On holiday for a week. Best wishes to you all.
Friday, October 24, 2008
At first I was prepared to believe that an Australian politican could be this aggressive, but despite Web-spread assurances that it's genuine, it come from this series.
Doing the rounds: explaining the world with cows
The World Explained with Cows
DEMOCRAT You have two cows.Your neighbor has none.You feel guilty for being successful. Barbara Streisand sings for you.
REPUBLICAN You have two cows.Your neighbor has none.So?
SOCIALIST You have two cows.The government takes one and gives it to your neighbor.You form a cooperative to tell him how to manage his cow.
COMMUNIST You have two cows.The government seizes both and provides you with milk.You wait in line for hours to get it.It is expensive and sour.
CAPITALISM, AMERICAN STYLE You have two cows.You sell one, buy a bull, and build a herd of cows.
DEMOCRACY, AMERICAN STYLE You have two cows.The government taxes you to the point you have to sell both to support a man in a foreign country who has only one cow, which was a gift from your government.
BUREAUCRACY, AMERICAN STYLE You have two cows.The government takes them both, shoots one, milks the other, pays you for the milk, and then pours the milk down the drain.
AMERICAN CORPORATION You have two cows.You sell one, lease it back to yourself and do an IPO on the 2nd one.You force the two cows to produce the milk of four cows.You are surprised when one cow drops dead. You spin an announcement to the analysts stating you have down sized and are reducing expenses.Your stock's price goes up.
FRENCH CORPORATION You have two cows.You go on strike because you want three cows.You go to lunch and drink wine.Life is good.
JAPANESE CORPORATION You have two cows.You redesign them so they are one tenth the size of an ordinary cow and produce twenty times the milk. They learn to travel on unbelievably crowded trains. Most are at the top of their class at cow school.
GERMAN CORPORATION You have two cows.You engineer them so they are all blond, give excellent quality milk, and run a hundred miles an hour. Unfortunately they also demand 13 weeks of vacation per year.
ITALIAN CORPORATION You have two cows but you don't know where they are. While ambling around, you see a beautiful woman.You break for lunch.Life is good.
RUSSIAN CORPORATION You have two cows.You have some vodka.You count them and learn you have five cows.You have some more vodka.You count them again and learn you have 42 cows. The Mafia shows up and takes over however many cows you really have.
TALIBAN CORPORATION You have all the cows in Afghanistan, which are two.You don't milk them because you cannot touch any creature's private parts.Then you kill them and claim a U.S. bomb blew them up while they were in the hospital.
IRAQI CORPORATION You have two cows.They go into hiding.They send radio tapes of their mooing.
POLISH CORPORATION You have two bulls.Employees are regularly maimed and killed attempting to milk them.
FLORIDA CORPORATION You have a black cow and a brown cow.Everyone votes for the best looking one.Some of the people who like the brown one best, vote for the black one.Some people vote for both. Some people vote for neither.Some people can't figure out how to vote at all.Finally, a bunch of guys from out-of-state tell you which is the best looking cow.
CALIFORNIAN You have a cow and a bull.The bull is depressed.It has spent its life living a lie.It goes away for two weeks and comes back after a taxpayer-paid sex-change operation. You now have two cows.One makes milk; the other doesn't.You try to sell the transgender cow, but its lawyer sues you for discrimination.You lose in court.You sell the milk-generating cow to pay the damages. You now have one rich, transgender, non-milk-producing cow.You change your business to beef. PETA pickets your farm.Jesse Jackson makes a speech in your driveway.Cruz Bustamante calls for higher farm taxes to help "working cows". Hillary Clinton calls for the nationalization of 1/7 of your farm "for the children."The legislature passes a law giving your farm to Mexico.The L.A. Times quotes five anonymous cows claiming you groped their teats. You declare bankruptcy and shut down all operations and the cow starves to death.The L.A. Times' analysis shows your business failure is Bush's fault.
htp: my wife's American cousin. GOK where it started, though.
Thursday, October 23, 2008
A credible, horrible warning
We may be days away from an international credit incident originating outside of the United States. Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have. They too have chosen to lie.
