The Singularity Is Here — Fiat Money and The Government Debt Bomb

On 27 October 2020, something awfully strange occurred to a mysterious, no-name stock on the ASX.

Strategic Elements is one of those weird little jack-of-all-trades tech stocks that always has a few crazy projects on the go at any one time.

Kind of like a small-cap Tony Stark (the Iron Man guy).

It’s only a $50 million company. But it has a hand in AI-powered military robots…‘nanocube memory ink’…reopening long-mothballed goldfields in New Zealand…and mining meteorite sites for precious rare earths…to name just a few of its brilliantly crazy schemes.

Normally, a Strategic Elements-type venture happily spends its life beavering away but going completely ignored by investors.

On 27 October, however, the company got noticed.

Its shares leapt from seven cents to 15 cents in a single trading session.

What got it noticed?

Well, none of the projects above.

It was a crazy little moon-shot project it’s been working on regarding clean energy. 

The project was so secret, the Exponential Stock Investor guys Ryan Dinse and Lachlann Tierney tell me they had no idea about it.

And Strategic Elements has been one of their buy recommendations since October 2019!

So…what caused all the fuss?

Strategic Elements has an even crazier little sub-division called Australian Advanced Materials. And it turns out these guys have been quietly working on their own sci-fi-sounding mission: Development of a self-charging flexible battery technology.

That’s right…

A SELF-CHARGING battery.

The company shocks the market…a market which, until then, pretty much didn’t know it existed…by announcing it’s about to achieve ‘scale up’ on the project before Christmas.

The project has even been partially funded by the federal government.

As Proactive Investors reports:

The battery cells generate electricity from humidity in the air or skin surface to self-charge themselves within minutes.

No manual charging or wired power is required as they are created with a printable ink and are ideally suited for use in Internet of Things (IOT) devices.

The global battery market for IOT was worth US$8.7 billion in 2009 and forecast to be US$15.9 billion in 2025.

The stock immediately went ballistic.

Strategic Elements is now deploying its capital to dramatically accelerate development.

Its share purchase plan was suddenly oversubscribed by 330% once the news broke.

It was a rather happy surprise for Exponential Stock Investor subscribers, who’ve had the little Perth-based company on their buy list for over year.

For them, it was primarily an AI/robotics play.

Strategic Elements’ work on the wonder-battery didn’t even get a passing mention in the initial writeup.

It was a side hustle.

Not even on their radar back then.

That’s what makes it a prime example of the strange clean energy phenomenon we’re going to be talking about this week

As soon as the press release came out, my ever-technical, analytically minded co-editor Lachlann Tierney emailed me to say:

SELF-CHARGING BATTERIES??? 

This is some next-level stuff if it works.

Like HUGE.

Wowzerssss.

The market concurred.

But here’s the thing…

Would that have happened if the company dropped this news a year ago, back in October 2019?

Maybe.

But I don’t think so.

Strategic Elements was a beneficiary of a new phenomenon only just manifesting in certain stocks.

Something quite distinct from the blistering run-up of conventional alternative energy stocks so far in 2020.

But that could prove to be even more profitable in 2021.

The phenomenon centres around the ‘second-order effects’ of the clean energy boom that’s unfolding right now.

And it’s very possible that, next year, you’re likely to see similar stories all over the place, in every index on the planet.

As such, you’ll see companies like Strategic Elements completely rejig and refocus their models to take this into account.

The trick going forward is to anticipate deliberately and in advance which stocks might benefit from this phenomenon next.

This is potentially huge if we have the scoop on this.

More tomorrow.

For now, I’ll hand over to normal services…

James Woodburn,
Group Publisher

**

The Singularity Is Here

The most consequential thing in capital markets last week was not the Dow Jones Industrials setting a new all-time high and closing over 30,000. It was not bitcoin making another epic run above $19,000. Both matter. And I’ll get to them later.

But the most consequential event in capital markets last week was Portugal’s 10-year government bond yield going below zero. Portugal has a government debt-to-GDP ratio of 136%. Only Greece (176%) and Italy (137%) are higher in the Eurozone. All three countries, along with Spain, were at the epicentre of the 2011–12 European Sovereign Debt Crisis.

