19-08-01 M4No23

Insight & Support for the Managers of Wealth www.cantillon-consulting.ch “Silver
alone is the true sinews of the circulation” Essai sur la Nature du Commerce ©2019 Cantillon Consulting August 2019 Cantillon Consulting Volume III, Issue V August 2019 Jay Walking Central banks on the Road to Perdition

©2019 Cantillon Consulting Please see the disclaimer at the end
of this document PAGE 2 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 Jay Walking One of the most wearisome aspects of the modern financial world is that we are forced to pay so much attention to the words and deeds of the unaccounta- ble technocrats - or, rather, the theocrats – who pop- ulate our overmighty central banks. These, our de facto rulers, are a group of men and women who are in part products of a near mono- lithic academic training – a sort of Ivory Tower, DSGE knitting circle – and in part the sort of ever- present, political revolving-door operators perhaps best typified today by Teflon Tessie, herself, Mme Christine Lagarde. One word from any of them – and they are sadly not as short of words as they are of genuinely con- structive ideas - and the algos flash, the bids and the offers are thrown into tumult, and literally trillions of dollars of notional values are rewritten in an in- stant, transferring countless sums in a highly hap- hazard manner from the pockets of A to those of B. How did it come to this?? Back in the halcyon days of the final quarter of the 19th century, a vast expansion of trade and a near unprecedented rise in general prosperity took place under the aegis of the classical gold standard. Be- yond the trust instilled by that metal backing, banks, it is true, were still fractional in nature. But they were also largely reliant upon their own re- sources and so both carried high levels of precau- tionary reserves, a decent bulwark of capital, and closely observed the cautionary dictum that the gauge of a banker’s art was that he knew the difference between a bill (a short-term credit issued to aid the rapidly-repayable, everyday circulation of goods and services) and a mortgage (a long-term obligation linked to some form of illiquid, fixed capital). Limited liability incorporation had also recently become the norm, but it was often, whether by explicit statute or legal convention, not as ‘limited’ as the name suggests, especially for banks: a subtlety which meant that, unlike today’s freebooters of the dividend recap, plenty of ‘skin’ was always kept in ‘the game’. Moreover, as Hankey’s words above imply, the few central banks then in existence were both far more restricted in their powers and innately less willing to act as ‘lenders of last resort’ at the first sign of difficulties arising. Alas, the age of the Gold Standard was all too brief; its passing a side effect of human folly on an epic scale. For the industrial mincing machine of the Great War reduced not just men to mangled flesh, but also shredded the finances of governments and, with them, the prospects of a rapid, peacetime re- turn to sound money and free trade. The reconstruc- tion efforts that followed the carnage were thus in- fected with a fatal desire to smooth over the result- ant difficulties and so gave us the bastardized – and inherently precarious – Gold-Exchange standard; a construction which may have ‘economised’ on the “The knowledge that there is a statutory power [to provide emergency funds to banks] would induce and confirm a belief already too prevalent that if the commercial world acts imprudently by an excess of speculation, there are means by which the naturally injurious consequences may be averted… I cannot conceive of anything more likely to encourage rash and imprudent speculation. All commercial panics are caused by an excessive use of a system of credit… any statutory enactment which encourages a belief that, under any circumstances, credit is equal to capital is, in my opinion, a most retrograde step and most injurious to the best interest and prosperity of the whole community.” Thomson Hankey, sometime Deputy Governor of the Bank of England, ‘Principles of Banking’, 1878 edition “John Bull can stand many things, but he cannot stand two percent” – Walter Bagehot. “And, sadly, Mario Draghi cannot stand less than two percent” – Cantillon Consulting

