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âIf something cannot go on forever, it will stop.â
Herb Stein.
This weekâs commentary was first published three years ago. It is republished here in a moderately revised and updated form. Readers may find some of the content distressing.
There had been warnings.
Three years beforehand, in 1963, D.C.W. Jones, a Welsh waterworks engineer, had written to the District Public Works Superintendent at Treharris. Jones cautioned that the National Coal Board appeared to be dumping slurry âsimilar to that which was deposited and gave so much trouble in the Quarry at Merthyr Vale, up on to the existing [coal waste] tip at the rear of the Pantglas Schoolâ. He added, âI regard it as extremely serious as the slurry is so fluid and the gradient so steep that it could not possibly stay in position in the winter time or during periods of heavy rain..â
There were many coal tips at Aberfan, but âtip number sevenâ had been growing for eight years and had risen to a heap over 100 feet high. It lay on highly porous sandstone, above a number of streams and underwater springs.
The warnings went unheeded. The National Coal Board, nationalised in 1947, stood above the British mining industry like a colossus. In the post-war corporatist climate, miners knew better than to challenge its authority. There was an implicit understanding between the NCB and the people: make a fuss, and we will close the mines.
In the village of Aberfan at the heart of the south Wales coalfield, on Friday 21 October 1966, it had been raining for days, running into weeks.
Children at the Victorian red brick Pantglas School walked excitedly through the streets of the village, looking forward to mid-day, when their half term holiday would begin.
At 9.15 a.m., the senior school had not yet started lessons. The juniors, however, began their school day half an hour earlier, and some 240 children, aged between 4 and 11, were already at their desks.
And then the mountain hit.
The only warning the people of Aberfan had that the mountain of coal slag was on the move was a deafening vibration, like thunder, some said afterwards. Others compared it to a low-flying plane.
Over 200,000 cubic metres of sludge and liquid coal roared down the hill and over the old railway embankment, rearing thirty feet high, until it reached the village.
The first building it encountered was the junior school.
There was an emergency call to Merthyr Tydfyl Police:
âI have been asked to inform you that there has been a landslide at Pantglas. The tip has come down on the school.â
What the caller could not have known was that 116 young children and 28 adults had just been buried alive.
Cliff Michelmore, for the BBC, captured some of the shock and grief of the Aberfan tragedy in a live broadcast from the current affairs programme 24 Hours. (This young reporterâs letter home makes for even more uncomfortable reading.)
There was an inquiry â the longest inquiry in British history, lasting for 76 days. The blame for Aberfan was determined to lie squarely on the shoulders of the National Coal Board. It was, the report said,
âA terrifying tale of bungling ineptitude by many men charged with tasks for which they were totally unfitted, a failure to heed warnings, and a total lack of direction from above.â
The mountain starts to grow
An uncontrolled and now uncontrollable mountain of debt started its own relentless rise a little over 50 years ago.
US President Nixon interrupted an edition of the popular TV western âBonanzaâ on 15 August 1971, to announce to the American public that the US dollar would âtemporarilyâ no longer be convertible into gold.
The US economy was reeling from the costs of a âguns and butterâ policy instituted by his predecessor Lyndon Johnson: the Vietnam War, and a âGreat Societyâ welfare program, were bankrupting the country.
Some of the worldâs most unreliable allies, the French, werenât willing to take their US dollar losses lying down, so they began converting their depreciating dollars into gold. Just to make their intentions clear, the French sent a warship to New York City to retrieve their gold holdings from the US. A run on the United Statesâ gold reserves began. Nixon decided to stop it in its tracks.
By severing the link between gold bullion and the currency, Nixon ushered in a period in which the US currency would no longer be backed by anything more substantial than the âfull faith and creditâ of the US government. In the aftermath of the Nixon shock, and the collapse of the Bretton Woods currency system, which had lasted for nearly 30 years, in which all currencies were pegged to the dollar and the dollar itself pegged to gold, all currencies effectively went soft overnight. With no practical limits on the creation of currency any more, Nixon initiated a money printerâs paradise.
And the debt mountain began to swell.
In their seminal paper âGrowth in a Time of Debtâ, which you can read here, Reinhart and Rogoff taught us that once government debt exceeds 90% of a countryâs GDP, alarm bells start to ring. Economies effectively go ex-growth as the cost of servicing the debt burden sucks money away from more productive enterprise and the Big State crowds out the private sector in the war for capital.
All major western governments are bankrupt â the only question is how, precisely, the debt mountain falls.
This is, of course, exactly what Quantitative Easing (QE) and the glide path down towards zero interest rates were meant to address.
Forcing policy interest rates to zero â and in some cases below it â didnât help the debt mountain to contract. Politicians being what politicians are, it has merely encouraged them to borrow more.
McKinsey remind us that far from experiencing deleveraging since the Global Financial Crisis, global debt actually increased by over $57 trillion. In the US, since the Nixon gold shock of 1971, âtotal credit market debt owedâ has risen by over 35 times. GDP has inevitably lagged, growing by just 14 times over the same period.
Herbert Stein coined the appropriate adage for this growing debt mountain:
âIf something cannot go on forever, it will stop.â
There are growing signs that we may have reached the debt market end-game.
