The Melbourne Cup and Global Monetary Policy

The 2014 Melbourne Cup has been described as one of ‘triumph and tragedy’.

A German horse named Protectionist blitzed the field to win by an impressive four lengths.

The pre-race favourite and Caulfield Cup winner, Admire Ratki, ran hard early but upon rounding the final bend he laboured. The Japanese horse finished 25 lengths behind the second-last horse. Sadly, Admire Ratki died soon after returning to his tie-up stall.

Life can be cruel. It can also be ironic.

As I watched the events unfold at Flemington, it struck me how the present day global financial markets are not that dissimilar to the Cup race.

The Financial Markets Cup is a truly international event.

The American entrant, ‘ZIRP’, trained by the Federal Reserve, is a stayer. But there’s been a recent jockey change. Bernanke dismounted earlier this year, and Janet Yellen replaced him. Chairwoman Yellen has the same riding style as her predecessor. She sits high in the saddle and is not afraid to use the whip when required.

The European horse, ‘Whatever It Takes’ from the European Central Bank stables is a bit of a show pony. He prances a lot, but his German part-owners keep him somewhat in check. Mario Draghi has been in the saddle since November 2011.

Japan’s entrant in the big race is ‘Abenomics’ — a horse with a long track record of promising the punters a lot but only delivering disappointment. Bank of Japan Governor Haruhiko Kuroda is Abenomics’ latest jockey. Japanese Prime Minister, Shinzo Abe, Abenomics’ owner, gave Kuroda the ride on the strict proviso he followed, to the letter, Shinzo’s instructions.

The People’s Republic of China have ‘Centralised Planning’ in the big race. To date, Centralised Planning has been a huge success. In recent years, every other horse has been able to hop into Centralised Planning’s slipstream. No one is quite sure who’s the real jockey of the Chinese thoroughbred. It appears to be a team effort.

All the above horses are government owned — paid for by the taxpayer.

The only independent international horse entered into the race is ‘Free Market’. This once proud and strong stallion has been gelded, hobbled and sedated to such an extent it is a mere shadow of its once feisty self.

The investment bank bookies have ‘Free Market’ at long odds to win the cup. They have been given the wink and nod from the owners, stewards and stable boys…the fix is on. Don’t bet against the central bank trained horses. If you do, it’s a losing bet.

We pick the race up at the 2009 furlong. The debt weight in the saddle bags of the four government owned front runners saw them stumble badly. Free Market had taken the lead. The bookies went into meltdown. They had huge bets placed on ‘Sub-Prime’ — the sire of ZIRP.

The bookies were too big to fail. The racetrack was under threat of being closed down. Surely cleaning out corruption was a good idea? No. The owners needed a fixed race. They’d made big promises to the punters. Failure to deliver would threaten the governments’ taxpayer funded ownership models. Socialism was under threat. This could not be tolerated.

The consensus was ‘Free Market’ had to be hobbled. The horses were moved over to join ‘Abenomics’ on the zero bound race track.

The zero bound race track is a unique piece of landscaping. ‘Free Market’ has to run uphill while all the other horses get to run downhill. Hardly seems fair to the punters with their hard earned on ‘Free Market’. But their cries of ‘protest’ are drowned out by the Wall Street and ‘mainstream media’ crowd whooping with delight as their mounts surge to the lead. More Bollinger and caviar please.

Zero bound interest rates did the trick. They lightened the weight of the debt load. ‘Free Market’ faded to a distant last. Just to make sure, the stewards and the owners all conspired to give their charges an extra little ‘something’ to kick them along.

Various forms of QE (short for Quicker Equestrian) gave the horses the ‘red bull’ effect…wings to fly.

A little QE at first opened up a commanding lead over the uphill running ‘Free Market’. Minus QE, the horses began to fade. The threat of ‘Free Market’ repeating its 2008/09 furlong surge could not be countenanced.

They decided to go all out. Draghi sitting astride his mount ‘Whatever It Takes’ said ‘whatever it takes’. Bernanke wasn’t too worried about the horse’s welfare: ‘We don’t think that the [horses (financial stability)] concerns should at this point detract from the need for [QE (monetary policy accommodation)] which we are continuing to provide.

Sensible veterinarians have repeatedly warned the overuse of stimulants is harmful to the horse’s welfare. This is met with the retort of ‘horses ass’ from those possessed with PhDs in the theory of animal husbandry…they’ve actually never owned a stud or farm but have read plenty about them.

