Cash is king – June 5th 2014

It’s been nearly a year since the last View hit the streets during which time your correspondent has gotten himself married which I hasten to add has had nothing to do with the lack of output or indeed its resurrection! Normal service is now resumed and you can expect further diatribes on a monthly basis. First up given that markets everywhere are being manipulated in one way or another and most of them are not cheap where do you put your money. Clue: buy a large mattress.

“Inflation is not measurable, money is poorly understood and the economy is a complex system. From these observations can be derived a straightforward corollary on economic policy makers: trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things that happen weren’t supposed to happen.” From the Edelweiss Journal November 2013 www.edelweissjournal.com

 Yet we all live in the thrall of central bankers the kings (and queens) of economic policy forecasting. It has ever been thus, but in the relatively modern era, Paul Volcker’s taming of inflation in the 1980s, by levying penal rates of interest, opened the flood gates for all kinds of economic chicanery experiments culminating in ZIRP, QE and the euro. None of these policy initiatives has demonstrably worked in the way intended, but if we persist for long enough, we will get the result we want, seems to be the mantra. Thus giving credence to Einstein’s observation that doing the same thing repeatedly, but expecting a different outcome, is the definition of madness.

 Today it is the ECBs turn to throw a spanner into the system. Having said that he would do whatever it took way back in July 2012, Dr Aghi has now actually had to pull his proverbial finger out as the Eurozone drifts inexorably towards deflation in a moribund economic environment. His first move was to reduce the rate at which banks lend to the ECB to minus 0.1%. It will now cost the banks money to park their cash in this particular safe haven. The theory being that they will now just have to lend the stuff out in order to make a turn. Problem is Rodney that no one with a decent credit rating wants to borrow from them.

 There will no doubt be lots of loans for car buyers, students and wanna-be home owners, but is this really going to make a lot of difference to the economic recovery. It certainly won’t in the periphery where austerity is still spoken by governments and the IMF and any dissent is being literally beaten out of the system. The EU are debating how “alternative views” can be supressed from the internet and people are being fined for going on anti-Government rallies in Spain; George Orwell was only 30 years early. It would never occur to the ECB that the recent election results giving voice to the anti-Euro brigade might just be the thin end of a very sharp wedge pointing in their direction. The politicians and their banking partners in crime are not going to be put off in their divine right to impose their will by a mere “protest” vote.

 The announcement today reiterated the do whatever it takes line and the initial market response was to sell the euro and gold and buy equities. Just as quickly those moves have been reversed and most things apart from gold are close to opening levels; buy on the rumour (July 2012) sell on the news (today) triumphs over conventional analysis (hot air) yet again…

 So in this crazy world just what are we to do. That other great “quant physicist” Keynes opined that “markets can stay irrational for longer than one can remain solvent” or “employed” if you are an investment manager with a bearish view on low interest rate / QE fuelled markets. If your investment universe is getting more expensive by the day, which asset class best serves the purpose of preserving your hard earned capital? The conventional risk off asset class used to be sovereign debt, but with yields at historic lows they really aren’t cheap or risk free anymore. In corporate bonds and high yield are you really being paid a big enough risk premium? Hedge fund strategies have had a tough time this year as the markets rotate from risk off to risk on and back again without any clear pattern and the historically successful funds are getting to be heroically large and geared to boot.

It may sound like heresy but the answer to the conundrum is cash; under that mattress and stacked on top of your gold bars.

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