"Dow 9,000" prediction: accelerating decline

Running to stand still: Alice and the Red Queen

November 2: Dow at 13,595.10, gold $806 per ounce. Since July 6, Dow has appeared to hold its ground, but the "gold-priced Dow" has dropped to 10,925.83 - a fall of over 49% annualised. And at this rate, gold will have doubled in dollar terms by July 2008.

China Olympics: Starter's Gun For Inflation

Image from the Summer Olympics of 1904 (St Louis, Missouri)

Robert Gottliebsen in Australia's Business Spectator (Thursday) gives thanks for Ben Bernanke's inflationary rescue of the banking system, but points out that the flight from devaluing US securities is driving demand for assets elsewhere. And there are longer-term consequences to face:

Before the latest US crisis developed my friends in China told me that many Chinese manufacturing businesses would try to raise prices by 10 per cent in 2008 -- probably after the Olympics. That determination will now be intensified because the manufacturers are not only receiving lower returns but are being forced to pay more for oil and commodities. Those seeking shelter from the US dollar will drive up prices.

Bernanke’s actions, even though they are justified, are going to inflame US inflationary pressures. So later in 2008 and in 2009 he will need to reverse the current process and increase interest rates. That will not be good for stock markets or commodities because it will reverse the current forces. But just how serious it will be for the US will depend on whether the current Bernanke medicine worked and the banking breakdown was repaired.

I think there is a chance it will work because rising stock markets are a powerful drug. But no one can be certain, and this is a very dangerous period.

Twang money - again

Pencils made from recycled money

Fiat currency can be expanded at will, but in a credit crunch can contract as easily, so I've previously nicknamed it "twang money". But it turns out there actually once was a medium of exchange known as "twang money" - the Hungarian pengo. It ended up as the worst case of inflation in history: someone writes in to today's Daily Mail (page 77) to say that by 1946, all the Hungarian banknotes in circulation, taken together, were worth one-thousandth of a US cent.

However, consider the potential uses of many tons of durable paper with run-resistant colours: wallpaper, sweet wrappers, firelighters... So for me, the story is about the buying opportunity when pessimism ignores intrinsic value.

The Clashing Rocks

Martin Hutchinson (Money Morning, today) sees the Fed caught between a rock and a hard place: as the dollar drops, oil and commodity prices go up and so American inflation worsens; if the dollar is supported by higher interest rates, the already-frail housing market stalls and maybe dives.

It's said that the Chinese pictogram for "crisis" combines the ideas of "threat" and "opportunity". Hutchinson offers ideas for those who want to take advantage: invest in...

• Japan
• gold
• natural resources
• Canadian oil
• - and a Korean bank.

"Wall of Worry" poll results

It seems respondents are as much confused as I am, about which way to go. I quoted Benjamin Graham's advice for passive investors, which is to strike some balance between equities and high-quality bonds, anywhere from 25:75 to 75:25, with a default position of 50:50.

The results are almost exactly divided: 8 at the top end for equities, 8 at the bottom for bonds, 7 voting for a 50:50 split, and one for 65% equities/35% bonds.

Another snort to keep going

Chris Ciovacco in SafeHaven today reads the historical charts and concludes that recent multiple Federal Reserve rate cuts are slightly bullish indicators:

... From my perspective, almost all the items above slightly favor the reflation trade over gloom-and-doom. However, the edge is small enough to remain diversified while keeping a close eye on the stock market's 50 and 200-day moving averages.

This would chime with Jim Puplava's assessment that "more of the same" will buy us a little more time until the system is exhausted, which he expects to happen around 2009 onwards.

There's never just one cockroach in the kitchen

... says Warren Buffett, at the trial of a former Freddie Mac chief executive.

Crazy like a fox?

I've received this unsolicited mail today. As Wavy Gravy said at Woodstock, there's a little bit of Heaven in every disaster... or is there?

Uncle Sam and John Bull

We're in it together (picture source)

Financial Sense yesterday: Adrian Ash points out that the UK has problems similar to America's, and draws comparisons with the economic situation of the 1970s. That word "stagflation" is being spoken again. He's another gold bug.

Frank Barbera looks at the ongoing credit crunch, with Structured Investment Vehicles looking for a rollover investment of £100 billion within the next few months, just as the market in commercial paper is drying up:

Bottom Line: It is simply a long way from over. So what do investors do while trying to make an honest buck? The answer is to expect more turmoil and periodic severe bouts of selling pressure rippling through the financial markets. We are looking at the battle between monetary reflation and debt deflation playing out on the grand stage.

Other bears look at the Thirties for their model. We have an advantage, in that we have the 70s and the 30s to learn from; they didn't have themselves in their history books. As Mark Twain said, "The past does not repeat itself, but it rhymes."

( Picture source)

Merrill in a panic

(Picture source)

Charles Merrill, a relation of the Merrill Lynch founder, has become a gold squirrel.

More surprises from Warren Buffett

Warren Buffett wants to pay more tax, according to NBC today.

And he doesn't have an accountant! (How many enemies can you make in one day?)

Money vs The People

(Picture source)

Money can improve happiness, below a certain income level; but above that point, the relationship is not so clear. And maybe there are distinctions between money, investments and wealth...

In Financial Sense yesterday, Robert McHugh comments:

When the Master Planners devalued the dollar over the past five years, they raised the cost of living for everyone. The Middle Class is getting annihilated from this silent event. Incomes are not keeping up. This was done because this administration “equates stock market success with economic success and has directed their efforts to drive up equities at literally any cost,” to quote one of our subscribers.

...but Tony Allison looks forward to a more energy-efficient future:

Change is seldom welcomed by most humans, but it can often bring about positive results. It is impossible to know what year the effects of peak oil production will barge into our living rooms, but change is on the way. The adjustment period to a permanent supply crunch will likely be very difficult, but some effects may be beneficial. For example, we could see a re-birth in local farming and manufacturing, as food and industrial products become exceedingly expensive to transport. We would see more public transit, more freight train transportation, more bicycles, more energy efficiencies of all kinds working their way into society.

Buffett goes South and East

MoneyNews.com (Friday) reports on Warren Buffett's investments in Brazil and South Korea. Apparently the great man has made a pile in Brazilian currency but is now looking to switch to their bonds.

Abroad elsewhere, he's looking for high-dividend companies - a combination of the standard value investing formula and hedging against the dollar.

