The economy is like a rainforest

The news always speaks of "the economy" as though it was one homogeneous whole. In fact, it's a host of micro-economies, financial equivalents of ecological niches.

In the rainforest, there are places that are light or dark, hot or cool, high or low, wet or dry. In the economy, there are savers, borrowers, amateur and professional investors, crooks, marks, young bold, cautious old, workers, shirkers and berserkers.

So centralised economic policy is enormously difficult. An intervention that helps one part, may hurt another, and further action is implied. It's like the tablets for hypertension that give you gout, which means you need tablets for the gout, which are likely to harm the lining of your stomach. Some might say, throw the lot away and have a glass of sherry before bedtime.

Or, in rainforest terms, let each species find its niche and organise its own survival strategies.

But I don't think this is an argument for complete liberal laissez-faire. To extend the analogy, maybe it's better to prevent harm than to seek to do good; the forest guardians need to control the rubber and banana companies, the clear-cutting loggers and polluting miners.

Dow Jones - worse bubble than the FTSE?

Just out of interest, I thought I'd do the same trend-spotting exercise for the Dow Jones as I did yesterday for the FTSE, i.e. extrapolating the highs and lows in the late 80s and early 90s.

The results are very different. October 2007 saw the Dow's highest-ever peak, and today, after falling over 2,000 points from that point, it still stands about where it was in the tech bubble of December 2000 (see yellow line).

And my hi-lo wedge (red lines) suggest that the Dow has been seriously above trend for most of the last 11 years. Of course, you can draw lines however you like, but I'm trying to do approximately the same as for the FTSE and the implication is that the Dow "ought" to be between 7,000 - 10,000, centring around the 8,500 mark. This chimes with what Robert McHugh predicted last year (9,000). (If you draw the "high" line to connect the '87 and '94 peaks, the hi-lo lines converge towards 7,000!)

I wonder what's keeping it up?

Stockmarket crash - a golden opportunity

I thought I was a bear: Wolfie says there's near-panic, City Unslicker talks about the FTSE losing a couple of thousand points, now Richard Lander on CityWire reports a prediction of the FTSE as low as 3,000 and another 60% to come off the S&P 500.

We could be approaching a once-in-a-generation Templeton opportunity, a financial fire-and-forget that could richly reward those who save very hard right now. Give the rifle another pull-through, hitch up your belt, and wait...

The FTSE - semi-wild guesses about fair value

I suggested on Wednesday that the market may already have lost much of its bubble, considered in real terms, and here below is my simple attempt at chartism.

What I've done is to draw two purple lines, one connecting the lows in the mid-80s/early 90s, and the other the highs in the same period. I've chosen that time-frame because it's before the silliness of the late 90s, and it does also include a period when the UK economy was in the doldrums.

Using these parameters, the late 90s and early 00s were well above trend, whereas last year's highs only just peeped above the upper line and the current value is hovering a little above the centre of the hi-lo wedge.

The implications are that the next low, if it comes soon, shouldn't be worse than around 4,500, and by 2010 (when I'm guessing the tide will turn) the bracket would be in the 4,700 - 7,000 bracket, with a midpoint of c. 5,850.

Taking the market at close yesterday and extrapolating to that 5,850 midpoint, would imply a future return (ignoring dividends) over the next 16 months, of c. 2.5% p.a. - not nearly as good as cash, especially in an ISA. On the same assumptions, to achieve an ex-dividend return of 6% p.a. would require entry into the market at c. 5,400.

On this tentative line of reasoning, we should be looking for a re-entry opportunity somewhere in the 4,500 - 5,400 level, say 5,000. Shall we wait for the next shoe to drop?

Inflation vs deflation - the iTulip debate

Find the time to have a look at this in iTulip. Lots of plums in this cake, including a suggestion that the USA is quietly negotiating a replacement for the dollar, with the Chinese. And 30% annual inflation in a few years' time.

How much of the crash is behind us?

The FTSE is closing somewhere around 5,666.10 today. It closed at 5,709.50 on 17 February 1998, which was the first time the market had breached today's level.

So we've spent a little over 10 years to get nowhere in nominal terms, and meanwhile the value of money has dropped by approximately 25%.

Yes, shares pay dividends, but most people buy them as part of some collective arrangement that involves initial and recurring charges and/or fees. After charges (and taxes, remember), it would have taken a net dividend yield of about 3% per year simple, or 2.65% compound, merely to replace the value lost to inflation.

So quite possibly the putative investor in the FTSE has actually fallen behind where he was in 1998.

Are the pessimists lagging behind the news? Has the worst happened already?

Littlejohn vs Toynbee

"... do you think about global warming when you're flying to your villa in Italy?"

A sought-after moment, I believe.

Investment in agriculture sparkles

Watching the idiot's lantern last night and who should be interviewed (on the subject of food prices and speculation) but Hugh Hendry, about whom I wrote last year. And his CF Eclectica Agriculture Fund currently ranks top out of 317 in the sector (up 35% in a year).

Of course, the poor are being hit badly (not the poor here, who aren't really poor). Hendry argues that rising food prices will encourage more (and much-needed) investment in agriculture.

Taking a line for a walk

Timothy McMahon at FinTrend reckons we should be looking to buy into US stocks this summer, using the rate of return graph above.

How far should we heed the chartists? Like cardsharps fleecing marks on a sinking Mississippi paddlewheeler, are they better at short-term plays, but inattentive to catastrophe?


Wreck of the "Sultana" off Memphis, Tennessee, April 27, 1865

Does freedom from self-destruction need a nudge?

I recently wondered whether freedom may not sometimes be an internal issue, as well as external. Isn't addiction a condition of being unfree? Is there some way of helping the unfree, without illiberal coercion?

As it happens, this is the thesis of a new book, "Nudge", by Richard Thaler and Cass Sunstein. It is critically reviewed by David Gordon here on the Mises website.

We are already being heavily nudged by our tax-greedy government and large commercial concerns, to gamble and drink away our wealth and future security. Surely there are ways in which we might diminish the temptation a little, to increase the possibility of rational, self-beneficial choice.