Dear Reader, Centralisation versus decentralisation. It’s one of the themes I often explore here at The Rum Rebellion. Put simply, in centralised political systems, the power resides with the few. In decentralised systems, the power is with the people. Think of China’s one party political state. There is a huge concentration of power at the top. Any dissenters are shut down immediately. And when I say shut down, I mean silenced…for good. For example, the Chinese communist party banned Falun Gong, a spiritual group which teaches mediation and self-improvement, about 20 years ago. They branded the group as an ‘evil cult’ which threatened social stability. They did more than just ban them though. As the ABC reported back in June: ‘China is murdering members of the Falun Gong spiritual group and harvesting their organs for transplant, a panel of lawyers and experts said as they invited further investigations into a potential genocide. ‘Members said they had heard clear evidence forced organ harvesting had taken place over at least 20 years in a final judgement from the China Tribunal, an independent panel set up to examine the issue. ‘Beijing has repeatedly denied accusations by human rights researchers and scholars that it forcibly takes organs from prisoners of conscience and said it stopped using organs from executed prisoners in 2015. ‘But the panel said it was "satisfied" that the practice was still taking place, with imprisoned Falun Gong members "probably the principal source" of organs for forced harvesting.’ As despicable as it sounds, organ harvesting is big business in China. But what makes that possible is the centralised nature of political power and control. While far from perfect, Australia has a relatively decentralised political system. We have three levels of government, local, state and federal. The designers of the constitution made it that way to prevent a concentration of power at the top. The same principle applies to financial markets. However, there is no constitutional protection to prevent a concentration of power as there is in politics. ..............................Advertisement.............................. Critical Deadline Alert: Must Act Before Tuesday There’s an exciting and permanent change coming to our premier tech trading service. And from Tuesday, it will cost new readers an extra $2,000 to join. But until then, you can join others who have made returns of 101%...120%...all the way up to 1,431%...before the price goes up. Click here for all the details. | .......................................................................... Over the years, the financial system has become more concentrated (centralised) under the guise of efficiency and consumer protection. At the same time, ‘central’ banks (there’s that word again) have become increasingly dominant. It took nearly 20 years of lobbying by the big private bankers to establish the Federal Reserve in 1913. And even then, they had to call it a ‘Federal Reserve’ (with 12 regional banks) not a ‘central bank’ (which it was) in order to get it over the line. This centralisation of banking power could not have occurred without removing gold from the financial system. So not surprisingly, around the same time as the Federal Reserve came into existence, the removal of gold from the hands of the people began. In the 1930s, President Roosevelt had to outlaw individuals owning gold, such was its power to prevent the centralisation of banking power. Gold only remained as ‘money’ in bank vaults. Soon though, gold left the national banks and went into central bank vaults only, where it remains concentrated today. The centralisation of ownership of gold and banking power go hand in hand. You cannot have one without the other. In Australia, we have one of the most centralised banking systems in the world. For example, our top four banks write around 80% of all mortgages. It’s an oligarchy. Yet, strangely, we don’t refer to our banking chiefs as ‘oligarchs’. The politicians and bankers sell this concentration to us as strength and stability. But as the royal commission showed, it’s also a platform for abuse of power. More than that, it’s a platform to take risks. The banks know they’re too big to fail. They know the central bank will always help them out with taxpayer money. But nature always chips away at power concentrations. Protected industries get lazy and complacent, and new players enter the market and cut their lunch. With this in mind, it was great to read about the entrepreneurial success of Netwealth Group Ltd [ASX:NWL] in the Weekend Australian. Netwealth, a wealth management platform, is a father and son business, 20 years in the making. It is benefitting as advisers and investors flee the big banks in the wake of the royal commission. The Heine’s, who started the business, have a long history of entrepreneurial endeavour. They have a family document ‘Lessons from History’ that seeks to build knowledge from this experience and hand it down through the generations. One of their lessons is that ‘It is ultimately your responsibility. Taking responsibility for when things go wrong is more important than taking responsibility for when things go right.’ It’s a lesson that all investors should heed. When you take responsibility for your mistakes, instead of blaming others, you tend to learn the lessons much quicker. Netwealth isn’t the only company benefitting from the slow malaise of the big four Aussie banks. There is an increasing number of players with leaner business models and a better service offering, and they are eating into the banks’ profits. My colleague Ryan Dinse (you’ll know him if you read Money Morning) has written a report on this malaise and ways to profit from it. It’s a fascinating read. As you’ll see, it has parallels with other instances in history. You can access your copy, here. Regards, | Greg Canavan, Editor, The Rum Rebellion |
