Welcome to another edition of The Daily Cut mailbag. We’ve got an unusual way to start this week’s issue…
One of your fellow readers is concerned he might be insane. So he turned to us for a sanity check. And Dan Denning (The Bonner-Denning Letter) is on the case…
Reader question: A crazy thought just occurred to me. I’m no economist, so let me know if I’m talking through my hat… Do countries really need a “central bank?”
Before the Federal Reserve was established (one of the worst mistakes in history, in my opinion) the United States printed its own money… money that was backed by gold and silver. Now we have funny money “Federal Reserve Notes.”
What if the U.S. and every other country on earth got rid of their central banks and just let the free market determine interest rates? Would that eliminate “bubbles” and “corrections,” and “crashes,” and “inflation,” and all of the other economic missteps that occur, or am I insane?
– Dale A. (Legacy Research member)
Dan’s answer: A country only needs a central bank if:
it wants to run regular public debts,
it wants to make war and needs a way to pay for it,
it wants a monopoly on money creation, or
it wants to make money by coining money (seigniorage).
The Bank of England was founded in 1694. Its main purpose was to fund the debt of the government, which was busy making war (as governments tend to do). Unable to tax the population more (political instability), they set upon the Bank as a way to permanently fund the Warfare/Welfare State.
The idea of Free Banking – that individual banks can issue their own notes and set their own interest rates for lending and savings – predates central banking and has years of history all over the world. It doesn’t prevent booms and busts. But it makes them shorter and sharper.
Being the “lender of last resort” in the financial system is the most common justification for modern central banking. Only a central bank with a monopoly on printing money can provide enough liquidity to distressed lenders to keep the system from a deflationary collapse. At least that’s the theory born out of the 1930s and the Great Depression.
What we now know is that centralizing the creation of money (and giving the government a monopoly on it… AND on setting the price of capital) changes the character of the economy from entrepreneurial to financial. More importantly, in my view, central banking is tied hand-in-hand with the ability of the State to grow and make war. Take away funny money, deficit spending, and centralized monetary policy… and war gets more expensive.
The crypto guys might find the idea of free banking quite attractive. Non-centralized money backed by some form of asset (digital, fiat) which amounts to private (or marketplace control) of the supply of money. But don’t expect the State to give up its claim on money without a fight.
A popular quote, often attributed to Albert Einstein, claims that, “The definition of insanity is doing the same thing over and over again and expecting a different result.” Measuring by that yardstick, the central bankers who believe they can save us all from bubbles, corrections, and crashes are the ones who need to be fitted for straightjackets.
The scarier idea is that they neither believe nor care whether monetary policy can regulate the business cycle. They’re just making this all up as they go along, mostly to benefit Wall Street and Washington types who run the system (and game it). Might sound cynical… but definitely not crazy.
Dan Denning also fielded the next unusual inquiry…
Reader question: I’m a regular reader of your stuff and I’ll soon be subscribing to your newsletters to increase my income.
I’m a corporate lawyer from London who dived into the gold business two years ago. I trade the physical stuff.
My question is: What is London going to look like in 10 years’ time? Every person I ask can’t answer this, and so I want to put it to the professionals and see what you guys think. If not, no problem.
– James T.
Dan’s answer: London is an International Financial Center with English characteristics. This was true several hundred years ago, although less so. And it was true when I first lived and worked there 15 years ago (although prior to the latest bubble, good food was harder to find, and what you did find was quite expensive).
London is a perfect place for what Douglas Murray calls “nowhere people.” These are people whose livelihood and identity are not tied to geography and nationality. They have second and third passports, bank accounts in multiple countries, and real estate all over the world. And they like living in cities that welcome them and their money.
London is one of those places and will be so, no matter what shape Brexit eventually takes. The Russians, the Arabs, the bond traders, the African warlords… They love places like London and Paris (but more London I think because it’s English speaking and livelier these days).
What I noticed while there more recently – from 2015 to 2017 – is how different London is (politically and culturally) from the rest of the UK and England. It’s similar to the Blue City/Red State dynamic in the U.S. Jobs in high tech, finance, media, and politics are city-based and attract the people most heavily invested in that system. Public policy is dominated by the interests of the city people (as is public discourse).
Trump and Brexit were similar in that they were popular rejections of this centralizing trend. Whether they can change that trend, though, I very much doubt.
But Dan wasn’t the only one with a response… Legacy Research cofounder Bill Bonner (The Bonner-Denning Letter and Bill Bonner’s Diary) and Palm Beach Research Group cofounder Tom Dyson (Bill Bonner’s Diary) chimed in as well…
Bill’s answer: I have no idea.
But if the Greed to Fear gauge is right… or our reading of it is right… being the world’s finance capital may be less profitable in the years ahead.
Tom’s answer: I’m having trouble answering this question. I guess the answer is, “not much”?!
London doesn’t really change much, I don’t think. Fortunes rise and fall, but the culture stays the same. At least it has since I’ve lived there (since I was 9).
