A very bizarre exchange between several CNBC finance pundits recently aired in the US. They started saying exactly the things they ridiculed not long ago. And they did a remarkably good job of explaining their new found beliefs. Here’s the gist of what they were on about:
We’re basically beholden to what the central bankers and policy makers do rather than the fundamentals in the economy…
Yes, even the media has figured out that the world’s economies are beholden to central bankers. Unelected academics, whose business dealings are secret and unaudited, control the bond markets, the stock markets, the banks, the value of money and much more. Today’s Markets and Money is about how to opt out of this dangerous nincompoopery as you prepare for retirement.
Here’s how the conversation, which is well worth watching, went down on CNBC:
I think that right now the question is ‘do we all work for the central bankers?’… Is this global governance at last? Is it one world – central bankers in charge? Aren’t we all just living and dying for what the central banks do? Aren’t we all just counting on the fact that there’s a Bernanke put?
Of course we are. Because if we look at the economic data there’s nothing to get excited about. We are absolutely slaves to central banks. And we’d love to be slaves to the economy, but the economic numbers continue to do nothing but trend lower.
The ‘Bernanke put’, by the way, is the name given to the idea that Federal Reserve Chairman Bernanke will intervene in the economy with more economic stimulus if the stock market falls beyond a certain point. The markets anticipation of the ‘put’ is enough to keep stocks up a lot of the time. That’s why they’re going neither up nor down with much consistency. Back to the video:
Do we work for the central bankers?
We do! Look, markets are driven by policy now. They’re not driven by market forces. They’re driven by … central bank proclamations. They’re driven by false rumours coming out of the ECB. They’re driven by …
… fiat currency that’s continuously watered down. They continually water our currency down so that markets go up and we feel good about it.
Here’s a chart from Barry Ritholz’s blog The Big Picture showing how quantitative easing (money printing) and other central bank actions have affected the stock market:
Each time the central bank intervenes, stocks go up. After each intervention, they fall.
Back to the video once more:
We’re basically beholden to what the central bankers and policy makers do rather than the fundamentals in the economy because we have not been able to generate real real growth without doing one of two things: Debasing the currency or borrowing our way to a false prosperity. How do you invest under those circumstances?
Remember that every central bank in the world, not just us, ultimately has to devalue their currency. So you’ve got to put your money in stuff.
Every major country holds gold. That tells me that it’s attractive. Is it attractive to you over a watered down currency?
I think it is very attractive, both as a currency and a store of value. Ultimately you’re going to want resources. The only good news here is that free markets will fight back. When we see bond riots in Spain and bond riots in Italy, those are free market forces fighting back. And ultimately they’ll win because investors, ultimately, will walk away.
Remember, if a mainstream media organisation is saying all this, it must be true. And you’re among the victims of this manipulation if you rely on the stock market, bond market or cash to fund your retirement.
It might sound nice to hear that free market forces will win eventually. But keep in mind that free market forces are about reality. And reality can suck. Especially after it’s been hidden for a long time.
So do you want to be relying on share prices holding up when reality strikes? Do you want your retirement plans to be beholden to central bank nincompoopery in the meantime? Opting out completely is pretty much impossible. Besides, it’s often fun to profit from the kind of opportunities all this meddling creates. But there are things you can do to escape the central banker’s grasp to some extent.
One of the takeaways from the video is investing in things whose ‘reality’ central bankers can’t change is a good idea. In that case, you can count out the stock market and bond market.
A second ago we showed you (in chart form) the effect of central bank manipulation on stocks. Here’s another chart, from Zerohedge.com, on how the Federal Reserve’s policies has impacted American bond yields and mortgage interest rates.
The shaded areas are interventions, which have increased interest rates almost every time. That means, at least in the short term, capital losses for bond holders. You’d think their interventions would have precisely the opposite effect, because they involve buying bonds, pushing up prices. But manipulation has all sorts of weird unintended consequences.
Investing in tangible things instead of stocks and bonds is good because you’ll come out the other end of this crisis with exactly the same thing. You don’t have to worry about what the central bank will do in the meantime anywhere near as much.
A much better way of saying that is ‘buy gold because no amount of central bank nincompoopery will change what it is.’ There are assets other than gold of course. Including, yes, housing. Assets that are what they are no matter what central bankers declare could be just the spot to keep your wealth in coming years.
