By MoneyMorning.com.au
We never thought a chat about pure mathematics and statistics could be interesting. You probably think the same thing.
Last night at the welcome cocktail party for ‘After America’, one of the delegates managed to change our mind. We practically wanted to start doing algebra on a beer coaster. There were a lot of interesting conversations like that. One of the older gents from Bundaberg in Queensland started talking about property investing and ended up talking about women. The conclusion for both was the same: he’d won and he’d lost.
People had come from all over Australia to join us. They shared the same worries mostly – financial instability and preserving hard earned savings. They were looking for income and ideas to grow their wealth. But don’t think the mood was sombre. The room practically hummed as people swapped stories. They swapped plenty of empty glasses for full ones too.
Stomach full, mobile off, eyes front: Thursday was underway early. There was a lot to get through. Your reporter did his best to catch what he could…but there was so much. We are already thinking about buying the DVD ourselves, to see what we missed. Keep in mind that what’s below is a summary at best, made on the run.
Master of ceremonies, Dr Marcus Matthews, opened the show with the idea that we were going to engage in the dangerous practice of thinking for ourselves. He didn’t leave us wondering. When you embrace ideas outside the mainstream, you’re either early – or wrong.
But as Dan Denning said, you’re always free to change your mind. But you always have to be ahead of the market. That much was clear. But getting ahead isn’t going to be easy in the next ten years.
Does Australia have anything to worry about the European debt crisis? Yes. The notion that Australia has decoupled from the major economies and forged an unbreakable link with China is wrong. So is the notion that Chinese bureaucrats can override 1.2 billion individuals to produce a desired effect.
Ultimately the financial system is global, and the crisis will shift from the periphery (Europe, Japan) to the centre – the United States. The global monetary regime – based on the US dollar – is in terminal decline. It is not stabilising, or recovering. There are three alternatives: a new order, disorder or chaos.
In the meantime, expect some of these: capital controls, more debt monetisation, political/social unrest and the nationalisation of finance. He named a US bank that recently failed a stress test. We won’t name it – we just hope you don’t have shares in it.
Part of the wider breakdown is the collapse of the western welfare state. When governments have to borrow money to pay off debt they have already incurred, the endgame is nearing. It’s not quite there yet for the United States – at the federal level anyway. But it’s practically about to smash the door down in Japan. The yen is a pillar of the current monetary order – the order that is collapsing.
The theme: Prepare for disorder. But never rule out chaos.
There is a myth of a seamless transition: that a rising China will neatly replace a falling America. While that may be true in the long sweep of this century, it’s not much good for investing over the next five to ten years. We’ll be lucky to do well in the market over the next ten years – for general or index investors, anyway. Your focus should be on wealth preservation – if you can take your focus off the volatility. Markets will be anything but stable.
Today, governments have huge debts. So does the private sector. The world has barely seen anything like this. But when history goes against us – after all, history has gone against plenty of people before – we at least have the luxury of preparing. We can also be ready to buy in when the market panics. It’s going to do that a lot more than we’re used to.
Which brought him to China. Greg’s knowledge of economics and markets shone through here – fifteen years in the trenches of finance will do that. He talked about China like this:
- Massive internal imbalances
- An epic credit boom
- Fragile financial system
- Blocked currency
- Run by the party for the party
- Horrible demographics
China can’t fill the power vacuum left by America in the short term. Why?
The big powers of the past have always had open capital markets.
China doesn’t. China’s capital controls means its citizens cannot move its savings out of the country. All they can do is stick it in the bank. With inflation higher than the interest rate, they’re losing purchasing power. If China tries to change its policy, and allowed investment overseas, the unintended consequence might be that capital would go to where it’s treated best, or better – and flood out of China. This would cause the Chinese banking system to collapse and the yuan to fall through the floor.
That was one scenario. The conclusion is that China’s central planners are in for a tough time. Another question Greg posed was whether China is going to cause a big re-evaluation in gold. Could it go to $5,000 an ounce. …$10,000… who knows? Nobody. But it might. Whatever the figure, it will make today’s spot price look cheap.
Dylan Grice is an alternative strategist at Societe Generale. His historical perspective goes back to ancient Greece. When he starts talking about ancient Rome, for him it’s practically the near past. The Great Depression is something like yesterday. The lesson is simple: ever since money has been used, there’s always been a temptation to debase and clip it.
Which brought us to inflation. Grice said it’s almost always a fiscal problem. Not a monetary problem, as Milton Friedman famously said. When governments go broke…like now…and can’t tap the financing…like now…they fiddle with the books…like increasing the balance sheets of central banks…until they lose control.
Central bankers are in charge of the price of credit – the most important price in the world right now. It’s a problem that they keep getting it wrong. It’s also a problem that we all think at some point they’re going to get it right. That’s another problem – telling ourselves stories despite the facts.
The facts say the western welfare state has huge unfunded liabilities that cannot be paid. The idea that the core of Europe is sound and the problems are contained to the periphery is wrong.
Dylan Grice sketched a strategy to deal with it. Gold, an Asian currency and solid companies that are not bets on the future. He gave an example of the type of company he was looking for. In response to a question, he said Australian real estate didn’t look a good bet, regardless of inflation.
There was only Kris Sayce to go. We wanted to include his talk in these notes but we are well over time already. We were worried that the delegates might have been fatigued by the time Kris came on stage. That their minds might’ve begun to wander slightly.
There was no danger of that. Kris knows how to make a bang. More tomorrow.
Callum Newman
Roving Reporter, ‘After America’
