Has gold ended its bull run?

The price of gold has soared in the last decade. Can it continue?

Two views make a market, as the saying goes. in "Gold's Run is Over -- I'd Much Rather Own This Stock", Tim Begany writes:

"Gold is the worst investment around. Anyone buying it now is doing so at their own risk, near the end of a bull run that's apt to end badly.

A major clue gold's time is up: institutions and hedge funds are starting to get out.

In October, for example, these big players reduced their long gold futures by -9%. Meanwhile, small investors added +5% to their long gold positions. It's a familiar pattern in which large investors exit the market of an overheated asset in a timely fashion, leaving the little guy to drive the final run-up to the big pop.

I give gold up to another year, maybe two, before it peaks. From there, it's all downhill."

Tim prefers shares in an ex-bankrupt company - Owens-Corning (NYSE: OC) - that makes insulation for buildings.

Bargain-hunting among distressed firms can be rewarding. The financial journalist George Goodman (aka "Adam Smith") once interviewed a fund manager who'd bought stock in the Santa Fe railroad, then bankrupt. The manager explained that the land, buildings and rolling stock had substantial value that was not yet reflected in the share price. This was decades before Warren Buffett and George Soros (an ex-railway porter) discovered their recent interest in choo-choos - maybe for similar reasons. (But it's worth noting that Soros recently sold his holdings in Canadian Pacific - cold feet?)

And it's true that the ratio of the Dow to gold has dropped below the long-term average since the closure of the "gold window" in 1971:

- though the ratio hasn't fallen to its 1980 low. It's also true that gold has outpaced inflation in a way not seen since the end of the 1970s:

So why do the gold bugs still have a voice?

I'd say it's because, as in 1980, these are not "normal" times. JK Galbraith said "The only function of economic forecasting is to make astrology look respectable" and all their cyclical predictions are junk when an asteroid is spotted coming in our direction. That asteroid is a combination of the vast debts of Western nations, the dependence of much of their populations on wealth transfers within those economies, and globalized trade.

Can we deflect it with rockets of bailout and default? The bailouts appear to be devaluing our currencies and may end with high inflation in necessary commodities; sovereign debt defaults would affect not only international relations but the mutual and pension funds on which many of us hope to live in retirement. If the biggest banks are allowed to fail and their shares go to zero, what will that do to Everyman's portfolio?

Gold is a speculation unlike most others: it's a vote of no confidence. As such, it's a systemic indicator, not an ordinary item of trade. At this level of the debate, graphs are meaningless. Among the bears, opinion is divided between people like Peter Schiff who think we can make something out of this crisis, and those like Michael Panzner who believe that when a civilization falls, even the richest citizen can lose all. For example, the biggest-ever hoard of Anglo-Saxon gold was discovered last year, not far from where I live. It's thought to be from the Kingdom of Mercia in the 7th or 8th century. The people who put it there never came back.

We should turn our minds from playing with money to repairing the framework of our nations, and preserving our liberty and democracy.

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 think I'm a bear, read THIS...

By his own account, "Savelife" is a mental health professional who is "a professional investor for a charitable trust" which pays richly for investment analysis by outside experts. Their assessment exceeds the worst I've dared suggest - and it's coming very soon.

"Their call: Markets will crash within two to six months (can happen at any time). First drop, in seven days, 3,000 points on the DOW. Then over six months, DOW will tank to about 1,000 points. Then a unionizing recovery will occur to the upside. Allow a decade or better for total recovery."

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.

Reasons to be fearful: a warning about the stock market

Previously published on Seeking Alpha - the business site with 3m readers monthly:
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This is the time that tests bearish investors.

Interest rates on deposits are lower than inflation, if you look at food and energy costs. Since the 1990s, I have been more cautious than most of my investors and have been careful to suggest that they might like to keep their powder dry. Some listened and switched to cash in 1998 and 1999, and so avoided the fall out of the 2000-2003 decline.

Just when I was beginning to feel that things were getting sensibly priced, interest rates were pushed down and the already-existing house price bubble superinflated from 2003 on, along with much else. And then...

But now there is talk of investors being "forced" into the market by negative real returns on cash - and fears that inflation may rise significantly. I recently displayed a graph from the Now and Futures site, showing how German shareholders survived the Weimar hyperinflation of 1923, after a severe interim drop. "Financial Armageddon" author Michael Panzner justly pointed out that there was a danger that investors in a similar situation might lose their nerve, sell out and miss the market recovery.

It is also very hard to stay out of the market when it has risen dramatically. I was batting away queries from clients in the latter stages of the tech stock boom with warnings of what I strongly suspected was a bubble ready to burst. But there is pressure to get in, not merely because of greed but in the case of fund managers, fear: the fear that your boss will use peer benchmarks to judge you negatively and appoint someone else to take over the portfolio. So you need nerve at more than one level in the organization.

Invesco Perpetual's Neil Woodford has that kind of nerve. During the dot com craze, he stayed out and stuck to his guns despite the stellar tech-invested performances of others' funds - and fortunately the management backed him.

