Oil your printers, start your helicopters
We saw some concerted (and co-ordinated) central bank action this week to address the coronavirus outbreak. The general idea of central bank intervention is that it should smooth market tensions sufficient to give people confidence to invest and generally promote growth. This has been interpreted in various ways across the world this week.
We’ll start in Asia with China, which has cut interest rates, waived loans and restructured debt in its banking sector. Many loans that were falling due are no longer due (this elegant trick is not available in all countries) and that seems to have helped things settle. In Singapore, $5.6bn in infrastructure spending has been pledged and there will be a 25% income tax rebate for everyone in 2020. Interestingly, South Korea despite being hard hit by the virus, did not cut interest rates.
Hong Kong took a different approach, they announced the largest budget deficit ever and have simply gone for helicopter money, HK10,000 for everyone. That’s around $1,300 USD, which is actually rather a lot.
In Australia, the Reserve Bank cut is interest rate to 0.25% and now has limited room for manoeuvre with the next step being quantitative easing. We have covered this in detail, clearly the Governor doesn’t want to go down that road but he might have to. In addition, the Government is set to announce a large fiscal stimulus but we wont hear about that until next week.
Moving then to Europe, the EU itself has “mobilized €230m in the fight against Corona”. That’s pocket change obviously, because it is more likely to be dealt with at individual country level but the Eurocrats had to say something, they’ll likely spend it wisely on next years Davos expenses. The European Central Bank was more emphatic, pledging this week to “take appropriate action and targeted measures, as necessary and commensurate with the underlying risks”. When your official rate is already negative, it’s rather difficult to declare you are going to cut interest rates further. In Europe they currently stand at -0.5% and rumour has it they might move this to -0.6%. This is where it becomes laughable, cutting rates once they are negative is counterproductive since it pressures banks profits even further and will drive people to hoard physical cash, hence the weasel words “appropriate action and targeted measures”. All they have left is helicopter money and it will come, €1,500 for every citizen is my prediction.
More specifically inside Europe, Germany is considering suspending its constitutional limit on government borrowing. No guarantee they will though. Germany can afford it but it is one of the few countries in the world that still has citizens that have lived through hyperinflation. Those people are now very old but they remember and their children are currently in positions of power. The scars of monetary disaster run deep.
No such qualms in Italy though, which cannot afford it, so I suppose it doesn’t matter. 3.6 billion Euros announced as fiscal stimulus. Italy is so far in breach of the EU borrowing rules that it appears no longer to matter, and the EU have given the unofficial nod for this round of spending.
Moving to the UK, the new Governor of the Bank of England was busy pre-announcing bail outs for struggling companies “there will need to be bailout for companies to help them bear the impact”. He made the statement to a Select Committee of UK MPs as though it was nothing. Apparently nobody appears concerned they might repeat the mistakes of 2008.
The Americans went furthest though, with an out of cycle cut of 0.5% which took everyone by surprise and crashed the market. America’s 10 year bond yield fell below 1%, for the first time ever. That people believe they cannot find a better investment than 1% over 10 years by lending to the US government is quite something. I must add too, Jay Powell is weak. In most countries the head of bank has real power, Powell seems to jump exactly when he’s told to. Trump demanded a cut, got a huge cut and hours later demanded more easing, which he will also likely get.
So it’s a been a very busy week for bankers, having committed at Davos to fight climate change with monetary policy, they have thrown in virus fighting too. The strange thing is none of this money exists, it will just be printed, it likely will not prevent a single person getting infected. There has been no reallocation from aircraft carriers to face masks, no reduction in road building for respirators, it’s all extra that they don’t have.
Where is the health minster simply saying we are going to give everyone five masks and a bar of soap? It would be orders of magnitude cheaper and wildly more effective. The fact is economies were in a tight spot and corona presented an opportunity and my word, those bankers have seized it.
