From Capital & Conflict (Great Britain) –
Monday was the 350th anniversary of the Great Fire of London in 1666. My mate Sam Volkering (whom I worked with in Australia but who also now lives in the UK) wrote about it. I’ve asked him for permission to republish his essay from Monday below. He graciously agreed.
Meanwhile, since it’s Friday, I’ve taken a crack at showing you how today’s bond market reminds me of the British retreat from Kabul in 1842. Only one member of the 4,500-strong fighting force survived. What happened? Read on below, but only if you’re interested in history and rising bond yields.
In markets (and speaking of bond yields) there are two stories worthy of your attention. First, that long-term bond yields in Japan and Germany are (in fact) rising. My concern is that this is the leading edge of the “crack up” bust in the bond market. What do I mean?
If investors believe central banks (the European Central Bank and the Bank of Japan) have surrendered in their war on deflation – or at least given up on using quantitative easing (QE) as a weapon – it could lead to an accelerated sell-off in the government bond market. And it’s not a small market.
The global government bond market is $60 trillion. Nearly $16 trillion of those bonds – mostly in Europe and Japan where deflation is most entrenched due to debt, technology and demography – has a negative yield. If you thought a small section of peripheral debt in the market couldn’t trigger a global wealth-destroying calamity, you’ve forgotten what sub-prime debt did to the world in 2008.
The good news is that Britain is thriving post-Brexit, at least so far. In a note toThe Fleet Street Letter readers yesterday, investment director Charlie Morris has set himself the task of figuring out which British stocks do well when interest rates rise. He’s not bullish on bonds. But he’s surprisingly bullish on banks and tech stocks.
If you think it’s just Charlie blowing the bullish bugle, think again. The Paris-based Organisation of Economic Cooperation and Development (OECD) conceded yesterday that Brexit hasn’t been a negative for global growth prospects. It’s kind of fun to watch institutions wipe egg off their faces with as much dignity as they can muster.
But let’s not diminish the seriousness or magnitude of the moment. The public retreat by central bankers from QE could unleash a wave of consequences in financial markets. Those are consequences you need to think about and prepare for now. The bond market action is at the periphery of the system for the moment. If it moves to the centre, the moves in asset prices will be big, burly and brutal. Which brings me to William Brydon and Kabul in early 1842.
“Go to your God like a soldier”.
Rudyard Kipling wouldn’t write the above words about a young British solider in Afghanistan until 1895. But there was already a precedent for disastrous British retreats in Afghanistan. I’m referring to the British retreat from Kabul in January 1842. Only one military man survived.
William Brydon was an assistant surgeon in the British East India Company. He was part of a column of 4,500 soldiers and 12,000 camp followers retreating from Kabul to Jalalabad in the First Anglo-Afghan War. He has the distinction of being the only military member of the entire expedition to survive. Numerous harassing raids by the Afghans turned the retreat into a disaster beyond compare.
I’m not using the example lightly. It’s a genuine human tragedy, as military retreats go. My point, which I’ll keep brief today, is that well-ordered retreats can and do turn into epic routs. Whole books have been written on the subject. Napoleon’s retreat from Moscow… the retreat from Caporetto described by Ernest Hemingway in A Farewell to Arms… the list is long and awful. But what does it have to do with the bond bubble?
There’s never been a bigger or more dangerous bubble in all the history of all the world than the current government bond bubble. An orderly retreat in financial markets, in which capital flees to stocks, cash, gold and property, presents an opportunity to save your capital and make money.
But a disorderly retreat? A rout? That would be a disaster beyond reckoning. Central bankers will do everything they can to prevent that. But what if their actions make things even worse? Death by deflation and a bond market collapse or death by inflation and a currency crisis is death either way.
In that god-awful scenario, preserving your capital means preserving as much of it from destruction as possible. That’s what this year’s MoneyWeek Conference is all about. And it can’t come a moment too soon, judging by the price action in the bond market. You can pre-order a copy of the DVD from this year’s conference here.
Fire and devastation
By Sam Volkering
5 September, 350 years ago…
For three days horrific fires sweep through the city of London. All in all it ravages 13,200 houses, 87 parish churches, and St Paul’s Cathedral. The population of central London (within the city walls) at the time is just 80,000 people.
Estimates are 70,000 are left homeless. No one really knows the death toll. It’s assumed not to be as high as expected. But the poor and middle class aren’t accounted for. Even still, the fire was so hot there was no way to count bodies; there was nothing left but ashes.
