- The speculator who wrote the book on asset bubbles
- Cantillon Effects are like signposts for investors
- How to position yourself to profit from the next bubble
Today, I’d like to give you a financial secret so powerful that it forced a man to fake his own death in a house fire and disappear into Asia under a pseudonym. His name was Richard Cantillon and this portfolio strategy is his story…
It all began 300 years ago with the Mississippi Bubble. Cantillon’s friend John Law had come up with a mad scheme to try and deal with France’s crippling government debt. He created what is now seen as the world’s first central bank to try and do so.
The initial investment pitch was simple… at first. The government would sell the right to trade with the new Mississippi colony to a company listed on the stock market, thereby reducing the government’s debt. The purchase would be funded by issuing shares in the company to the public.
The company soon morphed into something entirely different – a giant holding company of French government debt, instead of trading much with the New World.
It worked so well that they decided to add ever more variations on this ploy. Things soon got incredibly complicated. The scheme culminated in the issuance of paper money that was unbacked by gold.
Now, as you might know from experience, nothing makes stock markets fly faster than creating vast amounts of unbacked money. And, sure enough, that’s what happened back then too.
Cantillon was an early investor in the Mississippi Company. But he soon understood the underlying flaw in Law’s increasingly tenuous paper-money scheme. And so he sold out, making his first fortune before the collapse.
Cantillon also understood that Law’s new currency would crash on foreign exchange markets. And so he successfully speculated on this and moved his wealth to the UK… where the British government was busy emulating Law’s short-lived success to deal with its own crippling government debt. Today, we call the British version the South Sea Bubble.
The British scheme was initially similar to the French one, but things went South in a different way. Cantillon, having seen the same story play out in France, knew how to speculate on the way up and on the way down.
By this time, he had developed an entire school of economic thought and theory about what happens when governments issue too much paper money. Some credit Cantillon with the creation of the field of economics.
Unfortunately, Cantillon made so much money using his theories that some of his politically connected counterparties couldn’t pay up on their speculative bets. They began to accuse him of all sorts of things and so he either died in a house fire or faked his death in a house fire and disappeared. Some say a mysterious Frenchman later discovered travelling in Asia may have been Cantillon.
The real question is what Cantillon learned that allowed him to profit from a pair of bubbles and busts – an incredibly rare feat. And how can we use that lesson today? Conveniently, he wrote a book on the topic. Unfortunately, it’s so old that it’s difficult to decipher.
It’s not terribly difficult to understand the basics though. Simply put, central banks blow asset bubbles when they manipulate interest rates and fiddle with the money supply. And such bubbles eventually burst.
Thus, if you can identify a part of the economy that central bankers are pumping money into, such as the stock market (in 2000), bond market (in 2021) or property market (in 2007), then you know you’re in for one heck of a ride.
Investment prices soar well past what is rational. And then crash faster than an investor can sell out.
So Cantillon wasn’t just a speculator. He literally wrote the book on what happens when governments issue paper money, describing the booms and the busts as he saw them play out.
He also explained what became known as Cantillon Effects. These only really come to life when you consider their opposing theory.
According to many economists, money is neutral, meaning that it doesn’t really matter terribly much to the structure of the economy. You can increase or decrease the money supply and it won’t really make waves. All prices will just rise or fall in response to the amount of money in the economy.
Cantillon argued the opposite. Different sectors of the economy are affected differently by what we now call monetary policy, he claimed. That is why mucking around with interest rates and the money supply is disproportionately likely to cause trouble in specific parts of the economy. Specifically, the parts that require large upfront investment, because they are price and interest rate sensitive over long periods of time.
Today, we’d focus on the property sector and the stock market when looking for such Cantillon Effects. Back in Cantillon’s day, it was stock markets, capital-intensive industry and trade that got hit hardest by the booms and busts.
What made the South Sea and Mississippi Bubble so dramatic, as well as the Japan Bubble of the 80s and the US housing bubble of 2008, is that the money was directed into certain parts of the economy, causing a disproportionately large boom and bust in that specific sector.
Today, we are on the cusp of another such central banker funded and directed boom. Once again, they are funneling an expansion of the money supply into a specific sector of financial markets in an attempt to shape history. And, as ever, it will end in disaster.
But, like Cantillon, I suggest we take advantage of the boom instead of just doom-mongering about the inevitable bust it’ll cause.
The sector of the economy that the central banks are targeting today is the green energy transition.
One after the other, and sometimes in groups, the central bankers of the world have declared how they will help finance the green transition. Their plans include shifting bank regulation to favour green initiatives, providing cheaper funding from the central banks for green finance, investing in green bonds directly, stress testing large financial institutions for exposure to so-called stranded assets such as oil wells, and excluding fossil fuel companies from central bank asset holdings.
This means that central banks are both funding and directing their funds into this part of the financial markets. And as green energy is particularly capital intensive, the impact is likely to be especially large.
The question is, how should you play the bubble and bust?
My friends James Allen and Sam Volkering spend their time trying to find the best green tech companies set to profit from the spectacular boom to come at Revolutionary Trend Investor. The central bank’s support is like a tailwind to such markets.
But I suspect there’s a better way. You see, the green energy transition’s true bottleneck lies in the resources needed to build a new energy system. We can’t mine enough of them in time.
If central banks are funding the expansion of the green energy sector with an unlimited balance sheet’s worth of money, then that’ll push up asset prices. But they can’t create copper, cobalt or lithium with their digital printing presses. So I’m expecting such resources to surge in price. That’s what we’ve been focusing on at The Fleet Street Letter.
In coming years, as the green energy transition continues to wreak havoc on our energy system, you might find yourself wondering who the hell is funding all this nonsense. Well, now you know. And you know the impact it’ll have…
Of course, Cantillon is far from the only investor who turned an investment strategy into a fortune. Fellow Irishman Eoin Treacy, who hasn’t disappeared into Asia under a pseudonym, let alone staging a house fire, has been busy helping a long list of fund managers, sovereign wealth funds and ordinary investors to profit from what he calls “snap-backs”.
If you don’t have the stomach for investing in bubbles because the timing is so challenging, and you don’t trust the hopium of “buy and hold” investing in an age of inflation and other financial mismanagement, then trading snap-backs might be right for you.
They’re short to medium-term trades, so your capital is not tied up in the market over long periods of time.
The opportunities are specific and narrow, focusing on isolate situations.
The profit potential is large, with a target between 50% and 150%.
This method is not without risk of course but if this sounds of interest, check out how to learn snap-back trading here.
Until next time,
Editor, Fortune & Freedom