Monday, December 31, 2007
I think this links in with our domestic EU in-or-out debate, on which the allegedly Conservative British MP David Cameron has recently been making flirty noises. I say "flirty" because although the headline talks boldly of tearing up the un-referendum-ed Constitution, the leader of the Opposition says "We think the treaty is wrong because it passes too much power from Westminster to Brussels." How much is enough?
Perhaps some will say mine is a typical reaction from a little Englander, but originally that term meant an opponent of imperialism. Well, I'm used to ignorant brickbats. It was Philip Toynbee who - his son told me - called me a Colonel Blimp while I was still at school, I think because I had dared to ask him about the significance of colour in Lorca's poetry. What I gathered from this experience was: never ask a posh leftie for an explanation, he'll only look down his egalitarian nose at you. (I haven't met his daughter Polly, though.) Intriguingly, though the term "little Englander" is said to date from the 1899-1901 Second Boer War, there is an 1833 German dictionary-cum-phrasebook (published in Grunsberg) called "Der kleine Englander ober Sammlung". I do hope the title wasn't intended to have a pejorative tinge, but you can never be sure with the Germans - they do have a wry sense of humour.
The relevance of all this, aside from the asides? I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.
Sunday, December 30, 2007
He says the media is not reporting the truth. I tend to agree: I now throw away the Sunday football and financial supplements at the same time. If you want to know what's really happening, he says, watch what is going on at the banks, the Federal Reserve and Goldman Sachs, all of whom are battening the hatches, while CNBS (also castigated by Jim Willie) plays a cheerful tune to the proles.
I've written before how in 1999, as a financial adviser, I sat through a presentation from a leading UK investment house about tech stocks, which were supposedly about to start a second and bigger boom. I suspected then, and even more so now, that they were looking for the fabled "bigger fool" to offload their more favoured clients' holdings. Denninger intimates the same:
Are these shows, newspapers, and others reporters on the financial markets, entertainers, or worse, puppets of those who know and who need someone – anyone – to unload their shares to before the markets take a huge plunge, lest they get stuck with them?
Then he gives his predictions - which are grim, but not apocalyptic. It's the fools who will get roasted, not everybody. (By the way, Denninger is another Kondratieff cycle follower.)
What to hold, in his opinion? Cash, definitely; anything else, check the soundness of the deposit-taker. If you want to gamble on hyperinflation, he thinks call options on the stockmarket index are likely to yield more than gains on gold, even if the gold bugs are right.
This is where I thought we were in 1999. Thanks to criminally reckless credit expansion in the interim, we're still there, only the results may be worse than I feared then.
Oh, and he thinks the dollar will recover to some extent, because the rest of the world is going to get it just as bad, and probably worse. (Interesting that the pound is now back under $2.)
Saturday, December 29, 2007
There is an international project (ITER) in the south of France to develop this, and if it works...
Thanks to GMG for a link to this discussion of fusion power, which tends to the conclusion that a successful and economically viable fusion system is a very long way off, if feasible at all, and we'd do better to concentrate on fission, i.e. the present type of nuclear power station.
Generally, the poorer the country, the higher the income inequality as measured by the Gini Index (except for Azerbaijan, according to this from the ESRC).
The Factbook estimates 30% combined unemployment and underemployment in many non-industrialized countries; developed countries typically 4%-12% unemployment.
There are enormous fortunes to be made (by some) arbitraging the economic differences between countries.
In the USA and the UK, we are relentlessly spending more than we are earning.
What are our governments' plans for us to remain rich? And given the correlation between income and equality, do our business, media and political elites have much incentive to make and seek support for such plans?
But Tim Wood expects the market to hit a low - "The straw that finally breaks the camel’s back may be closer than you think."
Friday, December 28, 2007
However, many have already pointed out that (a) lending criteria are tightening and (b) not all of the interest rate cut is being passed on to the borrower. So lenders are trying to reduce their exposure and are also being paid more for the risk they have already assumed. And we see from this Christmas shopping season that (c) the consumer is becoming more reluctant to spend.
That's not to say that we won't get inflation (in some sectors, not housing), since falling interest rates tend to depreciate the currencies of debtor countries relative to their cash-rich trading partners. On the other hand, the latter will continue trying to hold down their currencies, in an attempt to keep the show on the road - the show being the osmosis of wealth from the lazy, spendthrift West to the hard-working, hard-saving developing world.
We're going to be buying less, but I don't know how fast the Eastern co-prosperity sphere will take up the slack. In his book "The Dollar Crisis", Richard Duncan argues for a worldwide minimum wage to stimulate demand; but maybe events have overtaken him. Certainly, China aims to expand its middle class, rapidly.
But there's another way for China to stave off depression while waiting for the sun to rise in the East. According to James Kynge, manufacturing and transportation costs account for only about 15% of the end-price of Chinese exports to the US. Some of the expanding Chinese middle class will surely go into advertising, marketing, sales, distribution and finance. As China develops its own version of Wal-Mart, Omnicom and banking, credit card and financing operations, it'll own more of the total profit in the supply chain - some of which it can sacrifice to retain market share. And they're motivated to do so by the fact that domestic consumption yields very little profit for their companies: the money's in exports. The longer this game goes on, the more the decline of capital and skilled labour at our end.