This will hammer the stockmarket:
You have already seen nearly half of your money disappear.
You could see another half disappear - within days.
This is an implication of the graph I did on Sunday (see below), looking at the Dow adjusted for CPI inflation since 1928. A return to 4,500 points would seem to be reversion to the long-term norm - but to have it happen all at once, from its peak last October, is a scary prospect.
Tyler concurs, with respect to the UK economy, because of our dependence on income from financial services and associated services:
"Brown's boom was built on a group of industries that are now facing an Almighty bust..."
Wednesday, October 22, 2008
Throw the grenade, or put it in your pocket?
This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.
Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.
Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.
A reason not to invest in pensions?
The Great Theft begins
Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages.
So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.
Am I wrong?
Sunday, October 19, 2008
Do-it-yourself Dow prediction
The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).
The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)
Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.
"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.
Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.
And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.
A note on abortion
I pass over the religious objections to abortion, and the arguments (to my mind, wholly specious and self-serving) about the humanity of the unborn. Do please spare me the hate mail.
But why is the political class so keen on it? And on the experimentation that continually encroaches on the right of human beings to live? (Don't tell me it will cure cancer and all the other things that make us mortal.)
Is it a financially-motivated plan to murder the poor, the deformed and the sick in their mother's wombs, so that they will not live to become benefit dependant and/or petty criminals? Is it about money? Has money become more real, more valid, than the people who earn and spend it?
Don't think it'll work anyway. A while back, I saw an interview with some serial shagger who didn't give a fig for any of his girlfriends, but there's one instinct he still retained. Remarking on his last, he said, "At least I got a kid out of her."
Abortion is a bloody and chaotic approach to sexuality and relationships. This study aims to correct some of the misunderstandings on the subject by both "conservative" and "liberals", and tends to support the greater use of contraception.
Will that work?
How do we get out of this?
- Not the shareholders, since (in most cases) we didn't let the banks collapse.
- Not the majority of retail depositors - they have votes, and enough education to make trouble.
- Not the poor - they have nothing, and are more likely to vote for whoever keeps paying their benefits. That's if they vote at all, but non-voters will become very interested in democracy if their money runs out.
- Not the seriously rich - they have most of their personal wealth safely outside this thieving country and if annoyed, will not only move out but close businesses that employ many voters, which will dump smelly stuff on the heads of the Government and leave a big tax hole to boot.
Stating the obvious
Saturday, October 18, 2008
Are trade deficits a good thing?
Here's a letter that I sent recently to the Washington Times:
In "Other economic numbers need attention" (Oct. 16), William Hawkins assumes that every dollar increase in America's trade deficit is a dollar increase in Americans’ debt. Not so. If Mr. Hawkins pays for a new car with $20,000 cash and then observes the car dealer stuffing that cash into a mattress, Mr. Hawkins's trade deficit with that dealer rises by $20,000 while his debt to that dealer rises by exactly $0.
More fundamentally, the trade deficit means that foreigners invest in the U.S. rather than spend all of their dollars on U.S. exports. If Mr. Hawkins mistakenly thinks such investments to be undesirable, I have good news for him: as Uncle Sam meddles much more aggressively in capital markets, foreign investors will be scared away. America will then be much more likely to run trade surpluses - just as it did for nine out of ten years of the greatly depressed 1930s.
Donald J. Boudreaux
J. Kyle Bass of Hayman Advisors, 14 October 2008. (htp: "Dearieme")
This source reckons LIBOR is out of sight, not because of counterparty worries, but because banks simply haven't got the money to lend.
Less pessimistically - just - George Slezak (quoted on Jesse) thinks the Dow could possibly go as low as 6,000.
... and see here for Chris Martenson's online "Crash Course" (a condensed version of his "end of Money" seminar).
If these teach you anything, please pass them on!
The importance of correctly predicting liquidity movements
A hedge fund manager (Andrew Lahde) says farewell to the industry (extracts):
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? ... Throw the Blackberry away and enjoy life.
...I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life – where I had to compete for spaces in universities and graduate schools, jobs and assets under management – with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunctinstitutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken...