Every Picture Tells A Story

Dow Jones Industrial Average, 1960 - 2007 (source: StockCharts.com)

My brother sent me this. Just imagine what it would look like if the chart wasn't using a logarithmic scale. Which way from here?

Vote early, vote often

... as the Irish used to say. One more day to go on the Wall of Worry poll and the optimists are winning. Can this be so? If you have votes to cast, prepare to cast them now.

Volume - shares and gold

(Picture source)

David Yu (Safe Haven, yesterday) comments on the unusually high volume of trade on the NASDAQ recently, and so expects a fallback sometime.

Peter Degraaf (GoldSeek, Friday) thinks gold can't be shorted or held down forever. He reminds us of the extraordinary volumes of bullion traded in 1967-68, and the explosive rise in the price when the containment attempt finally failed. Degraaf believes Frank Veneroso's theory that central banks are surreptitiously dumping gold again today, playing the same game - and expects the same result.

Faber: why the dollar may bounce back

The International Herald Tribune ( October 24) reports a mechanism by which the dollar may recover some lost ground:

Faber said if bubbles in emerging markets deflated, the dollar may rebound from all-time lows against the euro as fund managers who have invested in emerging markets shift investments to the United States.

China: a positive view - and a challenge to India

An old (Jan 2006) interview on Financial Sense with George Gu gives some more hopeful signs: progress towards the rule of law (as we in the West slide into bureaucratic authoritarianism); opening up the economy to outsiders; a reducing role for the military.

Like James Kynge, Gu makes the point that the big profits are made by the multinationals - the cheap labour input from China is only a small factor. (Surely this shows that there is a very strong incentive for China to develop its own marketing and management class.)

Gu explains that although India's labour costs are even lower than China's, India hasn't yet developed its supply chain and infrastructure to the same degree:

... China, over the last 26 years has gotten all of them in one place. For example, in consumer electronics you can set up your shop in Guangdong, then you get more than 10,000 component makers.

So, the gauntlet is thrown at India's feet.

Rapid fire

(Picture source and story)

Duff McDonald in New York Magazine (Saturday) goes through various doomsters' scenarios. How many bullets can we dodge, especially when the system is becoming automated?

By the way, he says CNBC calls Peter Schiff "Dr Doom" - surely that would be Marc Faber?

... and the brakes have been greased

How to stop a car without brakes

Further systemic risk. Jim in San Marcos comments on changes at the New York Stock Exchange, which has completed its conversion to electronic trading and has now removed some safety checks that were designed to reduce volatility in extreme conditions.

He says that a change in sentiment (perhaps initially caused by an error) could now lead to a much more rapid drop on the markets, since pension funds and investment companies are also using programmed trading.

Trouble ahead

The money-lender's pleasant dream

Market Ticker reports that a bank has borrowed $75 million at exceptionally high interest rates, suggesting that the collateral they were offering wasn't sound enough to be acceptable. And there are futures contracts being taken out that indicate some traders expect a major financial dislocation.

In other words, this bet is one that the credit markets will go supercritical.

And it wasn't made by just one firm, one speculator, or one guy.

A few months ago I pointed out that every big equity market dump - every last one of them - has started in the credit markets. It always starts there, simply because of the volume of business transacted and the sensitivity to problems. In the equity markets one company can go "boom" and it doesn't mean much. But in the credit markets "systemic risk" - that is, a refusal to trust people as a foundational principle - once it takes hold is very, very difficult to tamp back down.

Read the whole post here. And here's the evidence (source):

"Dow 9,000", UK loans to US, poll, doom

Not as bad as this, we trust...

Dow 9,000 update

The Dow is currently at 13,806.70, up slightly from its July 6 valuation of 13,611.69. But gold has risen from $647.75 to $783.50 in the same period - up 21% in 113 days, or around 85% annualised. This means the "gold-priced Dow" is worth 11,414.54. At this rate, Robert McHugh's prediction will be fulfilled by March 8 next year.

UK holdings of US Treasury securities

The dollar has dropped by 1.8% against the British pound since July 6, which may not seem like much, but is equivalent to 5.72% annualised. The capital loss pretty much wipes out the income payable to the UK.

I have tried to publicise Britain's recent heavy increase in ownership of US debt, but it seems nobody wants to make political capital out of it. Perhaps this is because some think the pound will eventually drop even faster than the buck. Or maybe the silence is because the markets are jittery enough already, without further evidence of American financial crisis.

Poll

Please take part in the "Wall of Worry" poll (sidebar)!

Hogarth on corrupt electioneering practices

Doom

Some people are so Eeyorish that you start to cheer up. Although an American, Jeffrey Nyquist gave us a good dose of Northern European apocalyptic prophecy in Financial Sense yesterday: computer viruses, Russia and China on the march, debt, war - the lot. Pass Pappy the liquor, son, and go git mah fiddle.

Bluegrass

Having said that, the (commendably) idealistic young and their left-wing Pied Pipers should learn more about the real nature and continuing threat of communism. George Orwell said the British Left played with fire and didn't know that it was hot. I suspect that happiness for the many is more likely to come from a restrained, green-conscious form of capitalism, than from the destructive dreams of millenarian socialists.

I also suspect that a major theme this century will be the contest between Marxism and Islam. I hope for a bloodless final end to the former, which has caused such suffering to so many millions in the last century; and the ascendancy of the civilised, cultured, intellectual and tolerant traditions within the latter.

Kicking through the slush

Here's something from Seeking Alpha about the proposed new post-subprime mess bank rescue fund, the "Master-Liquidity Enhancement Conduit" or MLEC for short.

The way I remember this acronym is to imagine (falsely, of course) that MLEC stands for Merrill Lynch Emergency Cash.

By the way, Joseph Heller pointed out in Catch-22 that "enhance" does not mean "increase", it means to make something stand out against a background. No Sackerson Prose Prize for this $75-billion mealy-mouthed monicker: too much perfume in it, not enough soap.

Sovereign wealth funds and national prosperity

I have had a comment (on an earlier piece about sovereign wealth funds) from a Shromon Das, who gives his view on SWFs here and a follow-up today here.

Without pretending to technical expertise in this area, I can envisage implications for a growing ownership of equities by governments. One effect may be to reduce volatility in large-capitalisation stocks, since national treasuries can take a longer view than the individual investor.