Woodford was very bullish - selectively - in January this year, according to the Daily Telegraph. So how does he feel now? Well, bearish about China this week, according to Investment Week. This, at a time when others are coming late to the emerging-markets party, looking for something to get exciting returns. Surely, we tell ourselves, someone's making money somewhere, and we want a piece. This, I think, is the dangerous time.

It's caught out geniuses before now. During the South Sea Bubble of 1720, Sir Isaac Newton bought in, sold out and made £7000 profit - about £1 million in today's money. Then, seeing the market soaring further, he bought in again. And the scam crashed, costing him £20,000 - the equivalent of nearly £3 million.

Some say the market now has been climbing a "wall of worry", so that really we're not in a mania and reasonable concern has already been factored into valuations. Personally, I fear that this is like a lunatic certifying his own sanity and discharging himself from the hospital - "I'm all right now."

I'm not alone in this fear. In a Financial Sense article by Tim Wood yesterday, he says:

"I continue to believe, based on the evidence at hand, that the rally out the March 2009 low is a large scale bear market rally that should ultimately prove to separate Phase I from Phase II of the much larger and ongoing secular bear market. But, just as I told my subscribers before that low was even made, the longer this rally holds up, the more dangerous it becomes. Reason being, it becomes more and more convincing."

We have interest rates lower than ever, debts higher than ever and a financial sector borrowing cash at giveaway rates and playing games in the market. We now have an interdependent world economy, which is like lashing all the lifeboats together - extra security in a small storm and complete disaster in a big one.

Granted that the situation is such that there is no completely valid basis of comparison - and remembering that the Dow now lists companies that garner much more from foreign earnings than they used to - let's take a look at the Dow adjusted for CPI inflation since the peak before last - the one in January of 1966:

Remember, too, that everyone agrees that we've just had a recession, and many say we're not out of it. Where would you pin the tail on this donkey? Mr Market appears to have stuck it on the back of his neck.

If we are climbing the Wall of Worry, we're starting from very high up. Don't look down.

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 God of small things

Eyelashes growing out of human skin - one of many wonderful electron microscope pictures here.

Should rich people be asking us to think that money isn't everything?

It's a debate here at the moment. I'm only asking.

http://news.bbc.co.uk/1/hi/uk_politics/5003314.stm
http://www.guardian.co.uk/business/2009/sep/20/economics-wealth-gdp-happiness

Protect your cash savings (UK customers)

The following is an extract from a just-published article by Nadeem Walayat on securing your bank deposits in the UK:

UK Savers Emergency Plan:

a. Ensure that you have at least 2 current accounts across banking groups.

b. That you have procedures in place to ensure that you can act fast to initiate transfer of funds from instant access savings accounts, especially if your total funds with a particular banking group exceeds £50k / £83k (1st Jan 2011).The best strategy is to limit exposure per banking group to the limit.

c. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.

d. Limit exposure to PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process of Savers having to wait for compensation.

The following list represents Britians' largest deposit taking banking groups and the banks that fall under each.

Note whilst banking groups may have multiple licences as a consequence of mergers and takeovers, however they also may be in the process of merging licences so for ultimate safety one should remain focused on banking groups.

LLOYDS BANKING GROUP
Lloyds TSB Bank
AA Savings
Bank of Scotland / HBOS
Birmingham Midshires
Capital Bank
Cheltenham & Gloucester Savings
Halifax
Intelligent Finance
Saga

SANTANDER GROUP
Santander bank
Abbey National
Asda Savings
Alliance and Leicester
Bradford and Bingley
Cahoot
Moneyback
Honycomb
Nationwide Building Society
Nationwide Building Society
Cheshire Building Society
Derbyshire Building Society
Dunfermline Building Society

BARCLAYS GROUP
Barclays Bank
Standardlife Bank

HSBC GROUP
HSBC Bank
First Direct
Marks and Spencer Financial

ALLIED IRISH GROUP
Allied Irish Bank
First Trust

CITI GROUP
Citibank
Egg

CO-OPERATIVE GROUP
Co-operative Bank
Britannia
Smile
Unity Trust Bank
RBS Group
Royal Bank of Scotland
Nat West Bank
Direct Line Savings
Lombard
The One Account
Drummonds
Ulster Bank

Additional comments

Foreign Banks under UK FSCS Scheme - ICICI (India), First Save (Nigeria)

Small business are covered by the FSCS on the basis of 2 of following 3 conditions - upto a turnover of 6.5 million, less than 50 employees, balance sheet total not more than £3.26 million

Banks not under the UK FSCS.

Post Office - Currently Guaranteed by the Irish Government, pending coming under the UK FSCS.
ING Direct, Tridos - Dutch
Anglo Irish, Bank of Ireland - Ireland

Don't delay! Act today to form a quick personal savings protection contingency plan, otherwise you may wake up one day to find yourselves locked out of your funds Iceland style!