of this document PAGE 3 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 metal itself, but which was also too far sparing of network resiliency and systemic robustness (of ‘anti -fragility’, as we have been taught to say, today). Following the revelation of its fundamental flaws amid the descent into Depression, demagoguery, and mass devastation, the next wheeze was the Gold-Dollar standard, cooked up at Bretton Woods. This sought to place the greenback, and only the greenback, on an equal footing with the metal in the ledgers of the world so it would no longer have to compete with the obligations of the now-shaky central banks of countries left ruined by the war, most notably those of the formerly pre-eminent British and French. From the inauguration of this, America’s ‘exorbitant privilege’, to the shambles of ‘our currency; your problem’ and ‘F**k the Italian lira’ took only a little over two decades of inexorably accelerating inflation and advancing socialism before another grand upheaval led us to what we might facetiously call the Goldman, Sachs standard. In this realm, Brookes Bros-attired, mathematical whiz kids, ballsy barrow -boys, and backstreet bookmakers all combined to make finance not a means of conducting trade, but trade an excuse to indulge in finance - much of it increasingly arcane and all of it subject to a series of panics of increasing magnitude until they culminat- ed in the Chicxulub extinction event of 2008. In the aftermath of that embarrassment, we have since endured a Swiftian parade of ever-mounting absurdity which we might variously call the ‘Own Goal’ standard for its evidently self-frustrating nature; the ‘Goal Seek’ standard to highlight the way that rules, conventions, and traditions have all been made secondary to the shamanistic obsession with delivering a given annual rate of increase in the consumer price index; or the ‘Golem’ standard in recognition of the fact that our central bankers ap- pear to have mutated into mindless automatons, each dully fixated on employing all necessary means (‘Whatever it takes’) to achieve their entirely arbitrary 2% per annum CPI objective and otherwise oblivious to the enormous collateral damage they are inflicting upon capital formation, retire- ment planning, fiscal rectitude, international amity, and societal harmony, all. Instead of those sanctimonious ‘mission statements’ like the Bank of England website’s nauseous “Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability”, what all such institutions should have carved over their portals is something much more honest, such as:- “The pursuit of two percent to the delight of the One Percent” Half a League Onward After a dreary decade of further misrule, the central banking hierarchy has arrogated ever more powers to itself as the reward for its serial failures. Crisis and Leviathan, Baptists and Bootleggers: the ratchet effect takes us ever further away from the ideals of personal and corporate responsibility, free markets, and regime stability. In such a departure lies much of the explanation for our present woes - for that wearisome, over-worked concept of ‘uncertainty’ under which we labour. Despite this, it would be vain to hope that the agents of our misfortune, our overweening monetary Apparat, would ever stop to consider whether they themselves are the problem and not the solu- tion. Instead, with every step its members take, the un- charted road they are blasting out leads further and further into a deepening, narrowing, seemingly endless ravine while the route behind has been im- passably blocked with the mounds of rubble left by the past dynamiting of their way. There may be no way forward, but there certainly is no way back. As they tirelessly quarry a way paved with Good Intentions, here and there, a few whispered objec- tions can occasionally be heard: BOJ members

of this document PAGE 4 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 fretting about the harm being done to commercial banks; the Fed engaging in a little cheap, CYA by delivering homilies on leveraged lending; the Bank of England’s chief economist laughably expressing belated fears of the ‘culture of low-rate dependency’ in whose seductive poisons he has long been an ac- tive, street-corner trafficker. But principally the attitude is ‘Flucht nach vorne’ - forward flight – with the major central banks gearing up to make a Passchendaele-style ‘one more heave’ and force people to pay at least that magic two percent more for their daily bread or else shatter the financial and political machinery in the attempt to do so. Grandpa - through a combination of negative interest rates and often binding ceilings on his tax-free accumulations – has been unconstitutionally expro- priated - robbed, even – to finance a Mos Eisley can- tina cast of Zombies, Unicorns, PE Vampires, public sector drones, and condo flippers. And they wonder why productivity is low, real wages unre- markable, and capital formation anaemic. No real surprise then that Draghi emerged from the ECB’s Unholy Conclave at Sintra, a few weeks back, to deliver a fait accompli with which to tie the hands of his successor (not that the crude political cypher who was later chosen for that role will need much in the way of restraining). A crafty mix of in- sinuation and artful wish-listing sparked the desired change in the financial markets, driving the Bund yield to new, negative depths, that on the no- torious Austrian 100-years to sub-unity, and the Greek 10-year to – and briefly through – parity with that of the good ole US of A. Cementing his triumph, the subsequent policy meeting delivered the verdict that rates would re- main at or - crucially - below their current levels for another year, at least, and that among the “options being examined” were “the design of a tiered system for reserve remuneration, and for the size and composition of potential new net asset purchases.” Blackrock’s Mr. Fink helpfully responded by offering to unload a bunch of stock upon him – which may tell you all you need to know about that worthy’s view of the equity market’s near-term prospects and of his wish for a liquidity backstop (c.f., Thomson Hankey, above). Ominously, Draghi mused about the ‘symmetry’ of the Bank’s 2% target which is to say that, whenever price rises do next choose to accelerate, the ECB will not be in any hurry to rein them in, once more, having thus added a wholly subjective, desired path for prices to the existing, equally fabulous, instantane- ous rate of climb. That, as a moment’s reflection will surely reveal, is a far from innocent addendum. We need look no further than Germany for evi- dence of the slowdown underway in the Eurozone which has prompted such anxiety on carissimo Mari- o’s behalf. Its mighty industrial sector is suffering flat to negative sales at home for the first time in three years; its Eurozone customers are also on strike, registering the first declines in purchases since autumn 2013; and while the count for the rest of the world is just positive overall, its key capital goods exports are off by nearly 3%, also the worst showing since the global, commodity-driven, ‘Hidden Recession’ of 2016. The IfO has dropped like a stone, from post-Unification highs to six-year lows, the sharpest descent since the GFC itself. Over at the Fed, meanwhile, the racing certainty is that cuts are on the way with the only token protes- tation of virtue (“Oooh! Sir Jasper!”) being over the rather trivial issue of whether to deliver one cut of half a point in one go , or two rapid instalments of a quarter. We shall shortly turn to the wisdom of this decision, below. In China, meanwhile, the problems are of a different order. Although rumours abound that a good deal of unsubtle censorship is being exercised (scuttlebutt lent a good deal of credence by the re-

