Well, I found out where all the £50 notes are. Hated by the elites in their war on cash, and ever rarer in day-to-day transactions, I finally found where all these elusive notes have run off to.

Turns out, they’ve all poured into the farming industry. Not the traditional farming industry though – this one’s a bit different. I ended up in one such farm over the weekend, and I only realised I was in one when I was walking through the middle of it.

As I entered, it was clear that the perimeter was kept secure. No daylight was allowed in, nor was there any natural breeze. The atmosphere was completely controlled and maintained, with air-con and florid lighting. Surveillance was constant, and the animals were fed and watered for maximum yields when it came to harvest.

I’d thought it was just a casino

A farm where the livestock could choose to leave… and even know that they are there to be farmed. They know the house always wins, and that their capital will be drained or even slaughtered in the harvest. And yet they choose to stay and be farmed. Come to think of it, the human farming industry isn’t just limited to casinos. But we’ll come back to that in a minute.

There were some interesting characters there that evening. Turned out I was the only customer who spoke English as their first language – everyone else was from China or the Middle East, and all had a huge fondness for the English £50 notes, which steadily poured across the tables in one direction, like sand through a broken hourglass.

I’ve never seen so many of the red notes my whole life. And there wasn’t a tenner or twenty in sight. Perhaps the Bank of England will have issues phasing out the £50 note after all, thanks to efforts from the casino lobby.

 

Hooked on caffeine

What was I doing there? Well, I’m not much of a gambling man. But I am a sucker for free coffee. Especially if that free coffee is available 24/7 in the middle of the city.

Of course, just as there “ain’t no such thing as a free lunch”, there ain’t no such thing as a free coffee in a casino. It’s only free in the hopes that the caffeine will stave off your fatigue and keep you gambling longer into the night, morning, or even afternoon…

My colleague Tim Price jested in a recent issue of The Price Report that it was actually illegal for a financial newsletter writer having visited Las Vegas, not to write a letter comparing financial markets to a casino. I’ve never been to Vegas, but it’s wise to stay on the right side of the law – you can’t be too careful these days.

The endless free coffee at the casino certainly has its parallels to the financial world. Central banks today are currently providing that free coffee to the banking system – low interest rates and asset purchases keep the financial markets “stimulated”, longer and longer into the night. How will the revelry end? Not well.

But until we get there, there are some incredible spectacles to be observed in the casino. European corporate bonds, for example, are now trading at lower yields than ten-year US government bonds, and aren’t far below US five-year government bonds. Oh, and it’s not just any European corporate bonds I’m referring to, either. It’s corporate bonds that are unilaterally agreed by ratings agencies to be below investment grade – more commonly known as junk.

In a world of endless stimulus from central bank buying,  investors and institutions that need yield to meet their obligations (like pension funds, for example) have been driven to buying bonds from some of the least creditworthy companies on the market. Demand for those bonds raises their price, which makes the yield it pays (relative to its price) smaller.

The need for a return has forced investors to behave recklessly. You might even say they have been forced to gamble.

Meanwhile, back at the farm

In a way, retail banks are another kind of farm. They water their crops by providing deposit accounts and money transfer services, and harvest them with loans, mortgages, credit cards and savings products. Sometimes, they even offer real free coffee, like a casino. Umpqua Bank in the US goes further, and offers free yoga and group knitting sessions (not sure that would work in a casino).

But these traditional farms are in poor repair, with physical UK bank branches closing in the hundreds every year. For while central bank stimulus boosts investment banking, it hamstrings traditional banking. Low interest rates make the traditional operations of a bank harder, as less money is generated from loans and customers are less likely to purchase savings products as they earn pathetic levels of interest.

A year or two ago on a train to Edinburgh, I overheard two men discussing the abysmal rates of interest offered by cash individual savings accounts (Isas) at the bank.

One of the men proudly declared his solution to the problem. It was quite simple, he said. All he did was regularly place £5 bets on unlikely football outcomes with at least 50/1 odds at the bookies.

“Who knows?” he said, a smile in his voice. “You might win.”

I was a financial adviser at the time, and had half a mind to introduce myself then and there to gain what would surely be a great investment client. However, I was getting off soon and I was all out of business cards.

In some ways, the gentleman on the train was simply substituting one casino for another. After all, by depositing your money in a bank, the money is no longer yours – it is legally owned by the bank, to do with as it pleases. You are merely its unsecured creditor. And should it decide to gamble, well… you don’t even stand to gain much if it comes out on top.

Escaping the farm

Of course, leaving a casino is quite straightforward (although not everyone finds it easy) – just find the exit.

Leaving other human farms is more difficult. How does one leave the entire banking system?

Well, there’s always gold. Shiny, heavy, and not much good for much other than as a means of storing wealth, it has no counterparty risk. And there’s cash, too – the fifties at the casino can be used to stash large sums of money away in a relatively small space. Remember though, you’ll need a good safe for both.

In recent times, cryptocurrencies like bitcoin have emerged, aiming to disintermediate banks completely, while being invisible, and without requiring a safe, provided you’ve got a good memory.

Speaking of which, bitcoin experienced another “user-activated hard fork” yesterday. Every holding bitcoin received an equal amount of “Bitcoin Gold” (BTG)… for free.

On the surface, the creation of Bitcoin Gold functions almost like a dividend for bitcoin investors. However, this dividend can be traded by itself, and fundamentally it aims to rival and even defeat the original bitcoin, like a patricidal son.

Sam Volkering, our cryptocurrency specialist, holds a very direct opinion of Bitcoin Gold, and what it means for the booming crypto sector. He’ll be sharing his advice with Revolutionary Tech Investor subscribers in the near future.

The creation of the fork has caused much controversy, including allegations of fraud, as my colleague Harry Hamburg described recently in Exponential Investor – you can read his analysis here.

As I write this, the price of 1 BTG stands roughly above £100. Plenty of free coffee for bitcoin investors. But are they being farmed?

Until next time,

Boaz Shoshan
Editor, Southbank Investment Research