Steve Keen, a non-mainstream economist who is one of a mere handful to have predicted the Great Financial Crisis, has put his latest academic paper on his website. It has a lot of mathematical equations and technical terms, as you'd expect, but I think it's possible to get the general drift if you don't get disheartened by all that. As a non-pro myself, I'll try to pick out some of the main points that appear relevant to investment (I am sorry that I cannot yet reproduce his graphs but in any case that might infringe his copyright).
Keen attempts to model the economy including the role of debt, which appears to be a major factor insufficiently considered by classical economic theory. Using past data, he observes that from 1920 -1940 "rising debt was strongly correlated with falling unemployment" (p.4).
But in the last 20 years private debt has risen far faster than production (fig. 5, page 5) and rising debt now appears to be associated with rising unemployment (fig. 12, page 11). Keen blames what he forthrightly calls "Ponzi finance", i.e. speculative money poured into assets, causing them to become overpriced. In the aftermath of the 1929 Great Crash, the biggest debt load was among businesses and government; now, most of the debt is concentrated in the financial sector and households (fig. 13, page 12). Running his model, Keen finds (fig. 14) that there is an inbuilt tendency for speculative debt (as opposed to debt-financed investment in production) to take off and ultimately account for almost all the debt in the economy.
Another of Keen's themes is that economics has confused the amount of money with the flow of money. This has misled the USA into supporting banks on the assumption that the latter would lend out the usual multiple of their deposits (they didn't), whereas in Australia the emphasis was on financial support to households. Consequently, unemployment in the USA has doubled to 10%, but in Oz it seems to have stabilised at around 5% (fig. 23).
It seems that as total debt reaches a critical size, there is an alteration in the way in which money and the economy interact (I think chemists call this sort of thing a "phase change"). Prior to this point, the system appears to be settling down, rather as milk does in the saucepan before suddenly frothing over and burning on the hob. Kenn quotes (p.12) Hyman Minsky: "Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing".
In Keen's model, the first effects of the crackup are felt by workers: wages spiral around from 100% of GDP, centring towards c. 70%, but then suddenly collapse down to below 50% (fig. 33, page 43). For about 10 years in this final decline, business profits appear fairly unaffected; then they slump catastrophically into deep losses (page 44). At the same time, the banker's share of national income soars. Economic growth turns into economic contraction, and we move from an apparent settling-down of the inflation rate into a savage deflation exceeding 35%.
As with any mathematical model, there is always the question about how far it fits observed reality, and in economics it seems hard to get exact figures and generally-agreed definitions, especially where debt is concerned (see my previous post). But Keen's seems to be a model operating on strict internal logic based on clear theoretical data and correlations, with outcomes that chime with phenomena we've see so far. His model has very worrying implications for the next part of the cycle.
An unknown factor is what government will do. Whatever the economic machinery, politicians are liable to throw a spanner into it, if only to be seen to be doing something. Keen's prediction of a housing price collapse was refuted by the financial measures the Australian government introduced to help householders, and internationally it is widely feared that governments will ultimately attempt to mitigate the effects of deflation by debauching the monetary system and introducing hyperinflation; hence the shrilling of the "gold bugs".
So every economic model will have to be updated to incorporate the new cogs, axles and valves invented by our desperate leaders. The value of Keen's model is, I think, not so much to offer accurate predictions of the future as to show that the system as it stands appears to tend to equilibrium but actually is highly unstable. He is predicting the burning of the Phoenix, not its reincarnation.
UPDATE: Keen's dynamic model, with its self-reinforcing trends, has something in common with George Soros' ideas of market feedback loops. Soros terms this process "reflexivity" and set out his theories in his 2008 book "The New Paradigm for Financial Markets". In his speech at Berlin's Humboldt University last week, Soros argues that Germany would be damaged by an exit from the Euro and should be less purist about financial rectitude at a time when weaker Eurozone countries are struggling to support their banking systems.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Monday, June 28, 2010
Sunday, June 27, 2010
How bad is the debt problem?
