Experts are uncertain about the way the economy will go - will we return to normal, do we face inflation (plus recession) as in the 1970s, or is it to be a "deflationary depression"?
Deflation is when there is less money (including borrowed money) in the economy. In such a situation, "cash is king". In this article, James Wood argues that the large government financial stimulus will not work, because an even larger amount of money has been lost on the stockmarket and in the housing market. He's talking about the USA, but much the same could be said of the UK (though here on our crowded island, it may be that the housing market does not suffer from quite such an oversupply as in the United States.)
Thinking along the same lines, Robert Prechter offers some recommendations. Here are a few major "dont's":
• Generally speaking, don’t own stocks.
• Don’t own any but the most pristine bonds.
• Generally speaking, don’t invest in real estate.
• Generally speaking, don’t buy commodities.
Prechter is an advocate of the Elliot Wave theory, which tries to fit a pattern onto long-term stock market movements. According to this analysis, the current market recovery is merely a temporary upturn before a long drop to the lowest point in the cycle, when it all begins again.
There are other theorists who have attempted to find cycles. One such is Nikolai Kondratiev (or Kondratieff), who thought he saw "long waves" in the economy, lasting a couple of generations. His followers think we are heading for the low point in that cycle - the Kondratieff Winter. In this time, deflation means that people try to store their money in whatever they consider safe - for example, government bonds, cash and gold. If the cycle is as regular as some would have it, "winter" will end somewhere around 2016-2018 - which is an interesting coincidence, because adjusted for inflation, the Dow Jones Index took 16 years to decline from its peak in 1966 to its bottom in 1982 (according to K's followers, that was the "summer" season). Here is a seductively attractive graphic summarising the Kondratieff cycle (please click on the image to enlarge it):
There are a couple of problems with all such attempts. Firstly, the human mind is wonderfully adapted to find patterns, and will find them even in randomness, which is why people once thought they could see a system of canals on Mars. Even if there is such a thing as a long-term economic cycle, there is the question of fit: exactly when will the change come? Once you think you see a pattern, there is the temptation to jam reality into the theory, like Cinderella's sisters trying on her slipper even at the cost of losing a toe or heel in the process.
The second problem is that we are dealing here with human behaviour, and unlike other things in Nature, this subject can take into account the theory that attempts to describe it - and change accordingly. For example, if I say I know what you are going to do next, and tell you, you may then alter your plan so as to prove me wrong. If all investors followed the Elliott Wave theory, they would presumably try to anticipate each other's reactions and that would alter the pattern.
However, these groups of theory-followers are, I think, still in a minority, so maybe the patterns will work, roughly. The contrarian instinctively feels that the way to win is not to follow the crowd - I remember the rich Yorkshire farmer in one of James Herriot's books whose principle was "When all the world goes one way, I go t'other".
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
*** FUTURE POSTS WILL ALSO APPEAR AT 'NOW AND NEXT' : https://rolfnorfolk.substack.com
Keyboard worrier
Friday, January 01, 2010
Wednesday, December 30, 2009
A straw in the wind reveals the changing direction of power
The public are gradually coming to realise that, within our countries, our institutions and businesses are not run fairly and for the general benefit of voters and investors.
Now, as the balance of economic power is shifting towards the East, we may discover that the rule of international law does not constrain the strongest. A straw in the wind is this story, about a small Chinese company that has defied a Goldman Sachs subsidiary, refusing to pay $80 million relating to derivatives contracts. The significant element is the reported preparedness of the Chinese government to support national businesses against foreign banks in the law courts.
Much more worrying, in my view, are the implications of this pugnacious stance if it is applied to copyrights and patents. Since the West cannot compete with the low labour costs of the developing world, it is placing its hope in its long-accumulated expertise and technology. Should mighty foreign nations begin to disregard intellectual property rights, we could find ourselves in a very difficult position. I raised this issue in 1997 - here, here and here. Please also see my review of James Kynge's "China Shakes the World", where Kynge is given the run-around when he tries to enquire into copyright theft in China.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Now, as the balance of economic power is shifting towards the East, we may discover that the rule of international law does not constrain the strongest. A straw in the wind is this story, about a small Chinese company that has defied a Goldman Sachs subsidiary, refusing to pay $80 million relating to derivatives contracts. The significant element is the reported preparedness of the Chinese government to support national businesses against foreign banks in the law courts.
Much more worrying, in my view, are the implications of this pugnacious stance if it is applied to copyrights and patents. Since the West cannot compete with the low labour costs of the developing world, it is placing its hope in its long-accumulated expertise and technology. Should mighty foreign nations begin to disregard intellectual property rights, we could find ourselves in a very difficult position. I raised this issue in 1997 - here, here and here. Please also see my review of James Kynge's "China Shakes the World", where Kynge is given the run-around when he tries to enquire into copyright theft in China.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, December 29, 2009
The US (and UK) mortgage crisis continues
Update: China may now be experiencing a housing bubble
__________________________________________
Economist Mark Thoma comments on news (which was released on Christmas Eve - a "good time to bury bad news"?) that the US Treasury is considering doubling its line of credit to "Fannie Mae" and "Freddie Mac", from $400 billion to $800 billion. What does this mean?
Let's start with the background to these two "government-sponsored enterprises" (GSEs).
"Fannie Mae" is the familiar term for the Federal National Mortgage Association, set up in 1938 at the tail end of the American Great Depression to help make mortgages more easily available to low-income housebuyers, by buying the loans from mortgage lenders. Effectively, this was a way of guaranteeing poorer-quality loans and so it supported and encouraged lenders as well as borrowers.
In 1968, Fannie Mae was split into two companies; one private, doing the same job as before, but without an explicit guarantee against losses from defaults. The other part was a new public organisation, the Government National Mortgage Association, aka "Ginnie Mae"; this did guarantee mortgage-backed investments, but was originally intended to serve defined groups of borrowers, e.g. public employees and veterans (ex-military personnel).
In 1970, "Freddie Mac" (the Federal Home Loan Mortgage Corporation) was created to do much the same as Fannie Mae, so providing competition and helping to increase the supply of mortgages.
Given the quality of the loans that underpinned their products, Fannie Mae and Freddie Mac were particularly vulnerable to problems in the credit market and were so badly damaged in the "Credit Crunch" of 2008 that they were taken into public control, or "conservatorship". This helped maintain confidence in the banking system, but at a cost: the Treasury has, in effect, become the guarantor against losses, which now become the liability of the taxpayer. Some would say that a second cost is "moral hazard", in that reckless lenders have been shielded from the consequences of their actions, and so will not properly learn their lesson.
Returning to Mark Thoma, we find that mortgage defaults may eventually total $400 billion, which in inflation-adjusted terms is similar to the losses sustained in the Savings and Loan crisis of the late 1980s. (The root cause of the problem then was the same - treating houses as another type of speculative investment - and the trigger for the fallout was the Tax Reform Act of 1986, which (among many other changes) removed or reduced tax breaks relating to residential property investment.)
Why, after all this official support, are we expecting heavy losses on the housing market?
The answer, as I understand it, is that the wrong problem has been solved. By bailing-out banks and other lenders, governments on both sides of the Atlantic have attempted to preserve "liquidity" - the availability of money. But this doesn't tackle the real problem, which is "insolvency" - i.e. when debts outweigh assets. Housing is overpriced - valuations swiftly doubled in the four years after 2002 - and when people perceive that the prices are unrealistic in the long term, the prices have to come down. However, home loans don't come down; they are fixed amounts of debt, that is either paid or defaulted. So as house valuations decline, more and more homeowners find themselves owing more than the resale value of their property. Behind them stand many others who fear that they may find themselves in the same situation, or who realize that renting would be even cheaper than paying their mortgage.
For although interest rates have dropped to historically low levels, the capital still has to be repaid, and so the total monthly cost can't be reduced much more. In an economic downturn, the weight of this obligation is unlikely to lighten because of quickly-rising wages, and until house prices rise significantly, they will also look like a poor capital investment to the borrower. For millions, a mortgage is now a useless millstone around the neck.
Back in September 2008, I floated the wild idea of paying off all US mortgages and making all such loans illegal in future; a comment by one reader, "Sobers", suggested the more moderate approach of partial debt forgiveness. Thoma speculates that one reason for the increased Treasury line of credit for Fannie Mae and Freddie Mac may indeed be a preparation for writing-off a proportion of mortgage debt.
This would be a radical step and maybe it's more likely that the US Treasury simply wishes to make enough money available to cover all likely defaults, with enough extra to prevent the spread of panic in the housing market. After all, people who bought their houses 10 years ago or earlier, are less likely to be in "negative equity" now; unless they took out extra property-backed loans for consumer spending (known as "secured loans" in the UK, and "home equity line of credit" - or HELOC - in the US). Paying off part of everyone's debt would give help to those who didn't need it as well as those who did; and might carry its own "moral hazard" by allowing future borrowers to hope that they might one day be bailed-out, too, so encouraging them to spend too much and get into unaffordable debt. Better, on the whole, to underwrite the losses of the worst cases and discipline the defaulting borrowers with the stigma of repossession, which is a warning to other borrowers, though sadly not so much of an object lesson to lenders.
Another strategy, since interest rates are so low, would be to reduce monthly costs of borrowing by extending the term of mortages and so cutting the amount of capital that has to be repaid each month. You can play with variants on interest rates and mortgage terms here - Yahoo offers some American versions here - and as you can see, extending the term offers some relief. However, there's only so long you're likely to want to have a mortgage, unless we descend to the 100-year mortgages of Japan.
There's also not much scope for cutting interest rates further. The banks loaned out far too much money in the good times and cut their reserves to a dangerous minimum. When the governments made more cash available to them, they kept a lot of it as a temporary buffer, so borrowing for housebuyers and businesses has continued to be on difficult terms. And the banks haven't passed on much of the drop in interest rates, because they are trying to rebuild their reserves. The central banks could cut the interest rate to zero and the banks that borrow from them would still be charging us something like 4%. Until the banks are solvent, we are going to remain hard up; unless there is debt forgiveness, and I don't think that will come for quite some time yet.
In short, I expect the current half-optimistic mood to evaporate gradually in the coming year, as people realize that the problems are enduring and begin to adjust their expectations and behaviour accordingly. I anticipate a longer-term reduction in the inflation-adjusted valuations of houses, though there may be temporary rallies from time to time, just as you get them in a "bear market" in stocks and shares.
I said years ago to friends and colleagues that whatever you treat like an investment will behave like one, and not for the first time, the housing market is copying the behaviour of equities, with the added disadvantages of being less easily and more expensively sold, and of being bought with borrowed money.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
__________________________________________
Economist Mark Thoma comments on news (which was released on Christmas Eve - a "good time to bury bad news"?) that the US Treasury is considering doubling its line of credit to "Fannie Mae" and "Freddie Mac", from $400 billion to $800 billion. What does this mean?
Let's start with the background to these two "government-sponsored enterprises" (GSEs).
"Fannie Mae" is the familiar term for the Federal National Mortgage Association, set up in 1938 at the tail end of the American Great Depression to help make mortgages more easily available to low-income housebuyers, by buying the loans from mortgage lenders. Effectively, this was a way of guaranteeing poorer-quality loans and so it supported and encouraged lenders as well as borrowers.
In 1968, Fannie Mae was split into two companies; one private, doing the same job as before, but without an explicit guarantee against losses from defaults. The other part was a new public organisation, the Government National Mortgage Association, aka "Ginnie Mae"; this did guarantee mortgage-backed investments, but was originally intended to serve defined groups of borrowers, e.g. public employees and veterans (ex-military personnel).
In 1970, "Freddie Mac" (the Federal Home Loan Mortgage Corporation) was created to do much the same as Fannie Mae, so providing competition and helping to increase the supply of mortgages.
Given the quality of the loans that underpinned their products, Fannie Mae and Freddie Mac were particularly vulnerable to problems in the credit market and were so badly damaged in the "Credit Crunch" of 2008 that they were taken into public control, or "conservatorship". This helped maintain confidence in the banking system, but at a cost: the Treasury has, in effect, become the guarantor against losses, which now become the liability of the taxpayer. Some would say that a second cost is "moral hazard", in that reckless lenders have been shielded from the consequences of their actions, and so will not properly learn their lesson.