So let's worry about the effects at home first. Yes, for investors inflation may be a worry, but perhaps they should extend their concern to include the stability of the society in which they live, as unemployment and insolvency stalk through the West. The issues are no longer financial, but political and social.
And we'd better hope that we don't go for the wrong solutions. Daughty quotes Ambrose Evans-Pritchard's 12 December article in The Daily Telegraph, which concludes (amazingly), "... it may now take a strong draught of socialism to save the Western democracies." I do not think Mr Evans-Pritchard is very old. Or maybe he's just saying that to bug the squares, an expression I'll wager he's too young to remember.
If I follow correctly, the trickery seems to come in step 4, where a CDO largely composed of middling-rated mortgage risk sells bits of itself with unreasonably optimistic ratings attached. "Skimmed milk masquerades as cream".
Thursday, December 27, 2007
1. Since 2003, if the dollar falls, all other asset classes rise; and conversely, if the dollar rises, the rest drops.
2. The "real" (adjusted for the price of gold) interest rate on 3-month Treasury bills predicts movements in the exchange rate of the dollar a year later.
Since the "real" interest rate has fallen sharply, he therefore expects a strengthening in other assets next year.
Modestly, Silberman adds, "Correlations are never perfect and tend to fail just when you need them most."
I think he's right there. To me, there seems to be a lot of jiggery-pokery in the gold market (speculators vs. central banks), and the predominance of "fiduciary money" (credit) in the economy means that we're measuring sizes with elastic bands.
In times of stress, the normal predictors don't hold, so currently I view all investments as speculative. My first priority is to reduce my vulnerability with respect to creditors, and my second is building cash to take advantage of emerging opportunities.
I've never understood why the stockmarket seems serenely unrelated to the dire state of the economy. Supposedly the market "looks ahead" around a year, but it can't be seeing what I'm looking at.
Anyhow, Panzner reproduces Dan Dorfman's article in the New York Sun, which reviews what's happened to the market in past recessions and gives tips on strong defensive areas - booze, cigs and "household products". I can understand that, too - or the first two, at least.
Jim Willie stands up nine reassuring statements about the US economy and smashes the lot down. He goes to the back of his mule for material to throw at Greenspan, Wall Street, CNBC etc and concludes that nothing is going to stop the financial melt. So he recommends gold.
He may be right, since on both sides of the Atlantic the authorities have decided to bail out lenders, instead of following Marc Faber's advice to let some of the players be taken out of the game.
However, as Faber has also pointed out recently, gold is an item everyone thinks everyone else supports, without committing themselves (elections have been lost that way). Is it not possible that we could see a continuing uptrend in the (relatively small) gold market, simply because of increased demand from existing fans? In which case, don't come late to the party - you'll have brought fresh beer but missed the fun.
Wednesday, December 26, 2007
A couple of things seem pretty clear to me: first, that I haven't lived long enough to have enough experience to know whether the bulls or bears are right about just how far the ripples will spread from the credit market problem; second, that there's never been an economic cycle just like this one, so even the people who have lived long enough to know who's right are speculating at best. (highlight mine.)
So it's not just me that's confused. And we're in distinguished company: Marc Faber also says we are in a new situation, with the possibility of a first-time-ever worldwide bust.
If we're into guesswork, then mine is that for a while, the monetary inflation will offset the credit (or "fiduciary money", as I'm learning to call it) deflation.
And then? Here's what worries me, in my amateurish, hunchy fashion: balance can be achieved in different ways (an empty seesaw is not the same as one with an elephant at each end). There's been a massive buildup of energy within the system, and the question is, can the Xbox take it?
I'm not so pessimistic; and if I were, investing in gold would be of less concern than physical survival.
And here's an interview he gave to Resource Investor 5 days ago. Some snippets:
it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish...
the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth... that leads to poor economic conditions... the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper... at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment...
whenever ... you have relative tightening of international liquidity ... you have a period of dollar strength... I think that we may have for the next three months at least a rebound in the U.S. dollar... I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar...
the global economy will slow down very considerably over the next six to 12 months...
I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure... But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money...
I would like to add to your comments that so many people are bullish about gold... people have actually very little gold in their portfolio... the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.
If he's right, my guesses (23 December) aren't too far off the mark.
Tuesday, December 25, 2007
Sunday, December 23, 2007
a marked deflation in property prices
a reduced demand for luxury goods and services
reduced imports of the above
consequent recession abroad
further interest rate cuts
higher State and Federal budget deficits
a sell-off in equities
increased demand for bonds
a weakening currency
higher prices for food, fuel and clothing
increase in the price of good-quality agricultural land
consumer price inflation indices will not be able to continue to mask the real increases in costs of living, and this will have further consequences for public finances
public enquiries, leading eventually to a thorough reform of the financial system
much the same as above, except I don't think our house prices will fall so far - the US subprime mess will hit investments, but we will drop our interest rates to devalue the pound to maintain stability against the dollar
will continue to fluctuate interestingly, but although some smart money is after it, there will be less spare money around generally, and other commodities will offer interesting opportunities for inflation-beaters. It's already above its inflation-adjusted long-term trend, and lenders will make sure that the real value of their loans is not destroyed by hyperinflation
... in short, slumpflation.
*and, by way of comparison, here is Karl Denninger's outlook in his Dec 24 post.