But there must also be concern about the possible use of ownership for political purposes. For example, I wonder at the UK's having allowed foreign enterprises to take over some of our energy and water supply companies.

I began this blog for investors, but increasingly I think the real story is not about how some may make (or protect) their fortunes, but about the implications for ordinary citizens.


Today I drove past the site of the former Rover car plant in Longbridge, Birmingham. The firm was on its way out years ago and a venture capital company called Alchemy offered to take it over, cut its size and specialise in a line of sports cars. The rest of the land could be redeveloped - housing and retail. The surplus workers would have their pension rights and redundancy payouts honoured, and some could still look around for employment in other plants.

But there was an election coming (2000), so the government chose to encourage a management buyout instead. Thousands of jobs were saved, supposedly. Besides, it was said (I seem to recall) that the site was too polluted for residential development, anyhow.

Well, Rover did go bust anyway (after a £6.5 million "bridging loan" to prevent its collapse immediately before the 2005 General Election). The workers didn't get the redundancy payments they'd have had from Alchemy in 2000, and their pensions were hit too. Anyone still interested in car work elsewhere would then be five years older, in an industry that some believe discriminated on the basis of age prior to new legislation in 2006.

A Chinese firm, SAIC, has picked over the carcase, with special attention to any designs and other paperwork that might help with setting up an alternative in the Far East. And now the site is being cleared - for residential and retail development.

There is a big, shiny new building on the Bristol Road in Longbridge - a JobCentre Plus.


Where, in all this, were the working people's long-term interests really considered, even by their political representatives?

Normal service will be resumed as soon as possible

The Potter's Wheel

Off for a short break - back soon. But what a time to pick - the Federal Reserve having just granted maybe $100 billion of special exemptions to major banks (see yesterday's post).

Dollars, gold and words

A couple of useful items from Financial Sense:

Gary Dorsch (October 18) explains that a falling dollar helps the S&P 500, "which earn roughly 44% of their revenue from overseas, mostly in Euros", and supports house prices in the US; but it also raises the price of oil, gold and agricultural commodities. While the US seems set to cut rates further, the Eurozone may raise theirs to control inflation. In five years, the Brazilian real has doubled against the dollar! Oh, to have been a currency trader.

Meanwhile, Doug Galland at Casey Research explains that gold was dipping together with shares, because institutional investors were scrambling for cash in the unfolding credit crisis. His view is that in the longer term, these sectors will diverge and gold will soar. He supplies an eloquently simple graph:

Speaking of eloquence, financial writers know their business but many need to hone their writing, so I propose a new prize: Sackerson's Prose Trophy. The first winner is Doug Galland, with the following simile:

Though admittedly impatient to see the gold show get on the road, we were largely unconcerned by gold’s behavior. That’s because our eyes remained firmly fixed on the perfect trap set over the years for Bernanke’s Fed.

Like hunters of antiquity watching large prey grazing toward a large covered pit, the bottom of which is decorated with sharpened sticks, we watched the handsomely attired and well-groomed Bernanke and friends shuffle ever closer to the edge, their attention no doubt occupied by pondering the flavor of champagne to be served with the evening’s second course.

One minute pondering bubbly, the very next standing, wide-eyed and hyperventilating, on thin cover with decades of fiscal abuse cracking precariously under their collective Italian leather loafers. We can’t entirely blame Bernanke for the dilemma he now finds himself in; it was more about showing up to work at the wrong place at the wrong time.

The second paragraph is splendid in its anticipation, and the phrasing conveys both the anguished expectation of the hunters and the relaxed, expansive mood of the prey. The denouement is a little disappointing: "pondering" is a repetition and the syntax is too florid; a short sentence would be better, contrasting the suddenness of the fall with the slowness of the approach.

Further nominations for Sackerson's Prose Trophy are welcomed.

The (scientific) pursuit of happiness

Cast Iron Gilt Buddha's hand, in the Jnana Mudra, gesture of teaching.

It seems that happiness, like health, is not what you have, but something you do.

In November 2005 I watched a BBC2 TV series by the psychologist Dr Richard Stevens, called "Making Slough Happy". He showed that you can increase your happiness in practical ways, and he demonstrated them on volunteers in Slough. It worked, even for the grumpies.

For more background, please click on the title below - but you may prefer to start the program straight away.

Happiness tools

1. Take half an hour of exercise three times a week

2. Count your blessings. At the end of each day, reflect on at least five things you are grateful for

3. Have an hour-long, uninterrupted, conversation with your partner or closest friends each week

4. Plant something: even if it’s in a window box or pot. Keep it alive!

5. Cut your TV viewing by half

6. Smile at and say hello to a stranger at least once a day

7. Make contact with at least one friend or relation you have not been in contact with for a while and arrange to meet

8. Have a good laugh at least once a day

9. Give yourself a treat every day. Take time to really enjoy this

10. Do an extra good turn for someone each day

Barclays emergency $20 billion financing move

AntiCitizenOne has alerted me to a US Federal Reserve letter dated October 11, permitting certain financial adjustments within the Barclays banking system. These could amount to as much as $20 billion.

Similar permissions have recently been granted to Citigroup, JPMorgan Chase, Bank of America and Deutsche Bank (see page 3).

Any comments?

UPDATE

Now RBS also, for up to $10 billion! (Thanks again to AntiCitizenOne for the alert.)

Will US protectionism pull the trigger?

The Appalachian Hatfield-McCoy feud

An article by D R Schoon in GoldSeek (26 September) alerts us to a bill heading for a vote in the US Congress this autumn. It seeks to impose a 20% tariff on Chinese imports.

... China will retaliate; and, dumping $1.33 trillion of US Treasuries on the open market will be an all too easy and accessible option. It would destroy the US dollar and deal the US economy a body blow from which it would take years to recover...

Now unless US politicians are really abysmally stupid, they must have a backup plan to stop a torrent of dollars pouring back into the States - exchange controls? Repudiating the debt? If Russia's default forced the bailout of LTCM to prevent systemic crisis, what would a giant American default do?

We must hope for cool heads all round. US multinationals are already urging calm.

Hubble-bubble

The hubble-bubble, or hookah

The American astronomer Edwin Hubble found the evidence for an expanding universe, in the phenomenon of "red shift". Objects moving at high speed change colour, because their velocity stretches the light waves. Looking at galaxies, he saw that the further away the object, the more its spectrum shifted, so the faster it was going.

