“You might say, well, it’s only because of tariffs. No, it’s not.
“Tariffs are not the cause. Tariffs are the catalyst. This would have happened anyway. Some other story, some other thing would have happened. We were headed in this direction anyway you cut it.
“Tariffs are only going to make it worse in the near term.”
Get your Free
financial review
Ernest Hemingway; Mark Twain; F. Scott Fitzgerald. They’ve all been credited with variations on the same underlying idea.
Q: How did you go bankrupt ?
A: Slowly, and then all at once.
Austrian Business Cycle Theory, developed by genuine economists (and not neo-Keynesian poseurs) such as Ludwig von Mises and Friedrich Hayek, posits that the expansion of the business cycle starts as a reflection of excessive growth in bank credit and artificially low interest rates set by central banks.
This boom period leads to what Austrians term “malinvestments” – projects undertaken only because artificially low credit facilitates a climate of euphoria on the part of hopeful “investors” which enables such projects to be funded. (Think Nvidia, perhaps. Or TrumpCoin.)
Such “malinvestments” would be irrational under a more normal economic environment, in which the risk of failure is an ever-present spectre at the feast. The expansion ends when central banks hike interest rates, triggering a credit crunch, and a subsequent recession. The “malinvestments” collapse. Growth subsides; interest rates are dropped, until borrowing is so attractive that the credit cycle starts all over again.
During the darkest days of 2008, many investors failed to see quantitative easing (QE) coming. This was a) because nothing like it, and certainly on such a scale, had ever been attempted before, ever in history. And b) because, at the risk of coming across all ideological, many investors back then carried a lingering, if naïve, belief in free markets and free enterprise capitalism.
In such a system, insolvent companies – including, crucially, banks – are allowed to fail, and bad managers (and bad entrepreneurs) are swept away, to be replaced by better ones. In this sense capital is never really entirely destroyed – it merely moves from weak hands to stronger ones.
But that is not, of course, the history of recent years. The post-GFC period has been a study in the last ditch support of crony capitalism, in which the state, and not the market, acts as the final arbiter of capital allocation.
Now, finally, the skies (and the currency and bond markets) are darkening with chickens coming home to roost.
We have not been alone in watching the political degradation of the West with some concern. Brexit, for example, we strongly suspect, will be treated by future historians as symptomatic of a fin de siècle moment in both economic and political history, in which the mask of a metropolitan, haute bourgeois elite slipped forever, revealing something peculiarly nasty underneath.
A case in point: Professor AC Grayling, whose contempt for 17.4 million Leave voters – and our democratic parliamentary system as a whole – can be glimpsed.
As the British philosopher John Gray writes,
“The vote for Brexit demonstrates that the rules of politics have changed irreversibly. The stabilisation that seemed to have been achieved following the financial crisis was a sham. The lopsided type of capitalism that exists today is inherently unstable and cannot be democratically legitimated.”
Something similar happened in the run-up to Trump Administrations 1.0 and 2.0.
But back to the central banks.
In a recent article, “Living Dangerously”, Alasdair Macleod, economist and unashamed hard money advocate, explains
“why monetary policy leads periodically to a credit crisis that exposes businesses which are only profitable so long as interest rates are suppressed. This has been a feature of the US economy during the current credit cycle for ten years until now, since the FFR [Fed Funds Rate, the US equivalent of our Libor] was aggressively reduced following the peak rate of 5.25% in 2006-2007. Since the introduction of near-zero rates in 2008, a widespread belief has taken hold that interest rates will never increase significantly again. Consequently, we can be sure the distortions from interest rate suppression have built up to an extent unseen in the past..”
“The fear is now that the Federal Reserve will kill off the current expansion, already long in the tooth, but also that the debt build-up associated with QE means that the downturn will be far more severe than prior economic contractions:
“… the approaching interest rate cycle peak could contribute directly to the collapse of economic activity through wealth destruction in equity markets as much as through the exposure of malinvestments in production. A credit crisis with these characteristics has much in common with the 1929-32 period.
