Will Super Mario Set Off a Stock Bonanza in Europe?

In life, there are some risks you take only because you don’t know any better. If you knew better, if you had any experience in the matter, if you were aware of the risks or the consequences of failure or the likelihood of success, you’d never try to begin with.

Julius Caesar would never have crossed the Rubicon if he knew Brutus owned a knife. Norma Jean Mortenson the actress might never have become Marilyn Monroe the vixen if she knew she’d be typecast as a voluptuous and seductive dumb blond. That’s another point. You can’t control what others think of you, which is why reputation is so overrated.

But if you don’t want to take risks in life, don’t bother getting out of bed. Dum vivimus vivamus. While we live, let us live. And in that spirit, I salute European Central Bank President Mario Draghi. While he lives, he shall print. To ignorance!

The much-anticipated meeting of the ECB board did not disappoint. Draghi said, ‘The longer [very low inflation] lasts, the higher are the risk… That is what we are reacting to.’ And then he reacted. Beginning on June 11th, the rate on bank reserves held at the ECB’s deposit facility will go negative, to 0.10%. If banks won’t lend money to fight deflation, the ECB is charging them to hold cash.

But wait. There’s more. The ECB promised to make up to $545 billion in loans available to European banks, provided those banks play along and begin lending again. This is another Long Term Refinancing Operation (LTRO). The maturity of the promised loans is four years. That’s supposed to give European banks plenty of time to restore growth in the economy without having to refinance their debts.

You could get lost in the policy details. But let’s focus on the reality, or realities (because there are two). First, the lack of growth in Europe (May inflation of just 0.5%) is demographic and historical. With interest rates now at the ‘zero bound’, Europe has become Japan. And we’ve seen how well zero interest rates have worked for Japanese growth. The policy is as effective is pounding a nail with a fly swatter.

The other reality — and this is the one investors can take advantage of, if they’re willing to become speculators — is that negative interest on reserves held at the ECB should send European stock prices higher. Just you watch. The banks won’t go lending to enterprises that don’t exist or consumers that don’t borrow. They’ll speculate on equities.

On a purely rational basis, it’s the most sensible thing to do. Why pay interest to hold cash when you can profit from a self-fulfilling stock rally? Besides, at least an investment in shares entitles you to the earnings generated by a real business. It’s different than pinning your retirement on an income stream that relies on the full faith and credit of a sovereign government (bonds).

Let’s see what happens. Draghi can’t claim full ignorance, since he’s following the playbook from Tokyo and Washington. But that’s the important point for investors. If the banks buy shares, Aussie investors can have a punt through several exchange traded funds (ETFs) made up of European shares. It will also be worth keeping an eye on the chart below. If the market doesn’t take Draghi seriously, then the Euro (in Aussie dollar terms) will continue to appreciate. On the other hand, if Draghi goes full-Bernanke, look out below.

XEU:XAD Euro - Philadelphia/Australian Dollar - Philadelphia INDX Close 1.46
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When you compare the ECB announcement with the $400 billion Russia-China gas deal announced last week, it’s a tale of two fortunes, isn’t it? Europe and America are low growth zones. The emerging markets are growing much faster than the developing the world. This is precisely what Marc Faber talked about at the World War D conference in March. (By the way, if you ordered a copy of the DVD set, it shipped this week. Thanks for being patient.)

The West is still rich. But increasingly, its control of the global financial system is its primary economic power. The developing world — Russia, China, India, Brazil, Indonesia and more — don’t want to be part of a system where the US remains powerful because everyone has to use the US dollar for business (for lack of a better alternative).

One more somewhat random note on using ETFs to speculate during this global power struggle for control of the world’s monetary system. I have just 28 hard-back copies of The Bull Hunter left. They are free to you on a first-come, first-served basis.

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Source: DR HQ, Albert Park

It’s hard to believe it’s been 10 years since the book was published (and 10 years since the DR Australia project began). But the discussion of ETFs, the commodity cycle, and China is still relevant. Mostly I’m tired of copping it from the other editors that I have a bunch of copies of my own book lying around. If you’d like a complimentary copy, send an email to cs@portphillippublishing.com.au and put ‘Bull Hunter’ in the subject line. I’ll post one out to you next week.

Earlier in the week I mentioned that I wanted to write to you about the psychology of belief. You may recall I wrote about the attitude toward fossil fuels exhibitive by a fringe group of political radicals that resembles, in its faith-based approach to policy, all the traits of religious believers. But this is also an investment issue.

When an irrational belief becomes safe enough to hold as a popular opinion, you know it’s reached the peak of its believability. The same dynamic is at work in the stock market. Most investors buy stocks only after they’ve made new highs. They wait for social proof, for price confirmation. That is a mistake.

You see the same thing with political ideas like banning smoking in public, or that socially responsible investors should ‘divest’ from oil and gas companies. When an idea becomes generic and bland enough to be widely held, it’s either a stupid idea, or very dangerous.

The stupid ideas are easy to manage. You just have to identify them and avoid them. That’s one of the main tasks all of us have here at Markets and Money. Fortunately, they die a natural death and if you remain clear of them, you won’t be infected.

Investors who buy high and sell low lose money. Investors who try to inject environmental values into company valuations will lose money too. The strength of their conviction is exceeded only by the depth of their ignorance. The values may be genuine, and even seem admirable, or at least fashionable to hold. That is usually a sign of their danger.

Which brings me back to ignorance and danger. Generic ideas are dangerous when the public is ignorant of their consequences. In economics, there is a sea of public ignorance fed by a steady stream of disinformation by mainstream economists. Tax the rich! Ban coal! Pay the share that I say is fair!

Ignorance is a necessary precursor to doing something monumentally dangerous (like trying to manage an economy through monetary policy. ‘For men to plunge headlong into an undertaking of vast change,’ wrote Eric Hoffer in The True Believer, ‘they must be intensely disconnected yet not destitute, and they must have the feeling that by the possession of some potent doctrine, infallible leader or some new technique, they have access to a source of irresistible power. They must also have an extravagant conception of the prospects and potentialities of the future.

Draghi, like Bernanke, has embraced the motto of QE uber alles. That’s dangerous for your personal wealth. But it’s also dangerous for the stability of civilisation, which depends upon stable economic values, including the value of money. Hoffer continues:

Finally, they [men] must be wholly ignorant of the difficulties involved in their vast undertaking. Experience is a handicap. The men who started the French Revolution were wholly without political experience. The same is true of the Bolsheviks, Nazis, and the revolutionaries in Asia. The experienced man of affairs is a latecomer. He enters the movement when it is already a going concern.

The academic economists running the global money system are ignorant of the real world consequences of their untested beliefs. Following Hoffer’s line of thought, today’s central bankers will be replaced by the heads of Goldman Sachs and JP Morgan. Or by a five start general or admiral. Make money while the making’s good.


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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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