The heat of the blaze was incomprehensible. Archaeologists say it hit 1,250 degrees Celsius.
On Monday 5 September 2016, Laurence Dodds wrote a brilliant piece about The Great Fire in The Telegraph. He steps through the whole event, day-by-day, almost hour-by-hour. His piece opens as he explains,
This is the story of a city on knife’s edge, riven by religious and political tensions, made vulnerable to disaster by its own neglect and avarice. It is a story of official blunders which turned a minor, commonplace accident into an all-consuming conflagration. It’s a story of chaos, mass hysteria, profiteering and racist violence — but it is also a story of some heroism and charity, from royal and commoner alike.
Sounds incredibly familiar…
Dodds continues as he writes about the second day of the fire,
The xenophobic backlash noted yesterday is getting worse. “Monday morning,” writes the Earl of Clarendon, “produced first a jealousy & then a universal conclusion, that this fire came not by chance.”
The French and the Dutch are primary suspects due to the ongoing war, but it could also be Catholics — perhaps even the Jesuits. The government takes no chances, ordering an embargo on anyone leaving the country via Gravesend or Dover.
Furthermore, a Dutchman was mobbed. His saving grace is the king’s brother, who happens to ride past. The xenophobia continues hour by hour. Random foreigners continue to fill the gaols.
The assumption is one of them started the fire. May as well lock them all up.
The fires continued until Tuesday, when the wind died and firebreaks begin to work. Eventually the fire burnt itself out. But the worst of the xenophobia came after London has burnt to the ground.
In the final parts, Dodds finishes by saying, “The domestic refugee crisis and the rebuilding of London dominate politics for the next few years.”
Again, sounds incredibly familiar…
Is the fire still raging?
Today the chance of a great fire razing London to ashes is remote. In fact it’s probably impossible. Today the construction of buildings means mass fire would barely jump a street, let alone across a city.
And of course we have firefighters. They didn’t even exist in 1666.
But what if there is a fire burning today? Just not a literal one.
I think there is. I think it’s underway, and there’s little we can do to stop it. It will end, it will burn itself out. But it will leave damage. The only question is how much damage will it do to you?
The fire I talk about now is an economic one. The foundations of it are deep in the global financial system. It’s actually been going for a while, thanks to poor government planning and bungled fiscal policy.
The economic fire that rages is similar to that of 350 years ago. Its by-product is fear, panic and a big dose of xenophobia.
In looking for the arsonists, foreigners are viewed as criminals. The assumption is if they’re not from these parts then they’re a suspect. Guilty until proven innocent.
The parallels between the reactions to The Great Fire of 1666 to The Great Economic Fire of 2016 are uncanny.
Right now it’s fair to say the current economic fire isn’t about to burn itself out just yet. It has some time to run.
Governments are trying to put it out. They are getting everything they can get together, trying to save their house. Unfortunately none of it is working.
Attempts to “ring fence” the blaze are futile. The ability to use monetary policy is weak. It’s like trying to use buckets to put out a 1,250-degree fire.
Will there be anything that can stop this economic fire? Perhaps not. Perhaps this will simply burn. Burn until there’s nothing left to burn anymore. At that point the devastation will be obvious.
But you can fight the fire. Don’t rely on the government to help you out. They can’t protect their own house. What makes you think they’ll protect yours?
That involves a few simple rules of engagement.
Control what you can control
First and foremost recognise that some things are out of your control. You don’t decide rates, stimulus packages, or when a country decides to run a drone strike on another.
Second, get the basics of investment sorted: diversify, have a plan, set goals, and keep things simple. These “basics” can go a long way to protecting yourself. Simple rules like managing your allocations to equities, property, cash and fixed interest can help ring fence your own financials.
Look for opportunity to douse any blaze that might get close. This can come in the form of investment opportunities. Typically short-term investment opportunities. These can add to your safety net before things get too heated.
But also think about having a strategy in place in advance to insulate you from a potential crash. Perhaps most important of all, understand your own capabilities and limitations. You have to know your own ability to invest and protect your money.
You don’t have to buy in to the fear and uncertainty that slams you on a daily basis. Yes, things aren’t great. Yes, there might be a global economic fire, but there are pockets of safety. These safe zones that can help you keep things under control, and keep the fire from burning your financials to the ground.