... plus a more sanguine assessment by Nadeem Walayat.
A Merry Christmas to all, and thanks for your visits and comments.
Saturday, December 22, 2007
I've been looking for one of those famous photographs from China's "Great Leap Forward", showing children standing on a field of wheat, such is the success of the Party's new agricultural techniques. Can anyone help me find it on the Net?
For it's certainly a bit like the official-fudged miracle economy we've got now. Except even the peasants have stopped believing in it, to judge by what's happening in the retail outlets.
Thursday, December 20, 2007
What is inflation, anyway? Ronald Cooke looks at the damned lies and self-serving statistics that underpin the official Consumer Price Index.
Jim Patterson reads the stockmarket runes and concludes:
Sub-Prime issues have been discounted. With overall market returns compressed the downside is limited. We expect a better market in the weeks and months ahead.
In his slightly starchy prose, The Contrarian Investor agrees with Patterson, up to a point, but also gives a serious warning:
1. In today’s market, the probability of the market going up is higher than the probability of it coming down. Hence, it is rightly called a bull market.
2. But should it come down (which is unlikely), it can collapse at extremely great speed and magnitude.
Hence, the stronger and longer this uptrend continues, the greater in magnitude and speed (as in volatility, not timing) the Great Crash III will be. Hence, the coming Great Crash III is a Black Swan event—an improbable but colossal impact event.
The importance of a particular event is the likelihood of it multiplied by its consequences. Black Swan events are events that are (1) highly unlikely and (2) colossal impact/consequences. One common mistake investors (and many professionals) make is to look at the former and forget about the latter i.e. ignore highly unlikely but impactful events.
Therefore, when contrarians are preparing for a crash, it does not necessary mean that they are predicting doom and gloom. Rather, they see the vulnerability of Black Swans and prepare for them.
If you're long stocks, bail now.
Wednesday, December 19, 2007
All investors take heed, you are staring at a market that is NOT responding well to “Good News.” Markets that cannot rally on Good News tend to accelerate downward on any type of bad news, and that is the kind of market which appears to be taking shape.
Now Governor Schwarzenegger is looking for a 10% cut in expenditures across the board, as the San Diego Union-Tribune reports.
Tuesday, December 18, 2007
Interestingly for me, he relates this action in part to the UK's having taken on so much of US Treasury debt, a matter on which I commented repeatedly some time ago.
Monday, December 17, 2007
Nadeem Walayat predicts another brightening of the FTSE's candle flame, before it flutters again;
Jas Jain says "total household debt growth below $300B annual rate will lead to outright deflation within months" and this is why the Fed has to keep trying to stimulate lending, with ever-diminishing responses;
Ghassan Abdallah counsels against trying to short the market, what with many forces attempting to support it - best to sit out the dance;
AFP interprets the slide in world stocks as a disappointed response to the Fed's limited interest rate cut, and a sign of fear of inflation - something Alex Wallenwein predicted recently;
Finally, Captain Hook plays with ideas that have occupied me for some time (rubric mine):
... If what we are witnessing is at a minimum a Grand Super-Cycle Degree event, then a total collapse of stock, bond, and currency markets world-wide could be in store as the globe reverts back to more regionalized economies, and localized currencies...
... the swings in the markets are enough to curl one's spine these days, so speculator exhaustion could play a role in curbing interest in speculation. This is a natural considering the aging western populations at this point and will play a big role in curbing the demand for financial assets moving forward as retirees attempt to spend their savings.
Sunday, December 16, 2007
Well, I'm not a respected Fleet Street money journalist, merely a no-account bearish personal financial adviser, but I'd suggest that in the exciting investment world of today, maybe a five-year period is not a good basis for comparing long-term results, or conditioning expectations for the future.
I had a client ask my opinion about investments a couple of years ago, because his bank had been showing him their fund's marvellous growth over a three-year period. I took time to explain to my client that over the five years to date (then), the graph (as for the FTSE 100) described a kind of bowl shape, and the period chosen by his bank just happened to draw a line from the bottom of the bowl to the lip.
I then showed him the five-year line in all its loveliness:
I think it's fair to say that these are not ordinary times. There has been a steady build-up of electrical charge, so to speak, over something like a decade (some would say, much longer), and there may well be some powerful bolts unleashed as a result. Where will the lightning will strike next: a steeple, an oak tree, a cap badge - who can tell?
Massive debt; changes in the balance of international trade; demographic weakening of future public finances; sneaky currency devaluation; wild financial speculation; wars and the rumours of wars; imprecisely known ecological limits to growth; declining energy resources; the desperation of the world's poor to join our fantastic lifestyle; our fear that we may lose the comfortable living we used to imagine was our birthright; the corruption, abuse and neglect of the young; the selfishness of their parents and the middle-aged; the increasing burden and growing neglect and abuse of the old.In all this turmoil, making five-year investment performance comparisons has an air of unreality, like planning tomorrow's menu on a mortally-wounded ocean liner.
Friday, December 14, 2007
Perhaps, after the next election, a new US President, with the strength of a fresh mandate, will be also able to act so decisively.
Thursday, December 13, 2007
The other is to keep the door closed until the smell is too bad, and then we have far worse problems - but it could take years. End result: deflationary depression.