For more on how to protect your wealth from debt default bankruptcy see the Inflation Mega-trend Ebook (FREE DOWNLOAD)

Comments and Source: http://www.marketoracle.co.uk/Article24572.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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.

EU: superb dressing-down by Nigel Farage

Using our brains

It is common wisdom that the Soviet Union and associated states collapsed because of the failures of centralized planning. Then why do we allow and encourage the same kinds of structures in large corporations and government in the West?

The ostensible reason given is easy to defend: large entities can be much more efficient. As a secondary reason (not usually stated), large entities also mean a concentration of power and wealth.

The problem with efficiency is that it comes at a price. This is not only the loss of jobs and transfer of wealth, but more disturbingly the catastrophic nature of any breakdown. We saw it in 2003 with the power grid in the US, in 2008 with the collapse of the banking system, and in new cars, which are much more reliable and efficient than those from the 1970’s, but harder and more expensive to repair.

The key to preventing or mitigating future disasters in finance, oil, energy and water appears to be the opposite of our past practices. Rather than make everything bigger, we should take a hint from the designers of the World Wide Web, and decentralize as much as possible. This will take planning and cooperation, and a thought process unlike anything since World War II. Just consider: how many large purchases for homes, business or government consider the long-term costs of maintenance?

Doing the same idiot thing ...

What makes the scientific community different from most groups of humans is the willingness of the group (but not necessarily individual scientists) to let go of emotionally-satisfying hypotheses when they are not supported by the data.

By contrast, consider education and government.

For at least two decades, we have been warned by business and government leaders that we need more graduates in the technical fields, just to sustain our infrastructure. Even in these tough economic times, the graduates in Engineering, Mathematics and Geology are finding good jobs. These disciplines require a great deal of Mathematics training to succeed, and our Education College experts hold to the philosophy that the key to that teaching is pedagogy. To that end, they have tried to make it easier to learn, to reduce the speed at which the students learn the material, or to dispense with material altogether. These huge experiments have not made a significant difference in the graduation rates in these subjects.

To my experimental mind, this suggests that the difference is one of innate ability, which is anathema to the John Dewey philosophy of education as a social equalizer. Instead, we just try to pump even more money into failing ideas.

In the case of government, we can look at tax policies. Since the 1950’s, the tax burden has shifted from corporations to individual taxpayers. Within that latter group, the past 30 years have seen a shift, where the lowest 50% or so pay very little in taxes, and the marginal tax rates for the wealthy have gone steadily down. All of these changes were supposed to make our economy strong, and have utterly failed. Yet, what is the current mantra? Cut taxes for business and keep the tax cuts for the wealthy (including preferential rates on capital gains and no estate tax).

While I can readily understand that the rich and powerful would have this view, what is it that makes middle-income and poor Americans support this idea?

Rough justice, Aussie-style

http://the-public-house.blogspot.com/2010/11/tiger-in-cage.html

A snapshot of the Irish disaster

In their third-quarter survey of credit default swaps (insurance against debt default), CMA Datavision rate Venezuela the riskiest country by far (see first graph); but currently (Tuesday, 23 November 2010 16:30 BST) the sub-investment grade of Allied irish Banks (AIB) is much, much worse (second graph).

Some might say that supporters of the Euro currency system are throwing good money after bad. It is not a good thing to let the markets sense an emotional attachment to a position, and the bond traders may find a way to exploit this weakness, just as George Soros did when the UK attempted to preserve its link to the Exchange Rate Mechanism. The crisis of "Black Monday" (16 September 1992) merely made Soros a billion dollars and cost the UK Treasury £3 billion sterling.

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.

Inequality, housing costs and resetting the economy

Previously published on the Broad Oak Blog:
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Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

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.

Inequality, housing costs and resetting the economy

Charles High Smith posts (as many times before) on the widening inequality of income and asset ownership in the USA. This time he uses it to explain the apparent recovery from recession: "The top 5% of Americans by income are responsible for 37% of all consumer spending-- about the same as the entire bottom 80% by income (39.5%)."

Among the useful links at the bottom of his post is one to an earlier article of his entitled "Why We Keep Getting Poorer: High-Cost Housing." Back in April, I took a graph (below, with some style additions by me) from Calculated Risk to illustrate that point.

(adapted graph from Calculated Risk) - click on image to enlarge

It seems to me that if the USA (and the UK, and Europe generally) wants to get competitive with the Far East, our wages will have to drop. But they can't until our debts are reduced.

Debt default, or debt forgiveness, may be the only way out.

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.

Will fusion power save us?

Forwarded to me by Paddington, an article that gives us hope for future energy production and the continuance of the civilisation we're used to:

A new approach to nuclear fusion means that in a few years time nuclear fusion will break even. Bearing in mind that our ‘preferred’ power choices of solar power, windmills etc. have to be heavily subsidised before people will even look at them and our electrickery bills will soon reflect our politician’s latest stealth tax.