“The 1929 Wall Street Crash came at the end of a similarly extended period of credit expansion, which prolonged the final pre-crash phase of the credit cycle, just as it has today. Consumer price rises were subdued through the introduction of factory production lines for new goods. Today they have been restrained by the expansion of production in cheaper jurisdictions [at least until Trump 2.0]. There can be little doubt there are similarities between that period and conditions today, not least in the optimism over the non-inflationary outlook..
“The onset of the next credit crisis in America could also be triggered from elsewhere, particularly the Eurozone. The ECB is still suppressing interest rates.. and buying government bonds during what is increasingly seen to be the final stages of the Eurozone’s credit cycle, making the inevitable interest rate adjustments that follow potentially very sudden and violent..
“All central banks are proceeding on the assumption there is no credit crisis on the horizon. This hubris was vividly demonstrated by Janet Yellen who.. told us she did not believe there would be another financial crisis in her lifetime, thanks largely to reforms of the banking system since the 2007-09 crash. That crash was a surprise to central bankers then, as was every crash before. Even Benjamin Strong in the late-1920s believed his new Federal Reserve System had tamed the business cycles of the previous century, though he died before being disproved by the 1929 Crash.
“Strong’s hubris then was the same as Yellen’s hubris.. Central banks have learned nothing about the credit cycle in nearly a century. If they had, they would be promoting sound money and a hands-off policy, while ensuring commercial banks restrict their credit expansion. They would let malinvestments wash out of the system, not build up for one huge crisis. They are not even aware, it seems, that they are living dangerously as they raise interest rates into and beyond the zone that will trigger the next credit crisis.
“A credit crisis today will be more catastrophic than that of ten years ago. And when the crisis comes, the response is always the same, except the quantities involved are far greater. The banks will be rescued by the Fed printing new capital for them without limitation, on condition they don’t foreclose on their customers. The Fed will take bad and doubtful debts off the banks at the same time. Government borrowing will rocket, reflecting increasing social liabilities and falling tax revenues. All the money required will be created out of thin air.
“The great financial crisis of 2007/08 will be eclipsed. In a nutshell, this time the quantity of new money required will likely lead to the destruction of the “full faith and credit” in the currencies themselves, which until now has been broadly unquestioned by ordinary members of the public.”
Macleod’s long-anticipated destruction of “full faith and credit” in currencies would now seem to be upon us, if the gold market is saying anything of predictive value.
Coordinated monetary policy stimulus bought us a decade of what John Gray calls “inherently unstable capitalism” – but if global bond yields continue to rise it may soon become coordinated monetary policy tightening instead. We should expect the outcome to be profound – a religious experience for those investors not positioned for the turn. The technical analysts at Northstar & Badcharts, for example, refer to a ‘Capital Rotation Event’, a significant macroeconomic shift whereby capital flows away from traditional equity markets such as the S&P 500 and Nasdaq and into alternative assets, particularly precious metals and commodities. This event is characterized by a breakdown in the relative performance of stocks priced in gold, as opposed to being priced in an inconstant currency such as the dollar. We believe that this ‘Capital Rotation Event’ has already begun.
As we make reference in our book, Investing Through the Looking Glass, a comparison with the US authorities’ handling of forest fires may be instructive. The US Forest Service used to try and put out forest fires whenever they arose. In the process, it inadvertently allowed a gigantic build-up of latent fuel that ultimately meant that “The Big One”, when it finally came, would be outside the normal experience by way of its severity.
Forest guardians ultimately came to appreciate that it was healthy to allow relatively small fires to break out from time to time – because that’s how nature operates. By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future.
Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable conflagration has a far greater store of combustible material at its disposal. For small fires, read recessions and banking crises.
In continuingly suppressing smaller outbreaks of financial instability or market volatility by means of drowning them with surplus liquidity, the monetary authorities inadvertently stored up a growing pile of combustible dry tinder.