Tuesday, December 11, 2007
Research into piles of sand grains showed that the timing of sudden collapses is quite unpredictable, but there is an inverse correlation between their magnitude and likelihood. As the sand piles up, "threads" of instability form, that can be triggered by the fall of a single grain in the wrong place. This is akin to the "Butterfly Effect" in catastrophe theory, I suppose.Mauldin connects this up with a paper published last year, about uncertainty created by humans in the development of their economic structures:
...the greater the number of connections within any given economic network, the greater the system is at risk.
This underscore the concerns I hinted at in an earlier post. The potential for catastrophic change is building up, and we can't predict what will be the trigger. Therefore, all the connections we are forming with each other need to be balanced by provisions for disconnecting, or for insulating one region from changes occurring in another.
To use an analogy, the supertankers that take oil around the world's oceans are internally divided into compartments. It would be cheaper, and so more profitable, not to install the internal compartments. But without them, a large wave hitting the ship could cause a movement in the liquid cargo that would shift the balance and quite possibly sink the vessel altogether.
So there is a trade-off between efficiency and survival.
Another aspect is how human behaviour changes in relation to risk perception. For example, research shows that when road junctions are widened and vision-obscuring vegetation cleared, drivers compensate for the extra security by going faster and less carefully. I understand that each of us has his/her our own preset level of risk tolerance, and when circumstances change, will seek to bring things back to that level .
But what if you don't fully understand the new circumstances? A miscalculation as to the level of security inherent in the situation could lead to your behaving more dangerously than you realise. The complexity and obscurity of CDOs, derivatives and credit default swaps are examples in the world of finance and economics, but surely this applies to other fields, too.
Perhaps conservative instincts are not just laziness, stupidity and timidity, but survival instincts. Have you noticed how those maddeningly slow drivers don't have dents in their old, lovingly-polished cars?
Maybe I'll get a hat, for driving.
Wallenwein suspects that the Fed has been buying longer-term US Treasury bonds to sustain demand and so keep interest rates low, but he thinks that once others scent the Fed's fear, there will be a massive dump that will throw more on the market than the Fed can mop up. This, he thinks, will send longer-term interest rates soaring.
His conclusion is that gold will perform its usual function of a safe haven in times of uncertainty.
As I pointed out this summer, the UK has (fairly recently) become the third-largest holder of US Treasury bonds.
Monday, December 10, 2007
Jim in San Marcos explains that it's probably not the banks we need to worry about, but the financial entitities that are NOT covered by Federal deposit insurance.
And Karl Denninger also details other areas threatened by financial contraction.
Sunday, December 09, 2007
It would have made no difference had it been a tin of cloned credit cards. You don't need to know what's in the box, or how it works; you need to know what it does, and who it's for.
Once you start thinking along these lines, things get so much clearer. For example, you don't have to be a "quant" like Richard Bookstaber, to know that derivatives are about risk. More precisely, they're for increasing risk.
Supposedly, a derivative reduces risk; but if you look at its use, it's a box that tells lenders and gamblers how far they can go. Seeing the fortunes that can be made in high finance, there is the strongest temptation to push the boundary.
My old primary school had a lovely little garden behind it, where we played at morning break. One game was "What's the time, Mister Wolf?". You went up to the "wolf" and asked him the time; he'd say nine o' clock; to the next child he'd say ten o'clock and so on, until he'd suddenly shout "Dinner time!" and chase you. Obviously, the game was not about telling the time.
So it is with financial risk models that service the need to maximise profits: always another trembling step forward. There's only one way to find out when you've gone too far.
But what if you could ask the time, and know that someone else would end up being chased? I think that explains the subprime packages currently causing so much trouble.
The bit I don't understand is why banks started buying garbage like this from each other. Maybe it's a case of the left hand not knowing what the right hand is doing, since these organisations are so big. Or maybe it's that everyone has their own personal box.
Then there's credit default swaps, and other attempts to herd together for collective security. They don't work if the reduction in fear leads to an increase in risk-taking. United we fall: no point in tying your dinghy to the Titanic's anchor-chain.
In fact, I think this opens up a much wider field of discussion, about efficiency versus survivability. In business, economics and politics we might eventually find ourselves talking about dispersion, diversity and disconnection.
Saturday, December 08, 2007
Thursday, December 06, 2007
So I'd ask whether economic progress is more important than being happy and optimistic. Read "Insurance - The White Man's Burden" and decide.
...and a nice little thread in Market Ticker's forums section, on rat-race dropouts who've taken to the beaches in Hawaii
An argument for betting on the index, if you're not an attentive stock-watcher.
This, I suggest, is one to bookmark, or print and put in in your wallet.
My grandfather used to say, things are never as good as you hope or as bad as you fear. As I reported some while ago, members of the Chicago Stock Exchange in 1934 papered their club room with what they thought were now worthless stock certificates, but within five years were steaming them off the walls again.
The Thirties crash hit debtors, unwary investors (especially those trading with borrowed money) and insolvent banks. The lessons from this are easy to learn.
Wednesday, December 05, 2007
Two problems: one is, I can't visualise anything with many zeroes, so it's not real for me. More importantly, if there's a major meteor-strike financial bust (i.e. deflation), I'd have thought cash in hand is what everyone will want.
