Tuesday, July 01, 2008

The potential for Near Eastern industrialisation

Why shouldn't the eastern seaboard of the Mediterranean bcome a manufacturing centre to rival any in the world?

  • There is still a vast amount of oil in Arabia, but water, too - e.g. under the Judean desert, plus three aquifers under the Sahara.
  • The dry atmospheric conditions are conducive to the long-term storage of stocks of new cars, planes etc.
  • The sunny region would be very suitable for "green" energy systems, too, such as solar updraft towers.
  • The Arab leaders have enormous reserves of capital.
  • There are many people in those countries who would benefit enormously from the work and wealth if their countries industrialised.
  • There is land a-plenty for development.
  • The eastern Med is beautifully located for producers to get their goods by sea to Western European and North African markets, and the Red Sea for the Middle and Far East.
I don't see why it couldn't happen, once political peace and good governance are established - and what incentives to do so!

Monday, June 30, 2008

Marc Faber update: take refuge in gold

Dr Faber has become a gold bug again, but is expecting a correction in other commodities. In a climate of low interest rates and high inflation, Adrian Ash seconds the call for gold.

And here's an extract from Faber's monthly "Market Comment" three years ago (July 5, 2005):

... Lastly, think about the following situation. The US manufacturing sector becomes very weak. The housing market falls and consumption declines. But oil goes through the roof because the empire of eternally rising home prices has just bombed Iran (very likely, in my opinion). Now the Fed cuts interest rates and eases massively. Just think what the stock, bond, foreign exchange, and gold market will do? The initial reaction might be a flight to safety – into government bonds and gold, and out of stocks. But, thereafter, a massive sell-off in bonds could occur as inflationary pressures build from sky high energy prices and massive money printing.

I have to confess, that I am not so sure exactly how this situation would play itself out, but it is worth thinking about it.

Worth the US$ 200 annual subscription, you may think. Especially since some of it goes towards the education of poor children in northern Thailand.

Janszen says next bubble will be in energy

A "bubble cycle" instead of a business cycle... house prices to revert to trend and fall 38% from peak... a $12 trillion gap to plug with fresh securities in a different sector as the current bubble collapses... government legislation to clear the way for the speculative rush... $12 tn + an extra $8 tn = $20 tn... it's going to be... ALTERNATIVE ENERGY.

Read iTulip founder Eric Janszen's Harpers article.

"Caloriefornia or bust!" Any views from energy investment specialists (e.g. Nick Drew)?

A defence of blogging

In early times, learning was only to be had by digging and mining; it is now the circulating medium. Men may become learned in many ways besides the means of erudite courses of instruction: that is learning which enables a writer to inform his readers of matters applicable to the purposes of either profit or pleasure, of which they were not previously aware. In this sense, many are learned who do not suspect themselves in possession of this envied distinction. A prejudice lingers, however, in favour of that description of learning gained by hard study over tall books, and under the dim light of the lamp. But this is only the theory: in practice, men appreciate the living learning only which cheers the evening of leisure, or guides the daily labour - enlightens the professions, or instructs the statesman.

From "The Spectator" magazine, inaugural issue, July 5, 1828.

Yet how swiftly do some other publications forget their humble origins, which have subsequently attained eminent status. "Private Eye" lampoons the "online community" in its column "From The Message Boards"; but in 1961, there were its founders Christopher Booker and Willie Rushton, using typewriter, Letraset, hand-drawn cartoons, scissors and glue (in Willie's mother's flat, I seem to remember) to compose their witty and scurrilous magazine; and the new technology of photo-litho offset to print it. How is this different from the homeworkers of the blogosphere, and the use of the new capabilities of the Internet? Was not Private Eye the original blogpaper?

Liberty Marr'd by its Champions


A gentleman writes, that Mr Andrew Marr, the news-reporter and erstwhile foe of judge-made privacy law, now desires to be kept privy not only certain information concerning himself, but also the knowledge that he has secured an injunction to that effect from the court.

If any correspondent should care to illuminate this dark matter, he shall find us all ears; though we grant, that ears cannot see.

Might it be item 35 here? As revealed by Guido in January?