What I can say is London has been a big beneficiary of the feds’ sugar factory… both in the amount of money coming in from the Arabs, Chinese, and Russians. But also in the profits the City makes.
If that winds down, I could see a major correction in property prices. My mother paid £85,000 for her house in 1986. It’s now worth £1.2 million.
Getting back to some more of our standard mailbag fare… Teeka Tiwari (The Palm Beach Letter, Palm Beach Confidential, Alpha Edge, and Crypto Income Quarterly) takes on a question about M&A (mergers and acquisitions) activity in the crypto space…
Reader question: Hi Teeka. With all the institutional money and extra interest that’s coming into the crypto market, do you think we’ll start to see and hear more about mergers and acquisitions in this space?
If so, as token holders (as opposed to shareholders of common stock), would we still benefit given that there are no voting rights with most tokens? Is it possible that companies get taken out but the token holders don’t benefit financially?
– Ian H. (Legacy Research member)
Teeka’s answer: Theoretically, for two different chains to merge, you would need a majority of the nodes on each network to agree to the merger. (This assumes the projects are running on their own blockchains.)
The assumption is the node operators would act in their own self-interest and would not agree to a deal that didn’t provide value to the token holders.
For our last Q&A of the day, Wall Street insider Jason Bodner (Palm Beach Trader) explains the rationale behind his risk-management strategy…
Reader question: When you say to set a stop loss at 40% from the open price, it seems to me I will be giving up the ability to lock in gains.
Do you support having a trailing stop that raises as the price rises? Do you have a sell discipline beyond the 40% from the open price? Do you alert us when the institutional buying has depleted? I would appreciate any clarity you can provide.
Thank you! And here’s to making your 2019 a happy, healthy, and prosperous year!
– Beth H. (Legacy Research member)
Jason’s answer: Hi Beth, and thanks for writing in.
You know… I have spent loads of time and energy on this very question. The truth is there are several answers depending on what type of market participant you are. Trader? Speculator? Investor? Ultimately, the 40% stop loss comes from a place of trying to capture the most gains possible.
Let me explain…
Trailing stops are great at protecting gains and buffering risk. But like all things in life, there is a trade-off.
After years of honing the strategy that picks outlier stocks, I realized that using trailing stops and tight risk parameters was not ideal for what I do. Here’s why: the stocks that we pick have the potential (and history) of being the biggest winning stocks in the market.
Now don’t get me wrong… I like gains of all sizes. That’s why we sometimes sell half our position when we’re up more than 100%. But I love having the biggest wins out there. So as long as my system keeps flashing unusual institutional (UI) buying signals on a position… we’ll keep holding for doubles, triples, and even 10-baggers.
Hope that helps.
Before signing off, I’d like to say a few words (more than a few, actually) about my friend Jeff Clark (Delta Report, Delta Direct, Jeff Clark Trader, and Market Minute)…
If you’re not too familiar with Jeff, the most important thing to know is that he has two exceptional talents:
He has an ironclad trading record
He writes stirring essays that reduce many readers (myself included) to tears
You’ll find proof of the former right here – Jeff’s track record. If you don’t feel like looking through the dozens of trades he’s made since joining Legacy Research Group, I’ll give you the gist of it… Jeff is 142 for 180. That’s a 78.9% win-rate.
And for proof of the latter, I urge you to read his Father’s Day essay… then read your fellow readers’ reactions below.
I’ll start with one from my hero… my 94-year-old grandfather – the original James R. Wells:
Very wonderful and touching tribute. That Jeff Clark must be quite a fellow.
– James W.
Thank you for another beautifully nostalgic image. Your writing is like looking at a Norman Rockwell print! Thank you very much!
– Susan R. (Legacy Research member)
Nice tribute to your dad. My dad was very much like that. There for all the big stuff, and the little stuff too.
– Art H. (Legacy Research member)
Great tribute to your dad, Jeff! Thanks for sharing!
– John P. (Legacy Research member)
Thank you for that beautiful tribute to your dad, Jeff. It brought a lump to my throat. I miss my dad terribly too, he died 42 years ago.
– Duncan D. (Legacy Research member)
Your dad sounds a lot like my dad. Those times sure built character. Thanks for the story.
– David H.
Happy Father’s Day, Jeff! Such a wonderful family you have, God bless you!
– Carol G. (Legacy Research member)
Thank you, Jeff, for your reminiscence of your father. It brought back a touching memory of my father.
– John C. (Legacy Research member)
I loved the piece that you wrote for Father’s Day. It’s great when you get away from the market for a little while and share the really important stuff with us. Brought a tear to my eye recalling my late father as well.
– Tom S. (Legacy Research member)
Your story was quite moving and touching the way you describe your father while you were a kid. Obviously, he taught you quite a few valuable lessons which shows from your motivating others who are not in a successful position.
Credit goes to him who put a valuable lesson in your heart and mind. “Do not travel alone on the road to success, you would have more success when you carry others along with you!” Remarkable thought.
– Ali R. (Legacy Research member)
That’s all for today. Have a nice weekend.
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