the greatest mining boom in the nation’s history will come with a hangover. It need not be raging, but there will certainly be a dry mouth and a headache.

It will show up in weak to negative national income growth. How weak or negative depends on many things. But according to a recent research paper from the RBA, it won’t be too bad. Or at least that’s what I think they are trying to say.

The chart below, from the RBA’s study, shows the effect of the mining boom, with the shaded area being the post-boom estimates. As you can see, the boom created a big gain in household income, and to a lesser extent, an increase in national purchasing power and real GDP growth.

Happily, the RBA sees a post boom plateau effect taking shape, which is not unusual. I’ve never really seen a central bank forecast anything other than a sanguine outcome for any type of financial shock.

That’s because they use ‘models’ that can’t possibly replicate the real world. I don’t know how the next few years will play out for Australia in a post mining boom environment. But I’m sure they won’t play out the way the RBA see it. It’s just too neat.

We’re in a unique period of ‘controlled monetary chaos’. Central banks are playing a massive confidence game with the markets, and Australia is not immune from the fallout. Our dollar is much higher than it ‘should be’, a victim of the currency wars currently underway between the dollar, yuan, euro, yen and pound.

Speaking of which, the US seems to be losing the battle at the moment. The greenback is the strongest major currency in the world, or at least it has been lately. Check out the chart below. The US dollar recently broke out above resistance and surged higher.

The dollar is now ‘overbought’ and due for a correction, but the trend is up, which bodes ill for commodities and precious metals right now. Commodities are usually an ‘anti-US dollar’ trade.

The US is losing the currency wars

The dollar’s strength is due to the Fed’s ongoing taper program and expected interest rate rises next year. In the world of currencies, it’s all relative, and relative to any other major currency, the greenback doesn’t look too bad right now.

But the big question is…what will the taper and higher interest rates do to the US and global economies? Don’t forget, the Chinese yuan is loosely pegged to the US dollar, so tighter US monetary policy translates into tighter conditions in China as well. The effects will be widespread.

We’ll look into what those effects might be tomorrow, but for today, we’ll leave you with this chart and something to ponder…

The chart shows US official interest rates as set by the Fed since 1950. The shaded areas indicate recession. In every single instance of recession, the Fed tightened monetary policy in the lead up period.

Does that mean a recession cannot happen now that interest rates are so low…and that the Fed will only tighten in baby steps?

We’ll explore the topic in detail tomorrow.


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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