Never Trust the Mainstream When It Comes to Your Money


There’s a perennial problem when you read anything about finance. Most of it is junk economics based on theory, not facts. This is why you can never trust the central banks or the government.

All their models stem from the academic world, not the real one. And even then, you never know whether you’re dealing with a fool or a liar. And the mainstream media just parrots the standard lines, too.

The Aussie dollar is a case in point right now. The currency has now broken through the 78 cent mark against the US dollar. So immediately the calls that the dollar needs to be lowered before it damages economic growth came.

It seems intuitive. The higher the dollar, the more expensive Australian goods become, right?

Another bogus mainstream myth

Well, not so fast, says Professor Steve Hanke. He’s one of the few economists worth listening too, because he is not afraid to challenge the reigning orthodoxy. That’s rare across the economics profession.

The argument for devaluation is a delusion, according to Professor.  In a recent article he cited both evidence from Indonesia and China that shows exports went up strongly when their currencies went higher.

Not only that, there’s evidence to suggest that a lower exchange rate leads to lower GDP growth.

Or as Hanke puts it, ‘David Ranson studied the relationship between currency devaluations and GDP growth for nineteen countries in the 1980 – 2012 period. The results are clear: to slow down economic growth, call for a currency devaluation (see the accompanying chart).

Source: Globe Asia

[click to open in new window]

What you normally get when the currency devalues is inflation and higher interest rates — not economic growth.

The doomsday prediction that hasn’t come true

Suffice to say you have to be very careful what you believe when it comes to your money.

Consider that one business association is now suggesting that the US is facing labour shortages in a wide range of sectors, reports the Financial Times.

Put aside for a moment whether or not you put any faith in the employment statistics and cast your mind back.

It was only a few years ago the doomsayers were crowing apocalyptic predictions that the baby boomers would cash in all their wealth to fund their retirements. Not only that, there wouldn’t be enough workers to pay for it all.

Not much evidence of that scenario playing out anytime soon. The FT cites Goldman Sachs statistics suggesting that labour costs as a share of revenue from the S&P500 companies rose 9.8% last year. That was on top of 9% growth the year before.

Wages are rising in the US. According to the FT, the time needed to fill a job is already at its highest in nearly 16 years.

These wage gains will if course take land values higher in the US as people can afford to bid more for real estate (no one else will tell you that, either).

Just consider the fact, according to RealtyTrac, that 31.8% of all US single family and condo sales in the first quarter were all-cash sales.

There’s still plenty of room for growth in US property. InvestCorp Bank seems to agree.

It’s the Gulf’s largest investor in US real estate over the last 10 years, and plans to double its assets under management in the next five to seven years. It’s going to invest US$1.5 billion this year alone.

Gloom versus data

Actually, the relative negativity that still surrounds the US could stem a lot from the Presidential election. I mean it’s pretty standard stuff for the contenders to highlight the negative aspects of the economy and how their policies will ‘fix’ the situation.

But the Financial Times reported last week the mood doesn’t quite fit with the facts. See for yourself…

Yet forecasts from the International Monetary Fund suggest the US has emerged as the healthiest among a sickly crop of leading economies, with GDP tipped to rise more than any other large advanced country next year and unemployment set to hover at half the euro area average.

We can also add the fact the Dow Jones passed 18,000 points again this week for the first time since July last year. The US markets are back trading close to all-time highs.

That’s a far cry from earlier in the year. Let’s not forget the opening 10 days in January were the worst in a hundred years for the Dow.

Indeed, on 12 January the Australian Financial Review reported:

The Royal Bank of Scotland (RBS) has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that the major stock markets could fall by a fifth and oil may reach $US16 a barrel.

The bank’s credit team said markets are flashing the same stress alerts as they did before the Lehman crisis in 2008.’

Not pretty or calming, in other words. But as my colleague Phil Anderson has taught me, this is the psychology of markets at work. A crash is most unlikely to happen when so many people position for one.

In hindsight — always so easy — 11 February was actually a buying opportunity.

But don’t fool yourself with hindsight bias. It would never have looked — or felt — so easy in February.

But that’s where the profit opportunity is.

It’s only spending years studying and trading in the market that can teach you things like this. And Phil’s been trading markets for over 20 years now.

That’s why we’re so thrilled we’re to make his trading knowledge available to you.

You can’t buy this experience for yourself at any price. It can only be earned in the market.

Best wishes,

Callum Newman

Ed note: The above article was originally published in Money Morning.

Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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