Why? Imagine you put a line of ink dots at intervals of an inch on a toy balloon, and then inflate it so that the space between each dot doubles. Dot A is now 2 inches from Dot B, and the latter is two inches from Dot C. So from A's perspective, B has receded by one inch, but C by two inches.

The implication is that as the universe continues to expand steadily, the objects furthest from us will eventually accelerate beyond the speed of light, and in Einsteinian terms will not be part of our universe any longer - we will never see anything from them again.

The financial universe is, as everyone who takes an interest knows, expanding. And everything is fine as long as the expansion continues, and while people are still prepared to use the inflating money.

One way the money supply expands is through loans. Banks only have to keep a fraction of their deposits ready for return to savers - the rest they can lend out. Some of that loaned money gets deposited into a different account - where again, part is kept and the rest loaned out. So the amount of money in the economy is multiplied by this "fractional reserve banking".

But unlike the cosmos, money can also contract. If more people than expected want their money back, loans get called in prematurely. It becomes a game of musical chairs. If there's growing concern that the system can't return all the cash demanded, two or three chairs are removed at a time and a panic starts. Rick Ackerman in GoldSeek (26 September) underscores this point.

"Captain Hook" in yesterday's Financial Sense suggests that we may be approaching such a time in the near future. The bubble may burst.

The problem for the rest of us is that if we believe the money supply will continue to expand, we want to get out of money and into anything that is more likely to hold its value; but if we anticipate deflation, then cash is king.

So, is it endless expansion, or inflation followed by a bust? Hubble, or bubble?

Backfire

Quick-Draw McGraw

Michael Panzner (Financial Armageddon, 11 October) comments on (and graphs) the increasingly synchronized movements of some speculative markets, including gold and tech shares. The range between these assets is tightening and may indicate that a turning point is due.

This would gel with other information: Marc Faber has said that he sees bubbles everywhere, including gold. True, it's also been reported recently that he's been buying into gold, but remember that he is something of an investment gunslinger and will have his own view about when to get out, too.

And Frank Veneroso thinks that the gold price rise is at least partly owing to heavy speculative backing from funds that may have to get out in a hurry, if a general market drop forces them to realize assets to settle accounts.

My feeling? We dudes shouldn't try to outdraw seasoned hands.

Back to Eden

Capt. Samuel Wallis of HMS Dolphin being received by the Queen of Otaheite, July 1767

Can we make a paradise here, instead of looking for it in a different country?

Round and round

"from the Chrysopoeia ('Gold Making') of Cleopatra during the Alexandrian Period in Egypt. The enclosed words mean 'The All is One.'"

Here's a piece by Brian Pretti yesterday, on the Federal Reserve and its attempts to shore up the system with interest rate cuts.

His prose is a little sparky and luxuriant, but his point is that even though the official interest rate may drop, the lending market has become more bearish and there may be higher rates (or more stringent terms) for riskier loans. He feels that lending has not previously enjoyed the discipline of a proper open market, which is why pension funds ended up buying pigs in pokes (subprime packages dressed up as a form of reasonably secure bond).

But why is so much wealth tied up in housing, anyway? I've previously suggested that lenders like to put money into houses because they rise in value, yet that rise is mainly the result of increased lending. It's what looks like an infinite loop, but there are other factors involved, that will lead to braking and possible breakdown.

Over a long period, house prices have increased:

a) because wages tend to increase faster than RPI; but in a global economy, Western wages are stalling; and in an ageing population, social costs (and therefore taxes) are rising.

b) because, sometime after WWII, we moved from a pattern of one significant income earner per couple, to two, who could bid more as DINKYs (dual income, no kids yet); but unless we learn to live as threesomes (TRINKYs) or in larger communes (FAMILIES), this driver has gone as far as it can.

c) because interest rates fell a long way, so people could service much larger mortgages; but now interest rates can't go up much, without widespread repossessions and bankruptcies - of registered voters. And whenever things get difficult, the temptation will be to drop rates further, which expands the lending and ultimately tightens the noose.

d) because lenders got rich and reckless in the boom; they might have offloaded the loans, but they may still have to pay a price for their deceits.

Meanwhile, we have diverted money into real estate that should have been powering business: R&D, startups, expanding small firms. Instead, large concerns are wiping out their potential successors: shopkeepers' children are stacking shelves for hypermarkets.

Democracy is rooted in a degree of economic independence and social equality. In effect, by permitting excessive concentration of capital, we are in danger of enslaving the next generation: the first of the "mind-forged manacles" is the limiting of their aspirations.

That sinking feeling

It is now 100 days since July 6, our starting point for measuring the Dow's fall. Against gold, the decline is substantial.

What about currency risk? According to O&A historical figures (using interbank rates), the US dollar has declined against the British pound by only 0.8%; and against the Chinese yuan, only 1.2%. But in the same period, the dollar has lost over 4% against the Euro, and 4.3% against the Japanese yen. Annualised, that's a drop of about 15% per year in yen terms. (Which currency has Warren Buffett bought this year?)

Gold? Acording to the World Gold Council (WGC), in the twelve months to 26 September, the Eurozone has sold 475.75 tonnes. (This zone includes Sweden and Switzerland; the latter has disposed of 113 tonnes out of that total, or nearly 9% of its stock. How strong is the Swiss franc? Is sound money a bad idea?)

The WGC September account reports that the US still holds 8,133.5 tonnes of gold, exactly the same amount as reported for Q1 2005, two and a half years ago. Allegedly: never forget that "credit" is Latin for "he believes it."

But maybe that's so; maybe Uncle Sam has, er, requested that other countries reduce their bullion stock in order to, um, maintain price stability. After all, the dollar has fallen 13.4% against gold already.

The competitive struggle to lose currency value continues.

Peter Schiff grows

A short, cogent, scholarly essay by Peter Schiff in Financial Sense today, explaining why a falling dollar isn't a quick exit from America's economic problems.

As well a well-wrought urn becomes
The greatest ashes, as half-acre tombs.

How would money buy this?

http://janestreetclayworks.com/2011/02/15/preview-the-history-of-bricks/1925-drawing-to-raleigh/

Many a truth is spoken in jest: at his request, Herriman's ashes were scattered in Monument Valley, Utah. Here is his love, expressed in a backhanded way that reveals more than it conceals.