(htp: Michael Panzner)
Wednesday, October 15, 2008
We're back to last Thursday
However, for those who do have money and also a long view, maybe it's not a bad price.
Deflation hasn't happened yet; interest rates to rise, eventually
But after that, he expects (as I suggested yesterday) gold to rise sharply: "the move in gold will obtain explosive momentum from which a major rally leg will occur as the banks lose control." The euro, too, he thinks; and oil will stay high. So he concludes that when the pent-up liquidity starts to flow in the system, the US will have to raise interest rates to prevent a relative decline in the dollar.
A future case for impeachment?
htp: Karl Denninger
At least $125bn is to go to nine of America's largest banks, including Citigroup, JPMorgan Chase and Bank of America, in exchange for capital under the rescue plan.
(9) TROUBLED ASSETS-
The term `troubled assets' means--
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
...not "prior approval", you'll note. For those that think they understand law, here is the full text of the genetically-modified bill as enacted on 3rd October 2008.
And here's an intriguing clause in Section 119:
(2) LIMITATIONS ON EQUITABLE RELIEF.—
(A) INJUNCTION.—No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101, 102, 106, and 109, other than to remedy a violation of the Constitution.Excuse my ignorance, but is this a watered-down version of the infamous "non-reviewable" Paulosn proposal ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.")?
A lesson from 1721
The South Sea Company had been built on high expectations which it could never fulfil, and it collapsed in August 1720. An investigation by Parliament found that Aislabie had been given £20,000 of company stock in exchange for his promotion of the scheme. He resigned the Exchequer in January 1721, and in March was found guilty by the Commons of the "most notorious, dangerous and infamous corruption". He was expelled from the House, removed from the Privy Council, and imprisoned in the Tower of London.
Aislabie was replaced by Robert Walpole, who became in effect Britain's first modern-style Prime Minister - who earlier had spent six months in the Tower in 1712, as a result of unjust impeachment by his political enemies.
Now, who will be properly prosecuted and properly punished for a man-made disaster that has undermined the world's banking system?
More dire warnings
I hope the right path is taken, because my brother lives there.
By the way, in body language terms I read Hank Paulson as a hell of a bully. He looks like a totalitarian danger to me.
Rally? The smart money's been moving out for a long time
Now Buffett has bought $5 billion of Goldman - but as preferred stock with a 10% dividend (and with warrants representing an instant capital gain from day one); and Philip Green is buying £2 billion of Baugur's debt. Note that these wise men are NOT buying stock market ordinary shares: they are betting on a sure thing, pretty much.
I think bear market rallies are when the pros sell to the amateurs. When the amateurs realise the pros have gone, and there are no more bigger fools, the panic proper starts. And then the pros are there, waiting for the bottom prices. I think this is what is behind legs 4 and 5 of the Elliott Wave.
Tuesday, October 14, 2008
A note on gold
As the credit market continues to remain tight and the prospects of quick killings made on the back of increasingly-expensive borrowed money become less plausible, watch for the gold price to bottom-out (I read one claim yesterday that this has already happened). Then when continued liquidity injections from governments start to work their way into prices, my guess is that gold will make a steeper and steadier rise, as it becomes not a find-a-bigger-fool speculation but a flight to security, away from devaluing currency.
I may soon get back in myself, with some of my small savings.
And yes, I did indeed start drawing my "cash stash" yesterday, and plan to take more out today. Can anyone believe the blanket guarantees for deposits at banks, especially under the present economic and monetary conditions? You think disasters can't happen, but as a young woman my mother suddenly found herself fleeing the country alone, with two horses. Hope for the best, plan for the worst.
Cassandra couldn't run Troy
If that means a midpoint of 8,500 and the overcorrection is 20%, then the momentary low point could be around 6,800, which at least suggests that the gap between my two red lines is approximately correct.
Friday's lowest point during the day was 7,773.71, still 10% away from the theorised minimum; and the Dow closed at 8,451.19. Yesterday it remained above the latter figure throughout, and rose to 9,387.61.
In short, Grantham must be reading this as a bear market rally, and it's not very silly to think that the Dow could come back to 7,000 at some point.