Unless a crazed government opts for hyperinflation. In which case, I'd rather have pallets of canned baked beans, boxes of ammunition and many brave, loyal friends. You can't eat gold.
But as with all truly terrible imaginings, the mind bounces off this like a tennis ball from a granite boulder, and we turn back to normal life with determined optimism.
... the problem with the U.S. financial system ... is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this.
This, plus Larry Lindsey's comments noted in my previous post, adds weight to Karl Denninger's continuing theme of inevitable deflation.
Ed Steer (Financial Sense) relates his October experience of an unusually frank speech, and answers to questions, by President Bush's former economic adviser. According to Steer (I paraphrase), Lindsey's views include:
- The Fed knew home loans were getting dumb, but didn't want to spoil the party
- Banks are going to have to revalue their property holdings realistically
- Hedge funds will have to take what comes, and probably will
- America has offloaded zillions in toxic-waste loan packages to other countries, and ha, ha !
- House prices will plummet
- Don't trust the government CPI figures
- Gold dumping is coming from European central banks, not the US
- America could handle a 20-30% dollar devaluation
... loads of beef in that burger, where's the fluffy bun?
Tuesday, December 04, 2007
He points out - as do others, including proponents of Islamic sharia banking - that however much money is created through credit, more must be created to cover the interest charged. Usury endlessly blows up the balloon, which must eventually pop, before the cycle begins again.
Lenders do want their money back, and so generally take security for the loans they grant. At some point - and Denninger believes it's now very close - lenders will become unwilling to lend further, and/or borrowers will retrench or become unable to service their debts. In short, borrowers will have to pay up or be ruined, together with the more reckless lenders.
Can the government print extra money to solve this? Not according to Denninger, who says that the effect of bad money will be to drive out private lenders (who would demand very high interest rates for lending in an inflationary environment). Since the government itself runs partly on borrowed money, it's not an option.
Conclusion: cash will be king; get out of debt now.
Sunday, December 02, 2007
Michael Panzner shows a couple of ominous graphs:
One is the "TED spread" - the difference between interest rates charged by banks to each other, and short-term (and safe) Treasury bonds. A wider margin indicates that the market is charging more because it considers lending to be more risky, and the current TED spread is approaching 1987 levels.
The other shows the ratio of amount loaned out, to amounts of cash on deposit. Lenders are now very stretched.
Saturday, December 01, 2007
Karl Denninger, on the other hand, is very emphatic that our economic woes are no laughing matter. Here he calls for all the "off-book" items to be included in lenders' accounts, and if that bankrupts them, so be it: a cleansing of the financial system, condign punishment for the perpetrators and a warning to others. This is similar to Marc Faber's position: he says the crisis should be allowed to "burn through and take out some of the players". Gritty.
And concrete. Denninger supplies a photo of a customer-empty store at 6 p.m. on a Sunday evening, to underscore his point.
Now that's something we can put to the test - look at the shops in your area and work out how crowded you'd normally expect them to be at the beginning of December.
Friday, November 30, 2007
So the books close, the champagne flows and the rest of us can start doing our own accounts. Where are the customers' yachts?, as the naive investor asked.
Karl Denninger looks at E*Trade's difficulties and reckons the 70% mark-down of their home equity lending portfolio implies a loss of $1.5 trillion on HELOCs (home equity line of credit) alone. The bad news hasn't all come out yet.
Perhaps we entering the period of "dawning realisation".
Thursday, November 29, 2007
There is a serious point: is America prepared to refresh its commitment to the principles of the Constitution, which Ron Paul champions; or is it "the old order changeth, yielding place to new"? In which case, when was that decided, and by whom, and with what right?
It's a burning issue for us in the UK, too: here, a thousand years of organic (and often bloody) constitutional development is to be hurriedly reshaped by lawyers and bureaucrats working for the Executive, in the name of vaguely-phrased hurray-words ("justice, rights and democracy" - the last is particularly ironic, since I don't remember voting for this ramshackle assault). Has it become the people's representatives v. the people? Perhaps our "new" Labour government has ignore its Methodist roots and relaxed the laws on drinking, gambling and sexual activity so that we will be distracted from taking an interest in more serious matters.
On a lighter note, it's fun to see that, legal currency or not, such Liberty Dollars as are still out of FBI custody are currently a good investment. Maybe better than the Fed's IOUs, if you believe the bullion-hoarders.
Jacob Shallus might have thought so. The $30 he earned for engrossing the Constitution was the equivalent of 5 weeks' worth of a Philadelphia printer's wages in 1786. What does $30 get you today?
Wednesday, November 28, 2007
It looks to me as if the median price of gold (in 2007 dollars) runs at around $450/oz., but I'd be glad to hear from anyone who can give a better estimate.
And the Contrarian Investor's Journal argues why, even in deflationary times, gold may still be a good choice.
Tuesday, November 27, 2007
Part of his argument is that the money supply is determined not just by how much there is in the economy, but also by how fast it changes hands (its "velocity"). If the heartbeat of economic activity slows, the monetary pressure will reduce.
Denninger shares the growing concern that subprime losses could be of the order of $1 trillion, and believes
... we are literally weeks or a handful of months away from an utter implosion in the equity markets.