of this document PAGE 5 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 cent closure of the site ‘wallstreetcn.com’ for alleg- edly vitiating the official spin), it is not hard to find repeated tellings of business hardship, company failure, executive corruption, audit complicity in fraud, and all manner of economic ills – mostly, if not entirely, credit related. Tales also abound of vast surplus capacity in re- gional airports; expensive but woefully under- utilized high-speed rail; of a worrying rise in office vacancies in some of the key growth cities; of the plunge in auto sales; of rapid disinvestment by for- eign companies and attempted offshoring by their domestic peers, among others. But perhaps a telling statistic is that the reported revenue growth for ‘industrial companies above a certain size’ has flat-spotted the racing slicks, screeching from more than 10% yoy to a lowly 2.1% since last summer, with a profit shortfall of 1.7% in QII making a stark contrast with 2018’s like-quarter rise of more than 20%. All this, too, despite a first-half injection 13% greater in size by way of loans and 22% in ‘total social finance’ than was added at the start of the previous year. What can central banks do to rectify this? Is the root of these difficulties really to be found in having an interest rate some fraction of a percent too high, or historically low bond yields remaining somehow too elevated? No. Not really. We’ll keep the Green Flag Flying In the first instance, much of the ‘uncertainty’ about which we hear so much - mainly, it must be said, from people paid vast executive salaries precisely in order to cope with such travails, or from policymak- ers arrogating to themselves far-reaching powers of intervention in the ‘fatal conceit’ that they under- stand our lives better than we do ourselves – is not directly financial in origin. The Sino-American trade war is not really just about cell-phone patents or sneaker prices but also com- prises a thankfully non-military struggle for hegem- ony which is serving to disrupt supply chains and company planning and execution across the globe. Ditto the escalating spat between Japan and Korea over war-time atrocities, 75 years after the fact. The Middle East, Venezuela, the ongoing pressure on Russia, the dispute over mass migration, the split between nationalists, federalists, and libera- tionists (!) in the European Disunion – all have had their contribution to make to clouding business ho- rizons. Then there is perhaps the greatest threat to prosperity of them all: viz., the carefully orchestrated cater- wauling of the Climate hysterics with their omni- present, figurehead, that obsessive, Joan of Arc wannabe, Greta Thunberg. The Green Leap Forward must take the blame as perhaps THE single greatest source of the debilitat- ing ‘uncertainty’ afflicting managers and entrepre- neurs. With governments of all stripes and political persuasions playing virtue leap-frog and so inciting ever more radical - and frankly worryingly totalitar- ian – demands from the ‘activist’ fringe to dismantle most of the structure and much of the freedom of Western Civilization in the name of their miserable Death Cult, what is a decision-maker supposed to do? He or she can have no idea what is next to be banned and what mandated, what will be subsi- dized and what punitively taxed, what may and may not be financed, all in order to appease the wrath of Holy Mother Gaia. As the Two-degree Totentanz bays and shrieks about him, the poor business owner is constantly being told that much of what surrounds him is no longer ‘sustainable’, if it is not positively noxious, and that a complete restructuring of activities will be required of him, his suppliers, his shippers, and

of this document PAGE 6 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 his customers on an ever more foreshortened - if still deliberately vague – timetable, much of it rely- ing on the deployment of yet-to-be realised, Tooth Fairy, technological fixes. How much of the capital entrusted to you would YOU invest amid such a cacophony of apocalyptic and, frankly, irrational prognostications? What would be the point the cynic might enquire, if your efforts only have a shelf-life of 12 years and if returns to money are meanwhile inconsistently negative? If Mario Draghi can lend some of that cheap cash to St. Greta so she can pay for whatever it might be that she needs to cultivate a few less obtrusive hob- bies (and maybe for a few clothes suitable for - you know – an actually 16-year old), another rate cut might do some good. But otherwise, not. So the question is not the straightforward one of “Are we headed for a recession?” It is rather: what form will it take? How much extra violence will be visited upon markets – and the economy at large - by the central banks’ efforts to forestall it, mitigate it, curtail it, prevent it from working its cathartic spell? To what degree will the underlying private sector retrenchment be obscured by an orgy of environmentally disastrous windmill- building and disruptive vehicle charging-point in- stallation? How far will the banks go in copying that most cu- rious of monetary role models to whom they are openly looking for inspiration – the thirty year-old Sisyphus of often fruitless inflation-chasing that is the Bank of Japan – and how far will they and their political masters venture in turning ‘Net Zero’ into Year Zero, by enlisting the terrible powers of the modern cyberstate to emulate the tottering, com- mand-economy posture of the putative EcoChina of which they all seem so avidly to dream?. Sean Corrigan