Returning to Mark Thoma, we find that mortgage defaults may eventually total $400 billion, which in inflation-adjusted terms is similar to the losses sustained in the Savings and Loan crisis of the late 1980s. (The root cause of the problem then was the same - treating houses as another type of speculative investment - and the trigger for the fallout was the Tax Reform Act of 1986, which (among many other changes) removed or reduced tax breaks relating to residential property investment.)
Why, after all this official support, are we expecting heavy losses on the housing market?
The answer, as I understand it, is that the wrong problem has been solved. By bailing-out banks and other lenders, governments on both sides of the Atlantic have attempted to preserve "liquidity" - the availability of money. But this doesn't tackle the real problem, which is "insolvency" - i.e. when debts outweigh assets. Housing is overpriced - valuations swiftly doubled in the four years after 2002 - and when people perceive that the prices are unrealistic in the long term, the prices have to come down. However, home loans don't come down; they are fixed amounts of debt, that is either paid or defaulted. So as house valuations decline, more and more homeowners find themselves owing more than the resale value of their property. Behind them stand many others who fear that they may find themselves in the same situation, or who realize that renting would be even cheaper than paying their mortgage.
For although interest rates have dropped to historically low levels, the capital still has to be repaid, and so the total monthly cost can't be reduced much more. In an economic downturn, the weight of this obligation is unlikely to lighten because of quickly-rising wages, and until house prices rise significantly, they will also look like a poor capital investment to the borrower. For millions, a mortgage is now a useless millstone around the neck.
Back in September 2008, I floated the wild idea of paying off all US mortgages and making all such loans illegal in future; a comment by one reader, "Sobers", suggested the more moderate approach of partial debt forgiveness. Thoma speculates that one reason for the increased Treasury line of credit for Fannie Mae and Freddie Mac may indeed be a preparation for writing-off a proportion of mortgage debt.
This would be a radical step and maybe it's more likely that the US Treasury simply wishes to make enough money available to cover all likely defaults, with enough extra to prevent the spread of panic in the housing market. After all, people who bought their houses 10 years ago or earlier, are less likely to be in "negative equity" now; unless they took out extra property-backed loans for consumer spending (known as "secured loans" in the UK, and "home equity line of credit" - or HELOC - in the US). Paying off part of everyone's debt would give help to those who didn't need it as well as those who did; and might carry its own "moral hazard" by allowing future borrowers to hope that they might one day be bailed-out, too, so encouraging them to spend too much and get into unaffordable debt. Better, on the whole, to underwrite the losses of the worst cases and discipline the defaulting borrowers with the stigma of repossession, which is a warning to other borrowers, though sadly not so much of an object lesson to lenders.
Another strategy, since interest rates are so low, would be to reduce monthly costs of borrowing by extending the term of mortages and so cutting the amount of capital that has to be repaid each month. You can play with variants on interest rates and mortgage terms here - Yahoo offers some American versions here - and as you can see, extending the term offers some relief. However, there's only so long you're likely to want to have a mortgage, unless we descend to the 100-year mortgages of Japan.
There's also not much scope for cutting interest rates further. The banks loaned out far too much money in the good times and cut their reserves to a dangerous minimum. When the governments made more cash available to them, they kept a lot of it as a temporary buffer, so borrowing for housebuyers and businesses has continued to be on difficult terms. And the banks haven't passed on much of the drop in interest rates, because they are trying to rebuild their reserves. The central banks could cut the interest rate to zero and the banks that borrow from them would still be charging us something like 4%. Until the banks are solvent, we are going to remain hard up; unless there is debt forgiveness, and I don't think that will come for quite some time yet.
In short, I expect the current half-optimistic mood to evaporate gradually in the coming year, as people realize that the problems are enduring and begin to adjust their expectations and behaviour accordingly. I anticipate a longer-term reduction in the inflation-adjusted valuations of houses, though there may be temporary rallies from time to time, just as you get them in a "bear market" in stocks and shares.
I said years ago to friends and colleagues that whatever you treat like an investment will behave like one, and not for the first time, the housing market is copying the behaviour of equities, with the added disadvantages of being less easily and more expensively sold, and of being bought with borrowed money.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Monday, December 21, 2009
When to invest?
This interactive resource from the Wall Street Journal (hat-tip to the Wall Street Pit blog) looks at 10-year returns from investing in the NYSE (companies listed on the New York Stock Exchange) and the S&P (Standard & Poor's) 500, i.e. the top 500 US companies. The last 10 years look like the worst decade since records began.
Now, some may say that it's a great time to get back in. But if you look at the S&P 500 graph at bottom right, you'll see that returns are calculated in both nominal and inflation-adjusted terms. Sometimes you get an apparent gain which is really much less so, or even a loss, once you take inflation into account.
This is exactly what happened in 1970-79. My fear is that all the current monetary pumping will stoke inflation and the market will rise in nominal terms, but these gains will be undermined by a general increase in consumer prices.
If we have a re-run of the 1970s, it could be years before the market yields real returns.I've covered this topic quite a few times on my old blog - in this post for example, I show that in nominal terms, the worst point was in September 1974; but adjusted for inflation, the real bottom came in July 1982:
It's said that history doesn't repeat itself, but it rhymes. If anything, that has worse implications for us, because by any measure, the levels of debt in the US and UK economies are much higher than they have ever been in history.
I can quite believe that the market will zoom up a bit more, but my feeling is that we are in what is known as a "bear market rally" - a temporary upward twist before a slump. Gamblers may make fortunes in the current rise, but the reversals in a bear market can be unpredictable, sudden and savage, just like the creature after which such a market is named.
Personally, I'm in favour of diversifying investments, and building up emergency supplies of cash and the things you need for daily life. I don't expect things to run smoothly in the next few years.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Now, some may say that it's a great time to get back in. But if you look at the S&P 500 graph at bottom right, you'll see that returns are calculated in both nominal and inflation-adjusted terms. Sometimes you get an apparent gain which is really much less so, or even a loss, once you take inflation into account.
This is exactly what happened in 1970-79. My fear is that all the current monetary pumping will stoke inflation and the market will rise in nominal terms, but these gains will be undermined by a general increase in consumer prices.
If we have a re-run of the 1970s, it could be years before the market yields real returns.I've covered this topic quite a few times on my old blog - in this post for example, I show that in nominal terms, the worst point was in September 1974; but adjusted for inflation, the real bottom came in July 1982:
It's said that history doesn't repeat itself, but it rhymes. If anything, that has worse implications for us, because by any measure, the levels of debt in the US and UK economies are much higher than they have ever been in history.
I can quite believe that the market will zoom up a bit more, but my feeling is that we are in what is known as a "bear market rally" - a temporary upward twist before a slump. Gamblers may make fortunes in the current rise, but the reversals in a bear market can be unpredictable, sudden and savage, just like the creature after which such a market is named.
Personally, I'm in favour of diversifying investments, and building up emergency supplies of cash and the things you need for daily life. I don't expect things to run smoothly in the next few years.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, December 20, 2009
More on gold
During this crisis, we hear more from the "gold bugs" - people who are convinced that most modern currencies will become worthless, because they are "fiat money", i.e. the government can make unlimited amounts of them since they are not related to anything in fixed supply, such as gold (or land, when the Nazis restructured the mark).
One such is an American called Jim Willie. He reminds us of debt problems, not only in the USA and Britain, but Spain, Greece etc. Even Swiss banks are under pressure, because of loans to small European countires whose currencies have since devalued. Willie thinks the Euro will unravel because of the difficulties of a number of its member economies, and that Germany will reintroduce the mark, perhaps under some reassuringly Euro-like pseudonym.
Germany happens to have the world's second-largest official holding of gold - 3,400 tonnes compared to the USA's 8,100 (assuming we are being told the truth about how much the USA actually has in its vaults, and that is a matter of serious debate). This article reports China's ambition to increase its own holding of gold, from around 1,000 tonnes now to perhaps as much as 10,000 tonnes in 10 years' time.
The gold mania is not universal. Writing in the Daily Telegraph, Ambrose Evans-Pritchard predicts that the price of gold will actually fall next year - among other bad things such as the collapse of America's social security pension fund. He may be right. In a panic, people want ready money, so maybe cash will (for a time) be king. But when an economy is in dire straits, its government will do whatever it can to ease the pain, and many think that the strategy will be to increase the money supply, or even introduce a new form of the currency, as has just happened in North Korea.
The attraction of gold is for pessimists. It doesn't earn any interest, so mainly it is seen as a last-resort store of value when the money system breaks down (and it's nice to wear and show off). It is perfectly possible that you could make a loss on gold, but it will never be worth nothing at all, unlike the old US Continentals, or Confederate money after the North won the Civil War. In this context, it's worth noting that Reuters news agency reported back in September that Hong Kong moved its gold reserves out of London and into the gold depository at its Chek Lap Kok international airport. A sign of something, but what?
Gold is not the only tangible store of value, of course. Agricultural land, houses, food, medicines etc all have intrinsic value, i.e. they are worth something because of what they can do for you themselves, not just because they can be exchanged for something else.
Inflation remains a serious long-term threat. Comparing the past and present value of cash is difficult, because the economy has increased in size and changed in nature; but depending on the measure you use and looking at what has happened since 1971 (when I started at college), the British pound has lost 90% - 96% of its buying power. It's still (until April next year) possible to retire at age 50 in this country, so if history repeats itself, you could see a similar devaluation during a long retirement.
In short, it's not about the value of gold, but the unreliability of money.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
One such is an American called Jim Willie. He reminds us of debt problems, not only in the USA and Britain, but Spain, Greece etc. Even Swiss banks are under pressure, because of loans to small European countires whose currencies have since devalued. Willie thinks the Euro will unravel because of the difficulties of a number of its member economies, and that Germany will reintroduce the mark, perhaps under some reassuringly Euro-like pseudonym.
Germany happens to have the world's second-largest official holding of gold - 3,400 tonnes compared to the USA's 8,100 (assuming we are being told the truth about how much the USA actually has in its vaults, and that is a matter of serious debate). This article reports China's ambition to increase its own holding of gold, from around 1,000 tonnes now to perhaps as much as 10,000 tonnes in 10 years' time.
The gold mania is not universal. Writing in the Daily Telegraph, Ambrose Evans-Pritchard predicts that the price of gold will actually fall next year - among other bad things such as the collapse of America's social security pension fund. He may be right. In a panic, people want ready money, so maybe cash will (for a time) be king. But when an economy is in dire straits, its government will do whatever it can to ease the pain, and many think that the strategy will be to increase the money supply, or even introduce a new form of the currency, as has just happened in North Korea.
The attraction of gold is for pessimists. It doesn't earn any interest, so mainly it is seen as a last-resort store of value when the money system breaks down (and it's nice to wear and show off). It is perfectly possible that you could make a loss on gold, but it will never be worth nothing at all, unlike the old US Continentals, or Confederate money after the North won the Civil War. In this context, it's worth noting that Reuters news agency reported back in September that Hong Kong moved its gold reserves out of London and into the gold depository at its Chek Lap Kok international airport. A sign of something, but what?
Gold is not the only tangible store of value, of course. Agricultural land, houses, food, medicines etc all have intrinsic value, i.e. they are worth something because of what they can do for you themselves, not just because they can be exchanged for something else.
Inflation remains a serious long-term threat. Comparing the past and present value of cash is difficult, because the economy has increased in size and changed in nature; but depending on the measure you use and looking at what has happened since 1971 (when I started at college), the British pound has lost 90% - 96% of its buying power. It's still (until April next year) possible to retire at age 50 in this country, so if history repeats itself, you could see a similar devaluation during a long retirement.
In short, it's not about the value of gold, but the unreliability of money.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, December 19, 2009
House prices: the second wave down?
Edward Harrison looks at statistics for US housing and quotes Frank Veneroso*, who guesses that, on average, houses with mortgages have almost no equity left in them:
"... the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."