Good luck to the day traders, I haven't the nerve and speed to try to make a fortune on the bucking-bronco stage of the market.
Monday, October 13, 2008
Except here in the UK, the Prime Minister wants banks to carry on lending like they did last year. Is there a touch of madness in this?
Surreal. That's the feeling.
I see Mish has the same feeling.
Dow falls are only at interim stage
Sunday, October 12, 2008
Derivatives blowup may hit insurance and car makers
Banking crisis part of a deep strategy?
Every picture tells a story
"An inflationary holocaust" - Jim Rogers
Despite the recent strengthening of the dollar, he is buying Japanese yen and Swiss francs; and commodities (especially agriculture), because they lead the way out of recession and their fundamentals are (he says) sound.
In the interview, he is challenged on his inflationary hypothesis: surely we are seeing "deleveraging" (reduction in borrowing) and don't we need more money in the system to deal with the liquidity crisis? Rogers cites past history and sticks to his guns
I think it was Marc Faber's comments that first helped me understand why all this public-money-throwing isn't going to help. It's NOT a liquidity crisis: liquidity is what has caused the problems (and anticipating the movement of the money tides is what has helped Faber grow his funds!).
It's a SOLVENCY crisis. If all your possessions are worth less than your total debts, borrowing more money will not help. So when the government creates massive extra funds for you to use, you will not wish to use them. And if your fellows are in the same position, you certainly won't wish to lend them any money you still have.
When you are insolvent, there are two ways out. One is to declare bankruptcy, in which case the money invested in you is lost and so excess liquidity goes down the drain. Good, though it's also painful (personal fortunes lost, people laid off).
The other way is to be unbelievably lucky, and have someone else pay-off your debts. When the government chooses to do the latter for the banks, it has to get the funds from somewhere, and ultimately that is the citizen/loyal subject. In this case, the liquidity is still in the system, and there is no drain to take it away. Sooner or later, it leaks out into the general economy and prices rise, because there is more cash to bid for the usual limited amount of goods and services.
(Or the government increases taxes, and uses the extra to pay-off debt. Nice idea, but increasing taxes slows the economy and creates more benefit dependants, which requires more taxes even as less revenue is coming in because business is suffering because people now have less spending money because taxes are higher, and...)
So there are two problems created: inflation, and moral hazard - the people who have been bought out in this undeserved way have no incentive to change their habits.
You may think that it's only a temporary problem and the government will recoup its investment when things get back to normal. The trouble is, "normal" means house prices dropping to about half what they were worth last year, because they doubled for no good reason in the five-year period before that. In the long term, I understand, houses are priced at 3 times income, not 6 times as during the recent period of monetary inflation.
So either the value of the excess credit is destroyed by bankuptcy, or by inflating away the money saved by more prudent people. Either the guilty (or foolish) suffer, or the innocent.
And here's another either/or: either we go this process again and again, or banks are prevented in future from increasing the money supply in the way they just did.
And the guilty must be punished.
A message to Peter Hitchens
Rarely for me, I completely disagree with him, and think that if he turned his mind to this subject he might be influential enough to help some greatly-needed changes happen. So I comment:
Re your Peston piece and "The truth is, nobody really knew":
Sadly, this state of affairs was in fact VERY well-anticipated. As an independent financial adviser, I repeatedly relayed warnings via my newsletters to clients about the increasing debt in the USA, starting a decade ago. On 20 October 1999 I attended a breakfast meeting given by an investment company to drum up business, and a rep stated that the Dow was 50% overvalued. This confirmed me in the intuitive feeling I had long had, that a collapse was imminent. I feared the consequences so much that I put my business on the back burner and returned to teaching, which is something not lightly to be done, you will understand.
The stockmarket collapse began on the first trading day in 2000. Jerkily, the FTSE went down to less that half its 1999 peak by March 2003, at which point I thought lessons might have been learned and we could start to invest with confidence; but then (and you can see the BoE statistics online) the rate of increase of the money supply was allowed to soar by an extra 5% per annum. The investment bubble had turned into a banking bubble, which led to the horrendous property price instability that now threatens the financial system itself. The government is deeply implicated, since its regulators allowed banking reserves to be pared back (this is part of how you increase the money supply) so that when a crisis occurred, the lifeboats weren't there.