Now it seems that we have had breakthroughs in nuclear fusion every few years without a reactor becoming available. However, I feel that we are finally getting there. The project is difficult but worthwhile to the whole human race. As it is so important to the human race I wonder why the money we are wasting on windmills and making coal stations more environmentally friendly is not being spent on making this become true.
Look at the benefits.

Electrickery at a cost that makes metering it unfeasible. Certainly not the case for anything we have now.Virtually pollution free. No waste and little environmental impact. Certainly less than coal, gas, windmills and hydropower.Safe power production. Negligible accidental risk and can be protected from nutters.

Of course from a politician’s perspective this is far from the Holy Grail. They won’t be able to tax us to death on the pretence of climate change, something they still push for tax reasons which have been debunked by all but a few climate nutters, plus they won’t be able to use climate change as a stick to beat us back to the Stone Age with. So even when a fusion reactor is available don’t expect our politicians to approve one being built any time soon.

Prince William, Kate Middleton and Bishop Broadbent

The death of deference cuts both ways...

Above, the man who put the "pric" in "bishopric" - Rt Rev "Pete" Broadbent (fashionably tieless - and somewhat unbuttoned - in the Sun's pic), Bishop of Willesden, who has now apologised for prognosticating the failure of a royal marriage that hasn't yet taken place. His wonderwall is on Facebook here - he seems to have time for such things. He has also put the "twit" in Twitter.

What else does he do? Does he curse infants at christenings, like the wicked fairy at Sleeping Beauty's? Or is his malevolence reserved only for his superiors? Did it occur to him that "Big Ears"'s mother is the Head of the Church of England, and William may one day be so?

Does he quite understand the difference between the C of E and the Labour Party? Perhaps not: "Formerly an Islington Councillor and Chair of its Development and Planning Committee, Peter Broadbent is a member of the Labour Party." ("Cranmer" had a bit of a go at this bien-pensant prelate last year.)

As a "good republican", perhaps he should consider his position, since Anglican bishops also "cost us an arm and a leg" - see "Bishops' office and working costs" and The Times' recent article on same. After all, those who have decamped to the Catholic Church are prepared to "make sacrifices, giving up salaries, additions to their pensions and accommodation." Would he be willing to turn his footsteps that way, like a previous incumbent (Graham Leonard)? Less likely, I suppose, since he seems to be an "evangelical", than the other direction; but in that case, perhaps, following Leonard's example, prudently after retirement and receiving his pension, so costing us an arm and a leg all the way.

As long ago as 2004 the Daily Telegraph revealed that "Newly appointed bishops are currently paid £33,930 a year in addition to which they receive a number of perks and allowances." "Pete" won 30Days' "Golden Mitre Suffragans Award" for his expenses in 2005, claiming £45,207. I don't know if he gets anything extra from his other position as the acting Bishop of Stepney - he has been riding both horses since July this year. King Athelstan must regret having given the parish ten manses.

Still, it's only the same sort of screw as a pole dancer. And, it would seem, for a similar degree of exhibitionism, if manifested in a slightly different way. Perhaps Willesden is his day job and he moonlights as Stepney.

UPDATE: He's been suspended "indefinitely". What price the "early retirement" solution ("Pete" is 58)? Of course, like the publicity-seeking, fast-gabbling controversialist David Jenkins, he may merely leave his episcopal post but continue with his priestly duties. At least Bishop Broadbent hasn't (so far as I know) sworn in sermons or had his church struck by lightning.

Airport X-ray bodyscanning machines may increase cancer rates

Read this.

Is there a science of flavour combining?

You're probably familiar with versions of the colour wheel, first attempted by Sir Isaac Newton in 1666 (left) and since reworked in different ways (example, above).

But can the same be done for food and drink? One thinks of chef Heston Blumenthal's bizarre combinations - snail porridge, bacon and egg ice cream, etc - and wonders whether there is some underlying set of principles.

This seems to be far more difficult, because individual foods are a complex of flavour elements and besides, texture and appearance are important additional factors. Also, all these aspects can change as a result of how they are prepared and cooked. And there are hundreds of ingredients, subdivided into many varieties, so there is a dauntingly large number of potential combinations.

A recent book byNiki Segnit, "The Flavour Thesaurus", attempts a schema of selected foods - see page 8.

But you may find this website useful in your experiments - it allows you to input an ingredient and find a choice of partners for it.

Blowing a stolen trumpet

As others have noted, blogging appears to be undergoing a recession (rage is so tiring); so I am thankful for any scraps of recognition or praise. Perhaps we should look for quality of readership, rather than quantity.

I am ego-boosted by my ranking as 6th/49 in Online MBA's list of "Top 49 Economic Blogs with Visual Aids", and the inclusion of Bearwatch on Alltop's live post-listing of "Top Economics News". We humbly rub shoulders there with some of the real big hitters, and are grateful that nobody's noticed our scuffed shoes.

When I finally suspect I'm an authority, I shall let you know. Until then, I shall continue to stand on the shoulders of giants, and pick their pockets.