This week, again, I spent time with clients talking not about money and how to invest it, but about what they wanted from life. It's so easy to let your mind become trapped in attempts to beat the top score on the pinball machine.

The hard stuff

Richard Greene in Financial Sense on Wednesday paints a very worrying, but credible picture of accelerating financial instability and official attempts to disguise the crisis. He looks at the worst case, and says that nothing beats holding the bullion yourself:

In this scenario you don’t accept futures, you don’t accept ETFs, you don’t accept any paper promises; you only accept the real physical gold and silver in your possession. It may take more time for this to occur in the US, but overseas this IS occurring right now, particularly in the Far East and the Middle East. This is exactly what has been necessary to break the fraud and suppression of the gold and silver price that has kept them from reaching a fair free market value. It is happening as we speak...

...if defaults and bankruptcies became prevalent the banks could easily cancel your credit cards, not have any of your cash on hand, and deny you access to your own assets. We don’t expect this worst case scenario to play out soon but then again we find it incredible how few are prepared; and it is a substantial risk. So again to play it safe: have some of that green funny money on hand, definitely have some gold and silver, and have a nice stockpile of canned foods on hand to deal with unexpected emergencies. Do it now! If these things come to pass don’t be surprised to see gold moving up hundreds of dollars per day.

The red highlight is mine - I've suspected for some time that the gold price is being held down by undisclosed releases of bullion onto the market, by central banks.

Meanwhile, I'm interested to test sentiment about the markets - please see the poll on the sidebar and have a go.

Inflation, here we come

Jordan Roy-Byrne's article featured in Financial Sense last week examines various types of inflation and gives graphs, facts and his thoughts on future trends. He concludes:

It is my belief that the Fed's recent cut is the wake up call that will finally stimulate rising inflation expectations. Moreover, the public awakening towards inflation is coming at a time when monetary inflation, commodity inflation, currency inflation and wage inflation, already at significant highs, are set to rise even further.

He predicts a sharp acceleration when gold breaches $1,020 per ounce - itself a price level about 38% higher than today.

Although his remarks have most relevance for an American audience, it is worth remembering the recent Telegraph article (5th October) that forecast sterling dropping even faster than the dollar. Our determination to be as financially reckless as our Transatlantic cousins may result in our facing similar problems.

The good news? Our enormous holding of US Treasury stock may turn out to have been a reasonable investment, in sterling terms. The bad news? Perhaps we should have put that money into bonds denominated in a stronger currency. The Euro, maybe?

UK Inheritance Tax threshold unchanged

The Inheritance Tax announcement yesterday by "Chancellor" Darling is misleading. It has the flavour of a Gordon Brown dodge - hence my inverted commas.

The threshold per person remains at £300,000, as this article by Labour Home itself explains. What has changed is that the allowance is transferable on death, if you are married or in a civil partnership.

A similar effect would previously have been achieved by any competent solicitor, will writer or estate planner, by including a Nil Rate Band Will Trust in your Will. Similar, but not quite the same: the Nil Rate Band trust means giving assets away to a third party (not to one's partner) after the first death. Making the allowance transferable lets the surviving partner enjoy the use of assets worth up to £600,000, without the threat of estate tax afterwards.

This will reduce the amount of tax raised from IHT, since it helps those who a) haven't written the right kind of will/trust arrangement or b) couldn't do so because of the continuing needs of the surviving partner (who might, for example, be disabled or in a privately-paid nursing home).

But it's certainly not what it sounded like, which was an IHT allowance of £600,000 per person, or £1.2 million altogether.

Thanks to Dizzy Thinks and The Spectator Coffee House blog for the alerts.

Which will fall faster: the pound or the dollar?

An article in the Telegraph (referred to by today's Daily Reckoning) says that the pound sterling could drop about 14% against the dollar by 2009.

Which one is the basket case economy?

Nothin can go mwrong

A Krazy Kat cartoon, by George Herriman

A propos Britain's new electronic surveillance laws...

"How much money do we need?" revisited

The Daily Reckoning supports the drift of my question:

Our old pen-pal Jack Lessinger has a new book out: “Change.”

...His book outlines the development of the US property market over the past two centuries in terms of what he calls “paradigmatic economic changes.” He notes that the shrewd investor always had to stay ahead of the trend. That meant, looking beyond what the then-current paradigm to what people were likely to want in the future. Instead of investing in the old colonial regions along the East Coast, for example, an investor in the early 19 th century should have looked to the frontier. There, he would have found cheap land…and could have watched it soar for the next 50 years. He should have seen the huge development that would take place in Chicago and St. Louis, for example.

Later, after WWI, the landscape changed dramatically. New technology had created a new idea about how people should live – in the suburbs. For the next 50 years, fortunes could have been made simply by anticipating the growth of the suburbs – further and further out from the urban centres.

Our consumer economy did not exist before 1900, says Lessinger. Since then, it has grown and grown – “Sexy young women, smiling from the billboards , urging strait-laced and penny-pinching citizens to save less and spend more. Buy, buy , buy screamed the advertisers. Buy Coca Cola and be happy. Buy Dentine gum and be kissable. Buy Camels and be manly. The consumer economy blossomed. Houses grew bigger and more lavish, cars roomier, faster and more comfortable. What a great time to be alive!”

But buy, buy, buy is going bye-bye, says Jack. The consumer economy is unsustainable. People don’t have the money for it. It is based on cheap energy and cheap credit, both of which are running out. He thinks it will disappear by 2020.

“Get ready for an existential leap…” he warns.

The next Big Thing in American society will be a huge interest in downscaling, downshifting, and simplifying. When the baby boomers realise that their houses won’t allow them to Live Large, says another friend, they’ll begin to appreciate Living Small.

Jack comes at the subject from a different direction than we would, but his book made us think. You can find out more at jacklessinger.com.

I've been thinking how to "get out from under" for a long time. Maybe I'd better act before it becomes the fashion. Jim Puplava thinks the Fed has just bought us another two years, at a cost - to those who stay on too long.

Besides, I like beer and darts.

Secret taxation

This is a payslip for a supply teacher, showing income and deductions. On an emergency tax coding, tax is levied at basic rate (22%) on all earnings after pension contributions have been made. National Insurance is paid at the reduced rate of 9.4%, because the teacher is in his/her occupational pension. Total tax and NI: £399.61 / £1,472.20 gross pay = 27.14%.

