Daniel Hannan and the EU

Look at the clip below - and pause it at 9 seconds in. All you need to know about the EU?

Should we have paid-off everyone's mortgage?

A recent figure I've seen for total mortgage debt outstanding in the US is $14.4 trillion. According to this commentator, the true cost of all the financial crisis bailout measures is $14 trillion. Should we have simply cancelled all mortgages, massively deflating house values but liberating millions of Americans from the threat of repossession and freeing up large amounts of their take-home income?

Probably not. Sudden and simplistic measures can be horribly destructive. But can we permit a system to continue, that is built on inflating (or maintaining the absurdly high level of) the cost of our dwellings? In cartoon-mythical ancient times, all a tribe of cavemen had to do was get rid of the bear - all in a day's work - and now the right to live in your own space takes years and years of toil.

Back to Thoreau and Walden?

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.

Big market fall expected, over several years

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time.

This from "Jesse", a sober and savvy commentator who deplores the schadenfreude crowd. Do read the rest.

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.

Matt Taibbi on the reinflated bubble

Rolling Stone journalist Matt Taibbi reexamines the world of Wall Street in his latest article of 3 days ago. He finds that the US government, aiming to rid the market of toxic mortgage-related investments, has provided cash for buyers and so inadvertently created a market for the rubbish it's trying to clear. In the third quarter of last year, reports Taibbi, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America bought $3.36 billion of such bad assets, presumably expecting to sell them on at a profit in a government-underwritten buying environment.

Slashing interest rates to get us through the emergency has made ordinary savings accounts unproductive and forced money into investments instead, even when analysis says stay out:

"One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the cr*p toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

"So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

""I said, '**** it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"

"This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street."

It takes nerve to stay out of the market when it's rising and when you think you may lose value on your cash held at bank. But unless you're confident that you'll be able to "jump out of the car before it goes off the cliff" (and remember, you don't have access to instant dealing like the City pros), maybe sitting on your hands is the thing to do.

And if price inflation worries you, don't forget, both the US and UK governments still sell guaranteed inflation-proofed investments of their own.

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.

"Consumer choice" and liberty

A letter to the Spectator magazine, emailed to them today:

Sir: Your editorial (“People Power”, 20 February) welcomes Conservative proposals to extend consumer choice in schools and hospitals, and I hope this will open a wider debate about these imperfect and possibly outdated reifications of learning and health. For example, might we see less bureaucratic resistance to, and more financial support for home education?

But if the Conservatives have rediscovered their appetite for freedom and democracy, why, as Greece, fons et origo of those principles, lies tormented on the Procrustean metanarrative of the EU, are we denied a voice in the ultimate political question, that of national self-determination? Absent a referendum on membership of the Romantic and revolutionary project, we shall be limited-list libertarians, like council house dwellers selecting the hue of their front doors from officially-compiled colour charts.

Are we to be consulted, or must we refuse to vote at all in the coming General Election?

Jerking the chain: China preparing a proxy US bond dump?

A few days ago on the Broad Oak Blog, I referred to Brad Setser's theory that China has been using the UK to make purchases of US Treasury securities, and that this may offer a different view of what has been happening recently (the apparent reduction in Chinese support for US debt).

In response to a comment, I suggested that the reason for this supposed system of proxy purchases was to allay the fears of the American public.

It occurs to me now, belatedly, that the recent reduction in direct Chinese holdings, coupled with the increase in holding by the UK, may be a preparation for a self-protective (or even punitive) dump of Treasuries using the same intermediaries. If their direct holdings remained relatively unchanged, the Chinese could (if their nominees stayed quiet) deny responsibility and forestall a backlash from American public opinion.

The Beginning of the End?

A recent episode of 'The Simpsons' featured a popular new teacher, who gave assignments by iPhone, and didn't believe in memorization, since it 'is simpler and easier to just google it'.

