Cash - the investment of the century

There's been comment recently about how the ordinary investor has been abandoning the market, in some cases with an undertone of contempt for the poor saps who are missing out on those incredible gains to be made just around the corner.

The banks who from time to time attempt to poach my clients often use past performance an an indicator of future returns, while of course covering themselves by the usual disclaimers. Typically they cherry-pick among terms of 1, 3, 5 and 10 years.

Let's see how the graph for the Dow would look over various time periods, and compare it with cash in your bedsock. To be fair, let's ignore the interest you could have earned on cash, and the dividends on stocks; as a special favour to the Dow, so being especially unfair to cash, let's also ignore the offer-bid spread and the fees and charges loaded onto the investor.

Over the last 12 months:, you could have made a good profit - well, you could if you'd got out a month early:
... over the last 3 years:
... over the last 5 years:
... and since January 2000:

"Mish" today points out that we are in deflation, if you are a monetarist, since credit and asset values have contracted. Inflation scares suit those who are running what some call a "wolf market" - come out, little pigs, it's all clear now.

What inflation? The consumer - and the inflation indices - may notice a rise in food and energy prices, but that's not what your nest-egg is for. Look at house prices - still going down in the UK and the USA - and all the other big-ticket items that in recent years were purchased with borrowed money.

I think Mish is right, for now. The concern I have - and it's reflected in the soaring price of gold - is what governments will do in their desperation once giving money to busted and corrupt banks (and governments) is finally seen as worse than useless. Can the bond market really dictate terms in an economic collapse, or will governments across the world break their currencies with the final splurge of money-printing that third-party control by central banks is designed to prevent?

Until that time, and despite the temptations of commodities, maybe cash-holders should hold the line while the enemy advances. A lot depends on your personal plans, of course; we're hoping to move house and such cash savings as we have may continue to appreciate against the thing we want. So really it's about relative values - comparing asset A with asset B - decided by you, not some index that doesn't reflect your priorities.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Where "should" the stock market be?

There's a flap on about market declines. I think it's because the traders are kids.

Take a look at the graph below, which shows the Dow since the end of WWII. Bearing in mind that in real terms, a thousand points on the Dow was worth more in the past than today, where do you think we ought to be, if the market was "normal", or better yet "sane"?

Adjusting for inflation (CPI-U), and looking at the Dow's progress from August 1945 to August 1980 (around when the Great Inflation really started), then extrapolating, I figure the Dow should be a shade under 3,000 points today.

The rest is, effectively, monetary bubble - which is not to say it can't continue.



INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

China downgrades American credit to "A"

Half a world away from the USA, China's Dagong credit rating agency can afford to be blunter than Standard & Poor.

Their view, shared by many in the West, is that the problems have not been solved but damagingly deferred; $4 trillion needs to be cut from the public budget within 5 years; QE3 is inevitable and "will throw the world economy into an overall crisis". Accordingly, on August 3 Dagong downgraded the US rating further, to "A, with a negative outlook".

If the Western rating agencies dare to echo that view (and some see last week's S&P's re-rating to AA+ as an attempt to break the news gently), it could be the trigger for a more serious selloff in the stock and bond markets. Disaster for many, opportunity for some - perhaps.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

In a nutshell - the investment crisis

A bear market is one where the odds of losing are greater than the odds of winning; they built Las Vegas on the back of it. So the gambling will continue, a few will do well and most will lose their wad. The difference is, Wall Street won't serve you drinks.

Crash? What crash?

The hackneyed news media deadlines are trotted out again: "x billion wiped off shares". How quickly we forget.

Below are the charts for the FTSE and the Dow from their recent low points in March 2009:

The FTSE closed Friday 49.4% higher than 29 months ago; the Dow, 74.8% higher.

I think that ultimately, both will (in real terms) plumb depths significantly deeper than they did in 2009, but it will not happen in one go, and it will take a long time.

The stockmarket is not a store of money: A has already paid B for ownership of the shares, and the money went into B's bank account. The money is not parked on Wall Street or Paternoster Square, it merely passes through it.