Inflation vs deflation revisited

I am flattered to receive attention from the Economic Policy Journal re my recent post on the Weimar hyperinflation of 1923. (I should have made it clearer that the graph is not mine - it comes from the site I linked to in that post, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

Some may think that I'm scaremongering, talking about such a scale of inflation; and we must hope that it doesn't come to pass. After all, history cannot be repeated exactly because the later time has the memory of the earlier, a point made elegantly by Jorge Luis Borges' short story "Pierre Menard, Author of the Quixote". But we may simply get to the same destination more slowly - after all, the dollar and pound have lost something like 98% of their value since the beginning of the 20th century.

So I responded to the comments as follows:

You're right, we're in a deflation at the moment, but the undermining of the currency is already showing up as inflation in energy and food prices. Recently (http://www.youtube.com/watch?v=J2-BZEyOnhE) Mike Shedlock and Dr Marc Faber appeared together on an interview and they agreed that inflation was the end stage, the only real difference of opinion between them was over timing.

Deflation would greatly benefit holders of cash (and gold, which seems to be a great each way bet if you buy in at the right price), but pretty much cripple and bust everyone else, so you're right again. Which is why our governments are so very motivated to find a way to restimulate inflation.

This time, the most indebted countries seem to be competing to see who inflates most (so they end up debauching their currencies in parallel), and the creditors who depend on exporting to them are trying to follow suit. The global economy has never been so interconnected before so we're in new teritory.

Faber reckons we are heading for a global bust; in which case I suppose global trade will break down, the focus will be on national and individual self-sufficiency and those who have spare assets will hold commodities of one sort or another until a new, sound currency arises.

Scaremongering? My mother's family lived through the Weimar inflation, but got through OK because they were farmers; until the busted German middle class turned to a new leader. The farm is now in Russian-held territory and we haven't seen it since 1945.

I have hope for the USA because it has natural resources (including land) that could satisfy the reasonable needs of the population; and because you have a Constitution that could be your storm cellar, if you don't let your corrupted elite persuade you to fill it in and build over it.

The State of the Union, in credit terms

First published on The Broad Oak Blog (Nov. 15, 2010):
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CMA DataVision's third-quarter report gives the latest assessments of sovereign debt default risk, as measured by the price of credit default insurance. This edition also includes ratings for selected individual States of the USA. I have combined the latter with the former in a ranking below, so that you can see the ratings of States in some sort of context. Please click on the picture to enlarge.



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.

Sovereign debt default risk

First published on The Broad Oak Blog (Nov. 15, 2010):
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On October 7, CMA DataVision released their third-quarter report on the credit ratings of sovereign countries. CMA's ratings are worked out by looking at what the credit market charges for insuring against default. This market-based marking is different from the assessments of Standard and Poor's, Moody's, Fitch etc, who are paid by the organisations they rate and whose reputation has been brought into question after the events of 2008.

On page 4, CMA says that four of the 10 most risky nations are in the EU (Greece, Ireland, Portugal, Romania). It's worth remembering that a fifth on that list, Ukraine, is eager to join the EU. (For those who want to know about all the "PIGS", Spain is 21st most risky.) How is the currency and banking of the European Union meant to contain these problems?

The UK is rated 59th most risky (or 13th safest), with an implied credit rating of aa+ (as opposed to the official AAA rating that has helped to keep down the cost of our credit).

Four Nordic countries lead the list of securest debt: Norway, Finland, Sweden and Denmark. Only four other countries share their "implied AAA" rating: Germany, Switzerland, the Netherlands and Australia.

The United States has been downgraded this quarter, from "aaa" to "aa+" - the same as for the United Kingdom.

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.

Gold is merely the thermometer of inflation?

First published on The Broad Oak Blog (Oct. 9, 2010):
________________________________

The vitally important inflation / deflation debate continues. In my last post, I relayed one view, which is that the very rich and powerful will not permit runaway inflation, because it erodes the value of money and the rich have most of the money.

As a corrective, I give below the latest video from the National Inflation Association (NIA), a US group that has warned about credit growth and inflation for a long time. Their motivation appears to be patriotic - a return to sound money as part of what makes individual prosperity and freedom possible.

The NIA argues that the rise in the price of gold is not because of mass speculation, for although a lot of gold has been bought recently, a lot has also been sold. What may be happening now is a transfer of privately-held gold from relatively poor people who need to raise money, to investors who are looking ahead to a time when cash will rapidly depreciate. Think of all those gold-buying outlets (or inlets) you now see on your High Street. As someone said a while ago, the mania will be when those shops start selling you gold instead of buying it from you.

As many have now said, trading nations around the world are devaluing their currencies to keep pace with one another, for fear that their exports will be hit if they don't. So the soaring value of precious metals can be seen as a better indication of inflation than currency exchange rates.