There’s something important to keep in mind though. With these assets, the price could go absolutely anywhere. Just look at house prices around the world. But you’re still left with the same thing at the end of the day if you buy tangible assets. You have to be able to ignore the fiat currency denominated price in times like these if you invest in them. Instead, focus on relative prices between actual things. How much gold does it take to buy a barrel of oil, or a house? You’ll find that relative prices of goods don’t change anywhere near as dramatically as nominal currency prices.
This is especially true in times when monetary meddling is causing the instability. It is the value of a currency that is fluctuating all over the place, not individual assets.
We’ve written so much about gold and housing in the Markets and Money, so what else is there to invest in?
How about a spot of gardening? Fruit trees and vegetable patches are real assets. And, to satisfy gold’s detractors, who like to point out you can’t eat gold, even though you can, fruit and veggies are far more nutritious than most investments. And they can reduce living costs significantly. Investing depreciating currency into these tangible asset producing machines of nature probably carries all sorts of holistic benefits too. And keep in mind the appreciating asset value of a fruit tree bought young and reared well.
Bill Bonner’s version of this investment is his sand fed beef cattle, which reside in Argentina. It’s rather time consuming to become a cattle farmer though. A subscriber gave us some gory details at the After America conference a few months ago. Bill still spends time on horseback, as long time Markets and Money readers will know.
His ill-fated bull castration story was a hit with subscribers. But you don’t need to be as hands on as Bill to benefit from agricultural investments. Nor invest as much money. Try your back garden for a start. And if that’s still too dirty for you, perhaps an agriculture ETF will do. There are several new ones on the ASX. Keep in mind that they aren’t the same as the real thing though.
Personal petrol stations are another amusing source of investment we’ve come across. Our high school friend lived near a partially abandoned airport and his parents used the fuel infrastructure to ‘invest’ in petrol. They would fill up a rather large tank when prices were cheap and use it for months while prices steadily rose.
You might not be able to do this with petrol, but what could you do it for? Canned and dried foods, beverages (you know which ones), household products like cleaning products (not to be confused with the beverages), stationary, and, most important of all, lollies. Imagine if you had bought a ton (literally) of 1 cent lollies 35 years ago. It would be worth about 20 times as much. And, we suspect, they would taste the same. Or better… (Ed: Or worse. 35 year old sugar with colours and flavouring? No thanks).
But be careful. Some things become cheaper relative to other goods. Don’t buy a plasma TV or car and expect it to keep up with inflation. Unless the car is German, in which case it has an inflation protection device built in. They made them mandatory after hyperinflation during the Weimar Republic.
Dan’s humpy portfolio, designed to withstand the end of civilisation, let alone the demise of central bank manipulation, includes vodka, rum, toilet paper and much more.
Have you found any odd and innovative ways to invest your depreciating currency into hard assets? Or how to avoid central bank manipulation of financial assets? Let us know at email@example.com
Until next week,
Markets and Money Weekend Edition
ALSO THIS WEEK in Markets and Money...
Australia’s Economic Boom in Reverse
By Dan Denning
The ‘risk’ Patten wrote about is Australia’s underexposure to foreign stocks. This isn’t just an Australian problem, by the way. Most investors (and financial planners) have a ‘home country’ bias. Your portfolio tends to be overweight companies in your country. Granted, you’re more likely to understand a company that operates in your home country. But this can leave you exposed to just one or two sectors.
The Grapefruit Currency Hindering China’s Economic Growth
By Dan Denning
Big deal, right? We’re making an economic mountain out of a statistical molehill, aren’t we? Those economic growth figures from China – even if they’re growing less fast – would be the absolute envy of every country in the Western world. Is this really all we have for evidence that the Chinese economic growth model – the engine behind Aussie resource earnings growth – is dead? Why…no.
Seven Reasons to Sell US Stocks Short
By Dan Amoss
Some folks interpret this fact as investors “shrugging off” bad developments, looking ahead to some unseen, glorious future that none of us individually can imagine. But the “wisdom of crowds” is overrated. I see an epidemic of denial – denial at a level last seen near the 2007 market peak, when central bank policy was thought to be propping up stock prices. That denial didn’t end well.
German Bonds – Just Like a Lead Zeppelin
By Eric Fry
The AAA German government is bearing a very heavy burden these days, thanks to its financially challenged Eurozone companions. As a result of this burden – both immediate and prospective – the cost of insuring a 5-year German bond against default is higher than the cost of insuring a 5-year Viacom bond against a default. How could this be?