Global Central Bank Focus

​The Purveyors of Notgeld

​Central banks are printing “emergency money” on a massive scale in an attempt to reflate asset prices and combat the wretched effects of the debt deleveraging process.

“What the hell has Hoover got to do with it? Besides, I had a better year than he did.”
-- New York Yankees baseball player Babe Ruth in 1930 on getting a raise to a salary higher than U.S. President Herbert Hoover’s.
Babe Ruth made just under a million dollars in total earnings during his illustrious baseball career, which spanned from 1914 to 1935, most of which was with the New York Yankees.  His peak salary for any season was $80,000 in 1930, which was $5,000 more than U.S. President Herbert Hoover earned the same year.
Little did Ruth know that someday the jersey off his back would fetch more money than he earned in his entire career. That’s what happened this past month when Ruth’s 1920 road jersey was auctioned for $4.42 million, the highest price ever paid for a piece of sports memorabilia. Other items used by The Babe also fetched big money, with a baseball cap selling for $537,000, and a baseball bat selling for $591,000. That’s quite a lot of money for strands of cotton yarn and a piece of wood, but at least the buyer can see and touch the items and perhaps smell sweat the Sultan of Swat shed onto his jersey and cap while circling the sandlots after yet another home run. And who knows, maybe someday the buyer will sell the items to someone just as eager to get a piece of The Babe and someday make a profit himself. The simple laws of supply and demand make it likely he will – there’s only so much of The Babe to go around.
It’s not just the limited supply of The Babe’s stuff that is selling well, so is other “stuff” that you can touch and feel, and I’m not talking about Greek government bond certificates – you’ll get less than face value for those. I’m talking about art work, which has sold spectacularly well of late, led by the sale in early May of Edvard Munch’s famous painting “The Scream,” which sold for nearly $120 million, the highest price ever paid for an auctioned painting and over 50% higher than the expected selling price. It’s a bounty to scream for!  Even comic books are fetching big bucks, with the first Superman comic book selling for $2.2 million. Not bad for an item that sold for 10 cents in 1938.
Central banks are harming investor purchasing power and increasing the attractiveness of real assets
The attractiveness of real assets as opposed to financial ones increases in particular when a central bank turns up its printing press, as is now occurring in the United States and in much of the developed world.  The good news is that outside Japan deflation has been avoided.  The risk going forward is that the value of paper money will diminish. While highly unlikely today, at extremes excessive coinage historically has wiped out the value of paper money, as was the case in Germany in the early 1920s under the Weimar Republic, in Argentina in the 1980s, and more recently in Zimbabwe (I have 200 trillion Zimbabwe dollars sitting on my desk – I bought them on eBay for $10).
The hyperinflation experienced under the Weimar Republic was so extreme (Figure 1) that Germans stopped using central bank money – the German mark – and began using other forms of currency as a medium of exchange. People began to take money printing into their own hands, designing all sorts of colorful money called “notgeld” (Figure 2), which in German literally means “emergency money.” These were monies created outside the purview of the German central bank and they held their value better than the central bank money did.  Notgeld were broadly accepted as a means of payment and they came in more than just paper form, including in the form of aluminum, coal, silk and stamps, for example. Real assets, in other words, held their value better than paper assets did.
Today’s purveyors of notgeld
The purveyors of notgeld today are the central banks of the developed world, which are fostering value in real assets by expanding their balance sheets and thus printing “emergency money” on a massive scale in an attempt to reflate asset prices and combat the wretched effects of the debt deleveraging process. It is through this emergency money and repressively low interest rates that the world’s central banks create conditions that compel investors to seek out value in real assets and move outward along the risk spectrum. Central bankers will have to maintain these conditions for a very long time, because the debts of the developed world will not be extinguished any time soon. This means that the Federal Reserve and central banks in other parts of the developed world will have to keep their benchmark rates low and keep their printing presses running at full speed for quite some time.
Investment implications
Today, notgeld are taking the form of Babe Ruth’s jersey, artwork, comic books and a plethora of other assets that investors believe will hold their value because of both their relatively limited supply and the abundance of central bank liquidity stemming from policies geared toward propping up asset prices and growing nations out of debt. In some cases these assets are being bought by investors in developing countries who are eager to show off their newfound wealth. Investors therefore should focus on assets that will vanquish attempts by central bankers to repress them and invest in assets that are likely to benefit from central bank policies designed to reflate deflated economies. These include real assets such as commodities, land, equipment and software, and human capital, all of which have the potential to provide a better rate of return than can potentially be earned investing in financial assets in the developed world. 
In the fixed income market, investors should consider low-duration, inflation-protected assets and aim to fortify their portfolios against the risk of permanent losses by investing in bonds that are high in the capital structure, favoring entities that are high quality, have hard assets to sell, have high amounts of assets relative to their debts, exposure to the fastest-growing economies and industries in the world, and low degrees of sensitivity to the ups and downs of the business cycle. Chop volatility off at the knees, in other words, because in choppy markets an investor can get chopped up. In equities this means favoring entities in the developing world over those of the developed world, in particular those reliably expected to pay a dividend.
Uncovering value is challenging in today’s uncertain, volatile world, but there remains one simple truth to guide investors: actions by central banks that result in excess coinage will have both deleterious and propitious effects. In many assets in the developed world you will find the former. By carefully selecting assets in the developed world and scouring for opportunities in the developing world you will likely find the latter. You may also find some in your attic.
The Author

Tony Crescenzi

Portfolio Manager, Market Strategist

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