You may think that if currencies are depreciating, then surely prices of goods and services in general must also increase rapidly, and we don't see this yet. But we are in a recession and the threat of unemployment is keeping down wage demands; the self-employed are willing to lower their rates, perhaps especially if paid in cash; and traders in items such as cars and computers are offering discounts to clear stock and keep paying their overheads.

However, the NIA and others say there will come a time when the system begins to crack. Governments are buying their own debt, or lending money to banks to do it for them, to maintain the appearance of normality and control; this can't go on forever. The prediction is that we will get either default or hyperinflation. So the gold bugs say buy gold, silver, maybe oil and agricultural commodities etc - anything tangible that can't be multiplied at will.

I don't think (feel) that the turning point is imminent, because of recession and the attempts by some governments (such as the UK) to retrench. But I fear that these last-ditch attempts are untimately doomed to partial or complete failure. In that case, the gold bugs will probably be vindicated.

The other thing I'd say, as I've said before, is that if the system really does come under severe strain, the price of gold may not be the most important of your concerns. If you accept the inflationists' thesis, you will be quietly making preparations to cope with emergencies of different kinds.



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.

Should retirees look to the stockmarket for income?

First published on The Broad Oak Blog (Sept. 7, 2010):
______________________________________
Adapted from my advice to a client this weekend:

Price inflation is not uniform or universal. Food and fuel have risen in cost recently, but State Pension benefits are linked to a cost of living index and should therefore approximately keep pace with increases in the price of basic needs.

In other areas (e.g. cars, cruises) prices have remained stable or even fallen. During what I suspect will turn out to be a long, Japan-style recession, it may be that the price of luxury goods and services will not inflate greatly, except perhaps for the luxuries of the very wealthiest.

Other than cash, what other ways could you invest?

First, one could look at deposits that link to inflation indices. Unfortunately, NS&I recently withdrew their index-linked savings certificates, the first time they have done so in 35 years. National Counties Building Society has an RPI-linked cash ISA (available until 30 September) but this is for a fixed amount (£5,100), runs for a fixed 5 year term and does not permit earlier withdrawals, so it may not fit in with your requirements.

If the government issues new index-linked gilts, these provide income and capital growth in line with RPI. The initial income may be low, however. For further details, please see the website of the Debt Management Office or a stockbroker. Generally, I would not now strongly recommend government bonds on the second-hand market, because the demand for them has become so high in these troubled times that the yield (ratio of income to traded price) is very low. If public finances unravel and interest rates rise, the effect on the capital value of bonds would be very depressing. As it is, the UK is struggling to maintain its official AAA rating and the implied credit rating on the credit default insurance market is actually rather lower already.**

Residential property appears still to be overpriced in historical terms. I think the only reason prices haven’t fallen much further is that interest rates are very low, which allows homeowners to maintain their mortgage payments on large loans. As the budget cuts begin to take effect, I think we will also see a depression in commercial real estate.

The stock market is also in a bubble, I believe. The ratio of price to earnings is still very high and the earnings may not truly reflect the forward position*. Companies are reportedly maintaining some degree of profitability by running down stocks, closing sites and laying off staff, but there is only so far they can go down this road. Many leading companies derive a significant part of their earnings overseas, but world trade is so interconnected these days that a slowdown in Western consumption will also impact on Eastern production.

The general picture appears to be deflationary, and although governments would like to stimulate further inflation in the way they have done over the past 30 years, there are respected economic and investment commentators who say we are now saturated with debt and unless we see outright defaults by sovereign nations (which could still happen), we will have to go through a long and painful process of retrenchment and paying-off debt.

Others look beyond deflation and think that it will ultimately force governments to find some way to increase the monetary base and devalue their currency. It may be significant that both Russia and China have made substantial purchases of gold in the last few months, and China has announced its intention of increasing her holding from c. 1,000 tonnes to six or ten times that amount in the next decade. But here we are in the realms of financial speculation, and the inflation speculators are already buying into agricultural commodities, precious metals, oil etc.

However, extreme or unconventional government strategies to deal with deflation don’t seem imminent and so I think that over the next couple of years, cash savings are likely to be a good way to build up funds for your envisaged discretionary expenditure***. Should there appear to be a major policy change, then we may have to look at investments that could protect against high inflation.

* Albert Edwards at SocGen expects a major reversal, the FT reports today.

** Though CMA DataVision have raised the UK from aa to aa+ in their Q2 report.

*** "There are no longer any “defensive” securities on the planet. The old asset allocation models and the diversification models don’t and won’t work any more and they haven’t for over a decade. I can’t believe that prominent asset managers are still using this approach." - Steven Bauer

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 State of the Union, in credit terms

CMA DataVision's third-quarter report gives the latest assessments of sovereign debt default risk, as measured by the price of credit default insurance. This edition also includes ratings for selected individual States of the USA. I have combined the latter with the former in a ranking below, so that you can see the ratings of States in some sort of context. Please click on the picture to enlarge.



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.

