I’m going to pick up today’s Daily Reckoning where I left off on Tuesday. That is, trying to decipher what signs the market might throw off to tell you that confidence in the system is failing. I’ll also have a look at the recent fall in the gold price and see what that means for my ‘new gold bull market thesis’.
But first, a little rant…
On Monday night, I was watching a bunch of advertisements, occasionally interrupted by the last episode of the Gallipoli miniseries. On reflecting how tough life was back then, and how resilient the soldiers were, an ad came on that really highlighted how far we’ve come…if you want to put it that way.
The ad has the slick Catriona Rowntree extolling the virtues of a bank of ovens in the kitchen for the budding home cook/entertainer. That’s right, one oven in the kitchen no longer cuts it. You need a couple. And once you get them, you’ll be the envy of your friends, apparently.
Gallipoli then returned to the screens briefly to show one of the brothers having his guts blown out by a Turkish shell. The symbolism between past and present was jarring…
My second rant involves the latest episode of Tony Abbott jamming his foot in his mouth. The media was alight yesterday, as was the opposition, about Abbott’s poorly considered comment on remote aboriginal communities. Abbott questioned how much taxpayers should subsidise these communities’ ‘lifestyle’ choices.
In the context of the budget (whether state or federal), I don’t know how much these subsidies actually are. But I’m guessing it’s a small amount.
If Abbott is so concerned about taxpayers funds subsidising others, why isn’t he having a go at negative gearing into property? This is a policy that involves taxpayers subsidising property speculators by the billions every year, with no discernible benefit for the economy other than to promote speculation and capital gains.
It’s been proven that negative gearing doesn’t encourage more housing supply (the vast majority of negatively geared property is old housing stock). And taxpayers subsidising losses on property investment sure doesn’t make this nation more productive.
But I bet if you asked Abbott what he thought of the subsidies going to property investors, you’d get some lame answer endorsed by property industry lobby groups.
Every day, the political discourse in this country deteriorates. It really is spectacular. No wonder business and consumer confidence can’t get up off the floor.
On the other hand, confidence in the market remains pretty high, both here and overseas. Stocks in the US and Europe are correcting from all-time highs, while in Australia the market recently made a new, post-2008 high.
It’s all thanks to low interest rates and a desire by central bankers to punish savers. Currency wars force people to take risks…to move their money out of cash and into assets like houses, bonds and shares.
I wrote in Tuesday’s Daily Reckoning that this has made the global financial system incredibly fragile. It’s the confidence of investors holding the system together right now. Specifically, it’s their confidence in central banks to make the right moves to prop up markets.
While this confidence remains, people are happy not to hold cash. Instead, they want to swap it for higher yielding assets, which pushes prices up. But if confidence in the never ending game of stimulus falters, demand for cash will return and asset prices will fall.
In a panic or a crisis of confidence, the demand for cash rises exponentially. This is what credit crises are all about. Confidence breaks, and the demand for money overwhelms the system’s ability to supply it. Hence falling asset prices.
So far, central banks have been pretty good at supplying the system with money. In fact, they have ‘produced’ so much that the supply now overwhelms demand, creating relentlessly rising asset prices.
Put simply, a rising market tells you that central banks are doing a good job at debasing their currencies, which is precisely the opposite of what they’re meant to be doing. A falling or down trending market tells you the opposite.
The market only partially reflects what’s happening in the real economy these days. Increasingly, it’s a barometer of central bank policy ‘success’ or otherwise. In that case, despite this week’s pullback, the market is telling you that central banks are still in control. The upward trend remains firm in the world’s major markets.
They will lose control at some point. You can bet on it. The question is whether the loss of control comes in six months, next year, or in five. Look to the market for clues as to when.
As insurance against this inevitable loss of control, you may want to own some gold. My ‘emerging gold bull market’ thesis took a hit this week, as the US dollar bull market takes another leg higher, and anything ‘non-dollar’ taking another leg lower.
But my contention is that it’s different for Aussie investors. While the US dollar gold price is close to making a new low (it’s around $1,150), the Aussie dollar gold price is so far undergoing a healthy correction.
After advancing from around AUD$1,320 to $1,650 per ounce from November to late January, the Aussie dollar gold price is now correcting lower. This is by no means unusual. The price is now around AUD$1,520, well off its lows and quite healthy for many Aussie gold miners.
So despite the US dollar gold price action being awful lately, thanks to a weaker Aussie dollar, gold in the local currency looks quite good. The emerging bull market thesis is still intact. That may change in the future, but there’s no need to panic right now.
for The Daily Reckoning Australia