That’s practically ancient history now. Thanks to the €1.35 trillion bond buying program from the European Central Bank, government bond yields in the Eurozone are plunging. With the ECB committed to more stimulus in 2021 (to make up for the cost of disastrous lockdown policies), traders and institutional investors are doing the rational thing. What is that?

They’re buying government bonds — and other bonds of dubious credit quality (rated ‘junk’ by the ratings agencies — because they know someone else is on the other side of the trade. They know yields can go below zero. They know that even if Italian 10-year yields are 0.55% and Spanish 10-year yields are a paltry 0.05%, that’s STILL higher than 10-year yields in the northern part of the Eurozone.

Germany’s 10-year government bond, for example, has a negative yield of 0.59%. And as you may have heard, there are over $18 trillion in bonds globally with negative yields. And I’m talking about the nominal yield. If you calculated the ‘real yield’ — adjusted for even modest inflation — the total basket of negative yielding debt would be even larger. So what?

If you’re trading with someone else’s money and you believe 2021 will see even MORE central bank bond buying, more fiscal stimulus and ever larger government deficits, then whether you know it or not, you’re betting on LOWER interest rates. And by that, deeply negative nominal rates in the Eurozone, maybe the UK, and quite possibly the US.

You can try and trade that in the bond market, buying the higher yielding countries like Spain and Italy (the biggest spreads between German debt). Or even Greece! In 2013, 10-year Greek government bond yields hit 36.59%! Today they’re 0.647%. More stimulus should lead to even lower interest rates, which at current levels, means negative.

Do you think this explains the new high on the Dow and the big move in bitcoin? Do you think traders and savers see what’s happening with interest rates and are looking at other asset classes as a way of reducing exposure to government bonds?

Stocks are an obvious one. It’s the easiest place for liquidity to go to. If central banks are pumping money into bond markets, and you view the blow out in government debt as too risky for the reward on offer, then get in line and become a trend follower. Equities as an asset class (and growth or tech as ‘factors’) are the simply trade of 2021.

But beyond simple, what are your other alternatives? Clearly some people think bitcoin is becoming more and more attractive than a) earning zero interest on your savings, b) paying interest on your savings via negative rates, or c) buying gold. In any of those scenarios, bitcoin is seen as a way OUT of the legacy financial system and into an asset that won’t blow up when government debt leads to either inflation or default.

The biggest non-mover was, of course, gold. It DID move down in US dollar terms. You’d have to ask a technical analyst for their view on the short-term price action. But remember, it’s not gold that’s moving. It’s the relative value of fiat currencies in which gold is priced.

When you think about it that way, it becomes a lot easier to ignore the price action and buy the dips. That doesn’t mean you can’t lose money buying gold. If you sell it at a loss, it’s a loss. But if you’re saving in gold, as a way of putting some of your wealth in an asset without counterparty risk, then as a long-term prospect, gold is as appealing as ever.

The $11 trillion gold market is still much larger than the $300 billion bitcoin market. Some people argued that last week was a kind of passing of the monetary torch. An analog scarce asset (gold) was surpassed by a digital scarce asset (bitcoin). Both see the writing on the wall for fiat money and the government debt bomb.

Who will win? Can BOTH win? And how much time is left on the clock? The last one is the big question. The answer?

Governments are blowing out global debt levels on the belief that a vaccine for COVID-19 will return the economy to ‘normal’. But does anyone really expect debt levels to go down or interest rates to rise, assuming we even get back to ‘normal’? I don’t.

That’s the problem. Once you establish the principle that money is no object, then debt levels quickly escalate. Once you give the government powers to restrict your liberty in an emergency, the powers stay even when the emergency is gone. And once you train the population to become submissive and compliant any time there’s a new ‘outbreak’ of a disease, you’ll find more outbreaks, more diseases, and more pandemics.

What do you want to own then? I know MY answer. Send your answers to
cs@portphillippublishing.com.au with ‘Rum Rebellion’ as the subject line.

Regards,


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: If a ‘singularity’ is defined as a black hole with such massive gravity that it sucks everything in at event horizon — matter, energy, light — then government debt is quickly becoming a financial singularity. It’s sucking in massive quantities of money printed by central banks. This requires low (and even negative) interest rates. And the process triggers many other financial reactions to escape the low-yield black hole. Some of those reactions put investors at greater risk than they may know. And some of those reactions will be destructive to wealth. Getting YOUR reaction right has never been more important.


Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.


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