Sovereign debt default risk

On October 7, CMA DataVision released their third-quarter report on the credit ratings of sovereign countries. CMA's ratings are worked out by looking at what the credit market charges for insuring against default. This market-based marking is different from the assessments of Standard and Poor's, Moody's, Fitch etc, who are paid by the organisations they rate and whose reputation has been brought into question after the events of 2008.

On page 4, CMA says that four of the 10 most risky nations are in the EU (Greece, Ireland, Portugal, Romania). It's worth remembering that a fifth on that list, Ukraine, is eager to join the EU. (For those who want to know about all the "PIGS", Spain is 21st most risky.) How is the currency and banking of the European Union meant to contain these problems?

The UK is rated 59th most risky (or 13th safest), with an implied credit rating of aa+ (as opposed to the official AAA rating that has helped to keep down the cost of our credit).

Four Nordic countries lead the list of securest debt: Norway, Finland, Sweden and Denmark. Only four other countries share their "implied AAA" rating: Germany, Switzerland, the Netherlands and Australia.

The United States has been downgraded this quarter, from "aaa" to "aa+" - the same as for the United Kingdom.

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.

Shares as a safeguard against inflation

Previously published on the Broad Oak Blog (Nov. 14, 2010):
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It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).

What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.

UPDATE: As Michael Panzer points out, what I called a "pullback" should more properly be termed a horrendous crash! Unless you have the titanium nerve to hold on through such an event, there is a grave danger that you could buy in now and sell in a panic later and lose most of your wealth.

CLARIFICATION / CORRECTION:(I should have made it clearer that the graph above is not mine - it comes from the site I linked to in the text, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

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.

Could shares protect against inflation?

It is well-known that German money became worthless in 1923, thanks to hyperinflation. The value of cash savings was wiped out; fixed rents also became worthless, which benefitted the ordinary person; but practically all one's income was spent on food, instead (see Table 6 at the bottom of this page).

What is less well known is how investors who didn't have to sell their shares actually gained, after a market pullback.

UPDATE: As Michael Panzer points out, what I called a "pullback" should more properly be termed a horrendous crash! Unless you have the titanium nerve to hold on through such an event, there is a grave danger that you could buy in now and sell in a panic later and lose most of your wealth.

CLARIFICATION / CORRECTION:(I should have made it clearer that the graph above is not mine - it comes from the site I linked to in the text, i.e. Now and Futures. Apologies for any misunderstanding, which I didn't intend.)

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.

Parliament exploded

At last, a journalist tells it like it is, about something important.

"A liar and a cheat"

ONE

Black Dog, in the Mail on Sunday:

A new twist in the resignation from London’s Garrick Club of Guardian editor Alan Rusbridger after he unsuccessfully proposed ex-Labour City Minister Lord Myners as a member.

Now Dog hears of a contretemps over an unpaid dinner bill. When chased by the club some months later, Rusbridger sent a photocopy of the cheque he paid with.

The Garrick could still find no record of receiving the original cheque, so he sent a second one bearing a serial number consecutive to the first. Times are hard at The Guardian.

TWO

Mr Rusbridger himself (editor of The Guardian newspaper) about the collapse of Jeffrey Archer's libel case against that newspaper, in an article titled "A liar and a cheat" (highlights mine):

"The Guardian has never doubted the truth of its original story. We would have produced damning evidence of Mr Hamilton and Mr Greer's lack of integrity if the case had proceeded. No doubt that is why they dropped the action."

This ultimately led to a trial of Lord Archer for perjury. He was found guilty and sentenced to four years in jail.

THREE

Wikipedia, on the philosopher and media personage C.E.M. Joad:

In April 1948, Joad was convicted of travelling on a Waterloo-Exeter train without a valid ticket. Although he was a frequent fare dodger, he failed to give a satisfactory excuse. This made front-page headlines in the national newspapers, and the fine of £2 (£54 as of 2010) destroyed all hopes of a peerage and resulted in his dismissal from the BBC. The humiliation of this had a severe effect on his health, and he soon became bed-confined at his home in Hampstead.

Joad died a few years later, a broken man.
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Why were Mr Rusbridger's two cheques to the Garrick Club sequentially numbered? Is it really the case that he wrote no cheques at all on that account for the intervening months? This could easily be proved by revealing the dates of cheques written immediately before the first cheque to the Garrick.

One would think that the implications of Black Dog's article are potentially quite damaging for the editor of a national newspaper that, whatever its political inclinations, has built a reputation for truthfulness and integrity, qualities it seems to have found lacking in Mr Hamilton and Mr Greer.

I wonder what Mr Rusbridger may be prepared to do to combat the seeming innuendo of Black Dog's article?

In praise of "First Life"

How wonderful, to learn of creatures with rock bodies and crystal eyes, roaming shallow seas in endless variety, an infinite case of intricate, animated jewels.

Prospering during the collapse

Some of the websites I visit seem to be aimed at investors who want to make a killing out of the turmoil. There's even books about it, notably Peter Schiff''s. The mindset is, devil take the hindmost and aren't we the smart ones.