I repeat, very clear warnings have been sounded for a very long time by respected investment experts, mostly from the USA as the average Brit has very little understanding of money since we are rarely allowed to make or keep much of it. So I began a blog, in May last year, to learn more myself and to sound Cassandra-type warnings to any who would listen.
Bankers, politicians and economists knew very well, or ought to have known, the consequences, and the worst result of the present debacle is that it is likely that none of them will face Enron-style prosecution and punishment. They and/or their successors will therefore do it all over again, to their enormous gain and our near-ruin, as they have done periodically for centuries. Unless the perpetrators are punished in a way that will be remembered for generations, this moral hazard will continue to be a profound threat to our financial security and social stability.
You have written an excellent book on the mutilation of the British police, and I can promise you that the basics of finance are nothing like as complex as the professional fraudsters of the investment and banking community would like you to believe. I do really wish and hope that you will turn your investigative and communication skills to an analysis of what really went wrong with our Western economies.
Saturday, October 11, 2008
NEWS: Gold CAN back all the world's money
That's not so far off the long-term median price of gold, adjusted for inflation - see below for some attempts to describe that relationship.
Maybe it could work.
Refuge, flight, battle rejoined, victory, retribution
Friday, October 10, 2008
Guessing the low points
The FTSE is currently hovering around 4,000, which is lower than the line I drew in June. But then, the line passed through, not under, the lowest negative spike in 2003. I seem to recall Wolfie predicting 4,000 in one of his comments here recently; well done, old chap.
It's not about money; it's about democracy
Still air in the balloon
Elliot Wave again
In Elliott Wave terms the index is in an impulsive wave 3 down. At some point there will be a corrective wave 4 up, with still more down to follow in wave 5. A lower low can be expected.
Back to Kondratieff
Thursday, October 09, 2008
Would prudence have been rewarded, or would a Protestant adherence to the right course of action have been punished by falling exports and unemployment? In a global trading system, when one major player makes a mess of their money, must others do the same or be sorry?
Can the world be run on the principles of the efficient-market purists, or is there an advantage to the first to break ranks? Are monetarists doomed to merely understand what is going on, incapable of preventing it?
I increasingly suspect that one consequence of United States and Europe’s recent financial crisis will be a smaller deficit in both regions, and a smaller surplus in the emerging world.
Robert McHugh was right!
[The Dow] can be expected to drop to about the start of the pattern, at a minimum, meaning into the 9,000s over the intermediate-term... It is looking increasing likely to us that world central banks will choose hyperinflation rather than nominal decline in stock indices, which will force precious metals prices to rise sharply.
In gold-price terms, McHugh's Dow prediction came true on January 22 this year. Now it's come true in nominal terms, too (9,153.22 at 13:04 ET today) (UPDATE: 8.731.87 at 15:41).
It seems McHugh is an adherent of the Elliot Wave principle. Wikipedia gives a criticism of the theory:
The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which says that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.
I think one could riposte that events have demonstrated that the efficient market does not exist.
A big figure
Oddly, this latter figure, in dollar terms, is very similar to the one approved by Congress - a little over $692 billion at today's retail conversion rates (and even closer in wholesale terms).
But the really interesting thing is the difference is in its relationship to the size of the population of the country, and the GDP:
Marc Faber recently said that the US needed $5 trillion to resolve the crisis, i.e. 7 times more than the amount approved by Congress. Britain's bailout fund is proportionately 7 times greater, and so, crippling cost to the taxpayer aside, maybe it could work.
And it has political implications. The average Brit is so innumerate that he doesn't know how to calculate 75% of 100, so don't expect him to understand that it wasn't simply "the banks" to blame, but the relaxation of Government monetary controls. Don't discount the possibility that, however undeservedly, Gordon Brown may win the next election.
End of the dollar as the world's reserve currency?
But what will countries do, that export to the USA? Devalue their own currencies? Or demand payment in euros? Or oil contracts? Even Setser admits to struggling to understand what's going on.
Jesse also comments on a report that the Gulf States may diversify into gold.
