Zombie Money and the Abolition of Cash

Damn you World Bank. Australia’s stock market had a shocker yesterday, dropping three percent after the overnight cliff diving in New York. Supposedly the catalyst for the big move down was the World Bank’s revision of its 2009 global growth forecast. The World Bank now says the global economy will contract by 2.9% this year instead of 1.7%.

That could be right. But that’s not the reason stocks are falling. The rally that began in March has now run out of steam. It’s also run of news events to send it higher. So what now?

Well, the primary trend-and by that we mean what we think the dominant trend is for the next few years-is the systematic reduction of debt in the household and business sectors. That ought to lead to write downs in asset prices and a general contraction in credit. Perhaps that is why-despite the mondo auction of $104 billion in new debt-even U.S. government bonds followed stocks and commodities down yesterday.

One thing not going down is the Australian dollar. The Fed meets in the U.S. this week. By the way, keep your eyes peeled to see if the Fed has anything to say about its support of the bond market or mortgage-backed security market. Ben Bernanke is probably sighing with relief that Treasury yields have retreated recently. But don’t rule out another intervention by the Fed to support bond prices and suppress rebellious yields.

However, unless the Fed is sitting on some really bullish economic data not available to the World Bank, you can bet it will indicate that short-term interest rates in the U.S. aren’t going anywhere for awhile. If that’s the case, then the Aussie dollar is free to move higher against the greenback, although we’re not taking that trade to the bank. Why?

On a yield basis, the Aussie will be attractive. But there’s also an element of risk taking to the paired currency trades. In a risk-averse world, borrowing money in one currency to invest in another may not seem like such a prudent idea. Still, we reckon the yield differential should be good for the Aussie for a bit longer.

But will that transfer into an increased international appetite for Aussie stocks? Hmm. That’s the question. Are there bargains to be found after the recent declines? Is the decline ever over?

We reckon investors and insiders will wait to wade back into the market until this correction (if that’s what it is) runs its course. After all, the insiders have not been buying the rally. They’ve been selling into it.

According to research service TrimTabs insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases. “The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” says TrimTabs CEO Charles Biderman.

So the American insiders are bearish. They’ve been net sellers for fourteen straight weeks, according to Ben Silverman at InsiderScore. If the inside money is getting out, we reckon shares are going to do some bottom searching over the next few weeks. The World Bank announcement, then, merely confirmed what the action in the market has been telling us for the last few weeks.

Insider selling is a particularly charged bit of investment intelligence. But in our experience it is a piece of information that confirms what is already apparent through an analysis of other technical and fundamental variables. It doesn’t necessarily tell you anything you can’t figure out by other means.

It’s true that the insiders may be selling because they have access to information not known by the general public (although trading on this information would, of course, not be legal…but there you go). And insider sales-at least on large stocks with lots of liquidity-are easier to conceal in the general course of trading. But the money flow and volume still tell the tale, especially with smaller stocks.

If you step away from the technical guts of the market for a moment, the larger question is whether this last financial year will trigger any shifts in the investment habits or psyche of the Australian public. Judging by the number of people who stayed in balanced or growth funds over the last year, the Australian public is brain dead (zombies!). But then, let’s be fair. Maybe they ARE keeping their eye on the bigger picture. They just see the picture slightly differently than other living, thinking people.

The bigger picture can be seen below, courtesy of Super Ratings, in the value of a balanced Aussie super fund versus cash since 2003. Cash is slow and plodding and lazy and conservative. Very turtelish. The balances super funds, on the other hands, had three ripper years up to 2007, and two disastrous ones since. Even after an epic charge in commodities, balances super has barely beaten cash. Hmmn.

The Tortoise Cash and the Balanced Hare

Source: SuperRatings

You can see that after reaching parity earlier this year (at the markets slow) balanced funds have since rebounded. But you have to wonder how balanced they really are. Balance-according to our Super expert Kris Sayce-is supposed to be a kind of middle ground between aggressive growth and conservative cash. It also sounds sensible. Who is against balance? It’s prudent, right?

But if we read the latest report right from Super Ratings, the median balanced fund has 60%-76% of its investment portfolio allocated to growth assets, the riskiest type! That sounds distinctly unbalanced. It sounds, in fact, really stupid, considering this is a bear market in stocks.

Balanced zombie minds will point out that on rolling five, seven, and ten-year periods, balanced funds are all still up (4.75%, 4.99%, and 5.07%, respectively). But we would humbly suggest that there’s never been a better time to question the basic assumptions about investing in balanced funds-or any funds for that matter.

That is, a passive approach that assumes markets always go up and time is on your side is probably going to get you slaughtered in the coming years. If inflation doesn’t kill you, a few bad years could. And if your rolling period coincides with some of the frequent 17-year periods in which stock markets do not go up at all-well then the whole idea of using the stock market as a retirement machine is as dead as a zombie.

And speaking of zombies, we got another short note from the future from the leader of the economic resistance, Shawn Cownah. We reprint it below for your consumption.

Dear Dan,

First a bit of practical advice. I realise my last letter was full of the philosophy of zombies. But here is something you should always remember: distance equals safety.

Zombies reanimate in temperate conditions (both physically but also sociologically, I’d suggest). The climate has to be right for them to animate, operate, and obliterate the living. Unfortunately, you cannot do much about the climate. So remember that distance equals safety. You should especially avoid crowded urban areas.