On the way, it's purchased either the promise of a future income stream (and how reasonable is that hope in an unravelling world economy?) or the chance to sell on to a bigger fool (in the hope that it hasn't already happened).

Remember, you don't have to be in this game. I should like to know where the traders' and bankers' bonuses are invested at the moment: do they eat where they cook?

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), 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.

Gold and its correlation to debt and GDP - updated

Jesse offers a chart showing an apparently close relationship with the price of gold and the growth of US official debt, thus:


He wonders how this might look in relation to debt/GDP, and I give below gold's correlation with GDP and with debt in its broadest sense (TCMDO, ignoring intragovernmental lending) in the period 1952 - 2010:



I would suggest that gold's basic correlation is with GDP, but with wild swings reflecting debt-fuelled manias and financial crises. On this showing, and despite what looks like a meteoric rise over the last few years, gold is merely coming home and is not yet overpriced in the long view. This, as I understand him, is what Dr Marc Faber also thinks.

Not having had the money at the right time, I missed the opportunity to climb aboard gold when it was severely underpriced; but may do so soon, merely to preserve some of the value of our savings.

I'm not so much a gold bug as a most-everything-else bear. When the system stops lending cheap money to the riverboat gamblers with dusty top cards on Wall Street, I'll be interested in genuine investment.

UPDATE:

Here's the price of gold compared to the growth in Total Public Debt Outstanding since fiscal year 1929 - this includes intragovernmental debt (please click to enlarge):









INVESTMENT DISCLOSURE: None - YET. Still in cash (and some inflation-linked government savings certificates), 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.

Banks' final grab: the land

UPDATE: It's happening! Unbelievable!

_________________________________________

Robert Wenzel comments approvingly on a course of action mooted in a meeting of primary dealers and the US Treasury held at midday today. The idea:

"Dealers suggested that the Treasury might be able to repo their MBS portfolio to raise cash."



Yes, I should think banks would like to suggest that: have the government that bailed them out, now sell the MBS (mortgage-backed securities) back to them at fire-sale prices. 31 million mortgages - about half of all the mortgages in the USA - delivered into the hands of the swindlers.



What daring. It is almost Biblical in the scale of its impudence.



For the record, let's list these players:



BNP Paribas Securities Corp.

Barclays Capital Inc.

Cantor Fitzgerald & Co.

Citigroup Global Markets Inc.

Credit Suisse Securities (USA) LLC

Daiwa Capital Markets America Inc.

Deutsche Bank Securities Inc.

Goldman, Sachs & Co.

HSBC Securities (USA) Inc.

Jefferies & Company, Inc.

J.P. Morgan Securities LLC

MF Global Inc.

Merrill Lynch, Pierce, Fenner & Smith Incorporated

Mizuho Securities USA Inc.

Morgan Stanley & Co. LLC

Nomura Securities International, Inc.

RBC Capital Markets, LLC

RBS Securities Inc.

SG Americas Securities, LLC

UBS Securities LLC.



You'll note that six of them are now Limited Liability Companies (LLC), the latest to convert being Morgan Stanley (as of May 31, 2011). Apparently, this has a tax advantage for derivatives dealers; but I wonder whether not having shareholders while also avoiding personal liability is an equally important consideration, as we approach the endgame, when bank shares may finally burn up.



Imagine what Thomas Jefferson and Andrew Jackson would say, if they could see how in the Land of the Free a tiny elite not only owns most of the cash, bonds and shares, but now aspires to seize the real estate. America is approaching a peak of wealth inequality and mass servitude comparable to the condition of England in the eighteenth century, but without the hopes offered by the Industrial Revolution.



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.

When investing, remember inflation

The lowest point (so far) in the above monthly sequence was February 2009. But we've still lost a third in real terms overall since the start of the Millennium.

And what does this shape suggest to you about future returns?

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.

The Stock Market made simple?

A correspondent on Usenet took umbrage recently when I referred to traders as (possibly necessary) parasites on the economic system. That he used to be one probably had something to do with his outrage, but I meant the term in the biological sense, in that traders generate no wealth, nor provide any real service, at least in my simplistic understanding.