Oh no, it isn't.

The tax that dare not speak its name is employer's National Insurance, which would be around £93.37. It's an extra cost that the employee never sees, but it's money that could be paid in wages if it were not deducted at source. Therefore, the gross (pre all stoppages) pay is higher than shown, and so are the deductions.

So why don't we see payslips that tell the whole story, say something like this? ...

The reason is obvious, isn't it? Especially when you show the appropriate marginal rate.

And if this was a payslip for someone not in an occupational pension, the marginal rate of N.I. would be 11% for the employee, and 12.8% for the employer. In other words, £100 extra payslip-declared salary would actually cost the employer a total of £112.80, with marginal-rate deductions of £22 in income tax and £23.80 in N.I. ! In that case, the real effective marginal rate of revenue-raising would be 45.80/112.80, or 40.6%.

The average wage earner is, in fact, a 40% taxpayer, without knowing it.

Is it illegal to show the truth on your employees' wage slips? Don't you think it would make the ordinary person start to take the taxation issue seriously?

Gold price manipulation: Mylchreet backs Veneroso

I've previously noted Frank Veneroso's theory that central banks have been offloading gold to keep its price down, a ploy that obviously cannot work forever. Now here's Paul Mylchreet saying the same thing:

"Central banks have 10-15,000 tonnes of gold less than their officially reported reserves of 31,000" the Chevreux report announced. "This gold has been lent to bullion banks and their counterparties and has already been sold for jewelry, etc. Non-gold producers account for most [of the borrowing] and may be unable to cover shorts without causing a spike in the gold price."

In other words, "covert selling (via central bank lending) has artificially depressed the gold price for a decade [and a] strongly rising Gold Price could have severe consequences for US monetary policy and the US Dollar."

The conclusion? "Start hoarding," said Paul Mylchreet...

The United States Federal Reserve: why the secrecy?

Two most interesting blog articles by the jokily-pseudonym-ed "Lord Higham-Johnson".

The posts themselves are far from jocular and those who may be tempted to dismiss them as conspiracy theorising must still recognise that there is nevertheless a case, of sorts, to answer; or at least, the scent of a story for the financial bloodhounds.

The first, from March this year, looks at the process by which the Federal Reserve came to be proposed, named and brought into being.

The second, today's, is a restrained fisking of an attempt by a teacher of economics to discount conspiracy theory in relation to "the Fed".

Lasting Power of Attorney: the next step in the Long March

The great day has arrived. The Mental Capacity Act 2005 is now in effect.

Though I'm not sure how many people who take out an LPA are aware that the withdrawal of "treatment" includes denying water, so patients in hospital can be made to die slowly of thirst ("Since a landmark House of Lords judgment in 1993, providing food and water to those who cannot eat or drink for themselves counts as treatment as well."). And no-one can be certain what is felt by someone who is apparently in a coma.

Doesn't this conflict with the Hippocratic Oath?

What oath? Wikipedia says:

In the 1970s, cultural and social forces induced many American medical schools to abandon the Hippocratic Oath as part of graduation ceremonies, usually substituting a version modified to something considered more politically up to date, or an alternate pledge like the Oath or Prayer of Maimonides.

A Catholic scholar details the Oath and its history here.

The Act is here; the government's own take on it is here.

We seem to be approaching a time when anybody except a criminal may be lawfully killed.

Is that charitable trust trustworthy?

I have received another charity mailing, this time from the World Children's Fund. There's so many that I feel guilt at not being able to give to all. And aren't they well-presented these days?

But there's something about the name of this one - similar to other charities somehow. So I google it. Page after page on Google, each leading you directly to their site.

But now for blogpower! I look to see what my fellow bloggers say. Here's one, and it's most interesting. I say no more, since I have no money to fight in court.

I shall now add Elmer to my links, and the US charity evaluation site, Charity Navigator.

Another case where bloggers have proved to be useful, I would say.

How much money do we need?

By W A Sillince (1906-1974)

I'll remove this if someone representing the now-defunct "Punch" insists, but it's so wise and truthful that I think Sillince's work should be more widely known.

The mortgage conundrum

Much of the nation's wealth seems to be tied up in our houses, which don't appear to be very productive from an economic standpoint. There is a kind of circular logic:

1. Houses cost a lot, so you have to borrow a great deal of money to buy a house.

2. Houses cost a lot, because you can borrow a great deal of money to buy a house.

Having regard for the wider consequences of your proposals, what is the optimum solution?

Thrift and Prudence: essay competition

Cartoon by Charles Keene (1823-1891) in "Punch" magazine

Contrary to Mr Gordon Brown's claim to be prudent, many believe that the British Government (as well as that of the USA) wastes public money. One such critic is "Wat Tyler" in the British blog, Burning Our Money.

What if the people we criticise said, put up or shut up?

So, if you want better value for money in public finance, how would you get it? How would you achieve the same results for less money, or how would you improve quality without increasing expenditure?

If you wish to submit a longer piece, please submit your email in the comments - I shall then add you as an author to this blog pro tem (but will keep your email address off the blog unless you wish it to be published).

Off theme

Dow 9,000 update

July 6 to present: Dow up from 13,611.69 to 13,895.63; gold up from $647.75/oz. to $743.10. So the "gold-priced Dow" is down 11.01% in 84 days.

Annualised equivalent: gold increasing by c. 82% p.a., "gold-priced Dow" falling 40% over a year. Will these trends continue?

Faber: bubble in commodities, but buy gold

Marc Faber in ABC News, Tuesday:

Very simply, it will end in a catastrophe. We never had, in the history of capitalism, a global, synchronised, boom. If you travel around the world, everywhere you go, there are booming conditions.

Now if you look at the last 200 years of financial history, you had investment booms and mania in relatively small sectors in the economy: in the US in canals and railroad in the 19th century, some regional real estate markets. And then in the 1920s you had the stockmarket boom, and in the late 80s you have a silver, gold and energy share boom, and in the year 2000 we had a boom in tech stocks and in Japan in the 80s in Japanese shares. And each time these bubbles burst, they had an impact but the impact was largely sectorial or regional and not affecting the whole world.