Abenomics was running a solo race for so long it’d become depressed. Imagine its joy when it was joined on the zero-bound racetrack by the others? The old nag thought it was a young colt again. But it couldn’t keep up. The debt weight in its saddlebags was far too heavy. With the election of the mad vet Shinzo Abe in late 2012, Abenomics was given a new lease on life. Since early 2013, Abenomics has received a monthly steroidal injection from a needle the size of a telegraph pole.

Initially, Abenomics eyes opened wide and it was off. Nikkei up and yen down. Kuroda rode that bucking bronco for all it was worth. But underneath it all Abenomics is still a depressed nag. Not to be deterred, Kuroda has ordered the vet to apply an even bigger monthly injection into his steed. Same reaction as last time…Nikkei up and yen down. For those looking at the form guide, this is the ninth injection of QE the Japanese owners have used over the past 25 years. The stimulants promise a lot but deliver very little…except for more weight in the saddlebags.

The Chinese horse ‘Central Planning’ had grown strong on a diet of ore. However, it appears it has a condition known as ‘hemochromatosis’ — otherwise termed iron overload. One of the symptoms of hemochromatosis is fatigue. ‘Central Planning’ is a steely horse. It has long obeyed its owners’ instructions and delivered the pre-determined outcomes with military precision…funny that.

Now that fatigue is setting in, it’ll be interesting to see what the owners do to create the illusion all is well with their state-owned stallion. There are a billion punters who will be seriously p**sed if their horse fails to deliver. A mass riot at the racetrack is the last thing the owners want. It’s ironic the fatigue has happened in the ‘Year of the Horse’. As an aside, in the regional races, the horse named ‘Lucky Country’ is hoping Central Planning develops an iron deficiency real soon. Otherwise, the odds of ‘Lucky Country’ going into recession are shortening every day.

Here we are at furlong 2014 and the race call is as follows:

ZIRP is in front by a head. Yellen has eased up in the whip for now. Central Planning is a close second; however, the six jockeys on its back are deep in conversation about whether to hit it harder or not. Abenomics has found its ninth wind and is making a surge towards the leaders. We can’t help but notice Abenomics’ saddlebags are hanging so low they are creating a rut in the track. Whatever It Takes is trying to convince its German part-owners to give it more QE juice. The protectionist Germans are not entirely convinced this is the right thing to do. So for now, the European punters will have to listen to Draghi — the Italian Stallion — saying ‘giddy up’ with very little response from Whatever It Takes. If history is guide, then Whatever It Takes is sure to get its steroidal oats in the not too distant future.

A quick weight check reveals all four horses are carrying more debt weight in the saddlebags in 2014 than they were in 2008. The stewards, owners, vets, trainers, jockeys and most of the punters ignore this fact. The ‘roids’ and the downhill track are doing the trick (ruse, deception, fraud, illusion, ploy).

Coming in a distant last is Free Market. It’s become accustomed to the uphill track but struggles to compete with horses that are doped to the eyeballs. If you study the form guide, you’ll note Free Market won’t change its pace. There will be no surge to the finish line from Free Market. What happens is the other horses fade and in some cases come to a standstill. Free Market gallops on, leaving the others in its wake. Very few are betting on this result. The longer the fixed race goes on, the greater this outcome becomes a certainty. The late, great horse trainer (economist), Hyman Minsky, described this phenomenon as ‘stability breeding instability’.

The steroidal abuse and the ever-increasing amount of lead in the saddlebags will eventually take their toll. Sadly, Abenomics is a short odds to be the first casualty in The Financial Markets Cup.

Abenomics has been flogged so hard for so long it’s a wonder it is still in the race. When Abenomics falters, watch the bookies make a hasty exit from the racetrack. They’ll take their money and run. The punters will be left high and dry. New owners will be elected. The central banker jockeys will retire in disgrace, claiming they only did what the owners told them to do.

Free Market will not be a popular winner. Far too many punters will ‘have done their shirts’ betting against him. The crowd will be screaming for the new owners to once again fix the race and make all bets whole again. Sorry, those horses will be retired to the knackery. The race to the bottom will be consigned to the history books.

In their place will be fresh colts. These new colts will bound past the galloping Free Market. It’s the new colts that the ever-patient value punter wants to place their bet.

One question remains: At what furlong will The Financial Markets Cup finish? 2015, 2016 or beyond? The horses are looking awfully tired. Hopefully this cruelty can’t continue for too much longer.

Vern Gowdie+
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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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