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The Most Important Thing We Learned in the Last 20 Years By Bill Bonner This week, we’ve been working our way down the very short list of things we think we know. At first glance, our second lesson, described on Friday, does not seem very helpful. ‘Nobody knows anything’ may be gospel truth. But it doesn’t tell you what movie to watch or what stock to buy. Still, it is probably the most important thing we learned in the last 20 years. It establishes a rock-solid foundation for the investor, the parent, or the businessman. He builds on something he can always depend on — ignorance. No illusions Of course, the family man needs little reminding; he has his spouse and children to tell him how little he really knows. The wise businessman, too, has no illusions. Instead of thinking he knows what customers want, he listens to them. But the investor — like the politician, economist, or policy wonk — is always in danger of thinking he knows something; invariably, it turns out to be untrue. In 1999, for example, he believed the dotcoms offered a whole new era of growth and profits. In 2007, he believed his house was like an ATM that never ran out of cash. And in 2019, he is sure that central banks know what they are doing, and that the coming rate cuts will drive both stocks and bonds higher. How else can you explain yesterday’s news? The yield curve is inverted. The federal government is closed down. Sales are falling. Industrial production is down. The Donald is now ‘80% Retard’ with his China trade war. The entire world seems to be headed for recession. The bond market is in the biggest bubble in 500 years. The Dow is near a record high. The US is borrowing $5 billion per business day. And yet, investors bid up the Dow by more than 370 points. Stable geniuses Humility is probably the most underrated virtue a person can have. That’s not a problem for us here at the Diary. We’re humble and we’re proud of it. Nobody is more humble than we are. When it comes to humility, we’re number 1…stable geniuses of modesty…the chosen ones of uncertainty. You know our motto: Sometimes right; sometimes wrong; always in doubt. But sometimes we’re not so sure… So we just try to connect the dots…see patterns…and gain insights. Most often, these insights come not from company reports, analyst ratios, or ‘information’ on the internet. Instead, you find them in the distilled wisdom of old-timers…and old wives’ tales. And here’s one, Lesson # 3: That which gets out of whack is likely to get back into whack, sooner or later. While you never know what will happen, when you see things become unreasonable…weird…out of balance, you have better than even odds that they’ll ‘revert to the mean’ eventually. Measured in time In 1980, stocks traded at an all-time bottom, in gold terms, when you could buy all 30 Dow stocks for less than 2 ounces of gold. By 1999, they hit an all-time high, when it took 40 ounces. In terms of time, the move was less dramatic — but it told the same story. The average working man had to work about 100 hours to buy the Dow stocks in 1980. By 1999, he had to put in 821 hours. It looked like the stock market was out of whack on both ends. In 1980, stocks were too cheap. In 1999, they were too dear. But then, the stock market began a ‘correction’. The NASDAQ started to fall in January 2000. A year and a half later, it was down nearly 80% from its peak. Measured in time, it took the average person 350 hours of labour to buy the NASDAQ in 1999. By mid-2001, it took only 85. Meanwhile, the Dow industrials wiggle-waggled around after January 2000, but fell hard after the mortgage meltdown in 2008. At the bottom, in March 2009, the average person could buy the Dow for about half as many hours of work as it cost him 1999. Fits and furies With the help of the late Dow Jones theorist Richard Russell, we began to see that stock and bond markets followed big, long-term patterns. It took about 20–40 years for the stock market to complete a full cycle — top to top. The bond market took even longer. Scarcely anybody is still around who recalls the top of the last bull market in bonds. It happened in 1949; now, 70 years later, they’re hitting a new bubble high. While we knew we couldn’t predict the markets, we began to see that we could spot major tops and bottoms by looking at prices in terms of gold. The yellow metal is not perfect money. Like everything else in the natural world, it is subject to fits and furies. But it is still the most reliable money humans ever found. And over time, it does a fair job of telling us when things are out of whack. This led to a very simple Capital Loss Avoidance System, which proved to be very effective for long-term capital preservation: Any time you can buy the Dow for less than 5 ounces of gold, you should buy all the stocks you can. Then, when the Dow goes over 15 ounces of gold, you should sell stocks, buy gold, and sit tight until stocks fall again. The real beauty of it is that it doesn’t require any research or any pretence of knowledge. You don’t have to know when the trend will reverse, or what the Federal Reserve will do, or how the dollar will trade…or anything else. All you’re doing is buying stocks when they are really cheap and selling them when they are expensive. Otherwise, you sit tight in real money, gold. But the trouble with this strategy is that it is extremely long-term. It might make your grandchildren rich, but maybe not you. Over the last 100 years, for example, you would have made a move only once every 20 years — and multiplied your real wealth, measured in gold, some 27 times. You see, humility pays off! Next week, we’ll continue rehearsing what we’ve learned so far… …why ‘stimulus’ never works… …why America’s money is ‘fake’… …why the money system, as managed by the Fed, is corrupt and unfair, favouring the rich and the deep state… …and how we’ve been set up for a period of financial and political chaos when the next crisis begins. Stay tuned… Regards, | Bill Bonner, For The Rum Rebellion |
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