The things we really need to know seem to be the hardest to find out, at least here in the UK. I look again and again for figures on our debt and each time get a different answer.
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
The point of this is that not only are we very heavily in hock, but we are particularly vulnerable to pressure from foreign creditors.
In another post, I plan to consider our options, and the extent to which the recent "emergency Budget" has helped solve the problems we face.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, June 26, 2010
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
Sunday, June 20, 2010
Fun with gold
As the crisis continues, the gold bugs cheerily anticipate rocketing gold prices. Some fling about wild notions like $50,000 per ounce, others try to be a bit more sober (or less drunk) and guess at $10,000. But there are so many imponderables, as I comment:
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Email to clients, 20 June 2010
Dear Client
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Soros thinks markets still overpriced
June 11: Multi-billionaire George Soros gives his views on the present systemic crisis. He argues that since complete catastrophe was averted by government action in 2008, free-market discipline (failure and bankruptcy) no longer applies and must be replaced by official regulation and management - or the "superbubble" will eventually burst. I give below some extracts, but the piece is worth reading in its entirety.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, June 15, 2010
Banks - growing worry
There is growing concern about banks again, reflected in what is known as the "Ted Spread" - the difference between the yield (effective interest rate, compared to trading price) of government debt (3-month US Treasury bills) and interbank lending (the LIBOR rate). According to Paul Nolte, the difference has widened over the last three months from 10 basis points (0.1%) to over 50 b.p. (0.5%). In other words, investors are willing to accept a lower income from government debt, in exchange for greater confidence that they will be able to get their money back.
The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Monday, June 14, 2010
Credit crunch, bailouts and unemployment - according to Steve Keen
Steve Keen, Australian post-Keynesian economist and one of only about 16 (previously estimated at 12) out of 20,000 econ pros to have predicted the "credit crunch" (aka GFC - Global Financial Crisis), looks at economic models and produces his own. The one I find most striking is the last, Fig. 22:
There are several implications I see here:
1. It is better to bail out borrowers than banks
2. The disruption takes c. 15 years to settle
3. Whatever is done or not done, we are left with permanently elevated levels of unemployment
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, June 13, 2010
Currents in the sea of debt
Michael Panzner, author of "Financial Armageddon" (a book I reviewed 3 years ago when I began to relay advance warnings of the credit crisis), is a great miner of news and comment. Here he has unearthed an article that analyses the apparent improvement in USA household debt figures.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Wednesday, June 09, 2010
The Impending Geek Shortage
In his recent editorial (“Why a liberal arts degree? The Big Shaggy”), David Brooks of the New York Times writes, “… many people have the ability to produce a technical innovation; … Very few people have the ability to create a great brand;…”
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
Monday, June 07, 2010
Faber on inflation, war, and physical and financial security
May I recommend that you watch the following video in full, even if you are not an economics buff?
Dr Marc Faber is a highly respected investment and economics commentator. He has a wry sense of humour that verges on what the Germans call galgenhumor - the sort of joke you make when you are about to be hanged. His thesis is that prices have become very volatile because of manipulation of interest rates and the money supply, and that in the West we are now so far in debt that governments will see no option but to create very significant inflation.
Accordingly (he thinks), the things people would usually regard as safe stores of value - cash and bonds - will turn out to be places to lose your wealth. Equities may not make much in real terms - and may well lose a lot at certain points (he looks for example at the Mexican experience from the late 70s to the 90s) - but are likely to recover again. Nimble investors may even do very well by exiting and re-entering the stockmarket at the right points.
Faber also considers how the Eastern economies are coming to dominate manufacturing production and consumption, so that although they seem poor compared with us they are not spending the majority of their money on services, as we do in the West. Further, they are not generally so indebted (if we ignore Japan). Faber thinks that at some stage we should all have a significant proportion (he gives a ballpark figure of 50%) of our investments in the East - though he stresses that's not a signal to get in right now.