Perhaps the illuminati here can shed light on my misunderstanding by considering the following simple scenario:

1. MomandPopCo decide to expand, and so release an IPO of 2,001 shares. They keep 1001 to have majority control, and sell the rest for $100 per share. With a 1% fee charged by the brokers, they realize $99,000, and the latter get $1,000
2. A short time later, Amy sells her 100 shares for $105 per share to Bob. She gets $395 in profit, and the brokers get $105 for their service.

Questions:

1. Where does all of the money come from?
2. Why does Bob pay more for the shares than Amy did?
3. Why was Amy able to charge more than she paid?

The answers are clearly(?):

1. From the investors.
2. Unless Bob is an idiot, he assumes that the stock price will either further increase, or the dividends will cover his costs.
3. Amy must be taking the discounted value of the future dividends of the company, or we are starting yet another bubble. This is easier to see if the company is buying and raising cows for sale, being a transaction of finite duration.

Notice that the company does not benefit at all from the second transaction. Even if their stock goes up, they cannot sell any more without losing control.

Hedge fund titans admit they don't know what's going to happen

George Soros is retiring, closing his fund to outside investors and returning their money.

Some say it's because he's become old (81) and cautious, other suggest it's to avoid being regulated by the Securities and Exchange Commission, but he himself has said “I find the current situation much more baffling and much less predictable than I did at the time of the height of the financial crisis.”

Stanley Druckenmiller, one of Soros' former fund managers, also threw in the towel last year, and he's only 58.

Closing hedge funds is a trend, and the issue now even has its own website: The Hedge Fund Implode-O-Meter. I see this as further confirmation that it is no longer "business as usual" in the investment world. It is, perhaps, like that stage in WWII when senior officials on the losing side prepared fake IDs and packed gold and art treasures for their flight; that is, it's no longer about gain, but about hanging on to what you've taken.

This, I think, is part of what's behind the current US budget crisis. Agreed, public spending is out of control, but that has been so for a very long time. What's forcing us towards disaster is the overall level of debt, of which much the greater part is private credit. Players in finance and politics colluded to encourage the housing and credit bubbles, which disguised the failure to nurture domestic production and balance imports with exports. Fees, interest and selling securitised debt, plus capital gains on inflated assets in a booming economy, made many people rich, and some super-rich; and they bought the government and regulators.

The ordinary Joe's real wages stalled for 30 years and more, but loading him with easy credit (and sending his wife out to work) kept the show on the road. Now, it seems, the objective is to get him to pay for everything, without asking his masters for any of the money they made out of the game.

If the elite succeed, they keep their extraordinary wealth and Joe suffers. Actually, it looks as though they cannot lose, since most cash, bonds and equities are owned by the top 1% of the population. Even their houses will tend to retain most of their value, since the only people who can aspire to buy them are other people with lots of money.

Inflation would hit cash and bonds, but the rich also have most of the equities and nice houses. Deflation would amplify the power of cash and (provided there is no default) attractiveness of bonds, and the rich have most of that, too.

So why do we feel that we're at some break point? I think it's because the balance of opportunity and threat has altered significantly.

Firstly, there's nothing much more to steal; expansion is no longer a prospect.

Second, the economy may not rebalance without an increase in taxation, and I should think some of the wealthy are on the lookout for the possible imposition of capital controls that would prevent them from fleeing abroad with their money. The more far-sighted are already renouncing their US citizenship.

Third, if the system cannot survive without some redistribution of wealth, but those who have it hold on too hard, there may be a breakdown in the social order. Last year, Marc Faber and Ron Paul were each predicting such problems, Faber recommending moving out of cities because they are such easy targets for attack.

I agree with them. I think that when irrational greed and resentful desperation meet, there can be no good outcome. We are planning to move soon to somewhere pleasanter, but also, we hope, safer. We are beyond knowing what to do with our savings, other than to diversify so that we don't lose everything, and not to entrust it all to third parties.

Looks like the super-rich hedge fund managers think the same way.

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.