There are two ways to lose money — loudly or quietly.
If we have to lose money, our preference is to lose it loudly.
If we’re losing money, we want to know about it.
We want it to be a reminder to not do something stupid.
You should feel that way too.
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The worst way to lose money is quietly. So quietly that you don’t even know it’s happening.
But it’s the approach some of the world’s most influential people are lobbying for right now…
Of course, no one wants to lose money.
Given the choice between winning and losing, only a lunatic would choose losing.
The only instances we know of folks being happy about losing money is in the movies — The Million Pound Note, Brewster’s Millions and the musical Springtime for Hitler in Mel Brooks’ hit movie The Producers.
That’s the movies. Most normal people would pick winning money every time.
But then ‘normal’ isn’t a word you can use when it comes to talking about central banks.
The opportunity cost of losing money quietly
When it comes to losing money quietly there are a number of ways to do it.
One way is to buy a big blue-chip stock and then watch it slowly drift lower and lower over time.
You won’t sell it because it’s a blue-chip.
You don’t want to sell it because you’re not a ‘trader’. You’re a buy and hold investor.
And you don’t want to sell because it will cost you in commissions. In effect you decide that you’d rather lose $1,000 by staying in a dud stock than spending $20 in commission to sell the dud stock.
So you’ll stay with it…and stay with it…and stay with it.
Before you know it, over one, two or three years a big chunk of your portfolio has gone nowhere. Or worse, it’s gone down.
That’s especially bad news in a rising stock market. They have a fancy term for that in economics — opportunity cost.
The opportunity cost of holding on to a dud stock is that you potentially miss out on investing in a better stock.
That’s a bad way to lose money. But there is a worse way. It’s the way the International Monetary Fund (IMF) would like you to lose money.
A banker’s best friend
The IMF is the ‘central bank of central banks’.
It’s a United Nations organisation full of busybody economists and bureaucrats. They think they can direct the economy by pulling levers and pressing buttons.
Their favourite ‘lever’ is to print money.
Their favourite ‘button’ is to encourage price inflation.
This report in The Australian explains what we mean:
‘The International Monetary Fund has refreshed its call for central banks to raise their inflation targets to 4 per cent, arguing the additional inflation would come at little cost while preventing interest rates getting stuck at zero after recessions.’
Inflation. It’s the silent killer…the quiet way to lose money without you even realising it.
In fact, we’d argue it’s the quietest way to lose money.
So why do central bankers and the IMF want inflation?
The real reason is that inflation is the bankers’ best friend. Inflation allows banks to lend more money and help ensure that rising asset prices cover outstanding loans.
The banks can then lend more money when the owner sells an asset at a higher price. So as long as asset prices keep going up, the banks are happy.
They don’t like it when loans are high and asset prices are low. That’s what you call negative equity. It means that in instances of distressed selling it’s much harder for the borrower to repay their debts.
That’s bad news for banks. That’s why price deflation (generally falling prices) scares them so much.
But the desire for inflation means something else too…
Priming the market for a boom
It adds more fuel to our central theme, that stocks are going much higher.
The central banks won’t openly say it, but they’re priming the market for an immense asset price boom.
Some folks will say that’s rubbish. They’ll say central bankers have learned the lessons from the past — that a boom ends with a bust.
But that’s the thing. Everyone knows that. However, remember what we said about these people. They aren’t normal. They believe they can engineer a boom and then prevent it from going bust.
Most people have short memories. But this is exactly the same talk that happened during the 1990s, when Alan Greenspan was chairman of the US Federal Reserve Bank.
The Fed thought it could engineer a ‘soft landing’. They thought they could cool the market by gradually raising interest rates.
It turned out the Fed couldn’t engineer a ‘soft landing’. The result was a hard landing as markets crashed in 2000. The same will happen again. But not before stocks complete the final stages of the stock market rally.
That won’t be for a while yet. The central bankers are more worried about stoking the growth fires at the moment. That means low interest rates, more money printing, higher inflation…and higher stock prices.
In short: sell cash and buy stocks. It’s the only way to beat the central bankers at their wealth destroying game.
Cheers,
Kris+
