The Risk of Change is Nothing New

Happy New Year everyone! I hope you enjoyed a wonderful holiday with your loved ones.

With all the travel uncertainty, I spent most of my break exploring and revisiting some of the beautiful spots in Victoria’s Mornington Peninsula.

The first time I drove around the peninsula was back in October 2015. It wasn’t beach weather yet so instead we stopped at several towns and ended up at the tip, Point Nepean National Park.

Pretty much one of the first things you see once you arrive at the park is the old Quarantine Station, which was set up in the 1850s.

It’s quite impressive. Passenger rooms, disinfecting stations and even a cemetery.

This is where many people — and animals — spent their first weeks after arriving onto Australian shores. An isolated area to keep diseases at bay from entering the country.

As you can imagine, the area was used and even expanded during the Spanish flu in 1918. It was later turned into barracks by the army, and since then it has been part of the national park.

When I visited five years ago I remember thinking how foreign and old the whole concept seemed to me. That is, the idea of travel restrictions, disinfecting and quarantining for weeks to stop the spread of disease. It was a time of globalisation, Airbnb and cheap travel.

But here we are today…talk about change!

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2020 has been a year of changes

Financially speaking, it’s been a crazy year.

We’ve seen massive government stimulus…a stock market crash and rising unemployment.

And at the same time, pretty much almost everywhere you look things are looking up…stocks, gold, property, bitcoin even recently touched US$40,000 after institutional investors started moving in.

All except cash. With interest rates at record lows and all the money creation, people are fleeing cash and searching for growth in assets.

On the other hand, debt is increasing…fast.

According to the Institute of International Finance, global debt increased by over US$15 trillion in the first nine months of 2020 and is expected to have finished the year at US$277 trillion, or around 365% of the world’s GDP.

Debt is also cheap.

Denmark, one of the countries that has been offering negative interest rates for a while now started offering 20-year mortgage loans at a fixed-interest rate of zero. That is, you can pay your mortgage in instalments interest-free!

I mean, every way you look at it is crazy. A complete reversal of the system.

But on the other hand, if debt is cheap — or free —why not use it?

In their recent monetary quarterly review, Bloomberg writes they expect ‘ultra-low’ interest rates will be here for a while.

Central banks are set to spend 2021 maintaining their ultra-easy monetary policies even with the global economy expected to accelerate away from last year’s coronavirus-inflicted recession.

In Bloomberg’s quarterly review of monetary policy that covers 90% of the world economy, no major western central bank is expected to hike interest rates this year….

The assumption is central bankers will want to guarantee the recovery is safe before they even start to consider tightening policy. Continued uncertainty over the path of the virus along with elevated unemployment and weak inflation are the main reasons for waiting. And even if inflation makes a comeback this year, central banks will likely try to look through it.

Taming inflation isn’t easy

Consensus seems to be that money will keep flowing around, that assets will keep rising and interest rates will stay low.

The question here is how long banks will continue lending, and how long will this liquidity in the market continue?  And what if we see higher inflation?

The ingredients for higher inflation are in place. You have very powerful fiscal policy in place and perhaps more to come’, said St Louis Fed President James Bullard recently.

Truth is that with so much debt in the system we can’t afford higher rates…even if inflation starts.

From Reuters:

We are looking at a long period where the fed funds rate will stay at essentially zero’ [Philadelphia Fed President Patrick] Harker said, referring to the central bank’s key overnight interest rate. He added that he saw no signs thatinflation is going to go out of control”.’

It’s this image that things are under control that’s nagging me…

I mean, it may very well be so. That things follow the planned trajectory, that more stimulus comes inflating asset prices, that inflation is under control and interest rates stay low.

But taming inflation isn’t easy. I’ve written in these pages many times about the effects of out of control inflation in Argentina.

My point is the system is stretched and out of whack and there’s always the risk that things will change.


Selva Freigedo Signature

Selva Freigedo,
For 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