Weathering the storm

The bankers have shown their hand - they fear deflation more than inflation. Pumping-in cash and cutting rates will keep us going through the economic squalls that they created by the same lax monetary policy. If you believe the monetarists, there will be a price to pay, but as long as this crisis management succeeds, the damage will be insidious rather than cataclysmic: money will slowly rot.

Now that we know the opposition's strategy, what do we do? My guess is, hold cash, wait for further crises of confidence, and buy tangible assets, or assets backed by tangibles, at bargain prices.

That's why I think Buffett and Soros have been so clever in acquiring more rail stock in recent months. Railways are a natural Benjamin Graham choice: mature, income-producing investments. There are big barriers to entry - think of nineteenth-century land speculation and skulduggery, and add-in eco protests, modern politics and the unavailability of coolie labour. Rail has advantages over road, especially as so much freight now is containerised and port-to-city; but from an investor's perspective it is also solidly thing-based.

Other experts are into tangibles also. For example, Marc Faber likes real estate in emerging economies - and possibly in depressed areas of developed countries, and Bill Bonner has farmland in Argentina (the Chinese love beef). And then there's various types of commodity.

I think we'll be back to putting money into things we can understand.

Soros increases his mining stocks

Coat-tail Investor reveals Soros' largest holding by far is Companhia Vale Do Rio Doce, the world's second-largest mining corporation. Soros has increased his holding by around 10% as of end March. He's obviously sold on the commodities/natural resources/industrial metals theme.

A useful feature of the Coat-tail site is that you can re-order the information by clicking on each column heading, which makes searches much easier.

More on railroads, Buffett, Soros

Further to the last post, the Santa Fe railway is now owned by Burlington Northern (BNI), in which Warren Buffett's Berkshire Hathaway has recently increased its stake to over 10%; and this 2002 article in the Observer reveals that George Soros worked as a railway porter. I expect Soros has his hard-headed reasons for his own investment, but it's hard to rid yourself of the love of choo-choos.

Soros' views as summarised in the Observer article resonate today:

His basic arguments remain the same - that centralised institutions need strengthening as a political counterweight to economic globalisation; financial markets are inherently unstable; and there is an inbuilt inequity, or centre-periphery, problem.

...he is examining the minutiae of the workings of the World Trade Organisation, and statistics on capital flows to developing countries.

...there is no level playing field in the world economy. The rules of the game favour the rich, or 'centre', countries. 'Within the well-developed global markets, the centre has a considerable advantage over the periphery because the centre is in charge. And contrary to the false ideology of market fundamentalism, financial markets do not tend towards equilibrium, they need to be managed. So whoever is in charge has a distinct advantage,' he says.

He says conditions set by the IMF during financial crises tend to reinforce boom-and-bust cycles. 'They push countries into recessions by forcing them to raise interest rates and cut budgets - exactly the opposite of what the US is doing in similar circumstances,' he writes in the new book. [i.e. "On Globalization"]

He is also critical of the US obsession with 'moral hazard' - that intervening in financial crises rewards incompetent investors. Bailing-in private investors has replaced bailing-out crisis-ridden countries, he argues. Such policies are building a 'new Maginot line', fighting yesterday's war against credit crises rather than focusing on the real problem of the calamitous collapse in investment flows to developing countries.

Buffett, Soros, railways - a thought

Many years ago, I read a series of books by a financial expert calling himself "Adam Smith". In one, he spoke to an investment manager who had bought a holding in a railway, I think the Santa Fe, and asked him why so, since the company was somewhere around bankrupt. The manager replied that he was looking at the value of the tangible assets still owned by the company - land, rolling stock etc.

Railways tend to own a lot more land than the bit the rails run on. Is this a reason for Buffett and Soros to have gotten into that kind of business?

Planning for the crash

The Contrarian Investor's Journal reveals Part 3 of its thoughts on the crash-to-come, and addresses the dilemma of whether we are to prepare for inflation, or deflation.

I think I agree with the writer's analysis that it may play out as follows:

1. The current inflation will continue until some big scare or crisis starts the run
2. Then there will be deflation, but governments will try to get out of it by printing even more money
3. Printing more money won't work, because people will have lost faith in the currency, so (if you follow the link provided by the writer) we will eventually get to a surge in the price of gold

But we don't know when stage 1 will end, and holding cash may reduce your wealth relative to other assets. So where do you invest?

Buying gold now may mean a long wait before the market comes round to your point of view (if it ever does) and as some (e.g. Peter Schiff) have pointed out, even if you're right, you may find the government forces you to give up your gold, as it did before.

Houses are overpriced, but rather than a general sell-off of real estate I could imagine a long period of house price stagnation, with people staying put if possible. You haven't lost money till you've sold, or the bank has forced you to sell. If you really have nerve, you might sell, live in a tent and buy a bargain when (if!) the housing market tanks - but would your partner agree? Christopher Fildes was suggesting (in the Spectator magazine) moving into a hotel, some years ago - but look at what's happened to London house prices since then.

Some businesses continue even during a depression, if they provide essential services. It's interesting that Warren Buffett and George Soros have both bought into railways recently.

I can't call the play - personally, I am looking to reduce debt and trim personal expenditure, increase cash savings, and otherwise invest with a weather eye on the macroeconomic situation.