UPDATE: Another gentleman writes in defence of Mr Marr's right to privacy

*** 2009 UPDATE: Alastair Campbell implies exposure of Andrew Marr

Sunday, June 29, 2008

Making money out of distressed financials

Michael Panzner has come across a real estate blogpost that includes this idea:

Several of the deal guys said that banks they contacted three months ago about buying assets are all of a sudden calling back. Three months ago they said everything was fine. The idea du jour is to buy the bank to get the bank’s real estate. Sounds screwy to me but I’ll write some more about this one tomorrow.

This reminds me of something I read many years ago in "Adam Smith" (George Goodman) and wrote about here almost exactly a year ago - buying bankrupt (or nearly so) stock that includes the rights to tangible assets.

I don't have the cash or sophistication for this one, but maybe one of you out there knows how to work out whether a bank's shares are selling at a discount to the value of its underlying assets.

There's always an angle, isn't there?

Inflation not purely a monetary phenomenon

I'm puzzled. Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon," yet when I apply this to the UK it doesn't work.

I looked at the Bank of England's figures for M4 from end 1963 to end 2007, and by my calculation the monetary base has increased by a factor of about 240; yet prices have increased only 15 times in the same period. (*)

Currently (and time permitting) I'm also working through David Hackett Fischer's "The Great Wave". In his concluding chapter, he lists seven different causal explanations of inflation, and none of them quite fits the observed facts, not even monetarism. For example, in the sixteenth century, European prices began to rise some time before the imports of gold and silver from the New World could have made a difference.

His idea is that inflation-waves are "autogenous" (don't academics love this kind of label?), by which he means that people make decisions based on current circumstances and their personal predictions for the future, and that helps shape the next set of circumstances. It's like watching a football game unfold, each player adjusting his movements according to his perception of the others.

Fischer thinks that one important factor in the price-wave of the Middle Ages was a trend towards marrying earlier and having more children, which put pressure on natural resources at the same time as altering the ratio of working adults to dependant children. Perhaps this has modern echoes in the growing longevity and reducing mortality rate in the developing world, plus the increasing numbers of dependant elderly in most places.

At any rate, inflation in the West is likely to become less susceptible to control by adjusting the interest rate. What will the Monetary Policy Committee do then?

Perhaps it might help if we established some control over the actual amounts pumped into the economy by the banks (and other creditors). I can dimly remember the news in the 60s, about limits on how much you could borrow to buy fridges, washing machines etc - apparently a minimum deposit was a requirement of the Hire Purchase Act 1964.

However (it seems), Japanese manufacturers found ways to get round this and offer (in effect) 100% loans, and then came the pandemic of credit cards, starting with "your flexible friend" Access (1972). Telegram Sam the drug dealer is always friendly, at first.
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(*) Unless, of course, the discrepancy is accounted for by (a) the need for the monetary base to expand each year to cover interest on loans already made, and (b) much extra money being locked-up in real estate - an awful lot of building and rebuilding took place as the postwar economy recovered.

Investment, inflation and market collapses

We have had no fewer than three major financial institutions (outside the US) call for an utter collapse of the equity markets in the last two weeks.

... says Karl Denninger. Seems like the pros are sitting around waiting for someone else to panic first. Then it'll be time to get in, right?

I recently looked at what happened to shares when a period of inflation begins. You might think that since inflation will also balloon the underlying tangible assets of companies, shares would do okay. But here's the results:
If you're an active investor, you may start thinking about opportunities. Look at the red zones. Draw a line from a deep points to a high one, and feel the greed; but draw lines from a temporary rally to another low, and feel the disappointment. You do need to get your timing right.
But inflation heavily penalises the passive investor, too. His boat settles onto the harbour mud; while the unlucky speculator dives headfirst off the retaining wall, deep into the goo. Inflation raises the risks for all.

Crime and punishment

Henry Wallis: "The Stone Breaker" (1857)

(I've brightened Wallis' painting above, but the foreground in the original is very dark, making a contrast with the gleaming, unreachable beauty of the twilit sky and its reflection on the lake.)

In a country with proper justice, nobody would dare intimidate a witness.

In such a country, wrongdoers are afraid of the law. They'd know that such a crime would certainly be prosecuted and that they'd end up doing at least 15 years breaking rocks.