Wednesday, October 08, 2008
Currency devaluation time?
Are there any currency experts out there who can tell me whether the UK won't race to do the same? Will the Yen and the Renminbi be forced upwards, relatively speaking? Should we be buying dried food etc instead of holding cash?
FTSE prediction: poll results
Stop blaming the Americans
The Americans may have sold packaged mortgages, but our institutions here didn't have to buy stuff they didn't have the competence to analyze.
And we didn't have to have 6x earnings, LTV100%+, self-certification or a rush into buy-to-let.
This disaster is home-grown.
Just a thought...
Monday, October 06, 2008
Gold set to leap?
FTSE and Dow predictions revisited
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.
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?
How bearish are you? Too much so? See the poll in the sidebar.
By the way, I did a similar exercise for the Dow the next day and it suggested to me that the range should be 7,000 - 10,000.
I'm in good company:
Mr Lenhoff [chief strategist at Brewin Dolphin] predicted that the FTSE 100 could settle between 4,500 and 4,600: "In this bearish phase the market has given up more than 50pc of the bull market gain, we are back where we were in early 2004. One of the key retraceable levels is thought to be two-thirds of a bull-market gain, which would be between 4,500 and 4,600. The market looks like it wants to give up the gain."
Sunday, October 05, 2008
When will the experts understand that Chindia will have the tools and skilled workers to rebuild their fortune, AFTER the Crash? Why on Earth has the East been subsidising the improvident West for so long, if not as part of a plan to extract all the means of production it could?
Do the experts not realize we have been in a state of economic warfare for years?
How to force the UK Government to give 100% guarantee on your deposits
"Backed by HM Treasury
National Savings and Investments is backed by HM Treasury, so any money you invest with us is 100% secure."
The Easy Access Savings Account can take up to £2 million per person. In all, depending on your age, NS&I could take more than £6 million per head.
If enough people know about this, and act on it, only Northern Rock will be run-proof. HMG will have to provide an "Irish guarantee". Unless, of course, the Chancellor suddenly welches on government credit, and that really would be the end; or closes the door to new NS&I deposits.
Get in while you can?
But not into Ireland:
However, experts are already raising questions over the Irish scheme, and asking how much protection it really affords. Adrian Coles, the director general of the Building Societies Association, said savers should write to the Irish Embassy to ask them how they intended to guarantee UK savings, and how they would obtain enough sterling in the event of a bank failing.
"Has the Irish government quantified the potentially huge liabilities it is taking on by guaranteeing sterling deposits in Britain, where household cash savings amount to £1.1 trillion?" he said.
"Savers should beware that, if they switch accounts to take up this guarantee, they are effectively betting on the Irish government's ability to buy sufficient sterling in the foreign exchange markets.
Saturday, October 04, 2008
The Chinese and US mortgage-backed securities
New York Times, 4 September 2008:
China’s central bank is in a bind.
It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout - Seeking Alpha (14 September 2008)
... The upshot is, Treasury Secretary Paulson was happy to make an example out of equity investors like Miller, who knew they were taking a big risk in pursuit of a big return.
But no way, no how was Paulson about to blow out the holdings of one of America’s top creditors (China).
By some estimates, China has now amassed as much as $1.6 trillion in foreign reserves, with more than two-thirds of that parked in U.S. debt instruments (agency debt, treasury bonds and so on). Burn those guys in a bailout plan? You’ve got to be kidding. Fiscally speaking, that would be like shooting ourselves in the foot with a machine gun.
So Gross had a pretty good lock on the situation. He knew it was sharp to align his interests with China’s. And to further ensure a positive outcome, the Bond King took every opportunity by ranting and raving from his soapbox -- a mighty big soap box -- about how government should be on the lookout for mortgage holders, and how letting mortgage owners suffer would be a travesty.
When news came out that the Fannie and Freddie debt holders would indeed be kept whole (as China demanded and Gross knew would happen), the value of those debt holdings soared, giving Gross a $1.7 billion pop in the value of his fund.
Business Week, 27 Sept 2008 (via Fox44 website)
"Perfect" Bond Asset Class?