He is also bullish long-term on gold, merely because of what he thinks will happen to our currencies as governments in the West try to inflate their way out of the debt trap. Interestingly and untypically of many of Faber's audiences, many of the people he is talking to here themselves hold significant amounts of physical gold. (I have just come back from a haircut here in Birmingham and a shop has just opened next door, specialising in buying gold - not so much an outlet as an inlet, you may say.)
Other investment themes are covered in the last few minutes of the video, and include agricultural land and infrastructure companies working e.g. in India, where the majority of the population is still rural and cities will have to be built.
Faber considers geopolitical aspects as well, and thinks that there will be growing international tensions. He is quite clear and non-humorous about how big cities are very vulnerable and that those who can afford to do so should have somewhere to live far away from them. It's worth pointing out that he has taken his own advice and lives in Chiang Mai, northern Thailand - and close to borders with several other countries.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Dr Marc Faber is a highly respected investment and economics commentator. He has a wry sense of humour that verges on what the Germans call galgenhumor - the sort of joke you make when you are about to be hanged. His thesis is that prices have become very volatile because of manipulation of interest rates and the money supply, and that in the West we are now so far in debt that governments will see no option but to create very significant inflation.
Accordingly (he thinks), the things people would usually regard as safe stores of value - cash and bonds - will turn out to be places to lose your wealth. Equities may not make much in real terms - and may well lose a lot at certain points (he looks for example at the Mexican experience from the late 70s to the 90s) - but are likely to recover again. Nimble investors may even do very well by exiting and re-entering the stockmarket at the right points.
Faber also considers how the Eastern economies are coming to dominate manufacturing production and consumption, so that although they seem poor compared with us they are not spending the majority of their money on services, as we do in the West. Further, they are not generally so indebted (if we ignore Japan). Faber thinks that at some stage we should all have a significant proportion (he gives a ballpark figure of 50%) of our investments in the East - though he stresses that's not a signal to get in right now.
He is also bullish long-term on gold, merely because of what he thinks will happen to our currencies as governments in the West try to inflate their way out of the debt trap. Interestingly and untypically of many of Faber's audiences, many of the people he is talking to here themselves hold significant amounts of physical gold. (I have just come back from a haircut here in Birmingham and a shop has just opened next door, specialising in buying gold - not so much an outlet as an inlet, you may say.)
Other investment themes are covered in the last few minutes of the video, and include agricultural land and infrastructure companies working e.g. in India, where the majority of the population is still rural and cities will have to be built.
Faber considers geopolitical aspects as well, and thinks that there will be growing international tensions. He is quite clear and non-humorous about how big cities are very vulnerable and that those who can afford to do so should have somewhere to live far away from them. It's worth pointing out that he has taken his own advice and lives in Chiang Mai, northern Thailand - and close to borders with several other countries.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, June 06, 2010
Another expert predicting sharp market falls
Bob Janjuah of RBS is talking about the S&P 500 halving from its current level - over 1,700 - to somewhere in the 800s. If this is reflected in the Dow then the Dow will do what (in Dec 2008) I suggested it might, i.e. fall to around 4,000 points.
The interviewer describes Janjuah as an uber-bear, but in fact some other commentators have said the same for quite some time, and it's not even the most pessimistic figure I've seen. Though if and when it comes, the index may have to be interpreted in the light of inflation - and what the true inflation rate really is, is another issue.
Given this scenario, Janjuah says he is interested in gold, "value" (income-producing) stocks of large, financially solvent companies, and emerging market equities.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The interviewer describes Janjuah as an uber-bear, but in fact some other commentators have said the same for quite some time, and it's not even the most pessimistic figure I've seen. Though if and when it comes, the index may have to be interpreted in the light of inflation - and what the true inflation rate really is, is another issue.
Given this scenario, Janjuah says he is interested in gold, "value" (income-producing) stocks of large, financially solvent companies, and emerging market equities.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
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