... says Peter Hitchens in today's Sunday Grumbler.

"Pitee renneth sone in gentil herte," said Chaucer, sometimes ironically. The worthy compassion shown to unfortunates by the Victorians has, gone too far, some argue.

But there are now different reasons to pity. Prisons do not punish the wrongdoer in the old-fashioned ways, but the incarcerated man is no longer protected against bullying, beating, buggery and theft. In how many movies do we hear the police threaten a criminal with what his fellows will do to him in prison? Judge Mental does not put on his black cap and say, "You will be taken from here to a place of detention where you will have your arm forced up your back and..."

Then there's life outside, for the neglected underclass. "Theodore Dalrymple", a doctor who has dealt with many prisoners in Birmingham (UK), used to note in the Spectator magazine that prisoners' health improved considerably in prison, because of no (or reduced) access to drugs. Read the good doctor here on how the liberal approach to mind-altering substances is pretty much a sentence of death (prolonged and degrading). Here's an extract on alcohol:

I once worked as a doctor on a British government aid project to Africa. We were building a road through remote African bush. The contract stipulated that the construction company could import, free of all taxes, alcoholic drinks from the United Kingdom...

Of course, the necessity to go to work somewhat limited the workers’ consumption of alcohol. Nevertheless, drunkenness among them far outstripped anything I have ever seen, before or since. I discovered that, when alcohol is effectively free of charge, a fifth of British construction workers will regularly go to bed so drunk that they are incontinent both of urine and feces. I remember one man who very rarely got as far as his bed at night: he fell asleep in the lavatory, where he was usually found the next morning. Half the men shook in the mornings and resorted to the hair of the dog to steady their hands before they drove their bulldozers and other heavy machines (which they frequently wrecked, at enormous expense to the British taxpayer); hangovers were universal. The men were either drunk or hung over for months on end.

Our soft-handedness on crime and drugs, is really an extreme hard-heartedness.

Saturday, June 28, 2008

The economy is like a rainforest

The news always speaks of "the economy" as though it was one homogeneous whole. In fact, it's a host of micro-economies, financial equivalents of ecological niches.

In the rainforest, there are places that are light or dark, hot or cool, high or low, wet or dry. In the economy, there are savers, borrowers, amateur and professional investors, crooks, marks, young bold, cautious old, workers, shirkers and berserkers.

So centralised economic policy is enormously difficult. An intervention that helps one part, may hurt another, and further action is implied. It's like the tablets for hypertension that give you gout, which means you need tablets for the gout, which are likely to harm the lining of your stomach. Some might say, throw the lot away and have a glass of sherry before bedtime.

Or, in rainforest terms, let each species find its niche and organise its own survival strategies.

But I don't think this is an argument for complete liberal laissez-faire. To extend the analogy, maybe it's better to prevent harm than to seek to do good; the forest guardians need to control the rubber and banana companies, the clear-cutting loggers and polluting miners.

Friday, June 27, 2008

Dow Jones - worse bubble than the FTSE?

Just out of interest, I thought I'd do the same trend-spotting exercise for the Dow Jones as I did yesterday for the FTSE, i.e. extrapolating the highs and lows in the late 80s and early 90s.

The results are very different. October 2007 saw the Dow's highest-ever peak, and today, after falling over 2,000 points from that point, it still stands about where it was in the tech bubble of December 2000 (see yellow line).

And my hi-lo wedge (red lines) suggest that the Dow has been seriously above trend for most of the last 11 years. Of course, you can draw lines however you like, but I'm trying to do approximately the same as for the FTSE and the implication is that the Dow "ought" to be between 7,000 - 10,000, centring around the 8,500 mark. This chimes with what Robert McHugh predicted last year (9,000). (If you draw the "high" line to connect the '87 and '94 peaks, the hi-lo lines converge towards 7,000!)

I wonder what's keeping it up?

Stockmarket crash - a golden opportunity

I thought I was a bear: Wolfie says there's near-panic, City Unslicker talks about the FTSE losing a couple of thousand points, now Richard Lander on CityWire reports a prediction of the FTSE as low as 3,000 and another 60% to come off the S&P 500.