Bill Larkin, portfolio manager for fixed income at Cabot Money Management in Salem, Mass., advises people to stay away from Fannie and Freddie debt except for shorter-dated maturities, since the agencies' fate remains to be seen. If they become part of the government, investors will win, whereas if they are broken into pieces, investors will lose because the debt will be much less liquid. He recommends other government agency debt such as that issued by the Federal Home Loan Bank or Ginnie Mae. He also suggests people buy these bonds to hold until maturity instead of buying them to trade them.
... U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.
... Ginnie Mae is ``in a better position than most'' to offer mortgage products because, unlike Fannie Mae and Freddie Mac, it provides the full backing of the U.S. government, Jackson said. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said.
Now the chickens are flying back to roost.
Snap! And crackle...
Bailout Bill $700 billion
Additional Pork $150 billion
Dow (-484) in 3 hours $600 billion
Total carnage to you, The Taxpayer $1.45 trillion
I would almost say, buy into the packages the Chinese bought; but I expect there are ways to make the Chinese the preferred creditors and stiff everybody else.
Remember that Denninger has been saying recently, buy a good home safe and get your cash out of the bank? Let's see how unreasonable his doomster position turns out to be.
Friday, October 03, 2008
Well, you got what they wanted
Financial white-water dead ahead
Maybe I was right, then, when I thought I saw panic in Hank Paulson's demeanour the other night, as he responded to Congress' rejection of the bailout proposals.
US debt-to-GDP, 1940 - onwards
I'm not sure how much comfort we can take from the fact that the blue line was slightly higher in the mid-1990s, and far higher in the '40s. I suppose it depends on what you think may happen to the GDP part.
US debt outstanding, Fiscal Years 1950 - 2008
Thursday, October 02, 2008
US debts vs. other expenditure - 2006
(Figures are in billions of US dollars.)
By way of comparison, I also give below two figures - the increase in debt plus interest paid for 2006, and then for 2008. In the latter case, the increase in debt is that from 30 Sep 2007 to 12 months later, and the interest is the latest available as per here.
In other words, if America had no such debts, she would have $1.45 trillion more per year to spend on other things.
Interest, plus rolling-up more debt, now equates to some 30% of all non-debt-servicing costs of the States and Federal Government.
20 years ago, it was $214,145,028,847.73.
Zgirl's "Better than nothing" blog explains why deflation would cripple the American government, so money has to keep pouring in and we have to hope that foreign creditors (including the equally busted Brits, it seems) continue to buy-in US Treasury securities.
How to come down from this perilous height?
Wednesday, October 01, 2008
If this is the pitch, the answer is "No".
He refers to a major insurance company allegedly under threat, and a hypothetical example of a local Nevada bank safeguarded by increased deposit insurance. And as I've been typing this, I've been hearing Senator Hillary Clinton enunciating, in her hectoring, braying, bored voice, all the good reasons why "I" want this, that and the other and so should you.
Maybe they're just the world's worst salespeople, but I don't buy. Sorry.
So you think the USA has problems?
Paul Kedrosky (htp: Jesse)
UPDATE: the Daily Telegraph concurs.
The $700 billion is to appease foreign investors?
And that probably doesn't mean us Brits, either.
More from iTulip
This iTulip post describes the process whereby the current deflation may suddenly turn into inflation.
This one warns against Bill-bashing for its own sake, which may be cutting off your nose to spite your face - something must be done, he says, because the market does NOT self-correct. I would suggest that it might, if the government and banks hadn't "intervened" long ago to create a fiat currency. Once that's happened, we're playing the game for the benefit of bankers and politicians, and by their rules.
And the solution?
TITUS Ha, ha, ha!
MARCUS Why dost thou laugh? It fits not with this hour.
TITUS Why, I have not another tear to shed.
Humour can also unblock the mind to work creatively in a disaster. But there is also the "We're doomed, I tell ye!" John Laurie type who only cheers up when it's as bad as he always said it would be. Watch out for them, because unconsciously, they may steer events to match their temper.
iTulip explains succinctly, below, the problem caused by the house price crash. For me, though, it's a reminder of how wonderful the old cartoons are.