And now, back to the 18th century to learn some more lessons about where things are going today…
When John Law was busy ruining the French currency, he was doing it for a reason. The primary aim was to keep his head attached to his body. And he understood this required two secondary goals to be met.
First, the king’s debts needed to be cut down to size. And second, the speculative classes of France needed to support the plan (with their money).
The combined result was the Mississippi Bubble – a speculative extravaganza that would make even Exponential Investors blush.
Law converted French government bonds into options on Mississippi Company stock. Or something to that effect, anyway. This led to a boom in the prices of both government debt and Mississippi stock.
Things eventually went pear shaped. No matter how you disguise it, money printing always ends the same way. Law has been known as “the father of inflation” ever since.
Fast forward to today and things are looking mighty familiar. The world’s politicians and central bankers have unleashed their powers on the world. Anything is now possible. There are no limits to the plans of central bankers and politicians.
The aim of the game is to control government and corporate debt by printing money and triggering a new speculative boom in stock prices.
The father of inflation would be… proud?
But, unlike in the 18th century, the battle lines have divided society in a new way. It’s no longer about the rich and the poor, the powerful and the dispossessed, the elites and the plebs.
This time, it’s about age. Intergenerational warfare. That’s because the Covid-19 crisis, and the policies of governments and central banks in response, are dividing us along new lines. Not to mention the differences in health risk presented by Covid-19. But let’s leave that to the side for now.
One of our readers was on to this development before me, by the way. Their feedback pointed out how the crisis had separated societies into two groups.
For young people, the reader wrote, the current crash looks like a buying opportunity. They can pile into investments at cheap prices and maybe even afford their own homes. Heck, if interest rates are zero and mortgage payments optional, who can’t afford a house?
Those nearing retirement have been devastated by the financial crash. The value of the assets they plan to sell during retirement has plunged. That means selling more stocks to fund the same lifestyle, or downgrading your lifestyle.
The government’s response to the crisis has the same flavour. Each policy either benefits the young, or those with retirement finances on their mind. It’s the generational warfare’s equivalent to the invasion of Poland.
Suspending mortgage payments and rents is a huge advantage for the young, but at the expense of bank shareholders and property owners. Inflating asset prices is a huge advantage for retirees at the expense of those who would buy in at lower prices.
Suddenly, government rescue efforts are looking like trade-offs at best, or generational war at worst.
Politicians have so far promised everything to both sides. But trying to please everyone is what leads to inflation in the end.
My worry is what comes next in the intergenerational war. Now that politicians and central bankers can do anything, with their unlimited budgets, the real question is who they work for. Who gets the benefits of their powers? Who will abuse the printing press?
Does the government rescue the self-employed or inflate stock prices? Does it rescue employees or shareholders? Does it suspend taxes and mortgages or save pensions?
The amount of power that’s up for grabs is now larger than ever. Who’s gonna grab it first?
Find out exactly what steps the government will take next here.
Not that I’m advocating taking part in the generational war drama. It might put you and me on opposite sides of no man’s land, after all.
Instead, I’d like to tell you the story of The Irishman. And I don’t mean Martin Scorsese’s 2019 version. Although Robert De Niro could play the Irishman I mean quite well too.
We’re talking of Richard Cantillon. The only man to have successfully played an entire series of central bank stockmarket bubbles beautifully. He got so rich that, legend has it, he faked his own death with a headless body in a house fire, and fled overseas.
But how did he do it? Well, Cantillon understood the underlying flaws of his friend John Law’s plans for France. He refused to work for Law and instead set up a bank which dealt in options for its clients. By timing the various phases of the speculative bubbles in the Mississippi Bubble, the South Sea Bubble and others – both the initial boom and the subsequent bust – Cantillon became immensely wealthy.
My pitch to you is not to believe in the modern Law and to be like Cantillon instead. To understand the nature of the money printing fudges hitting the newswires today. To understand they’re not different to the 18th century cures for too much debt.
But what exactly does that translate to today? What should you do?
Just as in Cantillon’s time, there are essentially two assets. The financial speculative asset and the opt-out. During the boom, you should own speculative assets. During the bust, escape.
Well, my friend Eoin Treacy has discovered one way of playing both at the same time.
While the gold mints of the world are running out of stock, Eoin’s subscribers are not. They’re buying into an opportunity so good that it made me set up an ISA account. Unfortunately, I can’t get it approved because nobody will review my proof of address… So I’m stuck.
But I bet you’re not. Find out what the opportunity is here. And which specific stocks Eoin chose for you to take advantage.
Until next time,
Editor, Southbank Investment Research