Now, we have a bubble everywhere. We have a bubble in real estate prices, we have a bubble in stock, we have a bubble in art prices, we have a bubble in commodities.bigger the bubble, the bigger the bang will be. If someone argues we're in a global synchronised boom, I agree entirely. The consequence will be that the next boss will be a global synchronised boss.

By the way, I like that mistranscription, it conveys his Europeanness.

The southern Germans are comfortable with the themes of pain and loss, as you'll know if you've looked at the Meglinger painting on Dr Faber's GloomBoomDoom site. D.H. Lawrence wrote of the sensual agony in the little roadside shrines in interwar Bavaria. This is not simple morbidity - unlike modern crime/action films - but a sign that you can rise above suffering, instead of avoiding it.

A Viennese taxi driver explained to us the difference between Austrians and northern Germans: "They say, it's bad, but it's not hopeless; we say, it's hopeless, but it's not so bad."

Back to our muttons. Here he is again, quoted from various sources via Resourcexinvestor:

"Investors have to look for assets which cannot multiply as fast as the pace at which the Fed prints money."

... He advised buying gold to defend against monetary inflation... he recommends holding physical gold bullion investments in gold-friendly countries such as Hong Kong, India and Switzerland. He counsels against holding gold in the US for fear that it might be nationalized by the government.

Crescendo crisis

Today's Daily Reckoning UK directs us to this article on FT.com, which says that sovereign wealth funds will support (if not boost) share prices in a "crescendo of investing".

Bully for the fund managers. But I say again, consider the implications for the West, which is losing control of its debt and now looks set to start losing control of its assets.

Frank Veneroso elaborates on the gold bubble

I am impressed by the courtesy of important people.

After reporting on his April 2007 presentation to World Bank people (see yesterday's post, "Gold bubble"), I emailed Frank Veneroso, and have received a reply from him today. I wanted to follow up on his essay of May 2001. Here's what I asked:

In 2001, you wrote a very intriguing article, posted on GATA, theorising that central banks actually hold much less physical gold than they pretend, because of loan-outs and possibly surreptitious selling. If I may, I should like to ask a few questions:

1. Are you still of that opinion?
2. What do you think is the present situation regarding gold holdings by central banks?
3. What evidence do we now have?

Here is his reply:

That was my opinion. It still is. However I gave ranges regarding that amount. I now believe that central bank loan outs and undisclosed sales were at the low end of my expectations. Why? I have no direct evidence. My evidence is the following.

I believe that we are near the end of a commodity bubble that is the largest in all history. The greatest extreme is in metals. Hedge funds have accumulated futures, forwards and physical on a scale that simply has no precedent. The greatest excesses are in base metals but these same funds all hold large gold positions. I believe that individual funds may hold positions in copper or gold that are as large in value as the ETF. I know that sounds unbelievable. But I have a great deal of evidence.

If this is so, the price of gold should be much higher. My only explanation for why it is not is that central bank holdings must be very large for this to happen.

I should add, I believe there will be a coming crash in the metals sector that will surface. There will be an unprecedented investor revulsion toward this sector.

Gold’s fundamentals are totally different from those of base metals and silver. However, because the same funds also hold gold, I cannot see how gold can escape forced liquidations from these portfolios.

Mr Veneroso has kindly given his permission to publish the above comments.

From the prospectus for a conference in New Orleans in 2006:

Frank Veneroso — Perhaps the most highly regarded market economist of our time, Frank Veneroso has advised countless governments, as well as the World Bank, on economic policy, served as a senior partner in one of the world's largest hedge funds, and is a confidant and private advisor to many of today's most influential investors and economic leaders.

He was among only a handful of analysts who clearly predicted the Tech Wreck, and followed it up with a deadly-accurate forecast of today's gold bull market.

Now, Mr. Veneroso is stunning the world with predictions of a major train wreck in no less than two high-flying sectors of the global economy. Virtually no one is expecting these dramatic events...

Red Dragon, White Collar

Just a few tasters of the emerging advertising and media class in China:

http://www.apmforum.com/columns/china20.htm
http://www.danwei.org/
http://www.china-britain.org/

Stay here and go East

In today's Daily Reckoning Australia, Bill Bonner is at a conference and hears that while the US may languish, some US companies may thrive:

Whole new industries are waking up to a New China, with a middle class...and millions of rich people too... We spoke to a young man here who believes that the key to making money in large US companies actually lies in Asia.

"US companies aren't going to make much money by selling more product to Americans. Americans don't have any money... A company with a good product - especially a good brand - can make a lot of money now by doing two things. One is lowering its costs by outsourcing labour to Asia...not just manufacturing, but even high-level things like design, research, marketing, legal work. The other thing it has to do is to sell its products to this huge rising market of the Asian middle class.

"If it does these two things, it will have lower costs and higher revenues. If it doesn't do these two things, it will be stuck with high costs...and a stagnant market - at best. Actually, as the housing problem deepens in the United States, you'd expect domestic sales to fall."

He's probably right. While the average American will probably grow poorer - in both relative and absolute terms - many US companies will probably do quite well. Many already are.

I've suggested before now, that the white-collar people here are next in the firing line. Those mushrooming Third World (first-class) universities aren't just turning out engineering graduates. James Kynge pointed out that maybe 85% of the end-price of our Chinese imports is added on by sales and marketing. There's a strong incentive for developing Madison Avenue East. Not to mention Great Wall Street.

The good news for investors is that you may be able to make some money stock-picking the right Western companies, where access to shares is easier, accounts are not quite so dodgy, the government doesn't generally have its hand up the corporate puppet, and even governments have (to some degree) to obey the law and respect private property.

Returning to the gold-bubble question, Bill repeats the argument that gold is a haven in a storm, and mooring is getting cheaper:

There are times when the investing world becomes so dangerous that the most likely rate of return for the average investor will be negative. That is a good time to hold gold; your rate of return will almost certainly be better than actually investing! Gold is a hedge against the unknown... But like any insurance, it costs money. When you hold gold, you give up the yield you would otherwise get from stock dividends or bond coupons. Now that Bernanke has cut short-term rates, the cost of holding gold has gone down.

Is now the time to buy gold? The money supply in the United States is rising at a rate nearly five times the growth of the economy itself. The Fed, claiming that inflation is now under control, has just cut the price of credit to member banks by half a percentage point. The economic explorer has to rub his eyes and look twice; he can't quite believe it. How can inflation be under control when prices for key commodities - notably the keyest commodity, oil - are at record levels? He doesn't have an answer, but he can put two and two together. Whatever kind of 'flation' the Fed has been cooking up, we're going to get more of it. So put on your best bib and tucker, dear reader.