During the regime of “the Greenspan put”, for example, numerous small fires in the market – including the 1987 Crash, the failure of Long Term Capital Management, the non-event of the Y2K “crisis”, and the dotcom bust – were doused with plane loads (one might even say helicopter loads) of easy money.
Notwithstanding these interventions, equity market investors still endured two separate bear markets after the year 2000 that saw market valuations halve.
So perhaps the mainstream policy response to any hint of likely economic hardship should not simply be to slash interest rates, in the same way that the best response to recalcitrant children should not simply be to pay them off with sweets. The tirade will be all the stronger when the sugar rush wears off. As the philosopher Karl Popper said,
“In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable.”
And in a significant essay for Foreign Affairs, “The Black Swan of Cairo”, Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous:
“Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”
One of the biggest “Black Swans” out there is a potentially messy outbreak of inflation. This could come about via any number of market or economic developments, but the one that gives us most concern is a disorderly breakdown in the purchasing power of fiat currencies – which, again, seems to be occurring in plain sight.
So we reiterate our suggestion that some of the cheapest ‘Black Swan’ insurance available to investors in 2025 is not just gold and silver bullion, but the shares of already profitable gold and silver mining companies which stand to benefit enormously if the bullion price simply remains close to where it is – let alone rises further. In short, we expect to participate in ‘generational’ wealth creation from these investments in the months and years to come, at a time when prospects for more conventional investments (including bonds, and most ‘growth’ stocks) look decidedly uncertain. In the 1970s, for example, the gold price rose by some 23 times – in a decade which saw a huge monetary reset, significant stagflationary problems, and during which traditional stocks and bonds fared disastrously. History may not exactly repeat, but it is certainly capable of rhyming.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“You might say, well, it’s only because of tariffs. No, it’s not.
“Tariffs are not the cause. Tariffs are the catalyst. This would have happened anyway. Some other story, some other thing would have happened. We were headed in this direction anyway you cut it.
“Tariffs are only going to make it worse in the near term.”
Get your Free
financial review
Ernest Hemingway; Mark Twain; F. Scott Fitzgerald. They’ve all been credited with variations on the same underlying idea.
Q: How did you go bankrupt ?
A: Slowly, and then all at once.
Austrian Business Cycle Theory, developed by genuine economists (and not neo-Keynesian poseurs) such as Ludwig von Mises and Friedrich Hayek, posits that the expansion of the business cycle starts as a reflection of excessive growth in bank credit and artificially low interest rates set by central banks.
This boom period leads to what Austrians term “malinvestments” – projects undertaken only because artificially low credit facilitates a climate of euphoria on the part of hopeful “investors” which enables such projects to be funded. (Think Nvidia, perhaps. Or TrumpCoin.)
Such “malinvestments” would be irrational under a more normal economic environment, in which the risk of failure is an ever-present spectre at the feast. The expansion ends when central banks hike interest rates, triggering a credit crunch, and a subsequent recession. The “malinvestments” collapse. Growth subsides; interest rates are dropped, until borrowing is so attractive that the credit cycle starts all over again.
During the darkest days of 2008, many investors failed to see quantitative easing (QE) coming. This was a) because nothing like it, and certainly on such a scale, had ever been attempted before, ever in history. And b) because, at the risk of coming across all ideological, many investors back then carried a lingering, if naïve, belief in free markets and free enterprise capitalism.
In such a system, insolvent companies – including, crucially, banks – are allowed to fail, and bad managers (and bad entrepreneurs) are swept away, to be replaced by better ones. In this sense capital is never really entirely destroyed – it merely moves from weak hands to stronger ones.
But that is not, of course, the history of recent years. The post-GFC period has been a study in the last ditch support of crony capitalism, in which the state, and not the market, acts as the final arbiter of capital allocation.