Aside from being inherently supportable based in their needs for energy, food, and water-the megacities of your day are a virtual cornucopia for enterprising zombies. It is a target-rich environment for the undead. An isolated outbreak of zombiism can quickly turn into a pandemic. A plague.

You should also avoid lines. This may resonate with you with your investment background. Anything you have to get in line for is probably not worth buying at that price. You are way too late and it is already too expensive. Lines are the public precursor to a mob. And mobs are always dangerous. Avoid them.

One more note if you’ll indulge me. It relates to zombies and the money system which you currently live under. From when I write, that system is just another bad but undead idea. But most of your contemporaries take it quite seriously. Let me make a comparison which I hope you’ll find useful in your efforts to warn people about the dangers they face with zombie money.

You see, the trouble with zombies-precisely that which makes them undead-is that there is no living fluid or gas which animates them. They do not need oxygen. They do not need blood to circulate to vital bodily organs. In fact, they are driven by one and only one organ, in a way which we still do not entirely understand.

They are drive by the head. The brain. If you cut it off and kill it, the rest of the body dies. But as long as the brain functions it whatever diabolical fashion it does, the zombie will not-indeed CANNOT be killed.

This severing of the ties with the laws of physical reality is, I suppose, comparable to the idea of an irredeemable currency, or unsound money not grounded in real things. Money whose value is not tied to a commodity has no tangible connection with the objective world. It is relative. Its value is a figment of the imagination, or worse, a derivative of public confidence (a fickle and unstable thing).

Fiat money, as you call it, is animated by the mere ghost of an idea. That idea is that you treat someone else’s liability as a reliable store of value, and that money can be based on debt. That is absurd. Yet nearly everyone in your world believes it. It has become an unquestioned article of faith. In some ways, you are already zombies in this regard and I suspect my writing is futile.

But here is something to watch for: the disappearance of physical currency altogether from your society. This will be a dangerous new phase in your disastrous experiment with unsound money. It will lead to anarchy. I will try to explain why in a later letter.

For now, though, I can tell you how the argument will be made. Your central bankers (the chief zombies, as you know by now) will reach a point at which the real economy proves unresponsive to their man tool of low interest rates. They will begin discussing ways in which to achieve negative interest rate rates-the sort of thing that punishes savers and banks and induces them to give up their cash and spend it.

They believe this will stimulate more activity and investment in the economy. It will not occur to them that the decision to stay in cash and not invest is perfectly rational (although also emotional). I their monomaniacal fashion, these Zombies always think their undead brains know better than living ones. They will attempt to unleash an even greater nightmare upon you.

So they will come for your cash. The elimination of cash completely untethers the money supply from physical reality. It need not be circulated. And it is much harder to hoard. As I said, it will unleash chaos. I will tell you more about that soon. Until then, remember…avoid lines.


Shawn Cownah

Dan Denning
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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6 Comments on "Zombie Money and the Abolition of Cash"

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Cryptic but interesting…thanks for that

Coffee Addict
On money matters I often feel like a zombie in the midst of a B grade slow motion car crash. Who doesn’t? B grade horror flicks are, I understand, popular during periods of uncertainty or economic crisis. ( There’s one possible investment front for the day even though if your personal rating of Blair Witch type movies is very poor. ) Back to the markets, the worst will (can) only come after the USD capitulates and this has not yet happened. Whether it happens this year or next I don’t know. There is a possibility that Chinese companies are trying… Read more »
Charles  Norville
What about zombie ponzi super, where super is put into risky investments which then get stolen via eg US issued bonds, look at HIH where Aus was the end user in a international collapse…like musical stock holding. What capital are we accepting for Aus bond sales, has it got a picture of Uncle Sam….? US is claiming all its bucks back by issuing paper, fiat promisory…..backed up by the Rhetoric of law making. Aus can kiss its largest capital holding good-bye, Aus public super, mind you the pollies super is different isn’t it? Don’t forget to watch “The Assent of… Read more »
Biker Pete
CA: “As it takes a month or two for funds to action client instructions, your losses may be fully realised by the time you fund gets around to processing your application.” Agree with your take on all this, CA, but wondered about that delay in transferring Super between asset classes. We have three funds each. One we cannot touch… it’s guaranteed. The second, our TTR, takes five days. The third takes just TWO days. (That one used to be _overnight_ but too many folk were stayin’ up late, getting the US market data, then swiftly moving their money about!!!) Our… Read more »
Coffee Addict
Biker Pete As an administrative person in the education sector I get a choice of one fund unfortunately. I also have a large (cash) balance in a Commonwealth Government scheme that has a significant property exposure (not fully marked to market). Anyway its not a bad day on the hustings. The AGS pick which I first mentioned about a year ago on this site (and which was looking very gloomy yesterday) has just doubled the resource base at Four Mile. This news confirms a growing ability of Gandel Metals to also cash up some of the ALK developments. (Hope you… Read more »
Biker Pete
CA: Surprised your single fund doesn’t give you rapid online options. I’d formally request that service. We’ve been able to improve our situation with our industry fund, which I figure at least one or both of your schemes must be. Frankly, I don’t know enough to play anything but a very simple game; switching from ASX (probably indexed funds) to cash… and back again. I take my old man’s advice here: I set a sell when I set a buy, looking for a 600 pt fluctuation. I agree there’s a high element of luck, but volatility these days has helped…… Read more »
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