Golden bubble

A bubble shot through by a bullet - experiment described here

Here's a counter-blast to gold-bugs and fans of other metals:

In this long and dense presentation to the World Bank, delivered in April 2007 and revised/updated in July, Frank Veneroso says that commodities, including gold, nickel and copper, are already in a big bubble. He thinks an estimated $2 trillion in hedge funds, plus leveraging, is pumping the prices:

When it comes to metals, we see hedge fund speculation, hoarding and squeezing everywhere. Not only have some metals markets been driven far, far higher in this cycle compared to all past cycles; we see the same phenomenon across all metals. It is the combination of both the amplitude and breadth of the metals bubble that probably makes it the biggest speculation to the point of manipulation in the history of commodities. (Page 50)

Short runs costs have risen, but not long run costs. New sources are being exploited. And if recession hits, demand will drop:

... the historical pattern... for all commodities, suggests that, rather than seeing well above trend metals demand growth in the years to come as the consensus now projects, we are more likely to see outright declines in global demand for these metals as demand destruction takes hold. (Page 56)

For institutional investors, the "barren breed of metal" is unproductive compared to other assets:

... it is likely that the net nominal return to portfolios from investing in physical “stuff” has not been more than 1% per annum. By contrast, in a 3% inflation environment, bonds have yielded somewhere between 5% and 9% and equities have yielded somewhere between 8% and 11%. In effect, you gave up an immense amount of yield if you diversified out of bonds and stocks into commodities. You did gain by reducing overall portfolio volatility, but that gain was not large enough to offset the loss in yield. Diversifying with “stuff” did not enhance risk-adjusted returns. (Page 57)

So prices have been boosted by the futures market. And commodities as a market are small enough to be susceptible to "manipulation and collusion".

Readers of this blog will recall that Marc Faber recently said he saw bubbles everywhere, including commodities. Even if cash isn't king, it may be a pretender to the throne.

Slow down - credit crunch at work?

Eric Fry, in today's Daily Reckoning Australia, shows that substantial tightening in the credit market has already started.

The big picture (as I see it)

Home economics: making a mint

Most of the people now managing our money - the money that we plan to retire on - are too young to remember the financial world of the 1970s. This hampers their judgement, and a debacle like subprime lending shows how they have underestimated both the likelihood and the impact of Black Swan events.

In one of George Goodman's books, the financial journalist author (aka "Adam Smith") is shown round a dealer's office by a friend, and the young people are all chirping away optimistically about how they're going to make fortunes for the company in this or that opportunity. His friend turns to him and smiles ironically. "See what I mean? Kids!" Of course, in a rising market you want optimists: the scarred old bears will tend to hang back and miss out on the bonanza. Which is why Adam Smith's friend was employing kids.

But the tide is turning.

I called it far too early (but how was I to know that governments would lose their sanity and print money as fast as their presses would work?). Here's what I wrote to a client on 21st October 1999:

As you are now around three years off the maturity date of your personal pension with XXX Life, you should be considering the security of your fund.

I went to a very interesting investment seminar yesterday, at which it was said that the American stockmarket could be as much as 50% too high, and a correction is overdue. It has already slid 20% off its highest point, by degrees, but a bigger drop could happen. If and when it does, this would have consequences for other markets around the world, since the US is the biggest stockmarket of all.

As you know, the XXX Fund is designed specifically as a safe haven for your investment in uncertain times, and I enclose a form for you to sign and forward to XXX Life, if you agree with my suggestion.

To those in the know, the crash of 2000 was not a surprise. What was your adviser telling you then? Yet the tone of that seminar was upbeat - the market's overpriced, so what?

If governments had maintained financial integrity, then following the mad tech boom, the Great Correction would have started in 2000 and the cleansing and healing process would be well under way. Instead, our politicians chose inflation.

If you were earning money in the mid-70s, you'll know what runaway inflation is like. To counter it, we had financially-motivated strikes: strikes for more money to restore real incomes, strikes to maintain pay differentials between different categories of worker, and strikes for pay parity by those who were left behind. Then settlement, paid for by inflating the currency further. Then more price inflation, and more strikes.

In the new globalized economy, strikes aren't going to work. Here in the UK (and Alan Greenspan has recently advocated the same), we simply allow the import of lots of poor people to undercut our indigenous skilled and semi-skilled workers. This keeps down wage rates and improves productivity. But it also earns little tax/National Insurance, and builds up massive obligations for Health, Education and Welfare (present, for those undercut; future, for all).

For a former Chancellor of the Exchequer keen on off-book financing, it's not a big issue: let the future take care of itself. For most of us, who have to move into the future without a bomb-proof PM's pension and lifelong special police protection, those debts will come home to roost.

I've often wondered how middle-class Germans coped when their money was wiped out by hyperinflation; and how the Russians on State pensions survived in the hinterlands, after the economy collapsed some years ago. Today I read (UK's "Mail on Sunday", page 31) an account by one of the few remaining whites in Robert Mugabe's Zimbabwe:

"The professional generation before me, the doctors and lawyers and the engineers who built Zimbabwe, are all starving to death on their pensions." (If you want to help them, please contact ZANE - they're on the Web. And there's millions of black Zimbabweans who are even worse off.)

But it's to the Sunday Express I have to turn, to get a serious warning about inflation for ourselves. Geraint Jones (page 10) notes that China is hinting at dumping the dollar wholesale; Saudi Arabia has refused to follow the Federal Reserve's interest rate cut; China and India are emerging as this century's budding supereconomies; oil's going up; food is getting pricier; the subprime disaster hasn't finished; mortgages are costing more.

The Express' Financial section wants to lock the stable door after the horse has bolted - much good a reformed Bank of England will do us now. Back in the main paper, Jimmy Young supports the suggestion that UK savers should be given guarantees for the first £100,000 of their deposits - again, too late: it's inflation guarantees we need - in the Germany of late 1923, 100,000 marks wouldn't get you a postage stamp.

The American Jim Puplava, on his excellent Financial Sense Newshour, thinks the latest desperate reflation will buy us a couple of years.

Use them.