Now, finally, the skies (and the currency and bond markets) are darkening with chickens coming home to roost.
We have not been alone in watching the political degradation of the West with some concern. Brexit, for example, we strongly suspect, will be treated by future historians as symptomatic of a fin de siècle moment in both economic and political history, in which the mask of a metropolitan, haute bourgeois elite slipped forever, revealing something peculiarly nasty underneath.
A case in point: Professor AC Grayling, whose contempt for 17.4 million Leave voters – and our democratic parliamentary system as a whole – can be glimpsed.
As the British philosopher John Gray writes,
“The vote for Brexit demonstrates that the rules of politics have changed irreversibly. The stabilisation that seemed to have been achieved following the financial crisis was a sham. The lopsided type of capitalism that exists today is inherently unstable and cannot be democratically legitimated.”
Something similar happened in the run-up to Trump Administrations 1.0 and 2.0.
But back to the central banks.
In a recent article, “Living Dangerously”, Alasdair Macleod, economist and unashamed hard money advocate, explains
“why monetary policy leads periodically to a credit crisis that exposes businesses which are only profitable so long as interest rates are suppressed. This has been a feature of the US economy during the current credit cycle for ten years until now, since the FFR [Fed Funds Rate, the US equivalent of our Libor] was aggressively reduced following the peak rate of 5.25% in 2006-2007. Since the introduction of near-zero rates in 2008, a widespread belief has taken hold that interest rates will never increase significantly again. Consequently, we can be sure the distortions from interest rate suppression have built up to an extent unseen in the past..”
“The fear is now that the Federal Reserve will kill off the current expansion, already long in the tooth, but also that the debt build-up associated with QE means that the downturn will be far more severe than prior economic contractions:
“… the approaching interest rate cycle peak could contribute directly to the collapse of economic activity through wealth destruction in equity markets as much as through the exposure of malinvestments in production. A credit crisis with these characteristics has much in common with the 1929-32 period.
“The 1929 Wall Street Crash came at the end of a similarly extended period of credit expansion, which prolonged the final pre-crash phase of the credit cycle, just as it has today. Consumer price rises were subdued through the introduction of factory production lines for new goods. Today they have been restrained by the expansion of production in cheaper jurisdictions [at least until Trump 2.0]. There can be little doubt there are similarities between that period and conditions today, not least in the optimism over the non-inflationary outlook..
“The onset of the next credit crisis in America could also be triggered from elsewhere, particularly the Eurozone. The ECB is still suppressing interest rates.. and buying government bonds during what is increasingly seen to be the final stages of the Eurozone’s credit cycle, making the inevitable interest rate adjustments that follow potentially very sudden and violent..
“All central banks are proceeding on the assumption there is no credit crisis on the horizon. This hubris was vividly demonstrated by Janet Yellen who.. told us she did not believe there would be another financial crisis in her lifetime, thanks largely to reforms of the banking system since the 2007-09 crash. That crash was a surprise to central bankers then, as was every crash before. Even Benjamin Strong in the late-1920s believed his new Federal Reserve System had tamed the business cycles of the previous century, though he died before being disproved by the 1929 Crash.
“Strong’s hubris then was the same as Yellen’s hubris.. Central banks have learned nothing about the credit cycle in nearly a century. If they had, they would be promoting sound money and a hands-off policy, while ensuring commercial banks restrict their credit expansion. They would let malinvestments wash out of the system, not build up for one huge crisis. They are not even aware, it seems, that they are living dangerously as they raise interest rates into and beyond the zone that will trigger the next credit crisis.
“A credit crisis today will be more catastrophic than that of ten years ago. And when the crisis comes, the response is always the same, except the quantities involved are far greater. The banks will be rescued by the Fed printing new capital for them without limitation, on condition they don’t foreclose on their customers. The Fed will take bad and doubtful debts off the banks at the same time. Government borrowing will rocket, reflecting increasing social liabilities and falling tax revenues. All the money required will be created out of thin air.