I believe we are very, very close to the precipice - and that nothing Bernanke or Paulson can do now will change the outcome. The opportunity to address this and stop it expired a few years ago, with the cumulative damage growing the longer regulators fail to act.
In which case, it's time to hold cash, which on American notes says is good "for all debts".
This reminds me of another quotation I can't source: "Would that I could be so certain of anything as he is of everything." I suspect he may be right on this one; then again, I would, since I've been feeling it in my bones for about a decade, before the official policy became to inflate our way out of all troubles.
Michael Panzner alerts us to an article by Martin Hutchinson in Prudent Bear, which explains how the rotten apples in the banking barrel can affect the others. Here's a grim tidbit or two:
... If as now appears likely the eventual losses in the home mortgage market do not total only $100 billion, but a figure much closer to $1 trillion, then the subprime debacle becomes something much more than a localized meltdown...
Hutchinson suggests that in a bear market, "Level 3" assets may actually be worth as little as 10% of the banks' own declared estimates, and:
This immediately demonstrates the problem. Goldman Sachs, generally regarded as insulated from the subprime mortgage problem, has $72 billion of Level 3 assets; its capital is only $36 billion. If anything like 90% of the Level 3 assets’ value has to be written off, Goldman Sachs is insolvent. [...] Only the bonuses will survive, paid in cash and draining liquidity from the struggling company.
I observed a couple of weeks ago that "the Dow and the FTSE rise towards the end of the year, when traders' annual bonuses are calculated" and guessed that "the Dow will rise until bonus time". Watch for a rally of sorts and a final, determined suckout of bonuses, ahead of a forced, sober reassessment.
Monday, November 26, 2007
That in itself is grounds for worry (nothing to hide, nothing to fear); and the desired result must be achieved by dumping bullion, which can't continue indefinitely. On this thesis, the crisis signal will be when gold stops dancing with the Dow.
Predicting tough times ahead, Michael Panzner, author of Financial Armageddon, recommends that investors buy shares of companies that sell stuff that people need to buy no matter what's going on with the economy. Companies that sell soft drinks, tobacco, prescription drugs and toilet paper, for example.
Investors, he says, should play it safe, loading up on defensive stocks, socking away more cash and moving toward the safety of U.S. Treasury notes and bonds.
Sunday, November 25, 2007
Interesting also that he echoes my "twang money" idea:
Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.
An interesting post from Michael Panzner, commenting on the views of derivatives expert Satyajit Das. The latter thinks we're in for a 70s-style inflationary grind, whereas Mr Panzner leans towards a 30s-style deflation.
I am reminded of Borges' short story, "Pierre Menard, Author of the Quixote". In this, a modern author attempts to re-produce the 16th century novel "Don Quixote" by Cervantes: not copying - writing it again exactly, but as though for the first time ever. Since Menard is writing in a different period of history, the same words have quite different meanings, implications and associations. To pen the identical lines today, spontaneously, would involve a monstrous effort. So Borges' tale is a wonderful parable about the near-impossibility of our truly understanding the mindset of the past, and how history can never be quite repeated, because the present includes a knowledge of the past that it takes for its model.
For those reasons, we'll never have the Thirties again, or the Seventies; but we might have a retro revival. And the differences may be as significant as the similarities.
Saturday, November 24, 2007
As you see, mostly it was the nineties, with one instance in 1975 and three times in the sixties. The average rate for the whole series up to December 2006 is 13.47%. So the hand-mill never stops grinding.
But should it? Wikipedia gives an account of recession and the Great American Depression, and notes that during the latter period the money supply contracted by a third. Great for money-holders, bad for the economy and jobs.
This page points out that we tend (wrongly) to think of a period of economic slowdown as a recession, and says that technically, recession is defined as two successive quarters of negative economic growth. By that measure, we haven't had a recession in the UK (unlike Germany) for about 15 years - here's a graph of the last few years (source):And then there's the stockmarket. It doesn't seem to reflect the real state of the economy - until you shift the lines, when for example the S&P 500 turns out to be a fair predictor of changes in GDP, as shown in a graph in a 2005 entry from this blog ("Capital Chronicle", by RJH Adams):
Mind you, looking at Wikipedia's Tobin's Q graph, the median market valuation since 1900 seems to be something like only 70% of the worth of a company's assets. Can that be right? Or should we take the short-sighted view of some accountants and sell off everything that might show a quick profit?
Nevertheless, it still feels to me (yes, "finance with feeling", I'm afraid) as though the markets are over-high, even after taking account of the effects of monetary inflation on the price of shares. And debt has mounted up so far that a cutback by consumers could be what finally makes the economy turn down. Not just American consumers: here is a Daily Telegraph article from August 24th, stating that for the first time, personal borrowing in the UK has exceeded GDP.
The big question, asked so often now, is whether determined grinding-out of money and credit can stave off a vicious contraction like that of the Great Depression. Many commentators point out that although interest rates are declining again, the actual interest charged to the public is not falling - lenders are using the difference to cover what they perceive as increased risk. Maybe further interest rate cuts will be used in the same way and keep the lenders willing to finance the status quo.
