An Abnormal Mind in an Unsound Body

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–One way of viewing Charlie Sheen’s spectacular public meltdown is that it’s Ben Bernanke’s fault. How? Well, the word psychosis derives from the Greek words psyche (mind) and osis (abnormal condition). Thus, an abnormal condition of the mind is one where you are disconnected from reality.

–What causes a disconnect from reality? You guessed it! It begins when ordinary things in your everyday life become disconnected from reality, at least in terms of price. Inflation produces a massive disconnect both at the personal level and the social level. What begins with Ben Bernanke’s Quantitative Easing finds its psychotic fulfilment by banging seven pound rocks, living in one speed, one gear, go!

–Maybe it seems like a stretch, or unfair, to blame the Fed Chairmen for personal self implosions. Or maybe not! As an economic phenomenon, inflation destroys the value of long term planning by destroying purchasing power. When you’re less certain about the stability of the future and the value of your money, you become short-term oriented, or just short-sighted.

–For investors, this means compressing your time horizon. You tend to hold stocks for shorter periods of time; even if it means higher transaction costs and capital gains taxes. Why is this so? Could demographics explain it? Are Boomers trading in and out of the market to supplement their retirement nest egg?

–We would like to suggest that this shift to short-termism coincides almost exactly with the general decline in the purchasing power of money. Inflation forces you to seek higher returns, which in turn causes you to jump from stock to stock and asset class to asset class, always trying to beat inflation with a higher yielding investment.

–The average holding period on stocks has been declining since the 1960s, according to Sy Harding of Asset Management Research Corporation. Harding reports that, “According to the NYSE Factbook, the average holding period for stocks in 1960 was 100 months (eight years). By 1970 it had dropped to 63 months (five years). By 1980 it had dropped to 33 months, by 1990 to 26 months, by 2000 to just 14 months, and in 2010 just six months.”

–The average holding period is  even shorter this year (between three and four months). This, by the way, is why we are happy to have a full-time trader in the house. You can’t form a coherent investment strategy these days without having someone who understands the mechanics of price action in the market.

–But maybe there’s a simpler explanation for shorter holding periods: the auto-bots! The emergence of program and high frequency traders may be distorting the holding period data. After-all, a computer that’s buying and selling stocks every few seconds is not representative of mum and dad investors trying to find the best entry and exit points for blue-chip stocks.

–However we’re not going to blame Skynet and the nanotraders just yet. When in doubt, always go with the simpler of two explanations. And the simpler explanation for the shorter holding periods on big stocks is this: investors distrust the reality of a market that is manipulated and distorted by unsound money.

–The crack-up inflationary boom that results from money printing is an investment phenomenon. But it’s also a social phenomenon. How can it not be, when economics is the study of decisions taken by real people…decisions that reflect what people find valuable at any given moment in time?

–Stay with us, dear reader. Because we’re now getting to the heart of the issue. And to do so, we’ll quote Paul Cantor in his entertaining paper, Hyperinflation and Hyperreality:

If modernity is characterised by a loss of the sense of the real, this fact is connected to what has happened to money in the twentieth century. Everything threatens to become unreal once money ceases to be real…Hyperinflation occurs when a government starts printing all the money it wants, that is to say, when the government becomes a counterfeiter. Inflation is that moment when as a result of government action the distinction between fake money and real money begins to dissolve. That is why inflation has such a corrosive effect on society. Money is one of the primary measures of value in any society, perhaps the primary one, the principal repository of value. As such, money is the central source of stability, continuity, and coherence in any community. Hence to tamper with the basic money supply is to tamper with the community’s sense of value. By making money worthless, inflation threatens to undermine and dissolve all sense of value in a society.

–A couple of points to clarify here. First, we are not begrudging Charlie Sheen the right to make $1.2 million per episode for making a TV show. If that’s what the market will bear, that’s fine by us. But it’s probably evidence of how excessively financialised and superficial life can be in a deindustrialised Empire running on fumes. If that’s what people find valuable, you have to start wondering about their values.

