For just over 300 years, certain investors have understood that financial manias don’t just happen at random. They are caused. And once you understand what that cause is, you will come to realise that we are on the cusp of another such bubble today. One you can invest in and profit from, if you know how.
The first thing to understand is the ‘cluster of errors’ — a technical term invented about 200 years after it was first used to generate a pair of extraordinary fortunes (for the same man). Well, he profited from both the boom and the bust twice over, so you could say he made four fortunes. All using the idea of a cluster of errors.
You see, people make mistakes. They invest in doomed schemes. They start businesses that won’t make it. They overextend themselves financially. Their mine comes up empty. Or nature places a storm in the way of their ship.
Whatever it is, these things happen to financial ventures. The real question is why they should happen more often at certain times and less often at others. Why does the business ‘cycle a cycle’ rather than just a random distribution of such failures happening at a constant rate over time?
The answer can, at least in part, be found by some external influence that causes a general panic. War can turn an unusual number of businesses into disasters at the same time, for example.
One example of this, which happens to dominate financial and economic history, is the influence of the money supply. By pumping vast amounts of money into an economy, an unusual amount of business ventures appears to be viable…at first.
This causes a boom as asset prices and consumer prices surge. People feel rich, unemployment is low, and investments seem risk-free because of the general prosperity.
But in the end, money is just a veil. It acts like a drug, providing a temporary high. Eventually, the realities of the real economy set in. Investors and businesspeople discover that they’ve been duped into thinking the increase in the money supply represented more real purchasing power. But it didn’t. It was just more money, which leads to a higher price level, not more prosperity.
The period of adjustment back to that reality is known as a recession. It causes asset prices to crash back to true valuations. Unemployment becomes common as business ventures fail because the prices of their goods must be cut in order to sell. The drug wears off and the hangover sets in.
The point of this business cycle is that it is caused by attempting to use the money supply to influence prosperity in the first place. The bust is an inevitable part of the story which must follow such a boom. It is the initial cluster of success which makes things suspicious.
Once you understand this sequence of causation, you can profit from it. When central banks attempt to pump up an economy, you know that there will be a boom, a bubble, and then a bust. Each phase can be profitable for investors, businessmen and speculators.
The proof is in the pudding. Investors have been using this theory for over 300 years, after all.
Its story begins with an Irish-French banker called Richard Cantillon — the first man to make two fortunes from two bubbles caused by central bank manipulation of the money supply — the South Sea Bubble and the Mississippi Bubble. Both times he identified that the money supply was being fiddled with, triggering a vast boom. But he also knew this couldn’t last. And so, near the peak both times, he speculated on the crash.
He got so rich speculating on the booms and busts caused by central bankers that he had to fake his own death in a house fire and go on an indefinite holiday in Asia under a pseudonym. In other words, he retired in much the same way that many people want today…
Since Cantillon and his book which described the effect of monetary policy on the economy, central bankers have been busy proving him and his theories right again and again. His theories that describe how an increase in the money supply ripples through the economy are known as ‘Cantillon Effects’, and they highlight how investors can profit from such booms.
In short, central bankers have engineered boom after bust after boom after bust with their low-interest rates and QE. They have caused precisely the business cycle and inflation they’re supposed to mitigate. Sometimes, they even admit to this, such as during the Great Depression.
The tech bubble, the housing bubble, the bond bubble, the roaring 20s, the swinging 60s, and so on and so forth. Each is pumped up by central banker policies and followed by inevitable crashes.
The thing is, we’re about to embark on another one of their adventures. Central bankers have decided to make climate change their latest cause for targeted monetary intervention. Can you guess what happens next?
One after the other, and sometimes in groups, the central bankers of the world have declared how they will help finance the green transition. They plan to shift bank regulation to favour green initiatives. Provide cheaper funding from the central banks for green finance. Invest in green bonds directly. Stress test large financial institutions for exposure to so-called stranded assets such as oil wells. Exclude fossil fuel companies from central bank asset holdings.
Quite frankly, the fact that central banks are intervening at all is extraordinary. But to do so in favour of the green transition specifically is mind-boggling. They have turned themselves into central planners of the economy — another way in which a cluster of errors occurs.
Whatever their method or motivation, central banks are about to blow another bubble with their targeted manipulation of the money supply. That’s what Cantillon Effects make clear.
It’s a bubble we can profit from. The only question is how.
The best answer, in my opinion, is probably a bit of a surprise to you.
You see, green tech companies have a habit of failing or going bust. We better not mention why for fear of upsetting someone…
The real bottleneck to the green energy transition lies not in green energy, but in the commodities needed to roll it out. According to my research and upcoming book, Dark Green, an impossible number of commodities are needed to build the grid, infrastructure, renewable energy power plants, energy storage, and all the rest of it.
And when I asked eight different experts which commodity they believe to be at the centre of such a shortage, they almost all said copper. That’s because you can’t replace copper with substitutes in many applications needed for the green energy transition.
But that’s only half the story. The green energy transition will also be accompanied by vast inflation of the sort we’ve only had a foretaste of. As energy becomes scarce and central banks create vast amounts of new money to try and keep the green bubble going, the price of everything will have to rise. In such an environment, gold is an excellent investment because it offers a way to opt out of the devaluing currency.
Rather conveniently, gold and copper are often found in shared deposits. And there is a long list of gold and copper miners as a result, many of whom are listed in Australia.
My old friend and co-conspirator, Brian Chu, has been busy digging up such companies over at The Australian Gold Report. He also discovered a shocking secret about what the Chinese have really been up to as they soak up vast tracts of Africa and Australia…
To sum up today’s Daily Reckoning Australia, central bankers are about to use their blank cheques to finance a green bubble. And the real-world constraint they will run into is commodities. That’s how to profit from the coming bubble.
Just don’t forget to sell out when the time comes. All bubbles burst.
Editor, The Daily Reckoning Australia Weekend