Some might say that this perpetuates the financial irresponsibility of governments and consumers, but sometimes it's better to defer the "proper sorting-out" demanded by economic purists and zealots. History suggests it: in the 16th century, if Elizabeth I had listened to one party or another in Parliament, we'd have thrown in our lot with either France or Spain - and been drawn into a major war with the other. We sidestepped the worst effects of the Thirty Years' War, and even benefited from an influx of skilled workers fleeing the chaos on the Continent. If only we could have prevented the clash of authoritarians and rebellious Puritans for long enough, maybe we'd have avoided the Civil War, too.
So perhaps we shouldn't be quite so unyielding in our criticisms of central bankers who try to fudge their - and our - way out of total disaster.
In July, he looked at historical "awful times to invest", and found that July 2007 fits the same criteria. The 10-year outlook for the US investor is not attractive:
Presently, the probable total return on the S&P 500 over the coming decade ranges between -4% and 5% annually, with the most likely outcome in the low single digits.
More recently (November 12), he's considered many indicators and concluded:
I expect that a U.S. economic recession is immediately ahead.
This week (November 19), he remarks that much of the money apparently being pumped into the economic system is simply a rollover of earlier loans coming to maturity: the net increase is very small compared to the total oustanding, and so the rate of monetary inflation is slowing. He quotes Jan Hatzius of Goldman Sachs as saying (in effect) that if souring subprime debt hits financial institutions directly, they are likely to call in loans in order to preserve the ratio between their lending and their reserves, which in turn will slow the economy further.
What should investors do? He quotes the view of famous investment manager Jack Bogle:
"I would say do nothing – ride it out, if your asset allocation is right. The bonds in your portfolio and the long-term growth of businesses will bail you out. Unfortunately 80% of the market is speculators now, not investors. What would I say to the speculator? I would say I'm nervous and I might even say get out.”
So I guess it's the usual couple of points: are you in for the long term, or trying to make a quick killing? And where are you on the 25:75 Benjamin Graham bond-equity balance?
FT Alphaville (thanks to Michael Panzner for the alert) gives the above graphs to show how much is at stake in the business of mutual guarantees known as "over the counter" (OTC) derivatives: over $500 trillion. That's not all: Wikipedia's article (last link shown) explains that there is also a separate class of Exchange-Traded derivatives.
These sums are quite unimaginable. But we can compare them with other figures: according to FT.com, the total value of the US and European stockmarkets in March this year was a mere $31 trillion. Wikipedia estimates that the total value of all stocks and bonds in the world is less than $100 trillion.
Our daily lives stand on a thin crust over this boiling financial melange. We'd sure better hope that the experts haven't bitten off more than they can chew.
Thursday, November 22, 2007
Frank Barbera points out that Argentina's economy put itself back on track by devaluing the currency. Now,
... the place is booming, crime is way down, and foreign capital has flooded in...
All you had to do was ensure that you weren't the mark in that game:
... someone who was able to place money in precious metals avoided the collapse of the local currency, would now have that previous purchasing power intact, and could have used it in the last few years to buy back many fold depreciated assets in Argentina.
Tuesday, November 20, 2007
In the late 1970s, I read a book by Stafford Beer called "Designing Freedom". Unlike other management theory texts I've seen, it used cartoons and humour, though it also occasionally used language seemingly designed to cut out the layman - one gets the impression that business professors can be a sort of Glass Bead Game hermetic elite.
And I've just been trying to watch a lecture by him, recorded on video in 1974 and released on the internet by UMIST's archive (here). Maybe it's my computer, but the material is streaming in stits and farts; nevertheless, it's very interesting indeed.
Beer was invited to Chile to set up a system for the Allende government, to help manage the economy of a strangely-shaped and very diverse country. The project was never completed, since Allende was overthrown within a couple of years, but the ideas outlined in this video and the book I've mentioned were very far ahead of their time and probably somewhat ahead of ours, too.
At a time when computers were much less powerful than today, he was advocating their use to gather and crucially, filter, information in a way that allows decision-makers to make timely, well-informed (but crucially again, not over-informed) interventions. In the Chilean experiment, a system of telex machines across the country fed real-time data to a central (the only) computer, which then fed back decision-making alerts at every level from factory to government ministry.
Two things stand out for me:
1. You don't need all the information: you need to know of any significant change. (I have heard that toads only see likely prey if it moves, not when it is sitting still.)
2. You need relevant data fast, otherwise there is a danger that, owing to information time-lag, you will make exactly the wrong move. Beer said that this was a principal cause of the stop-go British economy. In today's context, maybe that's why the economy and the stockmarkets gyrate so wildly even now.
Beer emphatically denies that his system was intended to centralise power into a dictatorship, though in "Designing Freedom" he certainly sees its potential for tyranny. Instead, the model is a set of feedback systems akin to those that living creatures need to survive and to adapt to a changing environment.
Another point I've always remembered - and I think I must have seen it in another of his books, for I can't find it here - it that both resources and decision-making must be devolved, for maximum effectiveness. You give Department X a budget and a set of objectives, and let that department work out how best to use the resources to fulfil its brief. This is a lesson that the current micro-managing British regime has apparently never understood.
He was a real visionary - look at the contrasting pair of cartoons from the book, and remember that it was published 33 years ago. And buy it, as I have just done.
(By the way, my comments are not unduly influenced by the fact that he gave up most of his material possessions and moved to western Wales, devoting himself to art and poetry.)