–And if you start wondering about their values, you should start looking at their money. We’d disagree with Cantor that money is the primary value in a society. The emphasis on that word was his, not ours. In non-financialised societies, value is measured in many other ways, through faith and family, for example.

–But in a society flooded with counterfeit money, you can see how inflation does undermine all other values. It might seem like a stretch to connect Charlie Sheen’s meltdown with Ben Bernanke’s monetary policy. But the point is that unsound money undermines not just investment values, but personal values too. It compresses people’s preferences toward consumption and away from savings. And at a certain point, when money ceases to be real, you start banging seven gram rocks.

–Of course not all of us are doing that. But if you didn’t spend the last decade making $1.2 million per episode starring in your own sit-com, how do you manage the destabilising effects of inflation?

–Well, to follow up on yesterday’s point, we’d suggest that you “ground” yourself in tangible investments the way some nation states are. Energy security is just a manifestation of the desire to lock up wealth in assets with real value (instead of debt instruments or fiat money). And it’s a theme that can drive Australian shares higher, even as the U.S. dollar imitates Charlie Sheen.

–For example, last night the wire services reported China Guangdong Nuclear Power Holding Corp. (CGNPC) is set to make a $1.23 billion bid for London-listed Kalahari Minerals. Kalahari owns 42.3% of Aussie-listed Extract Resources. And Extract owns the Husab uranium deposit Namibia.

–This is the template Alex Cowie has been following in Diggers and Drillers. Find large resources in their early stages that will become more valuable the more the projects are “de risked.” These assets are cheap now. But their strategic value should grow, as evidenced by the CGNPC bid for Extract’s uranium, via Kalahari.

–There’s plenty of risk with this strategy. The biggest one is China’s reduced growth rate (based on the latest 5-year master plan of its economic overseers) will lead to a fall in commodity prices. No one in Australia who’s not within two feet of our keyboard seems to take the prospect of a commodity price crash seriously though.

–The Reserve Bank of Australia and the investment establishment are convinced that slower growth rates in China still mean high commodity prices, record terms of trade, and a strong dollar for the next five years or so. This seems like a complacent and dangerous assumption given how unstable investment values are, as a result of how unstable the value of paper money is.

–But that is a dead horse to beat for a different day. The FT article we linked to above does show China is shifting its energy security plans to a sector that could benefit even more small Australian companies. Gas!

–“In energy,” reports the FT, “China’s five-year plan could have an even bigger impact, as the government makes a push into natural gas and non-fossil fuel energy. According to the National Energy Administration’s targets, China will import 90bn cu m of gas a year by 2015 as well as producing 170bn cu m domestically. Although China has been a minor importer of natural gas in the past, that could soon change.”

–As China becomes a bigger importer of natural gas, the off-take agreements between Aussie LNG projects and Chinese customers may come even thicker and faster. “Last year China’s imports of liquefied natural gas jumped 69 per cent to reach 9.4m tonnes. Already, state energy giants such as Sinopec and Cnooc are gearing up for LNG imports with long-term contracts in Australia and the Middle East.”

–The re-valuation of Aussie LNG stocks has more or less taken place. But for unconventional gas plays in Australia, the re-valuation could be just ahead. And if it happens in the same way it happened in the States a few years ago, it could be a powerful trend that helps you deal with abnormal minds and an unsound world.

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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Comments

  1. Soooo when is DR going to write ANYTHING about the Japan tsunami? We can measure the lead times associated with the articles as a result I guess…..

    Reply
  2. Two long pieces in DR US today, Don. And Fry considers whether ‘luck’ might have something to do with it. Nothing about the continual, predictable shifting of tectonic plates at all… . He touches on Acts of God, though.

    You’d think the creation of the Himalayas might help provide
    The Big L-o-n-g Picture… . ;)

    Reply

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