Having reached a trough of less than 1% in yield during the first governmental overreaction to Covid in 2020, 10 year US Treasury bonds now yield well over 4%.
The financial historian and market strategist Russell Napier was recently asked where investors should sensibly invest. Here is his response:
âYou shouldnât own any fixed interest securities. None. Inflating away debt means destroying the purchasing power of fixed income securities. There may be rallies, but fixed income is in a long bear market. Bond bull and bear markets move in about 40 year periods, and we are now into year three of the current bear market. You can lose a fortune in real terms over the long term. Therefore: No bonds. Period.â
Meanwhile, monetary policy wonks have started pressing for the wider implementation of negative interest rates.
One-time IMF chief economist Kenneth Rogoff, the co-author of the 2010 paper cited above, recently published a book entitled âThe curse of cashâ. (You can perhaps gauge where our own sympathies lie given the title of our own 2015 book, âThe war on cashâ. You can download a free copy of our book here.)
In Rogoffâs book, he advocates getting rid of all high denomination dollar bills (and ultimately, all cash), notionally in the cause of fighting crime, terrorism and tax evasion.
The reality is so transparent, itâs laughable.
What Rogoff secretly, or perhaps not so secretly, supports is the introduction of solely electronic money, which would achieve two things instantaneously.
One is the ability of banks to start charging negative interest rates â a savings tax, effectively.
The other is the ability of government to monitor every single financial transaction you ever make.
By banning physical cash, which even Rogoff concedes is âcoined libertyâ, the authorities would be initiating a regime of Big State control so monstrous that even George Orwell could never have imagined it.
In the words of James Grant,
âGovernment control is not only [Rogoffâs] preferred position. It is the only position that seems to cross his mind.â
The great British parliamentarian Edmund Burke once noted that the only thing necessary for the triumph of evil is for good men to do nothing. So if you take against Kenneth Rogoffâs fascistic policy recommendations, make your voice heard.
Meanwhile, the debt mountain quietly continues to grow.
Since interest rates have got as low as they can realistically go, absent a Rogoff negative rate putsch at the central banks, bond markets have now started to fret about those signs of rising inflation.
Kathleen Gaffney of Eaton Vance, which manages over $300 billion in assets, comments:
âRates are rising from a very, very low base, which means thereâs lots of downside and very little upside for bond prices.â
She has reduced the duration of her bond portfolios and started to raise cash.
âIf you donât know how to time it, and I certainly donât, you just want to get out of the way.â
From our (value- and real asset-biased) perspective, given the distortions wrought by QE, ZIRP, NIRP and a fundamentally corrupt monetary system, the optimal way of betting against the debt mountain is not by taking any stand against debt instruments per se, but by owning, within the context of a diversified portfolio, gold and silver, and sensibly priced commodities companies with little or no debt but high cash flow generation; this way, weâll gain access to investments and firms that can thrive in an inflationary environment.
Speaking truth to power
John Humphreys is the former presenter of BBC Radio 4âs flagship âTodayâ news programme. He is the closest thing that Britain has ever had to the great American news anchorman Walter Cronkite. In a recent commemoration of the Aberfan disaster before his retirement from the programme, he concluded his tribute to the little village with a quite extraordinary call to arms. He ended his piece as follows:
âWhen I drove here from Cardiff 50 years ago, the hills on either side of the valley were scarred with [coal refuse] tips: black and ugly and threatening. Now, as I look back down the valley from this cemetery, theyâre gone: bulldozed away, or covered with grass and trees. The mining valleys of south Wales are green again.
âThe river that flows beneath me was also black and dead. And now itâs clean, and children can play and fish in its shallows. And the men of these valleys, unlike their fathers, do not end their dayâs work with lungs full of coal dust.
âI never met a miner who said he wanted his son to follow him down the pit. The nation owes miners a debt of gratitude for the wealth they helped create over the centuries. The mines have gone, of course, but our generation owes something different to the people of Aberfan. Respect for the courage and dignity they have shown for 50 years in dealing with unimaginable grief. But more than that.
âThe children in these graves were betrayed by the men in power decades ago. Who refused to listen to their fathers when they warned them that their little school faced a mortal danger.
âIf Aberfan stands for anything today, apart from unimaginable grief, it stands as a reminder of this: authority must always be challenged.â
The Aberfan tragedy was avoidable. It was certainly forecastable. The ultimate demise of the mountain of debt that overshadows all of us, and for that matter the next generation who will inherit it (or live with the aftermath of its cancellation, or being inflated away) is just as forecastable, if not necessarily easy to time. In this regard, in taking specific and meaningful action to protect oneâs wealth and valuable capital, better even a year too soon than just a minute too late.
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As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio â with no obligation at all:
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Tim Price is co-manager of the VT Price Value Portfolio and author of âInvesting through the Looking Glass: a rational guide to irrational financial marketsâ. You can access a full archive of these weekly investment commentaries here. You can listen to our regular âState of the Marketsâ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
I watched a documentary on Aberfan about 10 years ago, for the first time.
I cried.
Fixed interest bonds are a gigantic bug in search of a windscreen