One of the points he makes is that in the USA, the Securities Investor Protection Corporation may have no more than $3.4 billion available to protect depositors' losses, compared with anything up to half a trillion potential losses in the current credit crisis.
Here in the UK, depositors are protected by the government, up to a point; but who knows what the government might do if seriously financially challenged.
Saturday, November 17, 2007
[The research] implies that simply going to cash between May Day and Halloween will have only minor impact on long-term returns while dramatically reducing risk -- a winning combination that would show up in a much improved risk-adjusted performance.
Until everybody does it, of course. But what are the chances of that happening?
Friday, November 16, 2007
Thursday, November 15, 2007
His advice is to get a sense of the underlying trend. I agree, though I'm unhappy about what I'm sensing.
For while Japan and China are selling down their holding of US securities, the UK is gobbling up even more, according to Matt's graphs at Discursive Monologue. Maybe we want to be second in Uncle Sam's hierarchy of foreign creditors, instead of third.
And US employment is holding up, according to the official October figures - but not if you use a different measure, says Chris Puplava.
Is it central bank intervention in the bullion market, or gold forgetting it's a currency and trying to be a commodity, or a temporary slackening in demand because of investment houses having to pony up some cash to cover other positions?
"Danger! Danger!" to quote Robby the Robot from Lost In Space - and next episode, the meteor shower will hit the ground harmlessly.
Wednesday, November 14, 2007
Turkeys should note that Thanksgiving is on November 22 this year.
...gold's great bull market will be the harbinger of a major global recession or, more probably, a depression brought on by a sequence of massive defensive interest rate rises required to support the dollar in its pre-eminent position as a global currency, with all the benefits, political and economic, that this brings to the USA.
To what extent can one sensibly make predictions from the line alone, instead of interpreting it in the light of theorized underlying causes?
He also directs us to a useful blog ("The Slosh Report") on Fed Reserve liquidity operations, and the Fed's own funds site, which you can find here.
Denninger is rightly outraged at the cynical abuses of the financial system, and quite emphatic that US real estate will have to devalue by 30% - 50%. He has set up a petition, sadly limited by its nature to US citizens.
And a video, though I find the use of nuclear explosion imagery counter-productive (I've momentarily forgotten the psychological term for this, but it's a "never happen, Cap'n" response to terrible imaginings).
Tuesday, November 13, 2007
Wifred Hahn (SafeHaven) gives his reasons for thinking that, post-bubble-burst, American fundamentals will improve, at least for a while.
Is the US going through a bit of slow-down ... a bit of currency trashing? Yes, of course. It is deserved. But economic adjustments will now occur, feeding through to other world economies. Gradually, the trade (non-energy) deficit will shrink. Once foreign equity markets begin declining significantly in anticipation of a slowing global economy and the USD has put in a bottom, it is possible that a torrent of foreign-invested portfolio capital will return to the US. Some estimates put the value of this foreign investment at over $1.5 trillion (and rising as the US dollar falls.)
From our perch in Canada, the next few months likely present the lowest risk buying opportunity of US dollars in at least a century. US "large-cap" companies with significant overseas operations are also attractive on a relative global basis as these are best able to weather an economic slowdown. America will survive for a few years longer.
With any routine, selfish habits creep in: the consumer pays, but the service revolves around the provider. Even in the coldest weather, the driver, shut in his heated cab, would leave the passenger door open at each stop, including the long pauses at clock stages; this saved him having to punch the control for the door if a new fare should arrive. If the driver got hungry, he might pull up outside a fish and chip shop and get a hot meal to eat off his dashboard as he drove. On the 16 route, there was an green-painted cast-iron Victorian public urinal just off the Soho road, where the driver would stop off when he felt the need - leaving the bus door open, as usual.
"As above, so below", the alchemists said; and vice versa. I read a long time ago how British elections tend to be timed around economic boomlets; and more recently, how the American economy revives every four years to fit the fixed-term Presidential elections. Among stockbrokers, it used to be said "Sell in May, and go away", so the market suited the requirement for gentlemen to relax in summer; and see how even now, the Dow and the FTSE rise towards the end of the year, when traders' annual bonuses are calculated - the Tech boom of 2000 being an excellent example.
The doomsters don't tend to set timetables - maybe they've learned that from the Jehovah's Witnesses (I don't know how often The Watchtower showed us that the end was possibly going to come very soon - a favourite image was a runaway train heading downhill to a bridgeless chasm). So I'll my neck out instead and make a prediction: the Dow will rise until bonus time, then flutter nervously until the 2008 Chinese Olympics; then there's the US Presidential election to get through; then we'll have the reckoning. A new president will be able to say, "I've had a look at the books, gentlemen, and I hadn't realised how badly the company was managed." And at last, the corrective process will really begin.
That's my chance to join the ranks of the comprehensively wrong. Place your bets.
George Kleinman addresses this problem and suggests a relativistic approach: compare the historical price ratios of different asset types. He admits that you can play this game forever, but it's not his fault that governments have corrupted our traditional yardstick. All you can hope for is some sense of trend, which is what all this rune-reading is for, anyway.
His conclusions: gold looks undervalued against oil, and not overvalued against either the Dow or silver. His trend feeling: a coming economic and stockmarket downturn.
Financial Sense may be run by investment advisers, but I feel their commitment to public education goes well beyond self-interest. It's a sort of University of the Air.