We could be approaching a once-in-a-generation Templeton opportunity, a financial fire-and-forget that could richly reward those who save very hard right now. Give the rifle another pull-through, hitch up your belt, and wait...

Thursday, June 26, 2008

The FTSE - semi-wild guesses about fair value

I suggested on Wednesday that the market may already have lost much of its bubble, considered in real terms, and here below is my simple attempt at chartism.

What I've done is to draw two purple lines, one connecting the lows in the mid-80s/early 90s, and the other the highs in the same period. I've chosen that time-frame because it's before the silliness of the late 90s, and it does also include a period when the UK economy was in the doldrums.

Using these parameters, the late 90s and early 00s were well above trend, whereas last year's highs only just peeped above the upper line and the current value is hovering a little above the centre of the hi-lo wedge.

The implications are that the next low, if it comes soon, shouldn't be worse than around 4,500, and by 2010 (when I'm guessing the tide will turn) the bracket would be in the 4,700 - 7,000 bracket, with a midpoint of c. 5,850.

Taking the market at close yesterday and extrapolating to that 5,850 midpoint, would imply a future return (ignoring dividends) over the next 16 months, of c. 2.5% p.a. - not nearly as good as cash, especially in an ISA. On the same assumptions, to achieve an ex-dividend return of 6% p.a. would require entry into the market at c. 5,400.

On this tentative line of reasoning, we should be looking for a re-entry opportunity somewhere in the 4,500 - 5,400 level, say 5,000. Shall we wait for the next shoe to drop?

Inflation vs deflation - the iTulip debate

Find the time to have a look at this in iTulip. Lots of plums in this cake, including a suggestion that the USA is quietly negotiating a replacement for the dollar, with the Chinese. And 30% annual inflation in a few years' time.

Wednesday, June 25, 2008

How much of the crash is behind us?

The FTSE is closing somewhere around 5,666.10 today. It closed at 5,709.50 on 17 February 1998, which was the first time the market had breached today's level.

So we've spent a little over 10 years to get nowhere in nominal terms, and meanwhile the value of money has dropped by approximately 25%.
Yes, shares pay dividends, but most people buy them as part of some collective arrangement that involves initial and recurring charges and/or fees. After charges (and taxes, remember), it would have taken a net dividend yield of about 3% per year simple, or 2.65% compound, merely to replace the value lost to inflation.
So quite possibly the putative investor in the FTSE has actually fallen behind where he was in 1998.
Are the pessimists lagging behind the news? Has the worst happened already?

Tuesday, June 24, 2008

Littlejohn vs Toynbee

"... do you think about global warming when you're flying to your villa in Italy?"

A sought-after moment, I believe.

Investment in agriculture sparkles

Watching the idiot's lantern last night and who should be interviewed (on the subject of food prices and speculation) but Hugh Hendry, about whom I wrote last year. And his CF Eclectica Agriculture Fund currently ranks top out of 317 in the sector (up 35% in a year).

Of course, the poor are being hit badly (not the poor here, who aren't really poor). Hendry argues that rising food prices will encourage more (and much-needed) investment in agriculture.

Monday, June 23, 2008

Taking a line for a walk

Timothy McMahon at FinTrend reckons we should be looking to buy into US stocks this summer, using the rate of return graph above.

How far should we heed the chartists? Like cardsharps fleecing marks on a sinking Mississippi paddlewheeler, are they better at short-term plays, but inattentive to catastrophe?


Wreck of the "Sultana" off Memphis, Tennessee, April 27, 1865

Does freedom from self-destruction need a nudge?

I recently wondered whether freedom may not sometimes be an internal issue, as well as external. Isn't addiction a condition of being unfree? Is there some way of helping the unfree, without illiberal coercion?

As it happens, this is the thesis of a new book, "Nudge", by Richard Thaler and Cass Sunstein. It is critically reviewed by David Gordon here on the Mises website.

We are already being heavily nudged by our tax-greedy government and large commercial concerns, to gamble and drink away our wealth and future security. Surely there are ways in which we might diminish the temptation a little, to increase the possibility of rational, self-beneficial choice.

Comparisons are odious



Why has the American stockmarket done so much better than us since 1990?

And which way will these lines turn now?