“You are getting five times the bank base rate of interest from a profitable company”
I do not claim that Virgin will default, but airlines operate on pretty thin margins, the planes need to be full and they are not, the oil price will help them but honestly, corporate bonds look like there can only every be one big winner, the company. The best you can do as an investor is chop out with your interest intact.
Australia’s Central Bank Governor, Philip Lowe, called this out in a speech last month, it was a reference to the US:
I would also add, Virgin Airlines made a loss in 2017, 2018 and 2019 (in fairness, also highlighted in their risk section). I’m sure they will bounce back this year though, what with those shiny new planes on order.
For all this you get 7.88% and your money back if all goes well (actually you get 12.5% now because they price of the bonds has fallen so much). They tell me bitcoin is too risky though. The difference is bitcoin, which can still go to zero, can also go very, very high and make exceptional gains, something you cannot do with corporate bonds.
How to profit from crisis (not financial advice)
There are a number of potential avenues to profit from major market declines. All of them have different risk reward payoffs.
- Government bonds: Government bonds are rather more safe than the corporate kind. The government can (and does) print the money to pay back its creditors. You will get paid, the price of sovereign debt is going to rise in a crisis (as we have seen with US 10 year bonds). The metrics are a bit more complex though, because the money you are ultimately being paid back with will be worth less by the time it arrives (just ask Argentina), even so $ for $, you’re getting your money.
- Borrow money in weak currencies: For example the Australian dollar looks extremely sick and its prospects don’t look like improving anytime soon. For example, we see the AUD making its way to 50US cents, that would be a potential 30% gain. Equally, this could go the other way entirely. So you certainly wouldn’t want to overdo this.
- Equity options: buy put options. A put option allows you to sell a share at a fixed price in the future agreed now. If the price falls dramatically in the meantime, you make a killing. High risk, high return stuff. If that doesn’t happen, you lose your capital. Do it for fun, not for money.
Some options here are:
- Gold: gold will have a rough time in the short term as equities fall, something has to be sold to meet margin calls and gold will take its share of selling pressure. Even so in five years, given the long history of gold I’d want to be in it. Main issues with gold of course are the government can confiscate it when it starts to undermine the currency, exactly as it did less that 100 years ago.
- Bitcoin: The last 10 days in equity markets has caused untold panic. Bitcoin experiences that kind of movement at least once a month. You can’t really be in bitcoin as a safe haven but it is worth a reminder of why you might have some money in there:
- It cannot be confiscated. Only holders having the encryption keys, the government might ban it, but they cannot take it from you
- It is inflation proof. While fiat currency is printed without limit. Bitcoin only has a total supply of 21 million, not reached until 2140. They are very, very scarce
- Bitcoin benefits from crises, it benefits from low to zero interest rates and it benefits from money printing.
- The single best performing asset class of the last 12 years and the best performing asset of 2020
If you give away enough free stuff, people stop wanting it because it simply wont have scarcity value. Eventually, it will be the same with money. Interest rates now look set to fall further across the globe. More people will get into debt they cannot service at normal rates. The free money businesses like Afterpay and Klarna will multiply. Have whatever you like with Tommorow-charge and NeverCollect or whoever comes next, it’s because the money is worthless and there is no obvious way out of that.
This seems to be playing out with hash rate up 20% this year.
The hash rate is a key indicator, are people investing money in mining bitcoin? Yes. Does this mean they believe the price will rise? Yes. Why? Because the nominal reward to miners halves in about 65 days time. They will receive 6.25 bitcoins every 10 minutes rather than 12 bitcoins as currently, and yet they invest continually. It’s a different kind of futures market and it has something very bullish to say about bitcoin.
The German Federal Financial Supervisory Body has clarified the classification of cryptocurrency as a financial instrument. This is good and bad, the good is that it legitimises cryptocurrency. The “bad” is those currencies must now comply with all the rules of other financial market participants. That however is the price of not being outright banned and it is well worth paying.
A New South Wales court this week recognised bitcoin as an “investment vehicle”. In a defamation case the plaintiff was allowed to post bitcoin as collateral against the court awarding costs.
Slowly but surely.