For some US housebuyers (especially if they haven't taken out a second mortgage or secured loan on the property), the law relating to their loans says that they can return the house to the mortgage lender and if there is any debt left over after selling the house, that's the lender's hard luck - there's no pursuing the buyer. So if a homeowner is in negative equity and interest rates rise, the easy thing to do is strip the house, rent a van to move the stuff, and mail the house keys to the mortgage company (this is jocularly known as "jingle mail").
In some cases, the paperwork on the mortgage (written in haste in boom times) is so sloppy that mortgage lenders may not even be able to legally foreclose and seize the house.
I have also seen graphs (like this one) to show the large number of low-initial-fixed-rate mortgages that are going to return to variable rate in the next year or two, just as (it seems) interest rates may be on the increase.
So there are a number of reasons why banks, the housing market and the economy generally may still face very testing times.
*Veneroso also believes that for years, central banks have held far less gold than they would like us to believe. If this is correct and the currency comes under pressure, there may be a steep rise in the price of gold as the Federal Reserve and others buy back hastily, to reassure us that the currency does indeed have some kind of backing. But please remember (a) this is speculation and (b) gold has already appreciated very considerably in the last couple of years.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
"... the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."
For some US housebuyers (especially if they haven't taken out a second mortgage or secured loan on the property), the law relating to their loans says that they can return the house to the mortgage lender and if there is any debt left over after selling the house, that's the lender's hard luck - there's no pursuing the buyer. So if a homeowner is in negative equity and interest rates rise, the easy thing to do is strip the house, rent a van to move the stuff, and mail the house keys to the mortgage company (this is jocularly known as "jingle mail").
In some cases, the paperwork on the mortgage (written in haste in boom times) is so sloppy that mortgage lenders may not even be able to legally foreclose and seize the house.
Others, suspecting that the market will go down further, may wish to sell to get out what equity they can while there still is any. And actual or imminent unemployment may force still others to leave - the official US unemployment rate is around 10%, but some say that if looked at properly the true rate is more like 17%. (Update: John Williams says 22%)
I have also seen graphs (like this one) to show the large number of low-initial-fixed-rate mortgages that are going to return to variable rate in the next year or two, just as (it seems) interest rates may be on the increase.
So there are a number of reasons why banks, the housing market and the economy generally may still face very testing times.
*Veneroso also believes that for years, central banks have held far less gold than they would like us to believe. If this is correct and the currency comes under pressure, there may be a steep rise in the price of gold as the Federal Reserve and others buy back hastily, to reassure us that the currency does indeed have some kind of backing. But please remember (a) this is speculation and (b) gold has already appreciated very considerably in the last couple of years.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
'Tis a gift to be simple
Via Lifehacker, I find a sane blog to counter my (and possibly your) OCD: Small Notebook. One of the principles it stresses is knowing when to stop.
I'm adding it to my sidebar as a still, small voice of calm. Maybe you should do the same.
I'm adding it to my sidebar as a still, small voice of calm. Maybe you should do the same.
How should we invest if we're back to "boom and bust?"
Edward Harrison analyses the current financial situation, and thinks that governments will continue to try to stimulate their economies by increasing public debt. This will increase (or support) asset prices, but you can't rack up all your expenses on your credit card forever: another crisis will come and then it's time to pay the bill. The money base will shrink and asset prices will decline again.
The gamblers will try to buy into the false boom and sell before the bust, but this is a risky strategy. I haven't the nerve for it, though some would say you should be prepared to speculate with 10% of your investment money.
For the ordinary investor, it's a difficult time: holding cash will seem like a losing strategy, and he/she may be tempted back into the market at exactly the wrong moment - the moment when everybody thinks that "you can't lose". We saw this in the technology boom of the 90s, and the house price boom a few years ago.
What is clear is that the system is unstable. In these wild times, fortunes will be won by some, lost by others; but the prudent saver looking for secure and steady rewards will have to diversify and consider all sorts of safety measures. Let's look at common investment options, in what used to be thought of as ascending risk order.
If governments try to counter the downturn by producing too much new cash and credit, the result may be inflation and that will punish bank and building society accounts. The insurance company I started with in the late 80s used to have a handout on the effects of inflation: it showed the real purchasing power of money placed in a bank account for 10 years from the mid-70s to the mid-80s - even letting the interest accumulate in the account, your cash had lost 50% of its buying power in a decade. And the events of October 2008 have alerted savers to the fact that money in the bank is not a risk-free option - thank goodness for the limited (up to £50,000) protection of the Financial Services Compensation Scheme.
Government bonds (or gilts) are a problem, too - their yield (their annual income as a percentage of their current traded price) is very low, but when interest rates rise the capital value of gilts will fall correspondingly. There is also mounting concern about national credit ratings and the growing risk of default. For those who still have faith in the UK government's promises, National Savings and Investments claims to offer "100% security for your money" (actually, there is no such thing, but you know what they mean). For example, it is still possible to buy National Savings Index-Linked Certificates, to guard against inflation.
I suspect that with-profits funds will continue to face huge challenges in the coming years. They were set up to deliver modest but (most importantly) reassuringly steady growth; but the volatility of modern markets has stood up in their boat and is rocking it violently. Look out for further occasions when with-profits managers have to impose "Market Value Adjusters" (MVAs) - temporary discounts on the face value of your holding if you're trying to cash-out at a turbulent period. They're trying to preserve balance in an unbalanced time, and I fear they may not succeed.
Higher interest rates (maybe higher taxes, too) and increasing unemployment will tend to affect house prices. In a recession / depression, much commercial property will stand empty and so that market will decline, too.
When the money base shrinks and interest rates increase, businesses will suffer and many stocks and shares (aka "equities") will be hit. Already, professional investors have increased their holding of "defensive" stocks - shares in companies providing things we always need, such as energy and reasonably-priced food and clothing. You can reduce investment risk further by holding shares in more than one company and in more than one type of business; you can also diversify by including foreign equities.
Which brings us to another topic: currency depreciation. The British pound has lost some of its buying power abroad, in part a response by foreign investors to our problems with debt and a weakening economy. The pound has lost ground against the US dollar (not because the US economy is strong, but because the US dollar is still - for now - the world's trading currency) and the Euro over the last couple of years, so even if prices here in the UK seem stable, you might have gained by investment in other countries, or even just holding some money in foreign currency. Of course, the key questions are, which investments, which currencies, when to get in and out?
For the adventurous, there are commodities (everything from pork bellies to agricultural land, oil and gold), emerging markets (developing economies - remember the saying, "an emerging market is one from which it may be difficult to emerge") and specialist funds/shares, such as in technology and medical research.
Further up (or off) the scale are the outright financial gambles - futures and options, derivatives etc. These things - supposedly originally designed to cover and so reduce risk - are now the instruments that threaten our security. I think the main cause of the problem is that there seems to be no notion of "insurable interest", as with life insurance. Prior to the UK's Life assurance Act of 1774, it was possible to take out insurance on a complete stranger, whereas now you can insure only against the loss you might suffer if someone dies. If modern options trading was regulated in the same way, the market would be far smaller and much more secure. Perhaps that will come, one day.
This not the place for any recommendations, but if you are lucky enough to have any investments or savings, perhaps it's a good time to review them, maybe in consultation with your financial adviser. If you don't know which horse to back, then at least you can try to bet on a wider selection, or even all of them; for unlike racecourse betting, there is (most unfortunately) no option to stay out altogether; not unless you have nothing.
UPDATE
Z. O. Greenberg looks at ideas for diversifying investments out of the dollar. This would apply similarly to those who are chary of the British pound. But beware - some say the US dollar may strengthen soon.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The gamblers will try to buy into the false boom and sell before the bust, but this is a risky strategy. I haven't the nerve for it, though some would say you should be prepared to speculate with 10% of your investment money.
For the ordinary investor, it's a difficult time: holding cash will seem like a losing strategy, and he/she may be tempted back into the market at exactly the wrong moment - the moment when everybody thinks that "you can't lose". We saw this in the technology boom of the 90s, and the house price boom a few years ago.
What is clear is that the system is unstable. In these wild times, fortunes will be won by some, lost by others; but the prudent saver looking for secure and steady rewards will have to diversify and consider all sorts of safety measures. Let's look at common investment options, in what used to be thought of as ascending risk order.
If governments try to counter the downturn by producing too much new cash and credit, the result may be inflation and that will punish bank and building society accounts. The insurance company I started with in the late 80s used to have a handout on the effects of inflation: it showed the real purchasing power of money placed in a bank account for 10 years from the mid-70s to the mid-80s - even letting the interest accumulate in the account, your cash had lost 50% of its buying power in a decade. And the events of October 2008 have alerted savers to the fact that money in the bank is not a risk-free option - thank goodness for the limited (up to £50,000) protection of the Financial Services Compensation Scheme.
Government bonds (or gilts) are a problem, too - their yield (their annual income as a percentage of their current traded price) is very low, but when interest rates rise the capital value of gilts will fall correspondingly. There is also mounting concern about national credit ratings and the growing risk of default. For those who still have faith in the UK government's promises, National Savings and Investments claims to offer "100% security for your money" (actually, there is no such thing, but you know what they mean). For example, it is still possible to buy National Savings Index-Linked Certificates, to guard against inflation.
I suspect that with-profits funds will continue to face huge challenges in the coming years. They were set up to deliver modest but (most importantly) reassuringly steady growth; but the volatility of modern markets has stood up in their boat and is rocking it violently. Look out for further occasions when with-profits managers have to impose "Market Value Adjusters" (MVAs) - temporary discounts on the face value of your holding if you're trying to cash-out at a turbulent period. They're trying to preserve balance in an unbalanced time, and I fear they may not succeed.
Higher interest rates (maybe higher taxes, too) and increasing unemployment will tend to affect house prices. In a recession / depression, much commercial property will stand empty and so that market will decline, too.
When the money base shrinks and interest rates increase, businesses will suffer and many stocks and shares (aka "equities") will be hit. Already, professional investors have increased their holding of "defensive" stocks - shares in companies providing things we always need, such as energy and reasonably-priced food and clothing. You can reduce investment risk further by holding shares in more than one company and in more than one type of business; you can also diversify by including foreign equities.
Which brings us to another topic: currency depreciation. The British pound has lost some of its buying power abroad, in part a response by foreign investors to our problems with debt and a weakening economy. The pound has lost ground against the US dollar (not because the US economy is strong, but because the US dollar is still - for now - the world's trading currency) and the Euro over the last couple of years, so even if prices here in the UK seem stable, you might have gained by investment in other countries, or even just holding some money in foreign currency. Of course, the key questions are, which investments, which currencies, when to get in and out?
For the adventurous, there are commodities (everything from pork bellies to agricultural land, oil and gold), emerging markets (developing economies - remember the saying, "an emerging market is one from which it may be difficult to emerge") and specialist funds/shares, such as in technology and medical research.
Further up (or off) the scale are the outright financial gambles - futures and options, derivatives etc. These things - supposedly originally designed to cover and so reduce risk - are now the instruments that threaten our security. I think the main cause of the problem is that there seems to be no notion of "insurable interest", as with life insurance. Prior to the UK's Life assurance Act of 1774, it was possible to take out insurance on a complete stranger, whereas now you can insure only against the loss you might suffer if someone dies. If modern options trading was regulated in the same way, the market would be far smaller and much more secure. Perhaps that will come, one day.
This not the place for any recommendations, but if you are lucky enough to have any investments or savings, perhaps it's a good time to review them, maybe in consultation with your financial adviser. If you don't know which horse to back, then at least you can try to bet on a wider selection, or even all of them; for unlike racecourse betting, there is (most unfortunately) no option to stay out altogether; not unless you have nothing.
UPDATE
Z. O. Greenberg looks at ideas for diversifying investments out of the dollar. This would apply similarly to those who are chary of the British pound. But beware - some say the US dollar may strengthen soon.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Thursday, December 17, 2009
Time for a radical rethink
Warren Pollock considers ideas of Buckminster Fuller in relation to the economy and the real world. This is a most interesting video article and quite short (under 10 minutes). One point he makes is how vulnerable city-dwellers are, to dislocation of supplies. Click here to view the article.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Not time to get out of the market?
USA-based Chris Puplava at Financial Sense looks at indicators and thinks that although the market could suffer a downturn, that doesn't seem to be imminent.
This kind of analysis is for the active, more risk-taking investor: market timing is notoriously unpredictable.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
This kind of analysis is for the active, more risk-taking investor: market timing is notoriously unpredictable.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The inflation-deflation debate
Sheffield-based analyst Nadeem Walayat demonstrates that, apart from a blip a few months ago, the long-term inflationary trend in prices continues. Whether you look at CPI or RPI (the latter includes mortgage costs), household bills are rising.
He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.
Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.
But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.
Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.
But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The inflation-deflation debate
Sheffield-based analyst Nadeem Walayat demonstrates that, apart from a blip a few months ago, the long-term inflationary trend in prices continues. Whether you look at CPI or RPI (the latter includes mortgage costs), household bills are rising.
He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.
Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.
But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.
Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.
But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, December 15, 2009
Janszen: Gold is not overpriced
"Gold ads bug us from the TV and radio. To the new gold experts this means gold sentiment is now too bullish. We’re due for a crash.
Have they noticed that the gold ads are about selling not buying gold?"
In a long but well-worth-reading article, Eric Janszen of iTulip maintains that despite eight years of rising prices, gold is not undervalued, because the economic system is unstable. He points out that, for the first time in many years, central banks have started to buy gold.
Unlike many commentators, he doesn't support the notion that the dollar will collapse, because other major economies (e.g. China and Japan) have become dependent on the USA to buy their exports. Global inter-linking means that the coming bust will not take the same form as previous ones.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Have they noticed that the gold ads are about selling not buying gold?"
In a long but well-worth-reading article, Eric Janszen of iTulip maintains that despite eight years of rising prices, gold is not undervalued, because the economic system is unstable. He points out that, for the first time in many years, central banks have started to buy gold.
Unlike many commentators, he doesn't support the notion that the dollar will collapse, because other major economies (e.g. China and Japan) have become dependent on the USA to buy their exports. Global inter-linking means that the coming bust will not take the same form as previous ones.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, December 13, 2009
Inflation and then a bust, by 2012, says Andy Xie
Andy Xie, a respected former Morgan Stanley economic analyst says that low interest rates (cheap money) will lead to increasing asset prices until the game simply cannot continue, whereupon there will be a massive, world-wide breakdown, which he expects in 2012.
But Xie's ex-employer thinks the credit crisis may hit Britain as early as next year (hat-tip to "Jesse").
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
But Xie's ex-employer thinks the credit crisis may hit Britain as early as next year (hat-tip to "Jesse").
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, December 12, 2009
Could Britain go bust?
Britain's debtor weaknesses
Update: PIMCO has announced that it will be a net seller of UK bonds this year. The European portfolio manager is Andrew Balls, brother of UK government minister Ed Balls, so one wonders what the siblings may have to tell each other.
This week's Spectator includes an article by Irwin Stelzer, a noted economic commentator, entitled "Who would lend to a bankrupt Britain?"
Stelzer's comments follow recent developments in the market for "credit default swaps" (CDS) - insurance contracts that pay out if a business or government defaults on its debt. The premium (price) of the insurance reflects the degree of concern, and in the case of the UK, that concern has deepened.
CMA DataVision supplies information on the CDS market. Its third-quarter report on sovereign (national) debt assesses each country for the chances of a default within the next five years (CPD, or "Cumulative Probability of Default"), the cost of default insurance and what that means about creditworthiness. In this report (see page 14), the UK is rated as having a 4% CPD, with an implied credit rating at "aa+".
The top "aaa" credit rating is enjoyed by the USA, Australia and a small handful of European countries including ourselves, but things have moved on and it looks as though we are heading for a downgrading. The CMA report linked above covered the market for CDS contracts between July and September. On 7 December, the average CDS risk premium for the UK reportedly increased to 0.74% p.a. (85% higher than in the third quarter), which compares very unfavourably with the USA's premium at 0.32% p.a. This insurance repricing suggests that the UK's risk of default within 5 years may have risen to around 5.5%.
Are we going broke? Not yet, but our economy is not as strong as it used to be, and this is reflected in the price of gilts (government bonds, or Treasury securities). Gilts offer a fixed income for a fixed period, but can be bought and sold many times before their maturity date. Factors influencing their price include interest rates available elsewhere and the chance of default.
If gilts become cheaper, their fixed income is higher in comparison. The relationship of income to the traded price is called the "yield" - effectively, an interest rate. Immediately after British Chancellor Alistair Darling delivered his Pre-Budget Report to Parliament on 9 December, 10-year gilt prices fell and their yield rose from 3.81% to 3.85%.
The bond markets are, so to speak, the judges on Strictly Come Borrowing, and they are not impressed by the proposals they have seen. This, not bankruptcy, is the implication of CDS premiums, gilt yields and national credit ratings: we can expect to pay more for access to extra funds.
Since we are already so indebted, personally and nationally, an increase in interest rates will add to our burdens, at the same time that (in a recession) profits and tax revenues are decreasing; so Britain could have to borrow even more just to keep going. Spiralling debt and the growing reluctance of lenders could eventually force us to call in the International Monetary Fund as a lender of last resort, which we last did in 1976. That was bitter medicine, but still better than what would happen if we defaulted altogether and credit markets shunned us completely (or imposed loan-shark rates and terms).
However, we are very far from the worst case globally. The same third-quarter report by CMA DataVision named three countries that had a five-year default risk of over 50%: the Ukraine, Venezuela and Argentina. The annual CDS risk premiums for the first two were 12% and 11.25% respectively; both have since increased to over 13% per annum. Closer to home, Ireland's risk premium is 1.55%, Greece's 2%, , Lithuania's 3.2% and Iceland's 4.4%.
Although the USA is still regarded as a safe borrower, individual States are not: California's annual CDS premium is about 2.5%, reflecting an estimated 20% risk of default within 5 years.
British banks themselves now have a significant CDS premium, ranging from about 0.9% p.a. for Barclays to 1.4% p.a. for the Royal Bank of Scotland - the latter implies about a 10% risk of defaulting within 5 years.
So, no panic yet, but grounds for considerable concern.
Derivatives: a bigger worry?
A second worry is the state of credit default swaps themselves, and other "derivatives". The total amounts insured in this hard-to-understand market are vast, much bigger than any country's GDP. The USA's GDP is something like $14 trillion, but the CDS market is worth about $36 trillion - down from $62 trillion in 2008.
The derivatives market as a whole is much larger - an estimated $1,400 trillion in April 2009, many times the entire world's annual GDP. It's a mammoth global insurance/betting game, and if a major player comes unstuck it could destabilise finance, just as the collapse of Lehman Brothers and others threatened to do not long ago.
We think of insurance as reducing risk, but actually it's about transferring risk. Promises can turn out to be very expensive: the world's oldest mutual insurer, Equitable Life, suffered a major crisis because of a guarantee it made regarding minimum annuity rates for some of its pension investors; Barings, the oldest merchant bank in London, was destroyed by derivatives traded by its employee Nick Leeson.
The derivatives market is huge, interconnected and inadequately regulated. It is the fourth threat identified by Michael Panzner in his prescient book, "Financial Armageddon," which I reviewed in May 2007. Let us hope that this one can be neutralized in time.
______________________________________________
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Update: PIMCO has announced that it will be a net seller of UK bonds this year. The European portfolio manager is Andrew Balls, brother of UK government minister Ed Balls, so one wonders what the siblings may have to tell each other.
This week's Spectator includes an article by Irwin Stelzer, a noted economic commentator, entitled "Who would lend to a bankrupt Britain?"
Stelzer's comments follow recent developments in the market for "credit default swaps" (CDS) - insurance contracts that pay out if a business or government defaults on its debt. The premium (price) of the insurance reflects the degree of concern, and in the case of the UK, that concern has deepened.
CMA DataVision supplies information on the CDS market. Its third-quarter report on sovereign (national) debt assesses each country for the chances of a default within the next five years (CPD, or "Cumulative Probability of Default"), the cost of default insurance and what that means about creditworthiness. In this report (see page 14), the UK is rated as having a 4% CPD, with an implied credit rating at "aa+".
The top "aaa" credit rating is enjoyed by the USA, Australia and a small handful of European countries including ourselves, but things have moved on and it looks as though we are heading for a downgrading. The CMA report linked above covered the market for CDS contracts between July and September. On 7 December, the average CDS risk premium for the UK reportedly increased to 0.74% p.a. (85% higher than in the third quarter), which compares very unfavourably with the USA's premium at 0.32% p.a. This insurance repricing suggests that the UK's risk of default within 5 years may have risen to around 5.5%.
Are we going broke? Not yet, but our economy is not as strong as it used to be, and this is reflected in the price of gilts (government bonds, or Treasury securities). Gilts offer a fixed income for a fixed period, but can be bought and sold many times before their maturity date. Factors influencing their price include interest rates available elsewhere and the chance of default.
If gilts become cheaper, their fixed income is higher in comparison. The relationship of income to the traded price is called the "yield" - effectively, an interest rate. Immediately after British Chancellor Alistair Darling delivered his Pre-Budget Report to Parliament on 9 December, 10-year gilt prices fell and their yield rose from 3.81% to 3.85%.
The bond markets are, so to speak, the judges on Strictly Come Borrowing, and they are not impressed by the proposals they have seen. This, not bankruptcy, is the implication of CDS premiums, gilt yields and national credit ratings: we can expect to pay more for access to extra funds.
Since we are already so indebted, personally and nationally, an increase in interest rates will add to our burdens, at the same time that (in a recession) profits and tax revenues are decreasing; so Britain could have to borrow even more just to keep going. Spiralling debt and the growing reluctance of lenders could eventually force us to call in the International Monetary Fund as a lender of last resort, which we last did in 1976. That was bitter medicine, but still better than what would happen if we defaulted altogether and credit markets shunned us completely (or imposed loan-shark rates and terms).
However, we are very far from the worst case globally. The same third-quarter report by CMA DataVision named three countries that had a five-year default risk of over 50%: the Ukraine, Venezuela and Argentina. The annual CDS risk premiums for the first two were 12% and 11.25% respectively; both have since increased to over 13% per annum. Closer to home, Ireland's risk premium is 1.55%, Greece's 2%, , Lithuania's 3.2% and Iceland's 4.4%.
Although the USA is still regarded as a safe borrower, individual States are not: California's annual CDS premium is about 2.5%, reflecting an estimated 20% risk of default within 5 years.
British banks themselves now have a significant CDS premium, ranging from about 0.9% p.a. for Barclays to 1.4% p.a. for the Royal Bank of Scotland - the latter implies about a 10% risk of defaulting within 5 years.
So, no panic yet, but grounds for considerable concern.
Derivatives: a bigger worry?
A second worry is the state of credit default swaps themselves, and other "derivatives". The total amounts insured in this hard-to-understand market are vast, much bigger than any country's GDP. The USA's GDP is something like $14 trillion, but the CDS market is worth about $36 trillion - down from $62 trillion in 2008.
The derivatives market as a whole is much larger - an estimated $1,400 trillion in April 2009, many times the entire world's annual GDP. It's a mammoth global insurance/betting game, and if a major player comes unstuck it could destabilise finance, just as the collapse of Lehman Brothers and others threatened to do not long ago.
We think of insurance as reducing risk, but actually it's about transferring risk. Promises can turn out to be very expensive: the world's oldest mutual insurer, Equitable Life, suffered a major crisis because of a guarantee it made regarding minimum annuity rates for some of its pension investors; Barings, the oldest merchant bank in London, was destroyed by derivatives traded by its employee Nick Leeson.
The derivatives market is huge, interconnected and inadequately regulated. It is the fourth threat identified by Michael Panzner in his prescient book, "Financial Armageddon," which I reviewed in May 2007. Let us hope that this one can be neutralized in time.
______________________________________________
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Friday, December 11, 2009
The end of the dollar? But where else can we go?
The market is inherently unpredictable: if you think an accident is bound to happen, that still doesn't tell you when it will happen. However, this article by Paco Ahlgren takes the long view and maintains that the dollar must one day become worthless.
In the short term, who knows? In times of panic, many investors could run back to holding the dollar and temporarily boost its value.
Other countries are also weakening their currencies. Even the Euro suffers from flaws in the economies of some of its member countries, so although it may seem strong now against the pound and dollar, it too may be overvalued.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
In the short term, who knows? In times of panic, many investors could run back to holding the dollar and temporarily boost its value.
Other countries are also weakening their currencies. Even the Euro suffers from flaws in the economies of some of its member countries, so although it may seem strong now against the pound and dollar, it too may be overvalued.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Thursday, December 10, 2009
Education or Indoctrination?
Sackerson directed me to the following article: http://www.overcomingbias.com/2009/12/school-is-propaganda.html
In response, I argue that we have public schools because (based on the data):
a) they are cheaper than private schools;
b) they out-perform private schools, on average;
c) it is better to educate than imprison;
d) education is the only modern means for social mobility.
In response, I argue that we have public schools because (based on the data):
a) they are cheaper than private schools;
b) they out-perform private schools, on average;
c) it is better to educate than imprison;
d) education is the only modern means for social mobility.
Wednesday, December 09, 2009
Bringing down the Temple of Dagon
I listend to Radio 4's Any Questions? last Saturday and a question about bankers' bonuses reared its lovely head. And then the pundits fell down, one after another.
I can't answer the conundrum about the sound of one hand clapping, but I sure heard the sound of punches being pulled. Perhaps some of the speakers have banker friends; perhaps some are hoping not to alienate the Masters of the Universe in the weary stagger up to a General Election. But here's what I'd like to have said, and it proceeds from a simple question:
Did the bankers know the likely consequences of their actions?
If they didn't, they are incompetent and instead of dithering about the threat of the RBS' board to resign, the government should sack them and all like them. Doctors who are that bad at their jobs would be sued and/or worse.
If they did, they should be jailed. In my view, Max Keiser is not exaggerating when he calls them terrorists. They have wrought destruction on our economies and though the human cost may be hard to assess accurately, it is and will continue to be terrible.
So, why isn't it happening? A number of reasons occur to me:
1. It is convenient for politicians to have a few people earn (sorry, be given, legally steal) vast sums of money. The lucky recipients of this largesse can be taxed at 40% (or even 50% as under today's draft Budget proposals) and still have more than they can possibly eat, drink, wear or stick up their noses. "Tax doesn't have to be taxing", as that wretched radio advert chirrups.
2. Clapped-out politicians may one day be looking for a well-overpaid sinecure, like T--- B----. Best not to be too hard on your potential future employer.
3. Embarrassingly, the roots of the credit crunch are not (not merely) in socialist profligacy, but date back to the early 1980s. It was a so-called Conservative government, supposedly a convert to monetarism, that opened the floodgates of credit and tsunamied the economic "boom". Not a genuine boom, and now a very real bust. Criticising the present hapless bunch too sharply would beg a loud, sustained argument of "tu quoque" ("thou also didst so").
4. Just as an addict is partly responsible for the sins of the dealer, the consumer is implicated in the phoney house price rises and the spending spree. But I say that the Devil has the lowest place in Hell, because his knowledge was greater.
5. Nevertheless, if push came to shove, the bankers could point out that effectively, they were acting as the agents of a government determined to win re-election.
Very well, then. Let us have our punishment - we shall, anyway, and the next generation after us. But they must have theirs - the bankers, the politicians and the Fourth Estate that got too close and too cosy for too long.
Go for it.
I can't answer the conundrum about the sound of one hand clapping, but I sure heard the sound of punches being pulled. Perhaps some of the speakers have banker friends; perhaps some are hoping not to alienate the Masters of the Universe in the weary stagger up to a General Election. But here's what I'd like to have said, and it proceeds from a simple question:
Did the bankers know the likely consequences of their actions?
If they didn't, they are incompetent and instead of dithering about the threat of the RBS' board to resign, the government should sack them and all like them. Doctors who are that bad at their jobs would be sued and/or worse.
If they did, they should be jailed. In my view, Max Keiser is not exaggerating when he calls them terrorists. They have wrought destruction on our economies and though the human cost may be hard to assess accurately, it is and will continue to be terrible.
So, why isn't it happening? A number of reasons occur to me:
1. It is convenient for politicians to have a few people earn (sorry, be given, legally steal) vast sums of money. The lucky recipients of this largesse can be taxed at 40% (or even 50% as under today's draft Budget proposals) and still have more than they can possibly eat, drink, wear or stick up their noses. "Tax doesn't have to be taxing", as that wretched radio advert chirrups.
2. Clapped-out politicians may one day be looking for a well-overpaid sinecure, like T--- B----. Best not to be too hard on your potential future employer.
3. Embarrassingly, the roots of the credit crunch are not (not merely) in socialist profligacy, but date back to the early 1980s. It was a so-called Conservative government, supposedly a convert to monetarism, that opened the floodgates of credit and tsunamied the economic "boom". Not a genuine boom, and now a very real bust. Criticising the present hapless bunch too sharply would beg a loud, sustained argument of "tu quoque" ("thou also didst so").
4. Just as an addict is partly responsible for the sins of the dealer, the consumer is implicated in the phoney house price rises and the spending spree. But I say that the Devil has the lowest place in Hell, because his knowledge was greater.
5. Nevertheless, if push came to shove, the bankers could point out that effectively, they were acting as the agents of a government determined to win re-election.
Very well, then. Let us have our punishment - we shall, anyway, and the next generation after us. But they must have theirs - the bankers, the politicians and the Fourth Estate that got too close and too cosy for too long.
Go for it.
Debt: UK economy worse off than USA's
This article from Credit Writedowns looks at the development of debt over a long time, in both the US and UK economies.
Two things stand out (see charts 1a and 1b):
1. US debt (as a proportion of national income) is a worse problem now than in the Great Depression of the 1930s.
2. The UK's debt burden is signficantly worse than America's.
Consumer indebtedness exploded in the early 1980s - see the the first chart on this site. Up to then, it had pretty much kept pace with the growth of the economy generally. This is a major part of how our economic problems have developed - a deliberate loosening of credit to restimulate the stagnant economy of c. 1982. The banks grew fat on the loan-financed consumer boom, and on the inflation of property prices.
Now, our governments are looking for a way out. Mass unemployment and bankruptcies will turn the voters against them, so they have tried to keep the banking system going with loans that future generations must pay off. Insiders will tell you that they don't really know what they are doing, but they are in a panic to do something.
Technically, we are experiencing deflation - the total amount of money plus credit in the economy is shrinking, as lenders and spenders have become more cautious. But just as with Dubai recently, foreign investors are losing confidence in our ability to repay debt, and the dollar and pound have become worth less on the currency exchanges.
In the UK, as in the US, we spend a lot on things that come from outside our economy, and some of them are hard to cut out - energy, for example. So while house and car prices may be coming down, other costs are still rising, in pound terms. And as economic problems continue, it is possible that the pound may have further to fall.
So a combination of a slowed-down economy with price inflation - "stagflation" - is a potential threat to the UK.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Two things stand out (see charts 1a and 1b):
1. US debt (as a proportion of national income) is a worse problem now than in the Great Depression of the 1930s.
2. The UK's debt burden is signficantly worse than America's.
Consumer indebtedness exploded in the early 1980s - see the the first chart on this site. Up to then, it had pretty much kept pace with the growth of the economy generally. This is a major part of how our economic problems have developed - a deliberate loosening of credit to restimulate the stagnant economy of c. 1982. The banks grew fat on the loan-financed consumer boom, and on the inflation of property prices.
Now, our governments are looking for a way out. Mass unemployment and bankruptcies will turn the voters against them, so they have tried to keep the banking system going with loans that future generations must pay off. Insiders will tell you that they don't really know what they are doing, but they are in a panic to do something.
Technically, we are experiencing deflation - the total amount of money plus credit in the economy is shrinking, as lenders and spenders have become more cautious. But just as with Dubai recently, foreign investors are losing confidence in our ability to repay debt, and the dollar and pound have become worth less on the currency exchanges.
In the UK, as in the US, we spend a lot on things that come from outside our economy, and some of them are hard to cut out - energy, for example. So while house and car prices may be coming down, other costs are still rising, in pound terms. And as economic problems continue, it is possible that the pound may have further to fall.
So a combination of a slowed-down economy with price inflation - "stagflation" - is a potential threat to the UK.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, December 08, 2009
Beware the stock market boom
Another commentator I follow is an American called Warren Pollock. Here he says you should think twice about investing at this time. Companies raise cash from you by offering shares; now they have money, and you have hope.
In 1999, I attended a monthly meeting for brokers where a representative from one of the investment houses gave his views on the boom in technology shares. According to him, what we we were seeing was nothing to what would come after - the "super-boom". This was what we were to think, so we could advise our clients to buy into his company's technology fund.
Fund management companies earn a percentage of the money invested with them, so according to them it is always a good time to invest - the bigger their fund, the bigger their earnings.
If you are an investor who bought your shares through a stockbroker and you got in at the right time (low price), you need to get out at the right time (high price), so you need another buyer who thinks the price will go even higher. If you bought via a collective investment (e.g. the unit trusts that underpin most ISAs), then you can simply sell your units back to the fund - which means the fund has to find the cash to give you. And if the fund doesn't find new investors, it will shrink. So, maybe, that's the time to send their rep round to the brokers.
So you can see that at least two groups of people have a vested interest in encouraging optimism in you, even when they may not feel it themselves.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
In 1999, I attended a monthly meeting for brokers where a representative from one of the investment houses gave his views on the boom in technology shares. According to him, what we we were seeing was nothing to what would come after - the "super-boom". This was what we were to think, so we could advise our clients to buy into his company's technology fund.
Fund management companies earn a percentage of the money invested with them, so according to them it is always a good time to invest - the bigger their fund, the bigger their earnings.
If you are an investor who bought your shares through a stockbroker and you got in at the right time (low price), you need to get out at the right time (high price), so you need another buyer who thinks the price will go even higher. If you bought via a collective investment (e.g. the unit trusts that underpin most ISAs), then you can simply sell your units back to the fund - which means the fund has to find the cash to give you. And if the fund doesn't find new investors, it will shrink. So, maybe, that's the time to send their rep round to the brokers.
So you can see that at least two groups of people have a vested interest in encouraging optimism in you, even when they may not feel it themselves.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, December 06, 2009
Can we trust government information?
This snappy clip from the Mint.com blog (tip of the hat to Nathan's Economic Edge) examines official U.S. unemployment criteria and argues that the real jobless rate is not 10% but 17%.
As governments on both sides of the Atlantic continue to flounder, perhaps we can expect more misleading information and carefully-biased definitions. The inflation rate looks like another good candidate for this kind of treatment.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
As governments on both sides of the Atlantic continue to flounder, perhaps we can expect more misleading information and carefully-biased definitions. The inflation rate looks like another good candidate for this kind of treatment.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, December 05, 2009
Britain faces stagflation, says Walayat
Sheffield-based market analyst Nadeem Walayat argues that Britain's debt burden will continue to increase, accompanied by inflation as the government prints more money and the pound weakens against other currencies. Interest rates will have to rise to attract further lending to the UK, and the result will be economic stagnation.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Friday, December 04, 2009
China takes the long view
From Pension Pulse:
Keith thinks that all this talk of excess capacity in China is missing the bigger picture. He told me that China is planning and preparing for the future so they have every reason to over-invest now and build up their infrastructure aand stockpile the resources. It makes sense when you think about it; they saw all the mistakes the Western world made and decided its best to be better prepared for the future.
There are still problems in China, most notably the disparities between the rural and urban population, but they're making leaps and bounds in almost every area, including clean energy where China is securing first mover advantage in the market for renewable energy.
Keith thinks that all this talk of excess capacity in China is missing the bigger picture. He told me that China is planning and preparing for the future so they have every reason to over-invest now and build up their infrastructure aand stockpile the resources. It makes sense when you think about it; they saw all the mistakes the Western world made and decided its best to be better prepared for the future.
There are still problems in China, most notably the disparities between the rural and urban population, but they're making leaps and bounds in almost every area, including clean energy where China is securing first mover advantage in the market for renewable energy.
Thursday, December 03, 2009
Could Japan inadvertently start a run on America's credit?
Florida-based professional investor Karl Denninger comments on a rumour that Japan is considering selling U.S. government bonds ("Treasuries"). He reflects that such a move could begin a run on U.S. Treasuries, and the largest holder by far is China, who some think may have up to $1 trillion of U.S. debt.
A selloff would put pressure on the U.S. to raise interest rates, and this could have a domino effect in other countries. Higher interest rates make businesses' finance tougher, as well as hitting their customers' disposable income and therefore reducing demand for goods and services. So a crisis of faith in America's ability to repay its debts, and to maintain the exchange value of the dollar, could plunge the world economy back into recession. The investment outlook in this scenario would not be positive.
Denninger is a long-standing Cassandra on the U.S. economy, but he has a fairly sizeable following in the American personal investment community and despite his tendency to express himself in stark terms, his views and information should not be lightly dismissed.
A further reason to take him seriously is what has been happening between China and its U.S. debtors. It's been said some time ago, that China has been selling the debt of U.S. States and corporations in favour of U.S. Treasuries, because the latter are fully backed by the American Government. In retrospect, this seems to have been a very prudent move, since a number of U.S. States are now having significant difficulty in balancing their budgets, owing to a shrinking tax income and rising bills for unemployment benefit. It's understood that China has also been selling longer-term Treasuries to buy shorter-dated ones, because the latter offer an earlier exit should America's credit rating and currency weaken. So the notion that China might suddenly need or want to sell off Treasuries, is not entirely implausible.
On the other hand, America is China's best customer and if the dollar fell sharply or consumer spending reduced even more severely than it has already done, this would hit Chinese exports and increase unemployment in China, which is already a significant problem. It is in both parties' interests to manage the situation. The wider picture, many believe, is a long economic decline in the West as the East develops markets closer to its home, but at this stage everyone will prefer an ebbing tide to a tsunami in reverse.
Perhaps we should instead expect a slowing in the rate at which U.S. debt to China is increasing; and maybe an increasing reluctance on the part of the Chinese to purchase new Treasuries when the old ones mature.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
A selloff would put pressure on the U.S. to raise interest rates, and this could have a domino effect in other countries. Higher interest rates make businesses' finance tougher, as well as hitting their customers' disposable income and therefore reducing demand for goods and services. So a crisis of faith in America's ability to repay its debts, and to maintain the exchange value of the dollar, could plunge the world economy back into recession. The investment outlook in this scenario would not be positive.
Denninger is a long-standing Cassandra on the U.S. economy, but he has a fairly sizeable following in the American personal investment community and despite his tendency to express himself in stark terms, his views and information should not be lightly dismissed.
A further reason to take him seriously is what has been happening between China and its U.S. debtors. It's been said some time ago, that China has been selling the debt of U.S. States and corporations in favour of U.S. Treasuries, because the latter are fully backed by the American Government. In retrospect, this seems to have been a very prudent move, since a number of U.S. States are now having significant difficulty in balancing their budgets, owing to a shrinking tax income and rising bills for unemployment benefit. It's understood that China has also been selling longer-term Treasuries to buy shorter-dated ones, because the latter offer an earlier exit should America's credit rating and currency weaken. So the notion that China might suddenly need or want to sell off Treasuries, is not entirely implausible.
On the other hand, America is China's best customer and if the dollar fell sharply or consumer spending reduced even more severely than it has already done, this would hit Chinese exports and increase unemployment in China, which is already a significant problem. It is in both parties' interests to manage the situation. The wider picture, many believe, is a long economic decline in the West as the East develops markets closer to its home, but at this stage everyone will prefer an ebbing tide to a tsunami in reverse.
Perhaps we should instead expect a slowing in the rate at which U.S. debt to China is increasing; and maybe an increasing reluctance on the part of the Chinese to purchase new Treasuries when the old ones mature.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, December 01, 2009
India: reasons to be cheerful?
A briefing from SimplyBiz (the IFA support company) gives reasons why India may be an economy worth watching in years to come.
The demographics are in favour (half are under 25), the system is entrepreneurial and there is a large class of well-educated people.
The country has not yet adequately developed the infrastructure to support a booming industrial economy, but the government intends to spend $500 billion in the next five years to remedy this - and half a trillion dollars buys a lot more in India.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The demographics are in favour (half are under 25), the system is entrepreneurial and there is a large class of well-educated people.
The country has not yet adequately developed the infrastructure to support a booming industrial economy, but the government intends to spend $500 billion in the next five years to remedy this - and half a trillion dollars buys a lot more in India.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Is inflation on the way?
According to one commentator I follow, Japan has been pumping extra money into its system, seemingly with a view to making its currency weaker, which would make its exports cheaper and so stimulate extra demand.
If that was the plan, the first part of it seems to have worked, except in weakening the Yen vs the US dollar. The dollar went lower on world currency exchanges and Mr Pollock's reading is that the markets have started to wonder whether America will seek to do the same as Japan.
Pollock compares this situation to the beggar-thy-neighbour system between the two World Wars, when countries imposed tariffs on each other's exports to protect their own industries. Devaluing currencies was not so easy when they were backed by gold; now, nations can more easily expand their money supply to create inflation.
If other countries follow suit*, then the relationship of money to real things will alter and people will look to get rid of cash and buy things that will hold their value. Perhaps this is one of the factors behind the rise in the price of gold, but there's lots of other ways we could invest our money. Few are guaranteed to counter inflation, except products like National Savings Index-Linked Certificates; and even there we have the question of how the Government calculates the rate of inflation.
It is unsettling for the ordinary saver. Just when it seemed that "cash is king" and the prudent, frugal person was going to be rewarded by seeing prices drop (look at houses, cars, cruises, TVs and computers etc), the value of his/her money may be hit by inflation once again.
UPDATE (1st December):
* North Korea has just done something far worse. It has replaced the old currency with a new one, but only allowing a certain amount of the old to be changed into the new - effectively, a robbery of the larger saver.
UPDATE (4th December):
Koreans burning old money in protest, Korean government easing restrictions on converting currency (BBC) - (hat-tip to Credit Writedowns)
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
If that was the plan, the first part of it seems to have worked, except in weakening the Yen vs the US dollar. The dollar went lower on world currency exchanges and Mr Pollock's reading is that the markets have started to wonder whether America will seek to do the same as Japan.
Pollock compares this situation to the beggar-thy-neighbour system between the two World Wars, when countries imposed tariffs on each other's exports to protect their own industries. Devaluing currencies was not so easy when they were backed by gold; now, nations can more easily expand their money supply to create inflation.
If other countries follow suit*, then the relationship of money to real things will alter and people will look to get rid of cash and buy things that will hold their value. Perhaps this is one of the factors behind the rise in the price of gold, but there's lots of other ways we could invest our money. Few are guaranteed to counter inflation, except products like National Savings Index-Linked Certificates; and even there we have the question of how the Government calculates the rate of inflation.
It is unsettling for the ordinary saver. Just when it seemed that "cash is king" and the prudent, frugal person was going to be rewarded by seeing prices drop (look at houses, cars, cruises, TVs and computers etc), the value of his/her money may be hit by inflation once again.
UPDATE (1st December):
* North Korea has just done something far worse. It has replaced the old currency with a new one, but only allowing a certain amount of the old to be changed into the new - effectively, a robbery of the larger saver.
UPDATE (4th December):
Koreans burning old money in protest, Korean government easing restrictions on converting currency (BBC) - (hat-tip to Credit Writedowns)
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, November 29, 2009
Vent for the Day
In a discussion thread was this gem. What do you think?
'Innovation requires imagination, which requires an atmosphere where people can do that freely. That's why freedom is always better and leads to the "great ideas."
It's the idea that's important. Whoever has the idea can always get the geeks to actually create it.'
That's nice. Have someone else do all of the work, and get none of the credit. That's why the US and UK are overrun with technical talent.
'Innovation requires imagination, which requires an atmosphere where people can do that freely. That's why freedom is always better and leads to the "great ideas."
It's the idea that's important. Whoever has the idea can always get the geeks to actually create it.'
That's nice. Have someone else do all of the work, and get none of the credit. That's why the US and UK are overrun with technical talent.
Charitable giving - is it cost-effective?
As money gets tighter, charities have to compete more for what we are able to give them. How do we know that our contribution is being used effectively?
In the United States, you can log onto Charity Navigator and get financial information and ratings on U.S. charities, but unfortunately there is no sister site for the UK, so we have to check our charities with other sources.
For example, let's take a worthy-sounding UK-based cause called the World Children's Fund. This is attractively presented on its own website, and I have had several slick mailshot approaches from them which made me feel emotionally coerced. But are they value for money? I could look them up on Charity Choice, which says "WCF ... has minimal overhead costs". However, this may merely be a wording supplied by WCF itself, so we turn to the accounts submitted to the Charity Commission, where it transpires that 29.1% of the funds raised have been spent on "Generating voluntary income". Compare that with the British Red Cross Society, which only spent 13.7% on the same category.
But that's only one way to do the figures. Calculating the proportion that goes on "charitable spending", I see that WCF manages 70% as against the Red Cross' 76%; and the Red Cross is a massively bigger outfit, so it might benefit from economies of scale. Yet according to Charity Navigator, Action Aid International achieves 84.9% for "program expenses", despite having a turnover less than half that of WCF's.
Well, we get down to complexities of accounting again. How many hands touch the money as it goes past, how much sticks to their fingers, how much ends up where it's needed? How detailed, transparent, honest are the accounts?
And it also gets philosophical: what are the needs you're trying to address? How well are you succeeding? And don't the people involved in running the charity have needs, too? Should they work for nothing?
UK-based Intelligent Giving tries to give a subtler approach to weighing up the performance of charities, and how well they report on what they're doing - see here for their judgment on the Red Cross, for example. Intelligent Giving also features a page listing other evaluation sites and foundations that screen beneficiaries and projects.
New Philanthropy Capital is another UK-based organisation researching charities; and their blog argues that we can be too easily diverted by expenditure issues and should re-focus on what we are trying to achieve.
In short, think about and research your giving carefully, as you would do with other important spending.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
In the United States, you can log onto Charity Navigator and get financial information and ratings on U.S. charities, but unfortunately there is no sister site for the UK, so we have to check our charities with other sources.
For example, let's take a worthy-sounding UK-based cause called the World Children's Fund. This is attractively presented on its own website, and I have had several slick mailshot approaches from them which made me feel emotionally coerced. But are they value for money? I could look them up on Charity Choice, which says "WCF ... has minimal overhead costs". However, this may merely be a wording supplied by WCF itself, so we turn to the accounts submitted to the Charity Commission, where it transpires that 29.1% of the funds raised have been spent on "Generating voluntary income". Compare that with the British Red Cross Society, which only spent 13.7% on the same category.
But that's only one way to do the figures. Calculating the proportion that goes on "charitable spending", I see that WCF manages 70% as against the Red Cross' 76%; and the Red Cross is a massively bigger outfit, so it might benefit from economies of scale. Yet according to Charity Navigator, Action Aid International achieves 84.9% for "program expenses", despite having a turnover less than half that of WCF's.
Well, we get down to complexities of accounting again. How many hands touch the money as it goes past, how much sticks to their fingers, how much ends up where it's needed? How detailed, transparent, honest are the accounts?
And it also gets philosophical: what are the needs you're trying to address? How well are you succeeding? And don't the people involved in running the charity have needs, too? Should they work for nothing?
UK-based Intelligent Giving tries to give a subtler approach to weighing up the performance of charities, and how well they report on what they're doing - see here for their judgment on the Red Cross, for example. Intelligent Giving also features a page listing other evaluation sites and foundations that screen beneficiaries and projects.
New Philanthropy Capital is another UK-based organisation researching charities; and their blog argues that we can be too easily diverted by expenditure issues and should re-focus on what we are trying to achieve.
In short, think about and research your giving carefully, as you would do with other important spending.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, November 28, 2009
Société Générale: how to invest if the credit crunch worsens
A new report (fourth quarter of 2009) from French investment company Société Générale (SocGen) looks at the potential threat to the world economy of mounting debt. It may be that the credit crunch is far from over.
On page 12, the report looks at how investments could be affected, in the worst case. If the scenario is correct, then over the next 12 months SocGen predicts the best gains will come from long-term government bonds, and agricultural commodities.
On page 12, the report looks at how investments could be affected, in the worst case. If the scenario is correct, then over the next 12 months SocGen predicts the best gains will come from long-term government bonds, and agricultural commodities.
Thursday, November 26, 2009
Could Dubai be the trigger?
Warren Pollock points out that the real danger lies, not in Dubai possibly deciding to default on its sovereign debt, but in the credit default swaps surrounding the debt, which may magnify the problem by 10 - 100+ times. If some of these huge side bets are wild ones not adequately backed by the gamester's capital, off we go - and off Pollock goes, for his well-earned beer.
Incidentally, he gives a lovely description of a quantitative analyst: a schizophrenic with an IQ of 160 who belongs in a rubber room, but since he's working for a financial firm and "no-one understands him, what he's doing must be right". Only a brighter quant could spot his colleague's errors. Quis custodiet, eh?
Incidentally, he gives a lovely description of a quantitative analyst: a schizophrenic with an IQ of 160 who belongs in a rubber room, but since he's working for a financial firm and "no-one understands him, what he's doing must be right". Only a brighter quant could spot his colleague's errors. Quis custodiet, eh?
Don't know why, but this made me smile:
If you're feeling a little down today, and looking for something to be thankful for, be thankful you have not lent money to Dubai. Unless, of course, you have lent money to Dubai.
If you're feeling a little down today, and looking for something to be thankful for, be thankful you have not lent money to Dubai. Unless, of course, you have lent money to Dubai.
Wednesday, November 25, 2009
Breaking News - "Debtman" sunk
The following extract has been taken from news agencies, though Internet reception is currently poor on account of flooding and there may have been some scrambling of information. For the full story, click here.
British 'Debtman' Gordon Brown ditches in Atlantic
Not Philippe Naughton
The British political adventurer Gordon Brown found himself in deep water today after a failed bid to make the first long-range economic flight using a debt-powered wing attached to his back.
Brown, 58, planned to fly 7 years from the 2008 Credit Crunch to the 2015 General Election, at a speed of almost £120 million per hour, a flight that should have taken about 80 months.
Only a year into the flight, however, the British "Debtman" disappeared from TV feeds. Live pictures shortly afterwards showed him up to his neck in it, swimming around beside his Parliamentary pension golden parachute, while the IMF prepared to winch him to safety.
The reason for his failure was not immediately apparent to anybody except the blogosphere, but the British premier seemed to be unhurt and waved at a passing TV crew.
British 'Debtman' Gordon Brown ditches in Atlantic
Not Philippe Naughton
The British political adventurer Gordon Brown found himself in deep water today after a failed bid to make the first long-range economic flight using a debt-powered wing attached to his back.
Brown, 58, planned to fly 7 years from the 2008 Credit Crunch to the 2015 General Election, at a speed of almost £120 million per hour, a flight that should have taken about 80 months.
Only a year into the flight, however, the British "Debtman" disappeared from TV feeds. Live pictures shortly afterwards showed him up to his neck in it, swimming around beside his Parliamentary pension golden parachute, while the IMF prepared to winch him to safety.
The reason for his failure was not immediately apparent to anybody except the blogosphere, but the British premier seemed to be unhurt and waved at a passing TV crew.
Sunday, November 22, 2009
My hero!
Banks: "parasites... financial bastards... should never have lent the money in the first place... bankrupt them... nationalise them... cancel debt... or the economy will die... never-ending Depression."
Straight-talking Aussie economist Steve Keen, talking to teeth-clenched grinning, gonzo (but still on the money, in my opinion) "Wall Street are terrorists" Max Keiser.
Straight-talking Aussie economist Steve Keen, talking to teeth-clenched grinning, gonzo (but still on the money, in my opinion) "Wall Street are terrorists" Max Keiser.
Saturday, November 21, 2009
Steve Keen: we are facing a rerun of the 1930s
In a long and fairly technical presentation which, as an amateur I freely admit to not fully understanding, Steve Keen, one of the few professional economists to foresee the credit crunch, argues that there will NOT be a successful reflation this time, and instead we face a savage "deleveraging" as in the 1930s. Possibly worse, since the ratio of debt to GDP is worse this time.
Friday, November 20, 2009
India: the coming superpower
Like I've been saying for some time; and now someone else thinks so, too.
Thursday, November 19, 2009
Dilution
It is generally agreed that our current financial mess was precipitated by the sub-prime mortgage fiasco. The system was already burdened by too much debt to absorb those new losses. The commentators have moved on to the American hobby of assigning blame: to President Clinton and the Democrats for forcing the banks to offer high-risk loans to the poor, the bi-partisan officials for deregulation, and to the poor themselves, for accepting 'free' money.
To me, a finance ignoramus, the real questions are:
a) How did a few million bad loans bring down such a huge system?
and
b) How did the system get so much debt?
The answer to a) seems simple. While the government could have paid the $500 billion or so in bad loans, or Wall Street could have given up bonuses for a couple of years, the way that the debt was securitized meant that each bad dollar in investment was multiplied by factors in the hundreds. All on paper, of course.
As for b), I note that Robert Rubin states that 'this could not have been foreseen'. I can only attribute this to a quasi-religious belief in the magic of the market. Several people that I know were worried at the trends over 15 years ago. Nominal house prices were rising faster than inflation and incomes combined, and too many people were using their homes as cash machines by re-mortgaging.
This fiat money was magnified many times by the system through derivatives, until we reach the current state. With a world's annual production of goods and services at about $55 trillion, there is an estimated $1000 trillion in derivatives. That is, we have mortgaged everything on the Earth for the next 18-19 years. That's what I call a sub-prime loan!
Homeopathic 'medicines' are made by diluting active chemicals with distilled water until no molecule of the ingredient is left. We appear to be actively approaching homeopathic wealth, diluted by paper.
To me, a finance ignoramus, the real questions are:
a) How did a few million bad loans bring down such a huge system?
and
b) How did the system get so much debt?
The answer to a) seems simple. While the government could have paid the $500 billion or so in bad loans, or Wall Street could have given up bonuses for a couple of years, the way that the debt was securitized meant that each bad dollar in investment was multiplied by factors in the hundreds. All on paper, of course.
As for b), I note that Robert Rubin states that 'this could not have been foreseen'. I can only attribute this to a quasi-religious belief in the magic of the market. Several people that I know were worried at the trends over 15 years ago. Nominal house prices were rising faster than inflation and incomes combined, and too many people were using their homes as cash machines by re-mortgaging.
This fiat money was magnified many times by the system through derivatives, until we reach the current state. With a world's annual production of goods and services at about $55 trillion, there is an estimated $1000 trillion in derivatives. That is, we have mortgaged everything on the Earth for the next 18-19 years. That's what I call a sub-prime loan!
Homeopathic 'medicines' are made by diluting active chemicals with distilled water until no molecule of the ingredient is left. We appear to be actively approaching homeopathic wealth, diluted by paper.
Sunday, November 15, 2009
Strangling the goose
When the dust has settled on the Keydata case...
when Keydata and its directors no longer pay the taxman on profits, wages and dividends derived from a business that had, until the tax office got zealous and technical, apparently paid off all its debts, was showing a profit and had cash in hand;
.. will this really look like a win for the Shylock approach to revenue gathering, and to regulation?
when Keydata and its directors no longer pay the taxman on profits, wages and dividends derived from a business that had, until the tax office got zealous and technical, apparently paid off all its debts, was showing a profit and had cash in hand;
when the former employees are claiming a complex array of benefits instead of paying income tax and National Insurance;
when PriceWaterhouseCoopers have sent in their final massive bill for services rendered;
when the investors, many worried half to death for months, finally (most of them) get massive collective financial compensation from the Government..... will this really look like a win for the Shylock approach to revenue gathering, and to regulation?
The British taxman has become a laughing-stock
Following the ridiculous 2001 sale of the taxman's own offices to a property company that smartly transferred the ownership to the tax haven of Bermuda, the British Treasury has made itself into a charity case and is asking for tax-deductible donations to reduce the National Debt.
Saturday, November 14, 2009
In a tizz about guns
I have enjoyed firing rifles when a youth in the Combined Cadet Force (joining was compulsory at my school in the 60s), but away from a range, firearms scare me. Their power has a deadly fascination, just as the Ring has, even for the good Gandalf. (It's said that the samurai swords made by Muramasa tempted men to shed blood.)
However, here in the UK post-Dunblane, we haven't actually banned handguns; only legal ones. What now?
The National Rifle Association in the USA (htp: John Lott) obviously has its own quite clear agenda, but their arguments don't seem easy to dismiss out of hand. Here are some extracts:
... Researchers, both public and private, have estimated total defensive gun uses at between 800,000 and 2.5 million times per year. To many, that's a difficult reality to accept since we don't hear the hundreds of armed citizen stories that should be reported daily...
... One of the first things we learn through analysis of media-documented self-defense episodes is that no place is "safe"—no matter the place, time of day, neighborhood or crowds, no matter how unlikely an area is for a violent confrontation...
...The most frequently reported crime prevented by armed citizens has been home invasion... Approximately 25 percent of documented defensive gun uses occurred in places of business...
... Many anti-gun advocates would grudgingly allow ownership of rifles and shotguns if they could ban all handguns. Armed citizens, however, beg to differ. Of stories identifying defender firearms, 79 percent involved handguns. Shotguns were used only 15 percent of the time, and rifles 6 percent. The message is clear: Banning handguns would remove the most common means of self-defense for most people...
... In confrontational shootings, studies show police hit their targets between 13 percent and 25 percent of the time. Of the incidents analyzed in this study, civilians hit their targets 84 percent of the time. This comparison does not account for the number of shots fired, only hits or misses. Nevertheless, it gives us a statistical basis to refute claims that only police should have firearms or that civilian shooters are largely ineffective in emergencies.
I'd like to pooh-pooh it all as gun-nuttery, but if opposing the right to bear arms, where would one begin?
What an irony that (allegedly) a man can single-handedly kill 13 and wound 31 on the biggest Army base in America, and be stopped only by a policewoman's pistol (or maybe a sergeant's, we're not sure).
However, here in the UK post-Dunblane, we haven't actually banned handguns; only legal ones. What now?
The National Rifle Association in the USA (htp: John Lott) obviously has its own quite clear agenda, but their arguments don't seem easy to dismiss out of hand. Here are some extracts:
... Researchers, both public and private, have estimated total defensive gun uses at between 800,000 and 2.5 million times per year. To many, that's a difficult reality to accept since we don't hear the hundreds of armed citizen stories that should be reported daily...
... One of the first things we learn through analysis of media-documented self-defense episodes is that no place is "safe"—no matter the place, time of day, neighborhood or crowds, no matter how unlikely an area is for a violent confrontation...
...The most frequently reported crime prevented by armed citizens has been home invasion... Approximately 25 percent of documented defensive gun uses occurred in places of business...
... Many anti-gun advocates would grudgingly allow ownership of rifles and shotguns if they could ban all handguns. Armed citizens, however, beg to differ. Of stories identifying defender firearms, 79 percent involved handguns. Shotguns were used only 15 percent of the time, and rifles 6 percent. The message is clear: Banning handguns would remove the most common means of self-defense for most people...
... In confrontational shootings, studies show police hit their targets between 13 percent and 25 percent of the time. Of the incidents analyzed in this study, civilians hit their targets 84 percent of the time. This comparison does not account for the number of shots fired, only hits or misses. Nevertheless, it gives us a statistical basis to refute claims that only police should have firearms or that civilian shooters are largely ineffective in emergencies.
I'd like to pooh-pooh it all as gun-nuttery, but if opposing the right to bear arms, where would one begin?
What an irony that (allegedly) a man can single-handedly kill 13 and wound 31 on the biggest Army base in America, and be stopped only by a policewoman's pistol (or maybe a sergeant's, we're not sure).
Rude funnies that made my wife laugh
Friday, November 13, 2009
Frustration
Several international studies show the the US and UK populations perform woefully in science and mathematics, when compared with other industrialized nations. I have no doubt that this is contributing to our economic decline, which is supported by Sackerson's recent post on the health of the German economy.
Neurological studies show that talent in these areas seems to be genetic. However, the disregard for those with the talents, and the simultaneous embracement of the technology that results, is a cultural issue.
One does not have to look hard to see some of the enabling elements:
Popular culture has elevated all opinions to the same level. Sometimes, the level is based on the volume of the holder, or the number of adherants. Thus, the majority of the US public holds creationism at the same factual level as evolution theory, chiropractic as equivalent or better than evidence-based medicine, astrology equal to astronomy, and homeopathic medicines as better than those with active ingredients.
Our leaders make decisions based on the current polls and personal bias, even when the issues are highly technical, like defense, energy, medicine and education.
Our colleges of education teach that pedagogy trumps knowledge base. In other words, a 'good' teacher supposedly can teach material that they do not understand. Business colleges teach similarly that management skills are independent of the industry involved.
In higher education, we pretend that logic and analytical skills really don't matter, while claiming to teach 'critical thinking'.
I can give no better example than to summarize the discussion at a college meeting that I attended today. One highly-educated individual said: "It is all very well to have technical training (in science, technology, engineering and mathematics), but that is not 'real' education".
Neurological studies show that talent in these areas seems to be genetic. However, the disregard for those with the talents, and the simultaneous embracement of the technology that results, is a cultural issue.
One does not have to look hard to see some of the enabling elements:
Popular culture has elevated all opinions to the same level. Sometimes, the level is based on the volume of the holder, or the number of adherants. Thus, the majority of the US public holds creationism at the same factual level as evolution theory, chiropractic as equivalent or better than evidence-based medicine, astrology equal to astronomy, and homeopathic medicines as better than those with active ingredients.
Our leaders make decisions based on the current polls and personal bias, even when the issues are highly technical, like defense, energy, medicine and education.
Our colleges of education teach that pedagogy trumps knowledge base. In other words, a 'good' teacher supposedly can teach material that they do not understand. Business colleges teach similarly that management skills are independent of the industry involved.
In higher education, we pretend that logic and analytical skills really don't matter, while claiming to teach 'critical thinking'.
I can give no better example than to summarize the discussion at a college meeting that I attended today. One highly-educated individual said: "It is all very well to have technical training (in science, technology, engineering and mathematics), but that is not 'real' education".
Thursday, November 12, 2009
Sunday, November 08, 2009
Reds at St Catherine's College, Oxford
I haven't the time - or resources - to explore this fully, but there does seems to be plenty to find about a nexus of Marxists and revolutionary socialists at St Catherine's College, Oxford, starting as early as the 70s* and forming the background for Peter Mandelson and others with connexions to New Labour. I should be grateful for more insights.
*With much deeper roots - e.g. Terry Eagleton was a protege of Raymond Williams.
*With much deeper roots - e.g. Terry Eagleton was a protege of Raymond Williams.
Life insurance securitization
It seems the next bubble could be “life insurance securitization”. The idea is to buy other people's life cover, that maybe they would otherwise let lapse. So you then collect on the insured, face-value payout.
This will lead to problems. When setting premium levels, insurers factor-in the likelihood that the policy will not be maintained up to the point of a claim. This helps them cut the premiums in what can be a very competitive market, especially in term (limited-period) assurance. If insurers find that securitization leads to more policies qualifying for a claim, it will mess up their calculations and they will have to up premiums for similar new policies.
There is also a strong chance that existing policies that do not have fixed,"guaranteed premium" rates will be reviewed and repriced upwards. This won't help already cash-strapped households hang on to a vital part of their financial safety net.
Many policies are already being repriced because of the underperformance of insurance companies' investments in recent years, so overall it looks like a bad trend could develop in life assurance costs and consumer uptake.
There are other dangers, as UK investors in some Keydata Investment Services products have discovered. Their "Secure Income Bond" suite of investments was based on securitized "key employee" term assurance and following a tax investigation into their legal documentation, the plans were disqualified from certain exemptions. The resulting retrospective tax charge was laid at Keydata's door, and busted them. The incoming administrators, PriceWaterhouseCoopers, have found £100 million of underlying assets are now "missing". The situation is further complicated by the fact that the assets of the Secure Income Bond were held by a company set up in the secretive foreign tax haven of Luxembourg. Britain's Serious Fraud Office has been called in, and investors now await a ruling this week by the Financial Services Compensation Scheme as to whether they will be reimbursed for losses in what was supposed to be a safe, non-stock market-related investment.
The potential is huge - the New York Times reports $26 trillion in existing life cover policies in the USA alone, of which maybe $500 billion could be in the market for securitization. And the potential damage is equally huge. Will insurance companies end up needing bailouts like the banks? Could the US economy survive a second giant hammer blow?
This will lead to problems. When setting premium levels, insurers factor-in the likelihood that the policy will not be maintained up to the point of a claim. This helps them cut the premiums in what can be a very competitive market, especially in term (limited-period) assurance. If insurers find that securitization leads to more policies qualifying for a claim, it will mess up their calculations and they will have to up premiums for similar new policies.
There is also a strong chance that existing policies that do not have fixed,"guaranteed premium" rates will be reviewed and repriced upwards. This won't help already cash-strapped households hang on to a vital part of their financial safety net.
Many policies are already being repriced because of the underperformance of insurance companies' investments in recent years, so overall it looks like a bad trend could develop in life assurance costs and consumer uptake.
There are other dangers, as UK investors in some Keydata Investment Services products have discovered. Their "Secure Income Bond" suite of investments was based on securitized "key employee" term assurance and following a tax investigation into their legal documentation, the plans were disqualified from certain exemptions. The resulting retrospective tax charge was laid at Keydata's door, and busted them. The incoming administrators, PriceWaterhouseCoopers, have found £100 million of underlying assets are now "missing". The situation is further complicated by the fact that the assets of the Secure Income Bond were held by a company set up in the secretive foreign tax haven of Luxembourg. Britain's Serious Fraud Office has been called in, and investors now await a ruling this week by the Financial Services Compensation Scheme as to whether they will be reimbursed for losses in what was supposed to be a safe, non-stock market-related investment.
The potential is huge - the New York Times reports $26 trillion in existing life cover policies in the USA alone, of which maybe $500 billion could be in the market for securitization. And the potential damage is equally huge. Will insurance companies end up needing bailouts like the banks? Could the US economy survive a second giant hammer blow?
Reds under the chaise longue
Why would someone concentrate his academic research on how America has tried to counter Communism within its own country? But (and I think it more telling) why would the Labour Party notice and employ such a person?
Andrew Neather's PHD and a follow-up article surface in several places on the Web, e.g.:
"Popular Republicanism, Americanism, and the Roots of Anti-Communism, 1890-1925"
Duke University Ph.D. dissertation, May 1994
"Twentieth-Century Communism and Anticommunism: the View After the Cold War"
Reviews in American History - Volume 23, Number 2, June 1995, pp. 336-341
Linkedin.com supplies details of Neather's experience - a year working for Dennis McShane; another doing editing work for the Labour Party; nearly 3 years with Friends of the Earth; a year speechwriting at the Home Office under Jack Straw and David Blunkett; a year speechwriting with Tony Blair; and now he's with the Evening Standard, writing on wine, cycling, travel and local issues, as well as editing comments. (There seems to be a lacuna of a year (1994-95) between completing the PhD and starting with McShane, but doubtless it was some sort of gap year-cum-looking for a career.)
I think he's probably harmless, and the track record suggests a touch of the Green idealist and instinctive-moderniser-against-the-wicked-Establishment. If he were a "sleeper", he'd not have blurted out the stuff about Labour's secret motivations regarding immigration policy.
But "as the twig is bent, so the tree will grow": we have to look at beginnings, try to find some of the warning signs.
I recall a tiny incident regarding Peter Mandelson's college, St Catherine's, Oxford, at the time he was there (1973-76 - why did Peter matriculate at age c. 20?). I'd gone over there one evening (summer '75) with some friends to see a Ken Russell film, and we had a drink in the student bar first. Noticing us, somebody at the other end called out "bleedin' poors". True, but why say it?
It's not what someone does that is most revealing; it's the context, the belief that what they're doing is acceptable. St Catherine's was rather nice - newish, and expensively-designed, right down to the knives and forks (I kid you not). We were impressed; it was time when we still wore thick jumpers because college rooms were cold, and drank beer from large Party Seven cans at parties. Ever get the feeling that you've been let in by mistake, and wonder when you can afford better-looking shoes and clothes?
Privilege and socialism went together in those times. Posh Marxist meddlers dined at the Elizabeth or the Randolph, wore expensive blue boiler suits as a political fashion statement, spoke contemptuously at the Oxford Union of "the talking professions" that, of course, they would soon join. In the street, I overheard two chaps discussing what they would do when they graduated; one said it was a toss-up between joining his father's stockbroking firm or the IMG (International Marxist Group).
Power is sexier than money. In the old days, bored toffs could shag debs at the Hunt Ball, knock the necks off brandy bottles at two in the morning, test themselves against professional boxers; but ah, the chance to lead Revolution...
Don't look for revolutionaries among the likes of John Prescott, a former "bleedin' poor" who knows which side his bread is buttered; look for them among the drawing-room drawlers, the tea-table traitors, the Kim Philbys.
Who is to say that forty years from now, one of our deadliest enemies may not turn out to have been in the Bullingdon Club?
Andrew Neather's PHD and a follow-up article surface in several places on the Web, e.g.:
"Popular Republicanism, Americanism, and the Roots of Anti-Communism, 1890-1925"
Duke University Ph.D. dissertation, May 1994
"Twentieth-Century Communism and Anticommunism: the View After the Cold War"
Reviews in American History - Volume 23, Number 2, June 1995, pp. 336-341
Linkedin.com supplies details of Neather's experience - a year working for Dennis McShane; another doing editing work for the Labour Party; nearly 3 years with Friends of the Earth; a year speechwriting at the Home Office under Jack Straw and David Blunkett; a year speechwriting with Tony Blair; and now he's with the Evening Standard, writing on wine, cycling, travel and local issues, as well as editing comments. (There seems to be a lacuna of a year (1994-95) between completing the PhD and starting with McShane, but doubtless it was some sort of gap year-cum-looking for a career.)
I think he's probably harmless, and the track record suggests a touch of the Green idealist and instinctive-moderniser-against-the-wicked-Establishment. If he were a "sleeper", he'd not have blurted out the stuff about Labour's secret motivations regarding immigration policy.
But "as the twig is bent, so the tree will grow": we have to look at beginnings, try to find some of the warning signs.
I recall a tiny incident regarding Peter Mandelson's college, St Catherine's, Oxford, at the time he was there (1973-76 - why did Peter matriculate at age c. 20?). I'd gone over there one evening (summer '75) with some friends to see a Ken Russell film, and we had a drink in the student bar first. Noticing us, somebody at the other end called out "bleedin' poors". True, but why say it?
It's not what someone does that is most revealing; it's the context, the belief that what they're doing is acceptable. St Catherine's was rather nice - newish, and expensively-designed, right down to the knives and forks (I kid you not). We were impressed; it was time when we still wore thick jumpers because college rooms were cold, and drank beer from large Party Seven cans at parties. Ever get the feeling that you've been let in by mistake, and wonder when you can afford better-looking shoes and clothes?
Privilege and socialism went together in those times. Posh Marxist meddlers dined at the Elizabeth or the Randolph, wore expensive blue boiler suits as a political fashion statement, spoke contemptuously at the Oxford Union of "the talking professions" that, of course, they would soon join. In the street, I overheard two chaps discussing what they would do when they graduated; one said it was a toss-up between joining his father's stockbroking firm or the IMG (International Marxist Group).
Power is sexier than money. In the old days, bored toffs could shag debs at the Hunt Ball, knock the necks off brandy bottles at two in the morning, test themselves against professional boxers; but ah, the chance to lead Revolution...
Don't look for revolutionaries among the likes of John Prescott, a former "bleedin' poor" who knows which side his bread is buttered; look for them among the drawing-room drawlers, the tea-table traitors, the Kim Philbys.
Who is to say that forty years from now, one of our deadliest enemies may not turn out to have been in the Bullingdon Club?
Subscribe to:
Posts (Atom)