*** FUTURE POSTS WILL ALSO APPEAR AT 'NOW AND NEXT' : https://rolfnorfolk.substack.com
Sunday, May 10, 2009
The Revolution is beginning
It is now not only the Government that has ceased to deserve our trust. So many members of the House of Commons have disgraced themselves so completely that their right to make laws for the rest of us has evaporated.
Read the rest of this extraordinary attack on our corrupted Parliament and broken democracy, in the Mail on Sunday here. The blogger-whingeing has now gone mainstream.
Saturday, May 09, 2009
The gold bugs are chittering - but don't get over-excited
Jeff Clark at Casey Research (htp: The Mogambo Guru) plays with the numbers to estimate gold's potential.
One stat is created from a comparison of all the world's cash with all the world's gold: "Total central banks reserves (including gold holdings) = $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all official institutions that issue currency = $5,246 gold price." Or about £3,500 per ounce.
HOWEVER: the World Gold Council estimates that all the gold ever mined to the end of 2006 is about 158,000 tonnes, or 5,079.7 million ounces. If we round down to 5 billion ounces (to allow for some permanent loss, but offset to some extent by new mining - esp. in China - since 2006) we get a gold price of $960 per ounce - not far off where we are today. Allow a bit of cash held outside banks, and gold would be worth - what? $1,000? $1,200?
Yes, there may be a spike like in 1980 - and there may not be. But speculation/panic aside, it would seem that, globally, the current gold-to-money ratio is not quite so wrong as might seem at first sight. So the story is not really about gold, but about the weakness of the dollar in a heavily unbalanced US economy. Priced in a different, stronger currency, gold may not zoom to the moon.
Wednesday, May 06, 2009
Gold, and theft by inflation
Smith's take is that "the speculative mania in housing was fundamentally a tragic last-gasp effort to make up lost ground via speculation in housing". And if housing reverts to mean, it has a long, long way to go yet.
Friday, May 01, 2009
Is it worth a shot?
By contrast, our modern elite have often never generated anything. I believe that is why they find it so easy to destroy things that they don't understand (which is a long list).
Petty officials in Brussels attack the British banger and English chocolate, not by relevant measures such as taste or safety, but using purely arbitrary scales.
In Britain, the well-educated New Labour, demonstrating their reverse snobbery, diminish the Peerage, and complete the destruction of a once-great educational system.
In the US, we have the legions of draft-dodgers who steer high-ticket military contracts to their friends, while our exhausted troops salvage from junk yards. The managers, accountants and lawyers have brought our economy to its elbows by equating the movement of wealth with its generation. Our fragile education system is battered by consultants and administrators who confuse good grades with competent teaching and actual learning.
Perhaps some of this could be improved by adapting some of the Japanese model, where management trainees first must try every job on the shop floor?
Wednesday, April 29, 2009
My pay/pension's inflation-protected, so I'll be all right... won't I?
It's us or Them - and inflation's coming
A self-deprecating blogger styled "The Anecdotal Economist" suggests a fight back in the form of switching your savings and borrowings away from these enemies of the people.
htp: Jesse, who has joined the Angry Brigade and whose regularly changed sidebar links for reading ("Matière à Réflexion") are a treasure trove.
Meanwhile, John Williams of Shadowstats says:
We will see inflation levels not seen in our lifetime by as early as the end of this year. Eventually we will see liabilities of $65 trillion – more than four times U.S. GDP, more than global GDP. There will be a hyper inflation where the dollar becomes worthless, where the paper is worth more as wall paper than as currency.
htp: Michael Panzner, who also is a great pre-reader for us. Michael says he's switched swides to the inflation believers, but he's too modest - he himself predicted deflation followed by inflation in "Financial Armageddon".
Saturday, April 25, 2009
Deflation? You're joking!
I still think we're in a sort of re-run of the 70s. Cash will be forced out of accounts and into the market, where it will still lose value, but nothing like as badly as if left rotting in banks and building societies. The Great Theft is on its way.
If you follow Marc Faber, you'll know that he's currently suggesting holding half your wad as cash, since the bubble hasn't really burst yet; but other than that, he's thinking 10% gold and 40% in a combination of resource and emerging market stocks.
The world's average per capita income is $8k - $9k; as globalisation continues the levelling-out process, the East will never be as rich as we once were, but they'll be less poor. For us, on the other hand, this may be the last chance to put something away for our future.
Friday, April 24, 2009
Life goes on!
Wednesday, April 22, 2009
'Swhat I think...
- Jesse
But before then, I think we have a date with Mr Stockmarket Crunch. I just don't know when that date is.
Tuesday, April 21, 2009
Time for a Little Socialism?
In support of that argument, the often-quoted figure is that the top 10% of earners pay 40% of the taxes. That sounds unfair, doesn't it?
According to the IRS, in 2005, the top 10% of earners had 48.5% of the income. The top 1% had 21% of all income.
In other words, the top 10% earned about 8.5 times the average of the bottom 90%, the top 1% earned 26.3 times the average of the other 99%.
In addition, when calculating the taxes per dollar earned, using the conservatives' own figures, the lower 90% pays at a rate which is 1.4 times that of the top 10%.
Still not the truth
"... when FASB suspended mark-to-market accounting rules recently, major international banks were allowed to re-value some of their derivative products closer to their notional value on their books to pad their balance sheets. Due to this change in accounting law, I can almost guarantee you that before market open Friday, Citigroup will announce better than expected financial results as they carried huge amounts of illiquid mortgages and financial derivatives on their balance sheets."
I fear that many major banks may be thoroughly ruined, and until the lying stops, effective action cannot be taken.
Monday, April 20, 2009
Straws in the wind, the flight of birds
Sunday, April 19, 2009
The deflationary bust
Professor Antal E. Fekete revisits his deflationary theory: we have passed a crucial point in debt accumulation. From now (actually, from 2006, he says) onward, the more politicians attempt to stimulate it with debt, the faster the economy will shrink. Gold, the machine's "governor" that set limits to debt, was decoupled from the system a century ago - it got in the way of war financing.
Stephen Tetreault says if there's a rise in stocks, sell: "I do not see a positive bullish catalyst in the making as we head into the earnings sector other than a potential short squeeze, relief rally that should which should be sold into." He notes that deflation means those that can, are paying down debt, but also lenders are widening the margins between the interest they pay and the interest they charge, which gives further impetus to deflation.
Tony Allison says, sooner or later energy is going to cost more. He's thinking about the right point to speculate, the rest of us should consider the effect of higher energy costs on family budgets, and therefore on how reduced disposable income will be allocated.
Captain Hook foresees a time when "the public finally gives up the ghost on stocks in general, correspondingly they will fully embrace the likelihood of deflation, which will trigger a temporary collapse in commodity prices, led by their paper representations." He thinks this will be the time when physical gold will win; I wonder whether that is so, when most of us are so dependent on an electronic system. We're not farmers, selling corn and cattle to each other; the machine cannot be allowed to stop. That's why I think there will be, for a time, a switch to currency inflation; then perhaps a rerun of the early Eighties, as someone public-spirited in public life takes unpopular action to prevent the dive into the abyss.
For E. M. Forster's extraordinarily accurate vision of the future, written in 1909, please click the last link above. Telephone, TV, a populace paralysed by lethargy and wealth in its bedrooms...
How much is left in the banking system?
This information is a year out of date - more, in the case of credit unions. I wonder where we are now? Ambrose Evans-Pritchard reports that US housing has dropped 29% from peak. Is the system, as some say, basically bust?
Kill the old
Now the FT comments on how longevity (plus the old's passion for killing the unborn and preventing conception) is going to ruin us. We think the young are selfish, and don't dare glance at their elders, who imagine they can quit their jobs in the prime of life and live like kings on the backs of their progeny and remoter descendants - or such few of them as the old permit to survive.
As Mark Steyn puts it:
“Over the next decade,” Frau Merkel pointed out, “we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America.”
Translation: America can rack up multi-trillion-dollar deficits and stick it to its kids and grandkids. But in Europe there are no kids and grandkids to stick it to—just upside- down family trees: in Germany, Spain and Italy, four grandparents have two children have one grandchild. The Financial Times noted last week that the demographic death spiral is a far greater threat to fiscal solvency than the present economic downturn. And yet, despite Germany, Japan and Russia already being in net population decline, the G20 had not a word to say about it.
That bill's going to come in, and Herod himself can't prevent it. In fact, he caused it.
The market is going to tank
But I read this piece in the Grumbler.
Picture it. You are a rich broker - floated your company in May 2007 (how's that for timing?). Predicting good times ahead, you... sell £47m of your shares.
You say it's for "private projects", and throw the Mail journalist a tidbit about your beloved foopball club. The Mail journalist writing down your copy at least thinks to ask you how much of this cash will go towards the new stadium. You "decline to say".
Meanwhile, Charles Hugh Smith describes (April 18) the thinking that has led him to punt on a financial bear fund.
Straws in the wind, I'm thinking.
Wednesday, April 15, 2009
Will we ever learn?
The technology that enables 7 billion of us to survive, and provides creature comforts to those in the industrialized world, is due to a tiny percentage of talented and creative scientists, together with a core of engineers who adapted and refined the results, and a larger number who actually produce the products that we use.
Despite that, I am hard-pressed to find a society anywhere that gives those people the level of respect or adulation awarded to sports figures and entertainment personalities. The monetary rewards are far less than for the average investment or insurance agent, lawyer, accountant, or medical doctor.
In the extremist Muslim world, much of science is decried as 'anti-Islam'. Evolution, physics, and geology are under attack in at least 37 US states by creationists. Much of science is also discounted by the New Age thinkers, who don't like facts to get in the way of their own comfortable beliefs.
Yet our leaders believe that the answer to our economic meltdown is to throw money at the people who caused the crisis, and who produce nothing at all. Even at universities, where some rational thinking should be expected, the sciences are de-emphasized, since they are 'hard' and unpopular, while we build programs in psychology and business management.
Without a cultural change in these attitudes, I am fearful that we may see the end of technological civilization within a few generations.
Monday, April 13, 2009
Protecting against inflation
How do we protect our little wealth against inflation? The gold bugs still enthuse, and it's true that if you'd sold the Dow and bought gold at the start of 2000, and bought back into the Dow now, you'd have multiplied your investment by 5:
But looking at the historical relationship between the Dow and gold, it seems the Dow is already below par.
When Nixon closed the "gold window" (15 August 1971), gold ceased to be a currency backing and became just another thing you could choose to invest in, so let's compare these assets from a little before that turning-point, onwards:
The gold-priced Dow is now well below average. So what are we to make of (I think) Marc Faber's recently-expressed view that an ounce of gold will buy the Dow?
That depends on whether you read this as a statement about gold, or about the Dow. I looked at the Dow in inflation (CPI) terms a while back (December 2008):
If we are in a downwave, then the Dow's bottom is still a lot lower than where it stands now. Extrapolation is always risky, but my curve indicates maybe 4,000 points as its destination. Having said that, the highs of the years 2000 and 2007 are so much higher than might have been extrapolated, that maybe the low will be correspondingly lower. A real pessimist might argue that, adjusted for inflation, the Dow might test 1,000 or 2,000 points sometime in the next few years.
Back to gold-pricing: it's also notable that the Dow is currently still worth some 8 ounces of gold, but in previous lows (Feb. 1933, March 1980) fell below 2 ounces:
So should we still pile into gold, as a hedge against the further collapse of the Dow?
I think not. Firstly, the Dow may well have a rally, since it's fallen so sharply in such a short time. And secondly, this is missing the point, which is that we are looking to protect wealth against inflation, not against the Dow.
So another question is, how does gold hold its value during periods of price inflation? A period some readers may have lived through, is that after the oil price hike of October 1973. Here is what happened in the 5 years from 1974 to 1978:
True, the Dow merely held its value over that time (though it also made some sharp gains and losses) - but gold disappointed. I think this may be because, when prices are roaring up, people start looking for a yield, which of course the inert metal cannot provide.Before we start blaming the "G-dd-mn A-rabs" for inflation, let's remember the inadequately-reported fact that monetary inflation was roaring for several years beforehand. The OPEC price rise was a reaction intended to protect the Saudis' (and others') main asset - and you'd have done the same. Yes, it happened suddenly, but like an earthquake, it merely released long-pent-up stresses. Instead, let's blame a goverment that failed to control its finances generally, and spent far too much on war - a retro theme back in vogue today, it seems.
Looking at it from an investor's point of view, once the preceding monetary trend was identifiable, going overweight in gold in the early 70s would have been a sensible precaution.
So I suggest that gold's value as an inflation hedge is for those who anticipate well in advance. And this may be the lesson to draw in relation to the present time:
The inflation protection has already been built-in, for those who bought gold at the right time. The rest of us should note that gold is now above the long-term post-1971 trend:
There may indeed be a spike, as in 1980 - but that's for speculators. For the average person, who wants a "fire-and-forget" longer-term investment, I can't say gold looks like a bargain now.
Nor would I be that keen to get into the stockmarket, unless you're a day-trader. Some may make a killing in the present turbulence, but many will get killed. I'm still looking for that Dow-4,000 moment, and as I explained above, even then it's possible I may lose 50% - 75% in the short-to-medium term.
What else?
Houses? Still too pricey, in relation to average income. Yes, some houses are now selling - it's a thriving auction business at the moment, I understand. But again, housing is above trend.
Bonds? No, indeed. Municipal bonds in the US are offering high yields, for a very good reason; and even national bonds are a worry. The debt has not been squeezed out of the system, since our cowardly politicians have absorbed it into the public finances instead.
Here in the UK, we have National Savings & Investments Index-Linked Savings Certificates (3- and 5-year terms). Between them, a couple could get £60,000 into that haven, and not many of us have that much. I'm not sure about the rules and limits for US equivalent (TIPS), but the general argument applies. Yes, there is the question of how the government will choose to define inflation, but I don't suppose the definition will get too Mickey-Mouse.
Besides, doubtless you'll keep some cash for emergencies (including sudden bank closures), and for bargains (e.g. looking for distressed sales).
And if you've got lots more cash than the rest of us, congratulations, since the rich will get substantially richer. There's no being wealthy like being wealthy in a poor country, or one that's getting poorer. Watch that Gini Index rise.
Sunday, April 12, 2009
Conspiracy Theory
Has Guido been used?
Saturday, April 11, 2009
Straws in the wind
If you follow Cranmer, or Wat Tyler, or Jesse, or even the usually half-clowning Mogambo Guru, you'll see what I mean. Even mainstream journalists like Max Hastings and William Rees-Mogg have adopted language and ideas I would not have expected from them.
I can understand why it's happening, but this does not bode well.
O Freunde, nicht diese Töne!
Sondern lasst uns angenehmere anstimmen
Und freudenvollere!
Alle aussteigen!, Part Two
Friday, April 10, 2009
Gold and the Dow
As of 1st April, it was the equivalent of 8.4 ounces. So although gold has risen substantially since the 2000 watershed, one could argue that either gold still has a long way to rise, or the Dow a long way to fall, before the next bottoming-out.
More on bonds, and an alternative view
Prepare for a bond rout
(Highlight mine.) Read the rest of Peter Schiff's interview with Marc Faber here.
PS: Faber indicates something like the following portfolio to Schiff:
Commodities (e.g. oil, agriculture): 20%
Emerging markets: 10% - 20%
Gold (in physical form): 10%
Cash (the US dollar, for now): 50%
Thursday, April 09, 2009
Thirty years on
1979: Blair Peach
When Britain turns to Fascist methods, it employs them totally incompetently. And this is the Left at work, too; we are led by people who themselves were on the picket line and putting the "chicks up front" so the "pigs" couldn't clobber the guys.
Sunday, April 05, 2009
Interlude
The truth will out: it WAS fraud
Worse, the regulators didn't even start to investigate until the crash, whereas in the S&L crisis they were making preparations even while the lenders were boasting of record profits.
Black says the current mess is at least 100 times worse than the S&L debacle. In his view, Bernard Madoff is a mere "piker", not even in the first rank of the fraudsters responsible for all this.
(htp: Michael Panzner)
Saturday, April 04, 2009
Divination by horses
Well, I backed Golden Flight and down it went at the first fence - though the name is Delphic: will gold flee or take wing? For adherents of cash, Offshore Account stayed the course, but lost ground as the pace picked up, miming the effect of inflation.
On a political note, I was pleased that Eurotrek failed to complete. And we bloggers should not have been surprised to see Fleet Street unseated.
The winner, against all expectation, was Mon Mome (= "my kid"), perhaps a sign that we should be thinking of the next generation, as skewed demographics meets declining GDP. The trainer, Venetia Williams, was sporting a striking golden coat...
Who ruins Britain?
Take store group Arcadia, for example. In the year 2000, it was acquired by Stuart Rose, at which time it had a turnover of £2.5 billion, debts £250 million and a market capital value somewhere around £100 million. "The business was viewed as dead meat when he arrived." Two years later, the turnover was down to £2 billion, but all the debt was cleared and the group was making an annual profit of £106 million.
Rose then sold out to Philip Green for a reported £850 million (Peston says £775 million), of which Green's personal investment was only £9.2 million.
In 2005/2006, Arcadia's sales were down to £1.8 billion, but profits had risen to £300 million, according to Peston. Green then made it declare a £1.3 billion dividend, £1.2 billion of which went to his wife - who by then was, technically, domiciled in tax-free Monaco. This record-breaking payout was funded by bank loans to Arcadia totalling £1.35 billion, with the result that the group's net asset position went from plus £303 million (in August 2004) way into the red - minus £807 million. You'll see that the dividend accounted for the decline in Arcadia's net worth, and more besides.
Stuart Rose is like a man who buys a sick donkey, nurses it back to health and sells it at a profit. Green appears to me like the new owner who nurtures it further, then suddenly puts back-breaking quantities of heavy stone in its panniers and wanders off on other business, whistling merrily while the poor, over-laden beast staggers behind him in the wilderness. If it should stumble...
I can see what's in it for the bankers (less so, their shareholders). I can certainly see what's in it for Philip Green. But what's in it for us? We work, earn money, pay taxes and what is left we spend in stores that export our capital.
If this is to be the pattern for British business, we are finished. I don't see Johnny Foreigner making plans to take on the obligations of our Welfare State when we no longer make anything he wants; if he's looking for maltreated, ill-bred, indolent slaves, he'll find all he needs closer to home.
Are we making a nation fit for Marxists?
Back a winner!
Follow the Money
The source of this disparity was a combination of the arms manufacturers, faced in the late 1970's with their first downturn since 1939, and Leo Strauss' neo-conservative movement. Their propaganda assured us that the Soviets had invisible and powerful secret weapons that we had to counter. Under Reagan, the US engaged in the biggest peacetime arms build-up in history.
When the USSR collapsed, so did the need for all of our weapons. Just in time, we had the War on Terror. Rather than a counter-terrorist operation, we managed to turn it into a massive conventional war, when we chose to invade Iraq.
To date, we have spent at least $1 trillion in Iraq, $4 trillion on an uneccessary and unworkable Star Wars missile defense, and the military consumes over 50% of the budget.
Had we not been consumed by paranoia and fear, would we have a deficit now?
Thursday, April 02, 2009
What goes up
I dont know where Im going
But, I sure know where Ive been
Hanging on the promises
In songs of yesterday
An Ive made up my mind,
I aint wasting no more time
But, here I go again
Here I go again
(Whitesnake)
Maybe the national brokers are right. I don't think so.
The concrete life saver
Wednesday, April 01, 2009
Lessons not learned?
Adu Dhabi is has announced that it will change to coal-fired electricity generation. Dubai is currently building four such plants, with combined output of 4 gigawatts - enough to power 400,000 typical American homes. Oman is contracting with South Korea to build several as well, and Egypt proposes to build at least one on the shores of the Red Sea.
The supposed incentive is that coal from Australia is cheaper than their own natural gas. One wonders why they aren't using the desert for solar power. Perhaps it isn't the panacea that we have been told it is?
China, of course, puts one plant on their grid every 10 days, but at least they have their own mines.
Haven't the Arab nations learned the danger of energy dependence?
Where we went wrong?
While this data may be a little old, it may support my impressions that too much money is going to too few people, making the system inherently unstable.
In 2005, there were over 9,000 hedge funds, with over $1 trillion in assets. The managers earn 2% of the assets per year, plus 20% of any profit. Given the performance for those years, that's over $4 million per manager per year. The top three incomes reported in New York Magazine were all for hedge fund managers, with Edward Lampert topping the list at $1.02 billion.
It's what farmers used to call eating your seed corn.
Monday, March 30, 2009
The "correction" will come soon
Sunday, March 29, 2009
Horrifying budget
To comprehend the scale of the sickening task awaiting George Osborne if he becomes chancellor, consider the following. If he were to raise VAT to 25 per cent, double corporation tax, close the Foreign Office, cancel all international aid, disband the army and the police, release all prisoners, close every school and abolish unemployment benefit he would still be unable to close the gulf between what the UK government spends and what it raises in taxes.
Where does all the money go? How can we get out of this in one piece?
Saturday, March 28, 2009
Back to the Constitution - and its underlying principles
A fine rhetorical performance by Bob Basso (htp: Karl Denninger), reminding Americans that the issue isn't money, but liberty and national integrity (as in holding the pieces together).
I agree with everything before the tea-bag (never as good as leaves, old chap) and the call to buy guns; some might go further.
Götterdämmerung
Thursday, March 26, 2009
Divided consciousness
The Federal Reserve is out of control
None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go f*ck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.
For the full horror of the runaway financial train, see the Rolling Stone article here.
Wednesday, March 25, 2009
"Good time to invest," say fund managers
"Safe to go out at night again" - Dr Acula, Transfusion Times.
... but wear a very thick scarf, says Marc Faber.
Tuesday, March 24, 2009
An immodest proposal
Given that there is a great social need for such talent, and that it appears to be strongly genetic in origin - should we start a breeding program?
Monday, March 23, 2009
When the music stops, a dollar collapse?
"Words cannot really capture the sheer violence of the swings in private capital flows that somehow produced a a rise (net) private demand for US financial assets."
At some point, the balance of these cross-currents will change, and then? Maybe the turning point will come when Americans are forced to sell financial assets to meet living expenses and medical costs.
Meanwhile, Tim Iacono comments on a proposal to substitute the dollar as the world's reserve currency, with drawing rights from the IMF, i.e. a mixed bag of currencies. China's central bank seems terribly keen.
I have a sense of something being held up, but not for ever.
Let's move to Russia
It seems that the Russians are better-equipped to survive financial collapse than just about anyone else. They have formidable reserves of gold and foreign currency to soften the downward slide. They have a dwindling but still sizable endowment of things the world still wants, even if at temporarily reduced prices. They have plenty of timber and farmland and other natural resources, and can become self-sufficient and decouple themselves economically should they choose to do so. They have high-tech weaponry and a nuclear deterrent in case other nations get any crazy ideas. After all the upheavals, they have ended up with a centrally-managed, natural resource-based, geographically contiguous realm that is not overly dependent on global finance. Yes, the Russian consumer sector is crashing hard, and many Russians are in the process of losing their savings yet again, but they have managed to survive without a consumer sector before, and no doubt will again.
I'm almost tempted to live there. My grandparents' farm, overrun by the Red Army in 1945, is somewhere in that weird, tiny sliver of the Russian Federation stuck between Poland and Lithuania like a stone in your shoe. I'd need a heavily-armed gang to take the farmhouse back from whoever took it over after the hick troops stole everything in it. But maybe it's not there any more - probably it's covered with concrete now, the tyrant's material of choice. Still, life goes on; it's outlasted communism and looks set to outlast Western capitalism.
Though I should say that in the UK, the nutso socialist element must be seeing this as an opportunity to start the Millennium. I have been wondering whether it's possible to take American citzenship while continuing to live here, so that I might have some residual civil rights when my neighbours have lost theirs.
America, see the issue for what it is: not money, but democracy and freedom.
Sunday, March 22, 2009
What am I missing?
Clearly, the value to the buyer must be greater than that to the seller. This is usually achieved by adding value. For example, a manufacturer purchases raw materials, or a wholesale merchant moves goods to where the buyers are.
That being said, I do not see where the added value is in the investment market, for a typical investor. The present value of future earnings and stock price are the same for both sellers. The only reason for the purchase is then an imagined increase in price beyond inflation, i.e. finding a bigger sucker.
Is the whole system just a house of cards?
Saturday, March 21, 2009
Fractional reserve speculation
In much the same way, speculation in shares has changed. Once, investor A bought a share in a company from B, held it and received dividends. But the financial market exploded when it became possible to trade in shares without actually having the certificates.
Speculator C can "short" a share - agree to sell it to A (without yet having ownership) for $1, later buy it from B at 5oc (he fervently hopes), then when settlement time comes, A ends up with the share and C pockets the profit less trading expenses. (C can also "go long": agree to buy a share from B at 50c, sell it to A for $1 later, then comes settlement time when the share ownership is officially transferred).
C can multiply his bet if he trades "on margin", in effect making only a small down payment on his share speculation. If the margin is 10%, then he can (promise to) buy or sell 10 times as many shares, and (if his judgment is right), make 10 times the profit when settlement is made.
C experiences success in conditions of a bull market and expanding money supply. C is now trading in big, big quantities, with shares he doesn't own for most of the time, and cash he mostly doesn't have. C has gone beyond mere shares, and is simply betting on movements in the market. C has become a trader in derivatives; in effect, a high-rolling gambler. What a wonderful world! So much nicer than the school he went to! C has an abundance of worldly goods, worldly girlfriends and envious colleagues who laugh at his jokes. C has taken to introducing himself on the phone as "Nick with the big swinging d*ck". C is young, and has never known things to be different. C is complacent; C has become reckless.
But oh dear, if some of his enormous bets go wrong. C has losses, multiplied by the inverse of his margin, plus his trading expenses. Maybe C doesn't have enough money in his account to cover his losses. Maybe C has been trading with another gambler, D, and now can't pay him. Suddenly D is in trouble, too. And both have also been playing around the green baize with traders E, F and G; maybe with the whole alphabet of gamblers, maybe with the Greek and Cyrillic alphabets too.
But before he busts himself (and possibly his employer into the bargain), C has influence (since it is known that he never gets it wrong - until the day he does): news of his bets affect the market, especially when the market is nervous. When C shorts a share big-time, he can start a run - even if the company was basically OK before then.
Which is why Denninger is now calling for a return to the custom of getting the stock certificate when you buy the stock.
Good luck with that; and with ending fractional reserve banking. Denninger argues against the latter here, and prefers a system of minimum cash margins; perhaps it would be more logically consistent if he advocated the same for short-selling.
Personally, I'd go for whipping the money-changers out of the temple; but they always return.
Friday, March 20, 2009
Gold: the tide is turning
Private hoards of the yellow metal are beginning to rival national ones: the world's largest gold ETF, SPDR, is well into the top 10 - Bloomberg reports it's now overtaken Switzerland. But there is some question of how much of SPDR's holdings are actual physical gold.
Gold doesn't earn interest, which is one reason why China hasn't yet (apparently) leapt in, though Commodity Online says that country has been considering it.
Some say that the Chinese government likes to declare policy changes via apparently unofficial sources. It's worth noting that the China Gold Association called last November for an expansion of national holdings of gold beyond its present level of 600 tonnes.
China's recent switch from Agencies (local and State bonds) to Treasuries, and from long-dated Treasuries to short-dated ones, seem to indicate contingency planning for a worst-case scenario in which the US loses control of its budget and money supply.
The motivation to plan for the worst, is high. China's official holding of US debt, large as it is, is understated, according to Brad Setser, who believes that much of the investment in US Treasuries by the UK and Hong Kong are actually on behalf of China.
In the same way, I can imagine that China might wish to hedge its bets on America by quietly boosting its gold purchases, using intermediaries to take positions in large gold investment funds. This would be a typically quiet and indirect way to improve its own security without making open moves that could panic the market. And the funding for these purchases might come from selling US/UK government bonds back to us, thanks to "quantitative easing".
What's sauce for the goose, is sauce for the gander.
Thursday, March 19, 2009
Hold dollars?
He may be on the wrong medication - the current state of the world's finances is a great impetus towards paranoia and depression; but if he's even half right, we need to start making those quiet, regular cashpoint withdrawals and (for non-Americans) visiting the bureau de change. And not living in the city.
Where is all the money going?
This says two things to me: (a) the new money thus created is not going to help kick-start our economies, and (b) foreigners are losing confidence in us and want out, before inflation and defaults shrivel the value of their investment in us. As to the latter point, I said last August that I thought the Chinese wouldn't let themselves be swindled.
So I suspect we are still headed for slump, currency devaluation and, eventually, high interest rates.
Maybe a new currency, to whitewash the mess and make further progress towards some New World Order political grouping - Oceania, Eurasia etc. Any news on the Amero?
Tuesday, March 17, 2009
Alle aussteigen!
Or have the wise actions of our leaders solved all?
Simple Science
First Law: You can't win.
Second Law: You can't even break even.
Translated to money terms, they are still true, but all too many didn't believe it. That's what put us in our present mess.
Once we clear up the meltdown, perhaps the sensible approach would be to base the economy officially on energy. After all, it effectively is already. For example, the price of gold merely reflects the energy expense of extracting it.
Monday, March 16, 2009
Bonner: 1966 - 1982 , and Dow 5,000
Sunday, March 15, 2009
Good and bad borrowing
What seems to me a major point in his conspectus, is the difference between borrowing for production, and borrowing for consumption. If you borrow at 5% to get a machine that makes you 10% profit, that's fine; but borrowing for a private house to live in, a car for personal use, music and TV, alcohol and weekly groceries - madness.
Quietly edging towards the exits, before the general panic
They are taking cash out of the bank in preparation for a long-haul bad time. A friend in Florida told me the local bank was out of hundred-dollar bills on Wednesday because a man had come in the day before and withdrawn $90,000. Five weeks ago, when I asked a Wall Street titan what one should do to be safe in the future, he took me aback with the concreteness of his advice, and its bottom-line nature. Everyone should try to own a house, he said, no matter how big or small, but it has to have some land, on which you should learn how to grow things. He also recommended gold coins, such as American Eagles. I went to the U.S. Mint Web site the next day, but there was a six-week wait due to high demand. (I just went on the Web site again: Production of gold Eagle coins "has been temporarily suspended because of unprecedented demand" for bullion.)
Like I said over a month ago: "this is a time for individuals to make their own quiet plans and preparations."
Did we make things worse?
We in the US prize the individual over society (until they do something really bad), and so are not very accepting of the fact that humans, like wolves, elephants, and most other primates, are mostly pack animals.
In a pack of wolves or wild dogs with a calm, assertive leader, there are very few fights, and co-operation is the norm. The common role for the alpha females is the nurture and protection of the young. For the alpha male, it is protection of the pack from outside threats, and control of the aggressive adolescent males.
The liberalization of divorce laws in the 1960's shifted the balance of power in middle-class homes clearly to the woman of the house. One wrong move, and the man could lose his family, home, and most of his earnings. The pop psychology of the time told us that 'fathers were not needed to raise children', partly to assuage guilt.
Is it not possible that the removal of assertive leadership over teenage males has made some of our social problems worse?
Saturday, March 14, 2009
Unintended Consequences?
There has been a gradual and unremitting decline ever since. Many fixes have been proposed, and each has worked, in its own way.
Administrators and pundits said that the answer was more parental involvement. We had band and athletic boosters, the PTA, bake sales and the like. Middle-class parents did the homework for their children. In return for this work, they expected rewards, which fueled grade inflation.
Sociologists told us that teachers needed to be less authoritarian, and more nurturing. Students are now friendly with them, so much so that several hundred have been arrested in the past few years for sleeping and partying with them.
Psychologists assured us that the answer was to enhance self-esteem. In a recent study of mathematics achievement, the top 10% of Americans ranked at the 50% mark for South Koreans. However, the Americans rated their own performance as A/B, while the South Koreans rated themselves as C.
Teachers told us that increased pay was the answer. In many local districts, the pay and benefits for teachers exceeds that of college professors.
Education professors told us that the answer was to change teaching methods and curricula. Future teachers now take far more education credits than in the subjects that they will teach, and the teaching has changed so much and so often that we can't even compare student performance with a few years ago.
Politicians tell us that the answer is to reward 'good' teachers, and punish 'bad' ones. This had led to even more grade inflation, and encourages many to either cheat, or leave the profession entirely.
Friday, March 13, 2009
Dysfunctional Nation?
Our belief in free market capitalism led us to pour money into these problems, including prisons and the 'War on Drugs (TM)'. Per capita spending on education and healthcare is close to twice that of many other countries.
This investment has given us some of the highest paid teachers and doctors in the world, a bloated and inefficient managerial class, and legions of psychologists and lawyers to take care of the unhappiness and problems that result.
These problems are not new. Mark Twain wrote about the effects of over-nurturing parents in the 1870's, and Robert Heinlein discussed teen delinquency and bad mathematics education in the 1960's.
I used to visit my grandmother in Wiesbaden in the 1960's. She lived next to a lovely park. From four stories up and 1/2-mile away, we could tell which familes were US service personnel from the airbase. The German and African-American children stayed with their parents and behaved themselves. The other American children 'expressed themselves' by running into forbidden areas and making lots of noise.
That we have these problems in the poor urban areas is no surprise. That they occur as well in the suburbs is due, in my uneducated opinion, to an excess of wealth and free time, leading to a lack of competitive drive.
Wednesday, March 11, 2009
Consequences
Rule #1: Avoid decisions whose consequences can be traced back to you.
Rule #2: If you have to violate Rule #1, try to make decisions whose outcome cannot be classified as success or failure.
Rule #3: If you have to violate Rule #2, always make the choice which has failed somewhere else. If it succeeds for you, then you are a genius; if it fails, there is no blame.
This is why:
We encourage parents to be 'friends' to their children, then wonder why so many are self-centred lazy brats.
We put more and more responsibility for our children on teachers, but remove the authority to discipline them.
We put more emphasis on how people 'feel' about things than whether they contribute to society.
Companies lay off production workers to 'save money'.
We are measured by almost anything, except real productivity.
We are more concerned about 'effort' and 'hard work' than achievement.
Tuesday, March 10, 2009
Group-think and disaster
If alone, 75% of the guinea pigs left soon to report a possible fire; but if surrounded by actors who pretended nothing was wrong, only 10% raised the alarm, even though the smoke eventually got so bad that they could hardly see anything.
Rings bells for me.
By the way, I won't be surprised if the Dow rises above 9,000 points at some point, before the smoke gets too thick.
I see gold's under $900...
Monday, March 09, 2009
Could the City of London be facing long-term decline?
Had there been an international “early warning” system that was on the ball – and had the UK been willing to collect the data on flows through the UK in the face of inevitable complaints that such efforts would drive business abroad – it might well have picked up on some of these flows as a sign of brewing trouble in global financial markets.
At one of my old College's Gaudies (class reunion) a few years ago, a City financier complacently and cynically remarked that the UK was always going to have a strong financial community, since it has hundreds of years of experience in "shaving" its customers in subtle ways.
I don't think the Brits have a monopoly of greed, dishonesty and duplicity, and we see now the rotten fruits of their technical expertise. The UK National Defence Association may imagine we can concentrate on financial services and turn the rest of the country into a living museum; I say that just as we need to wean ourselves off coal and oil, so we must reduce our dependence on the old swindlers; no more fossil fuels, no more fossil fools.
Sunday, March 08, 2009
Marc Faber: inflation, war, gold
Also, here, from which the following extract:
The best bet for investors may be to buy a farm and escape from the cities, as a prolonged recession could lead to war, as the Great Depression did, said the Swiss national, who now lives in Thailand.
“Buy a farm and let your girlfriend work on the farm,” he said, to the applause of investors. “If the global economy doesn’t recover, usually people go to war.”
For pictures of his elegant Chiang Mai home, possibly a clue to his personality, see here - and for local Thai comment on him, see here.
Friday, March 06, 2009
Is now a good time to invest?
It is not possible to predict the market with any accuracy, but I think I have done well in foretelling the current state of affairs as early as the late 1990s. The market has dropped to half its 1999 peak (again, as it did in 2003), but that is not to say we are now at the bottom. Some (and I am moderately persuaded to this view) think that there may be a "bear market rally" soon-ish - maybe a rise that recovers perhaps 50% of the losses so far - but it is perfectly possible that the underlying trend is still downwards, so there may then be a horrid lurch towards - what? Maybe, ultimately, 4,000 on the Dow and 2,000 on the FTSE.
We are in the middle of an exciting ride and I fear that entering the market at this stage may still be for the adventurous and nimble. Yes, had one invested in mid-2003 and got out, say, late 2007, it would have turned a nice profit; but much depends on the entry and exit points. So as ever, attitude to risk and corresponding watchfulness are key factors.
There is also the question of what asset class to choose. I think domestic and commercial property are still overvalued, relative to income; because of fears regarding other assets, and also because of central bank investment ("quantitative easing" etc) government bonds are very highly priced, which is why the yields are so low (and if interest rates rise, bond values could then drop sharply); equities are depressed, but as dividends decline in very testing economic conditions, they may ultimately be depressed still further. Commodities (e.g. gold, silver, oil) are the subject of some speculation, but owing to shortage of borrowed money to invest with, not quite so much institutional speculation as formerly; even so, gold (for instance) is a bit above its long-term inflation-adjusted average, as far as I can tell - though if inflation takes off, the price could indeed escalate.
And then there is the question of currencies. The pound has lost heavily against the dollar; but some say the dollar may catch us up again. The Euro may also not stay as strong as it is now - several countries within the Eurozone are suffering economic problems and are hampered by the common currency; I have even read speculation that the Euro system may fall apart within a decade, or some states may secede from it.
In short, I still urge caution, and if you do decide to get in, be prepared to move quickly if the market should turn. Meantime, there are relatively safe options such as National Savings Certificates, including the index-linked ones that will at least keep the value of your savings roughly in line with RPI...
How central market intervention increases inequality
If the Fed doubles the money supply, in the long run, that will roughly double the prices of all goods and services. But if the Fed restricts the injection of new money into only the hands of a few privileged recipients, those people will be at a fantastic (albeit temporary) advantage relative to everyone else in the economy. They will get their hands on the billions in new dollars, while prices still reflect the old reality. The new money will then flow from sector to sector, pushing up prices as it ripples throughout the economy. But the last people in line receiving the new influx of twenty- and hundred-dollar bills will be much poorer than others, once prices settle down. Their paycheck was the last to rise, while they watched helplessly as more and more prices began doubling.
Thursday, March 05, 2009
Apocalypse now - Denninger
... says Denninger, but I still don't believe it. But maybe that's just me.
Wake Up!
Our strongest recommendations are as follows:
• Prepare for rising inflation – continue to buy gold;
• Sell government bonds;
• Look for cheaply valued strong stocks – BAE and BP in the UK are two examples, and in the US we like Pfizer.
• Deploy cash wisely – our current favourites are, believe it or not, the British pound; the yen is weakening, but at 100 yen to the dollar it is a buy again.
• Avoid the US dollar and the Euro.
Like that bit about the pound - I was scratching around looking for something to save what's left of the savings.
Dow 4,500 within 12 months - Cederholm
Wednesday, March 04, 2009
FDIC could fail - update
UPDATE (7 March 2009): Jesse has a piece on it now, too. But "deposits would remain fully backed by the government,", says his source - not much comfort for the taxpayer, then.
Webcam: gold vault at the Federal Reserve
According to GATA, they ain't got it no more, nor they don't want it back, neither. (htp: Jesse)
What happens when everyone knows?
Tuesday, March 03, 2009
Do buy, Dubai
It was said years ago that 90% of £20 notes in London bore traces of cocaine - because footballers have 90% of the notes. Sadly for some footballers and Old Etonians, possession of cocaine in the UAE is punishable by death. Nevertheless, lovely weather and no crowded, litter-strewn South East England commuter trains.
Could you stand Paradise? Or are you hooked on that museum of past industrial glories, the UK?
If GE falls...
Engineering Analysis
In human terms, one such example is drug addiction, where increased use leads to increased desire for the drug.
A more interesting example can be seen in the 'sudden acceleration' lawsuits against Audi some years ago. Once the cars were examined, it was determined that the drivers had been pushing on the accelerator pedal, rather than the brake. Because they were convinced that they were right, they pushed harder as they gained speed. In some cases, the drivers injured their own legs from the pressure, and bent the pedal.
The past 30 years have seen such a loop in the housing and financial sector. As house prices went up, they released fiat cash into the system, driving prices even higher. This, of course, led to the 'brilliant' idea of packaging mortgages. At some point, the profit margin became so huge that no 'real' industry could compete, which pulled even more investment capital into housing derivatives, and further crippled manufacturing.
Without a governor in place, by way of careful regulation, these crashes are inevitable. The capacity of the internet in moving money only sped things up a little.
Signs of cash hoarding?
Some of this may reflect a switch away from use of credit cards and accounts; but I wonder how much is disappearing into newly-bought floor safes and Heinz bean tin hideaways?