“The great financial crisis of 2007/08 will be eclipsed. In a nutshell, this time the quantity of new money required will likely lead to the destruction of the “full faith and credit” in the currencies themselves, which until now has been broadly unquestioned by ordinary members of the public.”
Macleod’s long-anticipated destruction of “full faith and credit” in currencies would now seem to be upon us, if the gold market is saying anything of predictive value.
Coordinated monetary policy stimulus bought us a decade of what John Gray calls “inherently unstable capitalism” – but if global bond yields continue to rise it may soon become coordinated monetary policy tightening instead. We should expect the outcome to be profound – a religious experience for those investors not positioned for the turn. The technical analysts at Northstar & Badcharts, for example, refer to a ‘Capital Rotation Event’, a significant macroeconomic shift whereby capital flows away from traditional equity markets such as the S&P 500 and Nasdaq and into alternative assets, particularly precious metals and commodities. This event is characterized by a breakdown in the relative performance of stocks priced in gold, as opposed to being priced in an inconstant currency such as the dollar. We believe that this ‘Capital Rotation Event’ has already begun.
As we make reference in our book, Investing Through the Looking Glass, a comparison with the US authorities’ handling of forest fires may be instructive. The US Forest Service used to try and put out forest fires whenever they arose. In the process, it inadvertently allowed a gigantic build-up of latent fuel that ultimately meant that “The Big One”, when it finally came, would be outside the normal experience by way of its severity.
Forest guardians ultimately came to appreciate that it was healthy to allow relatively small fires to break out from time to time – because that’s how nature operates. By continually suppressing small fires, they were unwittingly creating the conditions for larger and less containable wildfires in the future.
Naturally occurring fires are necessary to remove old forest cover, underbrush and debris. If they are suppressed, the inevitable conflagration has a far greater store of combustible material at its disposal. For small fires, read recessions and banking crises.
In continuingly suppressing smaller outbreaks of financial instability or market volatility by means of drowning them with surplus liquidity, the monetary authorities inadvertently stored up a growing pile of combustible dry tinder.
During the regime of “the Greenspan put”, for example, numerous small fires in the market – including the 1987 Crash, the failure of Long Term Capital Management, the non-event of the Y2K “crisis”, and the dotcom bust – were doused with plane loads (one might even say helicopter loads) of easy money.
Notwithstanding these interventions, equity market investors still endured two separate bear markets after the year 2000 that saw market valuations halve.
So perhaps the mainstream policy response to any hint of likely economic hardship should not simply be to slash interest rates, in the same way that the best response to recalcitrant children should not simply be to pay them off with sweets. The tirade will be all the stronger when the sugar rush wears off. As the philosopher Karl Popper said,
“In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable.”
And in a significant essay for Foreign Affairs, “The Black Swan of Cairo”, Nassim Taleb shows how the efforts of our authorities to suppress volatility actually end up making the world less predictable and more dangerous:
“Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” – that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.”
One of the biggest “Black Swans” out there is a potentially messy outbreak of inflation. This could come about via any number of market or economic developments, but the one that gives us most concern is a disorderly breakdown in the purchasing power of fiat currencies – which, again, seems to be occurring in plain sight.
So we reiterate our suggestion that some of the cheapest ‘Black Swan’ insurance available to investors in 2025 is not just gold and silver bullion, but the shares of already profitable gold and silver mining companies which stand to benefit enormously if the bullion price simply remains close to where it is – let alone rises further. In short, we expect to participate in ‘generational’ wealth creation from these investments in the months and years to come, at a time when prospects for more conventional investments (including bonds, and most ‘growth’ stocks) look decidedly uncertain. In the 1970s, for example, the gold price rose by some 23 times – in a decade which saw a huge monetary reset, significant stagflationary problems, and during which traditional stocks and bonds fared disastrously. History may not exactly repeat, but it is certainly capable of rhyming.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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