New Decade, New Form of Wealth

Dear Reader,

Nothing’s changed. Don’t you see? If nothing changes then the same thing is going to happen all over again.

A A Milne, Goodbye Christopher Robin

Author A A Milne, creator of Winnie the Pooh, had just come back from fighting for Britain in the First World War.

The First World War was supposed to be ‘the war to end all wars’. Yet he is worried, because he sees nothing has changed. People are reluctant to talk about the war. As he tells his friend, illustrator Ernest Shepard in the movie Goodbye Christopher Robin, he is worried that history will repeat itself.

Milne wasn’t wrong.

Only a couple decades after, Europe would find itself in the middle of a devastating Second World War. A war, caused in part by the aftermath of the First World War.

We are nearing the end of a decade.

Thinking back to 10 years ago, to the end of 2009, Europe and the US were suffering the devastating effects of the collapse of a housing bubble.

There was a lot of fear out there as credit and consumption collapsed.

There is always plenty of money around during the good times, it’s when things turn sour that cash disappears. Whoever didn’t get wiped out by the crisis and had cash in their pockets back then, did quite well.

The world looks like quite a different place today.

We are looking at one of the longest bull markets in history. Housing has also recovered. We have Brexit, and Donald Trump as US president.

But has anything really changed?

This recovery hasn’t been about prosperity, about workers seeing their salaries increase along with their standards of living. Workers aren’t making enough money, and spending is taking a hit. Instead, it has been all about asset price inflation, about pumping up stock prices and housing.

It isn’t real.

It’s why, after a massive debt crisis in 2008, we have seen debt increase even more.

It’s also why people are hoarding cash, even as central banks flood the world with liquidity.

This from the Wall Street Journal (emphasis added):

Banks are issuing more notes than ever and yet they seem to be disappearing off the face of the earth. Central banks don’t know where they have gone, or why, and are playing detective, trying to crack the same mystery.

The puzzle is especially perplexing since societies and companies are going cashless, given the boom in payments by cards and cellphone app.

The value of US dollars in circulation hit about $US1.7 trillion last year ($US12.4 billion of it in $1 bills; $US1.3 trillion of it in $US100 bills) according to the US Federal Reserve. That is up from $US1.2 trillion in 2013.

A Federal Reserve economist, Ruth Judson, wrote in a 2017 paper that about 60 per cent of all US currency, and about 75 per cent of $US100 bills, had left the country by the end of 2016 — for a total of about $US900 billion in US dollars kept overseas. Socking those bills away provides some protection against economic turmoil, especially in countries with a record of instability in their own financial systems, the paper said.

US Treasury Steven Mnuchin recently tried to explain the phenomenon. As he said in an interview on the Lou Dobbs Tonight show:

Literally, a lot of these $100 bills are sitting in bank vaults all over the world. The dollar is the reserve currency of the world, and everybody wants to hold dollars.  And the reason why they want to hold dollars is because the U.S. is a safe place to have your money, to invest and to hold your assets.

How do you protect what you already have?

The thing is, it’s not only the US that’s experiencing this. As the article on the Wall Street Journal also pointed out, it’s a similar trend also happening in Australia, with the number of bank notes issued relative to the size of the economy at a 50-year high.

And in Europe.

In fact, here is my favourite part of the article:

The European Central Bank, and others, tried asking the public for help.

“Everyone says that they are not hoarding cash but the money is clearly somewhere,” said Henk Esselink, head of the issue and circulation section in the ECB’s currency management division.

As I said, when things turn is when people start looking for cash. Cash is literally disappearing, even though central banks are flooding money into the system.

This decade’s recovery hasn’t been about growth, but stimulus, which has driven interest rates to record lows. Low interest rates are now making holding cash and gold more appealing.

We are already seeing less appetite for risk, investors becoming more cautious. The stock market is about profits, but also very much about sentiment.

With the stock market and housing at record highs and investors getting wary the big question for 2020 will be how do we make money from here, but also how do we protect what we already have.


Selva Freigedo
Editor, The Rum Rebellion

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 Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion