Friday, December 31, 2010

Electronic paper has a bright future

The Chinese are set to overtake both the Kindle and Nook (and Sony's Reader) with a new reflected-light colour e-book reader, according to this article last month.

The screen changes more slowly than radiant light screens, and has a more limited range of colours, but I've been looking for something like this for quite a while. I can see three distinct advantages of the new development:

1. It isn't radiant light. I read a lot on my laptop, and come away feeling my eyes are bruised. So much nicer to browse my Kindle with a cup of tea (Luckwar, since you don't ask).

2. If it works like monochrome e-paper, it uses much less power when offline, only enough to change the screen when you want it to. This should mean much longer use time on battery.

3. It's readable in bright sunlight.

4. See (1) again. There must be tens of millions of keen readers like me and we're in danger of macular degeneration thanks to modern but not cutting-edge technology. What with the hearing impairment suffered by the younger generation on their maxed-out audio systems, soon the deaf will be leading the blind.

What this will do for the fortunes of E Ink and LG Display (both have recovered well from October 2009 lows), and what it's now doing for China's Hanwang/Hanvon companies, I don't know; but I can't wait for an e-ink colour reader to reach Britain's shores.

I must be very nice to my wife next year, and invest in a nice, stretchy stocking for the mantelpiece.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

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, December 29, 2010

Income inequality in China and USA, and the international battle for resources

The Gini Coefficient measures personal income inequality (the nearer to 1.0, the nearer to maximum inequality).

This January 2010 study by the Brooks World Poverty Institute (PDF) says that the coefficient in China (PRC) rose from 0.3029 in 1978 (when the post-Mao economic reforms began) to 0.4448 in 2006 (table 2, p.20). By comparison, according to Wikipedia, the UN's Gini calculation gives the USA a coefficient of (est.) 0.408 in 2007 (though the CIA reckons it to be 0.45). There are some 63 dollar billionaires in mainland China as of 2007. Perhaps this explains the > $81 million paid for an antique Chinese porcelain vase last month in a British auctioneer's salesroom.

So the Chinese are really silk-hatted entrepreneurs like us, right?

I think not.

The thing to remember is that capitalist methods are being used by the Chinese to further Communist (and nationalist, I would suggest) objectives. The upper and middle classes, both growing, are being used as well-remunerated donkeys to pull a cart filled with a billion of their fellows out of the abject poverty in which they languished at the beginning of the last century. Attempts by the successful to pull off tax avoidance stunts like the Double Irish and Dutch Sandwich (see Google's wheeze here) would, I suspect, end with bullets in heads. That cart has to keep rolling, at all costs.

We can get a hint of the longer-term strategy from the machinations in the market for rare earths. Smart traders are trying to second-guess what China will do with its near-monopoly; it looks as though she can't resist the power this gives her to jerk the chain, as witness yesterday's announcement of tighter export quotas. Following September's allegedly punitive suspension of shipments to Japan, the latter has no intention of being held hostage in future and is busy stockpiling reserves.

Other Western countries would be well-advised to turn their attention a little from efficiency and budget balancing to survivability. Just-in-time logistics may become just-too-late. Clausewitz's famous dictum "War is the continuation of economy by other means" must needs be turned on its head in an era when war between major nations is simply too perilous: it is the field of the economy where great States will battle in future.

Disclosure: None

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.

Public pensions conundrum

Mike Shedlock comments on Illinois' budget problems and the new Governor's notion of borrowing billions more to keep the ship afloat.

Unfunded pension liabilities are a major part of the problem for this and most other States. The total deficit for such schemes nationally was $3.04 trillion in mid-2008, according to this February 2010 study by Andrew Biggs of the American Enterprise Institute. Illinois has the fifth-worst (40%) underfunding in proportion to State GDP (fig. 6, page 48).

Of more concern to a long-term bear like me is where those funds, inadequate as they may be, are invested. Here's Figure 1 of that study:

If' like me, you fear that both stocks and bonds will be hit badly when the credit crunch finally matures into a lender's strike, then a radical revision of pension entitlements is on the cards.

Disclosure: None

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, December 28, 2010

Doubts growing over UK economy

CMA Datavision reports concerns by the market in credit default swaps about the UK's ability to service its debts, as the following shows:

Britain's largest bookmaker Ladbrokes now rates 2011 as the second most likely year for a General Election:

The Odd Couple coalition of the Liberal Democrats (thought by many to be to the left of the British Labour Party until the latter reconnects with its old-style socialist roots) with a superficially touchy-feely new Conservative Party, may not be able to handle the strain of living together.

Already we have seen riots (to some extent sympathetically covered by the news media) about the raising of tuition fees for students, and the Coalition has been embarrassed by the publication of critical private remarks by Liberal MPs about their Conservative colleagues.

The present British Government is the first non-wartime coalition since 1922. If it cannot hold its crew together in these choppy seas, it will not be able to steer through the economic storm to come - and then our troubles will begin in earnest.

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, December 27, 2010

How America can climb out of the hole: the first step is seeing the light

Bruce Bartlett in the Fiscal Times (htp: Michael Panzner) submits a first-class, balanced essay on how the mess can be straightened out.

The key first step, he says, is to introduce honest financial reporting on the basis that corporations have to use, i.e. accrual accounting, for this will reveal the future economic effects of policy decisions made today. Doing so will help policymakers to make sensible adjustments and the public to accept them.

And it's not all bad news: for example, the Patient Protection and Affordable Care Act, signed by President Obama into law on 23 March 2010, is projected to save $15 trillion over the next 75 years. Raising the State Retirement Age and modifying other social benefits could bring the budget back into balance, long-term.

It won't be painless. If America starts to retrench now, the estimated cost is 2.4% of GDP. But delay merely magnifies the problem - a decade of further obfuscation and inaction raises the bar to 3.7% of GDP.

It is most fortunate that the US Government is required by law to produce a financial report of the kind that makes Mr Bartlett's comments possible. This law was signed by President Lyndon Johnson in 1966, one thing at least for which future generations must thank him.

Over the last few years, I have found it far easier to get useful information about the economy of the USA than about that of the UK where I live. Here, the truth seems harder to establish and dissent increasingly crushed. For although there is guff-talk about our being citizens, essentially we are merely subjects whenever it pleases our masters. Absent overruling by the courts of the European Union (itself a highly undemocratic organisation), our civil rights and liberties could be abolished at a stroke by the Privy Council, the legacy of the Anglo-Saxon kings' witan, or committee of high-born advisers (and potential rivals for the throne).

Long live the American Constitution: for all your well-founded instinctive distrust of power and authority, and for all the powerful businesses that lobby against any change that might slow their own accumulation of wealth at the expense of the citizens, Uncle Sam is still a people's government - so long as the people take an interest.

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, December 26, 2010

Long term care, insurance & "Death Panels": fact and fiction

US insurers MetLife (MET) and John Hancock (HPI) are backing out of the long care insurance market, according to an article by Anna K. Pfaehler in Economic Policy Journal today. The former will stop selling new policies at the end of this week, and the latter is asking for a 40% hike in premiums.

Partly this is because insurers' investments have performed poorly in recent years, thanks to the artificially low interest rates to which governments on both sides the Atlantic are now haplessly committed.

But also it will have something to do with the volume of claims, and how long modern medical science can keep the sufferer alive. The Family Caregiver Alliance says that 63% of claimants are over 65 but the rest (37%) are younger. The average stay in a nursing home is 2.44 years, says Long Term Care Link; but over half of inmates are 85 or older, a demographic that is expected to "increase dramatically" in the next 20 years.

I seem to remember an interview with Whoopi Goldberg in which she joked that children are keen for you to pass on "so that they can git yer stuff", but inheritance is certainly an issue, as well as the increasing burden on the State of the elderly poor. Here in the UK, ever since the Community Care Act of 1990, there's been a battle between local authorities who were thereby charged with the duty of providing care, and sufferers and relatives who don't want to pay for it directly.

There is a moral hazard in this financial pressure, and one wonders whether it's a factor in the British Government's seeming reluctance to punish those who "help" relatives to make a quicker end. I think we should resist the temptation and if you possess a Kindle, please read my e-story, "Dignity"!

P.S. Looks as though
President Obama is already going down the road towards officially-sponsored euthanasia.

Rolf Norfolk

Disclosure: author of "Dignity"

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.

Friday, December 24, 2010

On reading Adam Fergusson's "When Money Dies", an account of the German hyperinflation of 1923: Part 1

I am obliged to "Jesse" for publishing via Scribd the text of this book, which first appeared in 1975 and has just been reprinted. As the printed version is 288 pages in length and many readers are pressed for time, I shall attempt a hurried and necessarily partial and imperfect summary of some of the main points:

Chapter One
Paper currency became legal tender in Germany in 1910. When the Great War broke out, the right to exchange Reichsmark notes for gold was suspended. From 1915-1917, the financing of the war was through borrowing, not taxation.

The truth of economic affairs was hidden from the people: the stock markets were closed and foreign exchange rates not published. By the end of the war, standards of living had halved, but many had attributed price rises to shortages cause by war and profiteering.

There were factors other than monetary in the multiple crises that hit the country. After the war, stability was undermined by a militaristic Right that refused to accept responsibility for defeat, and a revolutionary Left inspired and sponsored by the recent events in Russia. A coalition government was formed, with overwhelming popular support, to resist both extremes.

Germany's postwar economy was hit by the loss of her African colonies plus c. 14% of her prewar sovereign territory and the other reparations and unfair trade terms demanded by vengeful victors. Economically crippled, and facing the consequences of 1.6 million dead and 3.5 million other casualties, Germany also had to cope with over 250,000 newly-unemployed soldiers.

Pre-1914, a British pound was worth 20 marks; by December 1918, it was worth 43 marks; by December 1919, 185 marks.

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.

Thursday, December 23, 2010

Will rising interest rates crash the market?

This item may seem to be UK-based, but essentially the situation is much the same on the other side of the Atlantic. It's a story, not about domestic mortgages but about the sleeping bear of the bond market:

The UK's Daily Telegraph reports comments by MPC member Paul Fisher that homeowners should steel themselves for an increase in interest rates, with an ultimate target of 5% (currently the Bank of England's lending rate is 0.5%).

This would be a two-edged sword. It would combat inflation and begin to reward savers; but it would also worsen conditions for business, by reducing the consumer's disposable income and raising the cost of commercial finance (which is already hard to get, particularly for smaller businesses).

The effect on the stockmarket would be negative, as higher costs and lower turnover would squeeze profits; and debt-fuelled share speculation would become more expensive and so riskier for the investment banks, who might give up looking for a bigger fool and race for the emergency exit.

However, there is no timescale given for this process and the article says that the market expectation is that the rate will rise to only 2% within the next two years.

I think Mr Fisher's statement, ostensibly warning borrowers to tighten their belts, is actually intended to be overheard by the bond market, trying to reassure the latter that it won't be ripped-off by inflation.

I also think it's a tactic characteristic of the previous government, namely to make a tentative policy announcement in order to gauge reactions and trim sails accordingly. It's come from a source that can later be spun as having been a personal view or at most, merely a long-term aspiration of the Monetary Policy Committee.

There are dangers in this type of nebulous news management. To me, it's a sign of the real weakness of our current economic position. And if the bond market thinks it's being bluffed because the government hasn't a clue how to proceed, it may decide to call for a show of the cards. Then the rate rise would come, in a quick and uncontrolled way, triggering a crisis that would end in deep recession, or some combination of default and currency devaluation.

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, December 22, 2010

Christmas shopping in the British Aisles

Earthquake in Cumbria

There was a minor earth tremor in north-east England yesterday as reported here.

It reminds me of the spoof charity appeal email I received from a Dudley-born friend after the quake there in 2002. It is, as they say, a classic and is preserved on this site. We Brits are never more comfortable than when mocking ourselves. The following is the closest to my memory of the original, though it's been reworked since with regional variations:

At 00:54 on Monday 23 September an earthquake measuring 4.8 on the Richter scale hit Dudley, UK causing untold disruption and distress -

* Many were woken well before their giro arrived
* Several priceless collections of mementoes from the Balearics and Spanish Costas were damaged
* Three acres of historic and scientifically significant litter were disturbed
* Thousands are confused and bewildered, trying to come to terms with the fact that something interesting has happened in Dudley

One resident, Donna-Marie Dutton, a 17 year old mother-of-three said "It was such a shock, little Chantal-Leanne came running into my bedroom crying. My youngest two, Tyler-Morgan and Megan-Storm slept through it. I was still shaking when I was watching Trisha the next morning."

Apparently though, looting did carry on as normal.

The British Red Cross have so far managed to ship 4000 crates of Sunny Delight to the area to help the stricken masses.

Rescue workers are still searching through the rubble and have found large quantities of personal belongings including benefit books and jewellery from Elizabeth Duke at Argos.


* £2 buys chips, scraps and blue pop for a family of four
* £10 can take a family to Stourport for the day, where children can play on an unspoiled canal bank among the national collection of stinging nettles
* 22p buys a biro for filling in a spurious compensation claim


Simply email us by return with your credit card details and we'll do the rest!

If you prefer to donate cash, there are collection points available at your local branches of Argos, Iceland and Clinton Cards.

Bank of America to be hit by Wikileaks

As I relayed here on 1 December, Julian Assange hinted at revelations about a major US bank. Now, according to the London Times, (htp: EPJ) he confirms it's BoA. He's going to be releasing much material next month and if its management is "responsive" there "will be resignations".

Journalists like to hint at causative connections - Yahoo News says "Shares in Bank of America have fallen amid speculation that it was a WikiLeaks target" - but in fact according to Yahoo Finance itself, BoA's shares have been trending down since mid-April and have actually risen slightly in the last week. Perhaps Assange appeals to the chip-on-the-shoulder Robin Hood element in the powerless scribe's psyche.

Men reveal their ambitions in their persons, but their souls in their writing. Assange set out his agenda in a couple of essays several years ago, and if you read with attention they tell us plenty about him. If you'd like to know a little more about how he thinks, I've recently done a little piece here.

That's not to say I trust banks any more. If there were no depositor insurance, I'd have my stash (accompanied by their ATM withdrawal slips) in my workplace locker or something similar. I started to do this when the banking crisis was on, and it seems the Irish are doing it now.

Buy your popcorn and sit down for the bank show overture in January. And, if Seeking Alpha commenter "Savelife" is to be believed, the whole investment and economic Ring Cycle drama over the course of 2011. Maybe it'll be best not to have a front seat.

Disclosure: None.

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, December 21, 2010

More on Barnes & Noble - a contrarian view

Phil Wahba's article in ABC News / Money points out (a) that Borders outlets overlap substantially with B&N and (b) the leases on Borders stores are long, which suggests they could go out of business first - leaving a cannibal boost for B&N.

We should also remember that in addition to the high street presence, B&N have 637 college stores. Blackwell's has done famously meeting the text needs of generations of Oxford University students and I'd have thought the college connection will continue to be much to B&N's advantage.

Further, the Nook Color is getting favourable reviews e.g. here and here , and this says they expect a million sales by year end.

I don't tip shares - but I'll keep an eye out for B&N news and wouldn't be surprised if the shorters get a surprise in 2011.

Disclosure: None.

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, December 20, 2010

Barnes & Noble not finished

In February this year, investment analysts Stansberry and Associates recommended short-selling booksellers Barnes & Noble (BKS). Less than 5 years ago, the share price stood at $46.25; on Friday it was at $14.30. More recently, Stansberry has explained how doomed B&N are, what with their debts and the impact of new technological alternatives.

I sometimes wonder what American business could achieve if all - or even half - the talent that went into stock trading and analysis, finance, banking and law were diverted into actually making things and running businesses.

"Retail is detail", so the adage goes. Please bear with me for an anecdote: I recently idled away some time on a little sim game by Armor Games called "Coffee Shop". You have a sidewalk coffee stand and only one product. All you can change is the recipe, your inventory and the price. Simple enough, and after setting these parameters and running the simulation I ended with a few tens of dollars profit. Isn't business easy?

Then I looked at the high scores - several were over a thousand. What I hadn't thought to do was change the variables according to the forecast weather. So instead of trying not to go broke, I doubled the price, strengthened the mixture and multiplied my final score.

That was without being able to increase my range of products, investing in advertising and marketing, researching locations etc. Macdonald's does, and has turned a hot meat sandwich into a global empire.

So imagine if Barnes & Noble were a sim game and someone let you see the high score beforehand - let's say a mere 13% compound annual growth, which would beat their previous high within 10 years. If you knew for certain it could be done - had been done - don't you think you might find a way?

According to this 2007 article in the Washington Post, Americans read on average 4 books a year. Yet in still-poor, workaholic China the average is 7 - and 25% have read an e-book.

Books increase mental power. Stalin and Mao were huge readers, which helped them dominate their unfortunate fellow man. On "The Long March", Mao was carried about in a litter as he continued to stock his mind with his reading; in his case, it should've been called "The Long Carry". 50 years ago, President Kennedy was concerned that US rates of literacy and scientific learning were falling behind those of Communist competitors; we need to re-visit this issue as our youngsters give themselves eyestrain with PCs, partial hearing loss from cranked-up iPods and repetitive strain injury from thumbing their DSs.

You could argue that B&N aren't done yet. They may have come late to the e-book party, but their Nook e-reader has been out for a year and done well - Amazon are now in the position of playing catchup with a 3G version of Kindle (which I've just bought) - and we've yet to see the impact of the new Nook Color.

That's not to say that the dead tree press is finished, either. Allowing for the 25% of Americans who don't read books at all, the per capita read is 7 books a year and B&N's 1,352 stores therefore have a potential customer base of maybe 150,000 adult readers each. One extra book per year = 14% growth.

There's also the fact that we read products in different ways. I'm enchanted with my Kindle, which I can glance at as I drink my tea without the cover flipping over and losing my place; but although it is good at marching you through a novel, it's not so good for the skimming, riffling through and back-and-forthing I do when I read a newpaper or magazine. It's great if I know what I want to find and download; it's not so great at the serendipitous finds you make browsing through a good shop. And it doesn't serve me a coffee, a doughnut and a pleasant smile.

Did paperback kill hardback? The car, the bicycle? The movies, radio? TV, the movies? No: but the market developed, and some of those that made their money in one invested most profitably in the next (remember when IBM made comptometers? Nor do I).

When I say invested, I mean got involved. It's all very well quoting the debt load, the tight margins and all, but perhaps you'd agree with me that the real driver of success or failure is quality of management. Here in the UK, Philip Green (now Sir Philip) took over the failing BHS store chain 10 years ago, grew it an estimated 600% and built an empire. Short, stocky, shirtsleeves rolled up, he got his hands dirty and a billion-plus (sterling) into his wife's Monaco account.

When America (and even more so, poor benighted Britain) gets back to minding the store, instead of boosting its executive perks and playing beggar-my-neighbour with fellow short-term investors, the country will get back on its feet. Don't play the funeral march just yet.

DISCLOSURE: Not trading. 100% in cash.

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, December 12, 2010

Passivity and moral implication

A letter to this week's Spectator magazine by a Thomas Furber of Greenwich directs us to the blog of Charles Stross for materials written by Julian Assange, "editor-in-chief" of Wikileaks. Stross' blog includes excerpts from and links to Assange's essays from late 2006, the period in which Wikileaks was founded.

These essays (3 Dec 2006 here and 10 Nov 2006 here) are a sort of attempted revolutionary rationale and have something of the flavour of the autodidact, which to some extent Assange is. They remind me of the 1970 film "The Strawberry Statement", in which the lead character (Simon) gets caught up in the feeling of revolution before he has any particular reason to revolt; at one stage, Simon composes and reads a revolutionary paper of his own, semi-incoherently, blah-blahing his way over passages that even he is impatient with. Interestingly, Assange himself rehearses the old Zen story after which this film is titled (see the entry for 24 October 2006 here).

There is an enemy in Assange's philosophy, but a very generalized one: "authoritarian power". As a child, my imagination fed on war comics, I would drift off to sleep absorbedly machine-gunning Germans running across a barbed-wired battlefield. I suspect the motivation in his case now is the same as mine was then: testosterone, the urge to have a go. The imagery used in the essays is tellingly violent - "knife", "throttle".

Mixed in with this is a sort of cybernetic analysis of communication systems in political circles and a reaching for ways in which communications can be disrupted to create disorder and the collapse of the tyrannous regime, to be replaced (of course) by "more humane forms of governance". (It's amazing that even self-styled right-wingers like James Delingpole harbour this delusion - his latest Spectator column ends with the words "Until we learn to stop thinking like slaves we shall never have the revolution that will set us free." It's as though neither man has read anything about what really happens in and after revolutions.)

As I said here a few days ago, I think the most likely consequence will be a mutation of confidential communications - more use of encoding, more done by whispers and note of hand, more sofa government but this time on the sofas of special advisers' homes rather than in Downing Street or the White House; that sort of thing. The system will react rather like Hot Lips Houlihan in the "natural blonde" scene in M.A.S.H.: humiliated, but afterwards enduringly careful - and resentful.

And yet... here is a footnote on page 1 of "Conspiracy as Governance":

Every time we witness an act that we feel to be unjust and do not act we become a party to injustice. Those who are repeatedly passive in the face of injustice soon find their character corroded into servility. Most witnessed acts of injustice are associated with bad governance, since when governance is good, unanswered injustice is rare. By the progressive diminution of a people’s character, the impact of reported, but unanswered injustice is far greater than it may initially seem. Modern communications states through their scale, homogeneity and excesses provide their populace with an unprecedented deluge of witnessed, but seemingly unanswerable injustices.

That chimes with me: the sense of being powerless, yet also defiled by inaction when action seems impossible. We see a self-serving and corrupt body of politicians and others - two ex-ministers publicly disgraced and disciplined yesterday; a coalition government of parties that didn't win the last General Election and very likely won't win the next one; the official exoneration of the banker who presided over the vast collapse of his firm and almost the banking system; ex-Prime Minister Tony Blair recalled to the Chilcott Enquiry to give "further detail" about how he led Britain into what many say was an illegal war; big bonuses all round for failure; and so on.

There is certainly plenty to be mended, even though I think Assange is not the man, and his methods not the means, to do it.

Purple prose

Sackerson's Prose Prize goes to Liz Jones in today's Mail on Sunday:

Like everything vaguely pleasurable these days – holidays, sofas – Christmas has been so super-hyped that the real thing is bound to disappoint. Isn’t Christmas Day always a bit of a let-down? I far prefer the promise of Christmas Eve, the twinkly equivalent of foreplay.

I am half-suppressing a mental image of tiny lights, um, ...

Will commodities protect investors in a major crisis?

John Butler fears that we will be overwhelmed by debt and governments must - perhaps should - default. In his Financial Sense article "A Century of Money Mischief and the Rising Sea of Debt" he looks to commodities as the Ark that will save us from the flood:

Everywhere you look, there are increasing risks to currencies, sovereign bonds, corporate securities and financial assets generally. The problem is, as pointed out above, there is just too much credit risk in the world and investors demand that it be reduced, by crisis if necessary. But how to avoid taking credit risk when even sovereign debt is at risk of default? When the world’s reserve currency, the dollar, is being deliberately devalued? There is only one asset class that has zero credit risk or devaluation risk: Unencumbered real assets. While in principle this includes property owned free and clear, with banks still on the hook for massive losses in residential and commercial lending, most of which are still not marked-to-market on balance sheets, we think it is too early to venture back into the property market. A much safer alternative is liquid commodities that can be traded for other goods, or services, all over the world. These cannot be defaulted on. They cannot be devalued by central banks or governments. As such, in a world of unstable currencies and financial markets generally, a well-diversified basket of liquid commodities provides the best available store of value until the reduction in credit risk has run its course, one way or the other. As global debt levels are still rising, we have a long, long way to go yet.

In the long run, he may be right. But although commodities tend to rise in value in the buildup period, the liquidity shortage when the crisis hits forces them down with other assets, as we see from the events of 2008:

Chart: Google Finance

In the above chart, we see that the Deutsche Bank Liquid Commodities Index rose while the Dow fell, then collapsed, almost closing the gap. This suggests that a potentially very profitable strategy for the nimble and daring, would be a switch to cash just before the dam breaks. That still assumes a degree of normality, and I'll say a little more about that in a moment.

Meanwhile, how is the DBLCI doing now? It's nominally around where it was in the Summer of 2007 and has been trending up from its low of December 1, 2008. But allowing some adjustment for inflation, it seems to be indicating, not a crisis, but a slow recovery from crisis.

Chart: Yahoo! Finance

That's not to say that a fresh catastrophe is remote, but we have to remember that the worst part of the 2008 crunch was the moment when interbank lending broke down. Now that governments have established a policy of supporting the banks (or at least, their favoured ones) at all costs, the next blow is more likely to come from a different direction; maybe in the form of a breakdown in Eurozone intergovernment lending.

Or perhaps we may see the sort of sovereign default that Mr Butler urges; but this could spread in a way that might make conventional investment strategy irrelevant. And default is a more brutal and naked form of cheating others than the slow embezzlement of inflation. What will those who stand to lose the money they've loaned, do about it?

It seems to me that some financial commentators are like those people who stood still and stared at the pretty white line on the ocean in the 2004 tsunami, unconscious of the need to move immediately; or like the farmers who grudgingly gave my refugee grandparents shelter in their barn in 1945, not dreaming that a couple of days later the Soviet Army would overtake them also.

Instead of a market readjustment, with winners and losers in a system basically unchanged, we may be facing a reordering of world affairs, one that may not have a comfortable place for ourselves personally. If Mr Butler is right in comparing debt to global warming, we must hope for the financial equivalent of the Kyoto and Cancun Summits.

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, December 08, 2010

One Flew Over The Cuckoo's Nest, revisited for real

If this is to be believed, health workers are effectively kidnapping an autistic lad without sectioning him... a case of officialdom creating the problem it claims to be trying to solve?

Please read this and pass it on.

And on the other hand ...

In contrast to my item yesterday, which I consider 'reality' (in my own biased way), we have the following piece on a Sudbury alternative school No Teachers, no homework .

The article contains this gem: 'While some may question how the format works with reading and math, "the truth is, that's the easy stuff,'' Ekendiz said. "Our children will need skills like self-understanding, self-motivation and creative problem-solving.'''

Hands up those who think that the typical child from this school will find reading and math 'easy'.

Tuesday, December 07, 2010

Bears go mainstream

If you won't quite believe bloggers and even doubt financial world insiders, perhaps you'll listen to one of the voices of middle-class, middle-brow England: Max Hastings. Britain's most-read newspaper the Daily Mail today published a piece by Hastings titled "We're all doomed."

It's only half-joking, and reminds me of the British hedge fund manager who, in 2008, actually came home at the end of one week and bought a farmer neighbour's flock of sheep, to ensure that his family would have something to eat in the general system breakdown.

Be prepared for emergencies, even if you don't expect one.

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 people get it

I was referred to The Heresy of Higher Education by Sackerson.

It is an excellent piece, echoing my frequent diatribes that higher education generates far too many people who want to 'manage' without actually producing anything (or having any skills, for that matter).

Monday, December 06, 2010

Is quantitative easing the cause of the rally?

Tyler Durden at Zero Hedge thinks so, and offers the following graph to illustrate the correlation:

Correlation is not the same as causation: I'd be a little happier about this theory if the mechanism could be explained. How exactly did the Federal Reserve's purchase of government bonds force up stocks?

I suppose the effect was indirect, in that the stock market recovered confidence when it saw that interest rates would be kept low with this extra demand for government credit, so making debt-fuelled market speculation cheap and easy. Also the fear of a banking sector collapse eased as the policy of official support at all costs became clear.

I guess the new bubble is in government credit, and will continue to inflate until a weak seam in the fabric splits. Keynes said, "Markets can remain irrational longer than you can remain solvent"; similarly, governments can stay irrational longer than you can afford to short their darlings. I'd be in no hurry to bet on a market reversal, even though it "should" happen and the present state of affairs is not tenable indefinitely.

Which is why I grit my teeth and hold cash.

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 correction will be delayed until after the bonuses are calculated

Bob Clark over at FSU airs the bonus-conspiracy theory of stock market movements, and after the way 1999 ended I'm inclined to give it some credence:

... there are a lot of Christmas bonuses tied to fund performance at year end. If you are the Fat Boys, why not let the funds buy the price up into a strong, year ending close. Sell to them, then kick the stool out from under them early next year. They make easy victims.

On 3 December on CNBC, Gary Kominski said (video embedded here) that effectively, there were only 9 trading days left because there is very low volume in the last two weeks of the year - "the 17th is your last day to make a significant change to your portfolio." If Clark is right and the "Fat Boys" are setting us up for a fall, I'd expect them to sweep up the cards and stand up from the table a week before Christmas. Perhaps we should be watching the behaviour of "the usual suspects" in this period.

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.

Measuring GDP for real

Another thing to thank Wikileaks for:

GDP figures are “man-made” and therefore unreliable, Li said. When evaluating Liaoning’s economy, he focuses on three figures:

1) electricity consumption, which was up 10 percent in Liaoning last year;

2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and

3) amount of loans disbursed, which also tends to be accurate given the interest fees charged.

By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are “for reference only,” he said smiling.

So, how would that set of measures work in our case?

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, December 05, 2010

The uselessness of gold

An article by Elliot Turner last week ("Why I Sold My Gold") echoes what I've been saying for a while:

No one knows what will happen in the event of chaos, but to me the only real answer would be to buy a cave stocked with canned goods. Forget about gold, as that would do nothing in a state of anarchy. Gold ultimately relies on the same psychological comfort that fiat currencies do in universal acceptance, and therein lies the gold as currency paradox.

I'd suggest that gold is not a protection against disaster per se, but a speculation during moderate troubles, and a store of wealth for a future time after disaster, when recovery has happened. But as with the Staffordshire Hoard, that latter time may be a long, long while later and you may not be there to benefit.

So I propose a new currency valid in good and bad times:

"Ah," you may say, "but this currency is perishable." So was the scrip issued in Wörgl in 1932-33; in fact, a negative interest rate was built into the scheme to encourage circulation instead of hoarding during a deflation. It worked wonderfully - so well that it displeased the local socialist party and the central bank.

Which leads me to think that the true measure of a currency's virtue, as of a man's, is not its supporters but its enemies.


The Heinz will also be superior to the current pound (= 100 pence) in terms of giving change, as was the old British pound. The latter was worth 240 pence, each penny legally exchangeable (until the end of 1960) for 4 farthings, thus £1 = 960 farthings.

You can get two 400g cans of Heinz beans today for less than £1, and each tin contains over 400 beans. So the modern pound must buy you c. 960 individual baked beans. I therefore propose to call a single baked bean a "farting".

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.

Restructure debt, or lose prosperity and liberty

Karl Denninger draws our attention to an interview with David Stockman on CNBC (see below). Key points:
  • Combining middle-class earners with government employees (aside from teachers), we see that millions of jobs have previously been lost and there is now no net gain in half the 130 million American jobs market. Stockman terms this the "new normal".
  • Numbers are increasing among part-time earners, but their annual pay averages $20,000 instead of the middle class' $50,000. As Stockman says, you can't support a family on that.
This is industrialization in reverse gear. America - and even more so the UK - now faces a great question: are we prepared to watch our industry eaten away? Last month, it was reported as a sort of victory that Britain made a deal with China to export pigs to them. Though agricultural production is important - God speed the plow - I don't see a bright future for the whole nation as pig farmers.

In a digitized world and globalized economy, our problems are evident and important to our competitors. Back in September China's "Beijing Review" crisply summarized America's woes and their causes:

Increasing financial pressures forced middle class Americans to rely on debt to continue their current lifestyles. Meanwhile, thriving financial innovations on Wall Street have encouraged their lifestyle of high debt and high consumption. The median debt-to-income ratio of the middle class families climbed to 1.19 in 2004 from 0.45 in 1983. So basically, credit-supported over-consumption of the middle class laid the groundwork for U.S. economic prosperity over the past three decades.

The over-consumption can be corrected by cutting back - something that is certainly a matter of concern to Beijing - but though the spending song is over, the debt melody lingers on. Private and public debts are absorbing the resources that should go into trade and industry. Lowering interest rates further is scarcely possible, and as Michael Panzer reports in "Ready for some crowding out?", the need (especially in Japan and the USA) to roll-over huge amounts of debt in the near future may see a bond market revolt and higher interest rates, instead. Commercial finance may well become both harder to obtain and significantly more expensive.

Meanwhile, the burden of debt now lies not in interest rates but in the capital repayments. As average incomes fall (owing to the shift from higher-paying to lower-paid jobs), the liabilities will grow heavier in proportion. Some of this ballast may have to be ejected from the balloon if we are not to crash to earth.

Normally, one would say that letting debtors off the hook is a moral hazard, but I think the scale of the emergency takes us beyond that consideration. In any case, default is already happening piecemeal in the residential mortgage market, and would be far more extensive if lenders constrained by capital adequacy requirements were not reluctant to foreclose. Beneath the tide of "jingle mail" is a savage undertow of tolerated delinquencies (*). Similarly, the banking sector would be pretty much dead if the government had not also been willing to defer foreclosure.

The challenge is to tackle the debt monster openly and through policy, not inaction and denial. Cutting welfare won't do it fast enough and generates many other problems. If we can't restructure our debts by agreement with creditors, we have to accept the "new normal": high unemployment, a reduced and distressed middle class and, perhaps, political instability barely restrained by greater authoritarianism.

(*) See today's post (with many graphs) by Michael David White, who thinks housing in America is only halfway through its correction.

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, December 04, 2010

Serbian Jazz is hot!

Even Johnny Depp comes to Serbia - admittedly more for the film, but the brass sound seems to be "in."

My favourite so far is this one:

Uploaded by aceituna11. - Watch more music videos, in HD!

Governments should provide secure inflation-proof savings vehicles

Logically, speculators and investors should be residing in two different groups, but the two kinds of sheep keep wandering out of their respective pens. And there are wolves outside the pens.

John Lounsbury, reviewing ‘What Investors Really Want,’ by Meir Statman.

This is the difficulty we face now. If you are a savvy speculator and willing to accept a high degree of risk, you may (with luck) do well in today's volatile markets.

But if you are an ordinary investor (like most people), you are looking for something that will at least preserve the value of your savings and reward you with modest real growth for not spending them.

Unfortunately for investors, our governments' attempts to shore up an essentially bankrupt banking system and profligate welfare system involve lower-than-inflation interest rates, and at least one product that is guaranteed to overmatch inflation has been withdrawn - see what happened to NS&I Index-Linked Savings Certificates in July.

Sadly, one suspects that even if such products continue to be available, inflation will be defined in a way that does not fully reflect increases in the cost of living for ordinary people. In fact, definition tweaking is already happening, as in the case of "hedonic adjustment" in the American CPI Index. This means, for example, that a new computer that costs the same as your old one but has double the memory, has effectively halved in price - even if the extra computing speed has absolutely no practical benefit for you (we don't all live in the fantasy world of role-playing games).

I'm quite happy to let the speculators play high-stakes poker with each other, as long as the rest of us can humbly and patiently build security through thrift. It should be a lasting shame to governments that they are denying us ways to do this.

"The hungry sheep look up, and are not fed."

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.

A 13th century account of the Big Bang

At the briefest instant following creation all the matter of the universe was concentrated in a very small place, no larger than a grain of mustard.

The matter at this time was very thin, so intangible, that it did not have real substance. It did have, however, a potential to gain substance and form and to become tangible matter.

From the initial concentration of this intangible substance in its minute location, the substance expanded, expanding the universe as it did so.

As the expansion progressed, a change in the substance occurred. This initially thin noncorporeal substance took on the tangible aspects of matter as we know it.

From this initial act of creation, from this etherieally thin pseudosubstance, everything that has existed, or will ever exist, was, is, and will be formed.

Rabbi Moshe ben Nahman (aka "Ramban" or "Nahmanides"), 1194 - 1270; Commentary on the Torah

Wikipedia article here, looked up in reference to a reader's query in the Dail Mail today.

Wednesday, December 01, 2010

Will Wikileaks break a US bank?

Which American bank is going to be blown apart by promised revelations from Wikileaks?

Britain's Daily Mail newspaper today reported US speculation that it might be Citigroup, but that doesn't appear in the online edition so maybe it was just a wild guess. Tyler Durden hears that the hard drive of a Bank of America executive casts a shadow over Merrill Lynch and/or Countrywide.

Slightly creepy though Julian Assange may be, it seems he's doing what our journalists over here used to do, before they started to see themselves as part of the New Aristocracy. When the horse-puckey hits the turbo, maybe we could see another Enron-type scandal complete with jailings and business foldups.

But I think there will be other repercussions. One will be, presumably, a drive to "clean up the act" - more regulations to try to bring the rogues under control.

Another will be how discussions are (or aren't) recorded in future. I'm sure that thanks to Assange's latest stunt, many diplomats will now be encoding their gossip prior to transmission.

But the most significant will be how observation will be evaded and rules circumvented.
This has already happened in politics: it's one of the curious features of Tony Blair's decade-long "sofa government" that decisions were often made without civil servants present to take minutes: no name, no pack drill, as they used to say in the Army.
We can expect the same in commercial circles. Again, some smart guys have been doing this all along: Jordan Belfort's book "The Wolf of Wall Street" describes how, in order to carry on share-ramping without the inconvenience of explaining their office telephone transcripts to SEC investigators, his boys would simply tell the client they'd call back, then go out and fire up their personal cellphones for an intimate, no-repercussions sales spiel.
The Sicilian Mafia showed them all the way. Bernardo Provenzano ran the Outfit from a shack, avoiding all electronic communication and typing little notes ("pizzini") on his Olivetti instead.
It's kind of a Darwinian co-evolution of predator and prey. We can expect continued crookery, with heightened secrecy. And a surge in sales of two-colour typewriter ribbons.
DISCLOSURE: No positions. Not even in typewriter ribbons.

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 blind leading the blind ...

I have wondered for some time whether the investment community were a bunch of con artists, or deluded.

I believe that I have my answer.

In the November issue of the US edition of Playboy is an article titled 'How to Destroy a Bank'.

In it, the author interviews several investment bankers. All of them lost a great deal of money in the recent collapse; are convinced that they can make it back with 'hard work'; and see financial Doomsday as impossible.

In other words, they are idiots.