The FTSE 100 is back where it was 18 years ago. Less than half the companies from back then are still in the index today. The Goldman Sachs Commodity Index is back where it started too. The oil price touched its 2000 level in 2016.

This is not exactly the investment performance you hoped for from productive assets or Britain’s top companies.

Meanwhile, gold is up five-fold over the same time in pounds and four-fold in dollars. Silver is not far behind. Diamond prices have doubled. Wine and stamps surged according to a report by Citibank. Art did ok too.

In other words, useless inanimate objects went up in price dramatically. Especially the one used to stabilise money for thousands of years.

Of course, this divergence is exactly what you’d expect from an era of monetary manipulation. If you were an Austrian economist, that is. More on that in a second.

The Bank of England’s balance sheet is up from £24 billion to half a trillion pounds. The American Federal Reserve’s balance sheet is up about nine-fold.

Did you really think this wouldn’t have bizarre effects on the value of financial assets and commodities?

The thing about manipulating the money supply is that it doesn’t just cause inflation equally everywhere. The so-called neutrality of money is false.

The predictable effects of monetary manipulation

Money pumped into the economic system confuses it deeply. The funds look like savings, but they aren’t. And that leads to the sorts of crises we’ve been having. Over time, this disadvantages productive investments like the stockmarket. But how?

First of all, true savings are foregone consumption. If the market is tricked into believing there is pent-up consumption out there somewhere, just waiting to buy stuff, it will invest to produce that stuff. When that consumption never appears because the savings weren’t real, just printed money, the investments fail.

Savings are also funds available for investing. The interest rate balances the supply and demand for these loanable funds. If the savings aren’t real, and the interest rate is manipulated by the central bank on top of this, then you once again get mistaken investments. Far too many in the wrong places, financed by money printing instead of true savings.

These mistakes are called malinvestments by the economists who explained all this. They’re call bad investments by stockmarket participants who see their companies struggle.

Many of the economists who exposed the misallocating effects of money printing were Austrian, so we call their set of beliefs Austrian economics. The name was originally intended as an insult from the German School of Economics.

The point of all this is that, if you’ve been busy investing in productive companies, it’s no surprise you’re going nowhere. And the booms and busts in the meantime are even less of a surprise. The economy is being led down dead ends by its central bankers.

Meanwhile, the value of inanimate objects is surging to reflect the inflation of the money supply. The price of such items simply reflect the amount of money there is available to allocate to them.

The best way to beat the casino is not to go there in the first place. Gold, silver, and others offer a way out.

Or you can trade the fluctuations

If you can gain a grasp of Austrian economics, you can pick a bubble a mile away. That’s because, instead of focusing on the symptoms, you look for the causes. If you find someone meddling with the money supply, you know there’s going to be a boom and a bust.

But why sit out on the boom? The oil price and commodity index didn’t just go nowhere since 2000. They jumped about all over the place.

With commodities at lows compared to financial market valuations, now is the time to buy into the sector for the next set of bubbles.

Our publisher Nick O’Connor knows this all too well. It’s why he’s prepared a rather impressive line-up for a summit early this month. I can’t reveal the details yet, but keep your eyes peeled to Capital & Conflict in coming days for the best set of energy investment opportunities from around the globe.

Until next time,

Nick Hubble
Capital & Conflict