So where are all the wise guys from the Mayans, Toltecs, Aztecs, Inca?

Perhaps their descendants are quartered on some as yet undiscovered Caribbean island, living off the interest on their interest and drunk on Inca Pisco every night. Maybe Dan Brown is working on another thriller about the secret inheritance of the ancients.

Or maybe not. I think we should be told.

Can the elite really control the outcome, as Charles Hugh Smith thinks?

Tea time

Bewildered

Why do they call it "waterboarding"? I've always known it as surfing. So what is "snowboarding"?

The class system

Why, after all the supposed socialist and proto-socialist governments since WWII, do we have such a high and rising gap between rich and poor?

Even our postal service has become class conscious - in 1968 and under a Labour government. You'll note it's not "Express" or "Priority" as with the US system, but "First Class" versus - what is it now - "Steerage"?

Something is completely ripe and succulent in the state of Denmark

UK is more corrupt than Qatar, Barbados or Luxembourg, says Transparency International.

Mind you, at 20th we're way above Italy, which ranks below Rwanda.

Having a go, because they won't

Ex-MP Matthew Parris pleads the case for our Parliamentary representatives. Understandable, since he has simply moved from one profession that imagines it knows better, to another.

As usual, he does coy, paradoxical and faux modest so well; but not well enough to disguise the fact that the Fourth Estate has become as conceited - and part of the in-crowd - as the rest of our masters. I will allow them the first, if they will relinquish the second.

A recurring fantasy pesters me, about the episode (sadly the clip omits the marching, menacing entrance of AC; audio fly on the wall here) in which the now pointedly poppy-less Jon Snow deals with a gatecrashing Alastair Campbell rather differently:

JS (before AC even reaches the desk): Please leave the studio, you have not been invited onto this programme.

AC: I phoned to say I was coming.

JS: And you had your reply. Please leave immediately.

AC: No I won't, there's something that needs to be said right now!

JS: Please leave now, or Security will escort you off the premises.

AC: I'd like to see them try! Now be sensible, Jon -

JS: - We'll take a break. Security!

Instead, we got "And now we are joined by Alastair Campbell - a rare moment - thank you for coming in" etc - and the chummy handshake at the end. Channel 4 News patted itself on the back for a journalistic coup, but out here in the bleachers it just looked as though Campbell felt entitled to treat a news studio like an airport executive lounge.

Reporters Without Borders' "Press Freedom Index" says we've gone backwards since 2003 - and even two points down on 2009. Our national ranking is now 19th, below most of the Nordic and Baltic countries. Is there a link between cold weather and integrity?

It's an ill wind...

(Please click on pictures to enlarge.)

Jesse's sidebar links to a website that shows national indebtedness, e.g.:


But this needs interpreting in the light of money owed both ways (the net international investment position, or NIIP), e.g.:


Recent ONS statistics show that as our pound and stocks devalued, our NIIP improved (if that's an improvement):


... so what counts as good news, and how badly-off are we?

Caravan news

We're heading back into the 60s/70s. Turn on, tune in, drop out. But I'd suggest a twist.

I've often said to others - especially my wife - never mind New Age travellers, let's become old age travellers. That is, no tats, no drugs, no atomkraft nie danke stickers. Just go where you like by caravan, pretending you're on holiday from your drab dwelling in e.g. Birmingham. That way the police will just see you as silly old crumblies and leave you alone. Bless you, love, we're on our way to Bournemouth for a fortnight, that sort of thing. My Mum used to say people always think you're dafter than they are, just play up to it.

In other words, don't challenge the system, just sidestep it unobtrusively. We're all too interconnected to bring down the system without horrible things happening to us, the ones we love and the ones we depend on. Find your niche. As the Chinese saying goes, better to light a small candle than complain about the dark.

It's not consistent, I think, to complain about Communist strategies for mass social subversion on the one hand and then on the other to advocate something very similar oneself, e.g. withdrawing all your cash from the bank on a given date, a move Ian PJ appears to support, though I well understand the temptation.

The point is not to smash the system - we've seen the joy that brought to Russia, China, Cambodia etc - but to encourage it to mutate to our preferences. CAMRA turned the tide on proper beer, people like Hugh Fearnley-Whittingstall got Tesco et al to get more serious about humane and organic food - all without torching the pubs and supermarkets.

The first to operate on the new model will doubtless get a free or cheap ride - see the caravanners who've invaded upmarket Venice Beach, a place where they could never afford to buy houses even before they had theirs repossessed - and then the system will adjust.

There's no need for a hey-guys-let's-all approach: do what you've decided, don't put up with what you don't have to, be prepared to pay the price for your decision. If enough others do the same, society will change appropriately; if not, you've suited yourself. I quit teaching in 1989 because I wasn't prepared to put up with the crap and bullying, and it cost me financially - but who knows what carrying on would have cost me? My life has been incredibly richer experientially as a result of realising that it wasn't all decided for me. We forget how free we are already.

No self-destructive emotional spasms, please, we're British.