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of this document PAGE 8 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019

of this document PAGE 17 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 -$100 -$20 $60 $140 $220 26-Dec-18 16-Jan-19 06-Feb-19 27-Feb-19 20-Mar-19 10-Apr-19 01-May-19 22-May-19 12-Jun-19 03-Jul-19 24-Jul-19 Cumulative US Fund Flows, blns: Source - ICI, Lipper, Cantillon Money Market Domestic Equity ROW Equity Bonds All Equity TOTAL

of this document PAGE 19 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 0 10 20 30 40 50 60 70 80 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Apr-83 Apr-88 Apr-93 Apr-98 Apr-03 Apr-08 Apr-13 Apr-18 Gold v Silver -2.75 -1.75 -0.75 0.25 1.25 2.25 -3.75 -2.25 -0.75 0.75 2.25 3.75 Dec-79 Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 Dec-15 Dec-19 Gold/Commodity Ratio (t+3) v UST yields, deviations from trend: Source - WB/IMF, FRED UST10 IMF/Au -2.75 -2.00 -1.25 -0.50 0.25 1.00 -3.75 -2.25 -0.75 0.75 2.25 3.75 Dec-79 Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Dec-03 Dec-07 Dec-11 Dec-15 Dec-19 dRESIDUALS UST10 IMF/Au Breakdown to peak of 'Super-Cycle' GFC

of this document PAGE 20 Insight & Support for the Managers of Wealth www.cantillon-consulting.ch August 2019 Disclaimer All content is intended to give general advice only. The investments and instruments mentioned therein are not necessarily suitable for every individual and you should use this information in conjunction with other advice and research to determine its suitability for your own circumstances and risk preferences. The value of all securities and investments, as well as the income derived from them, can fall as well as rise. Your investments may be subject to sudden, often substantial, declines in value which may not be recoverable; others may expire worthless after a specified period. You should not buy any of the securities or other investments mentioned with money you cannot afford to lose. In some cases there may be significant charges which may reduce the value of your investment. You run an extra risk of losing money when you buy shares in certain securities where there is a large difference or ‘spread’ between the buying price and the selling price, a circumstance which means that, should you sell them immediately, you may get back much less than you paid for them. In the case of investment trusts and certain other funds, these may use or propose to use the borrowing of money in order to increase the size of their exposures and/or invest in other securities with a similar strategy. As a result, movements in the price of the securities may be more volatile than the movements in the prices of those underlying investments. Some investments may involve a high degree of such borrowing (often referred to as ‘gearing’ or ‘leverage’) This means that a small movement in the price of the underlying asset may have a disproportionately large effect on that of your investment. Accordingly, a relatively small adverse movement in the price of the underlying asset can result in the loss of the entirety of your original investment. Changes in rates of exchange may have an adverse effect on the value or price of the investment and you should be aware that additional dealing, transaction, and custody charges for certain instruments may result when these are not traded in your home currency. Some investments may not be quoted on a recognised investment exchange and, as a result, you may find them to be ‘illiquid’. You may not easily be able to trade your illiquid investments and, in certain circumstances, it may become difficult, if not impossible to sell the investment in a timely manner and/or at its indicative price. Investment in any of the assets mentioned may have tax consequences regarding which you should consult your tax adviser. All reasonable care has been taken to ensure that all statements of fact and opinion contained in the either written or spoken form are fair and accurate in all material respects. All data is from sources considered to be reliable but its accuracy cannot be guaranteed. Investors should seek appropriate professional advice if any points are un- clear. Copyright ©2019 Cantillon Consulting Sàrl. Any disclosure, copy, reproduction by any means, distribution, or other action which relies on the contents of such materials, made without the prior written consent of Cantillon Consulting, is strictly prohibited and could lead to legal action.

19-08-01 M4No23

19-08-01 M4No23

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Insight & Support for the Managers of Wealth www.cantillon-consulting.ch “Silver

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end

©2019 Cantillon Consulting Please see the disclaimer at the end