The Capital Showdown

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…

Charles Dickens, A tale of two cities

It’s the opening line to one of my favourite classics.

In A Tale of Two Cities, Dickens portrays similarities and differences in London and Paris around the time of the French Revolution.

The French Revolution was a turning point for French society and government, one that impacted all of Europe. The revolt was the best of times for impoverished peasants, it was the worst of times for the monarchy and aristocrats.

Today we are facing an era of contradictions too

We are living in an epic time for globalisation and technological advancement.

Globalisation has increased world trade and opened the world to travel and cheaper goods from around the globe.

It has also brought in social divisions, more competition and salary stagnation.

It’s why we are moving towards protectionism. A divided Britain is battling with Brexit. We are seeing a Cold War-esque type conflict between the US and China.

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It’s been exciting times for technology too.

Internet’s proliferation means we have access to any information at our fingertips, we can communicate with friends around the world and even make extra money from our spare bedroom. New tech is bringing in virtual assistants, robots, self-driving cars…

But this has come hand in hand with data harvesting and the rise of surveillance states.

It’s why, we are also seeing some reactions against tech.

It’s been the best of times for money too. We are looking at a record bull market, a revolution brought by fintechs, cryptos and the decentralisation of money.

It’s also been the worst of times

There’s been heaps of easy money pumped into the system which have created asset bubbles and massive debt.

It’s been good times for asset holders, bad times for savers.

Do you see a half-full or half-empty glass?

Even here at the office we can’t agree. The latest editor and analyst show of hands revealed that roughly half of us see a bullish future while the other half sees a bearish one.

It’s a split that’s going global.

Europe…US…Asia…

What’s certainly clear is that a large portion of the population isn’t happy with the status quo.

Are we in for a major change?

I think so, and I think it will be a major change centred around money.

We may have tamed inflation, but at the cost of low growth, stagnating salaries and financial bubbles.

The central bank monetary experiment in the last years has corrupted our money. Now our money and purchasing power are under threat. At risk from negative rates, from asset bubbles collapsing, from cash restrictions.

We are sitting in a debt powder keg. One that is about to get worse.

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This week Apple announced that while they are sitting on a pile of cash, they are looking to take on debt. Why?

Bloomberg explains:

With the 30-year Treasury at record lows, many companies have been able to borrow more cheaply for much longer. Apple will pay around 2.99% interest on its new 30-year bonds, compared with the 3.45% it’s paying on three-decade bonds it sold in 2015. On a $1.5 billion issue, that equates to savings of nearly $7 million of interest annually, or more than $200 million over the course of three decades.

Today’s debt sale could help Apple refinance roughly $2 billion of debt that’s scheduled to mature this year in addition to much of the $10 billion it has coming due in 2020, according to data compiled by Bloomberg. The borrowing is profitable for the company’s shareholders by at least one measure: the company’s earnings yield, a measure of how much the company earns relative to its share price, is around 5.6%, while it can borrow for 30 years for less than 3%.

Borrowing is getting cheaper.

To be clear, I’m not criticising Apple’s decision. My point is, in a scenario like this where rates are decreasing, why not take on more debt?

Cheap interest rates are creating zombie companies and unproductive debt.

This also creates a lot of risk.

What will be the next trigger? It could come from anywhere.

Will China take us into a global recession? Will the US? How will our world look like in five…10…50 years?

It’s impossible to predict.

But expecting central bankers to get us out of this one isn’t a good plan.

The actions we take today will determine how well we weather the next crisis. Set up insurances and minimise your risks. Look into possibly holding some gold and cash.

One large financial event can set you back for decades, I’ve seen it happen.

The next crisis could be the best wealth creation moment of your life. It could also be the most destructive.

Best,

Selva Freigedo Signature

Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion. Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table. Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default. Selva has also lived in Brazil, Spain and the USA. Back in 2000 she was living in the US as the dot com bubble popped… And in 2008 she was in Spain as the property market exploded and then collapsed… She has seen first-hand what happens when bubbles burst. Selva joined Port Phillip Publishing’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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