Investors Are Deaf to the Screams of Gold, Cotton: Mark Gilbert

Most of us own truths too painful to confess. We drink too much. We lust inappropriately. We envy. We covet material goods, when every study shows experiences count for so much more. Confessing them, even just to ourselves in the long, dark teatime of the soul, is too distressing.

The collective subconscious of the financial markets is no different. It knows pension systems are bankrupt, water wars are coming, China will best the West, Keynesian stimulus is a surefire way to stoke inflation, gold is saying something, and the banking community remains as rapacious as it was prior to the credit crisis. Knowing and admitting isn’t the same thing.

The following paragraphs list some of the taboos that should ping our radar harder.

In Price Is Knowledge

If you told Rip van Bondtrader that gold had risen to a record during his decade-long slumber, he’d want to know what the inflation outlook was, and how badly he’d gotten killed on his bond investments. He’d be astonished to discover that he’s made a total return of about 8 percent since January on Treasuries maturing in more than a year.

“What makes the gold story so interesting is that bullion has so many different correlations -- with inflation, with the dollar, with interest rates, with political uncertainty,” according to David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “This year, for example, gold has shifted from being a commodity toward being a currency -- the classic role as a monetary metal that is no government’s liability.”

Gold may be screaming more about a general mistrust of the securities markets than about the prospect of rising prices. Rip, though, would be similarly horrified to see cotton trading near a 15-year high at more than $1 a pound, or wheat surging more than 30 percent in the past year, helping to drive a UBS/Bloomberg index of food prices up by about 28 percent. The official figures say inflation is dormant; the phrase “lies, damned lies and statistics” springs to mind.

Lots of Clever People Don’t Believe in Currencies

Imagine trying to explain to a grandmother or a teenager that a lot of very clever people in the financial world don’t actually believe in dollars, euros and yen. Exchanging goods and services for bits of paper is a confidence game, say some; a conjuring trick without bones, because without the skeleton of a gold standard, so-called fiat currencies are worth nothing more than the paper they are printed on.

Even the majority of finance professionals who don’t see any need to back currencies with precious metals are haunted by the thought of the central bank printing presses whirring into action. And, with every nation in the world trying to export its way out of trouble, the beggar-thy-neighbor race to devalue currencies will only gather pace in the coming months.

When I’m 64

Folk wisdom claims that bumble bees defy the laws of physics because their power-to-weight ratio should be insufficient to allow flight. Luckily, because the bees don’t know this, they happily take off, buzz around and land, buoyed by blissful ignorance. Similarly, no sane investor would ever buy a stock or a bond if they stopped to consider the inverted- pyramid mathematics of an ageing, death-resistant population, a slump in birthrates, and the New Normal of spectacularly low returns in a post-bubble environment.

How on Earth is society going to pay pensions to this growing army of old people? If granddad does what investment theory says he should and socks his nest egg (assuming he even has one) into the ultra safety of Treasuries, earning a record- low yield of less than 0.45 percent on two-year securities, how will he afford his medications? Many countries and companies are probably bankrupt once you account properly for their future obligations; some problems, though, are too big and too intractable and too downright scary for polite conversation.

Water, Water Everywhere

The recent surge in the price of wheat as a summer-singed Russia banned exports should have been a sign that food security is a global tinderbox waiting to flare. Everyone has read the stories about Chinese officials wandering around Africa buying agricultural rights that last for decades; no-one wants to really consider the consequences of not being able to feed their kids.

While the West was tinkering with its crops to grow allegedly environmentally friendly fuel for our automobile obsession, the nation that takes the long view was snapping up long-term leases on the world’s bread boxes. In the not-too distant future, nations that currently share rivers will divide into those geographically fortunate enough to be the source of those waterways, and those risking drought and deprivation.

The Inflationary Consequences of John Maynard Keynes

Inflation is always and everywhere a monetary phenomenon, according to Milton Friedman, who has been eclipsed in recent years by his chief competitor, John Maynard Keynes. Every bond investor suspects that chucking billions of dollars into the global economy builds a bed of kindling; nobody wants to shout “fire!” in a crowded trade.

The Answer to Too Much Debt Is Not More Debt

Lending to governments is not risk-free, whether that government is Argentina, Iceland, Ireland or the U.S. These days, when you buy government debt, you are taking on the credit risk of the global financial system because that is what the too-big-to-fail doctrine has saddled the world’s taxpayers with.

This week’s successful debt auctions by Ireland, Greece and Spain sure beat the alternative of failed sales with nobody turning up. With central banks acting as buyers of first and last resort, however, it is impossible to pretend that the capital markets are functioning properly -- another dirty little secret kept suppressed deep in the subconscious.

Mark Gilbert is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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