I laughed, until I started an on-line exchange with an instructor at a private college. I learned that there is a new breed of teacher, coming mostly from colleges of education. They use phrases such as 'training life-long learners', 'having students take charge of their education', 'learning to use the correct tools, rather than learning how to do things', 'cite sources, rather than memorizing' and 'communicating with podcasts, instead of writing'.

I have seen these methods tried in mathematics and science education, and they simply do not work. Even if they do work in other subjects (doubtful), the bad training carries over to the technical fields, hampering the learning anyway. That should be the end of the matter, except that these ideas are dangerously attractive:

Weak or lazy students like them, since they can get good grades without actually mastering anything. They also get the comfortable illusion of learning, without the pain.

Administrators like the idea, since they can then eliminate or reduce the cost of libraries and textbooks, and replace experts in subject matter with general 'communicators'. All teaching is then a higher art, being removed from 'mere content delivery'. This last is a phrase that I heard used by a colleague in our college of education.

Lastly, parents and politicians love the idea, since education costs can be brought down, and performance is way up, at least on paper. Never mind that the Pacific Rim countries, still using the 'old-fashioned' techniques, are outperforming us, year after year.

How much longer until we have the world of Ray Bradbury's 'Fahrenheit 451', when books are actually banned, because reading makes some people feel inferior?

A dire warning

Egon von Greyerz of Matterhorn Asset Management lays out his reasons for investing in physical gold. You may or may not accept his argument, but his analysis of worldwide economic problems is deeply troubling.

Whether or not gold is the right prescription, I am very much afraid that he may be making the right diagnosis and prognosis. Do have a look.

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 dire warning

Egon von Greyerz of Matterhorn Asset Management lays out his reasons for investing in physical gold. You may or may not accept his argument, but his analysis of worldwide economic problems is deeply troubling.

Whether or not gold is the right prescription, I am very much afraid that he may be making the right diagnosis and prognosis. Do have a look.

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.

What use are news organisations?

Our news media are a craven lot, aren't they? Mahmoud al-Mabhouh is killed in his hotel room by (allegedly) a Mossad assassination team, and everything I hear or see on the news is a fuss about the passports they used. I would almost rather have D-notices slapped all round, than have the media come in on cue and on one note like well-trained little choristers. At least censorship would indicate some residual respect for the Press; and for us.

The readers of the Boston Evening Transcript
Sway in the wind like a field of ripe corn.

T.S. Eliot

What goes up...

Reading "Jesse", I see an interesting graph (reproduced right). This looks at what proportion of US mutual fund (UK: think unit trust) money is held in cash. According to the graph, funds are more nearly "fully invested" than at any point since 1970.

So, where will the money come from to power further gains on the index? Or is it (as I fear) a sign that the private investor is trustingly holding the baby, just as the institutional investor (who only holds 20% of total US shares) is about to "pop out to get something, he'll be back in a bit"?

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.

Why inflation is bad

Mike Shedlock:

7Q. Who benefits from inflation?

7A. Inflation benefits those with first access to money, the banks and the already wealthy. It is a stealth tax on the middle class and poor whose wages never keep up with inflation. That problem is compounded by rising property taxes, sales taxes, etc, that eats consumers alive. Those at the bottom end of the totem pole get hit even harder. Their wages do not rise and they have no assets to inflate.

Absolutely spot-on. The theorists who say increasing the money supply doesn't matter because the effects spread throughout the system, overlook the point I've highlighted above. It's a grab.

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 advance of totalitarian ideals continues

In a well-publicised and suspiciously originated piece of research conducted on behalf of MiniJust, doubt is thrown on the "efficient" working of juries. Far better, you may think, ladies and gentlemen of the jury, to leave it all to us and not worry your pretty little heads about it.

Meanwhile, the case against Cossor Ali, in which she is being tried for not acting as a police informer against her husband (despite not knowing exactly what he was going to do), continues.

Also, support for killing the terminally ill grows, according to a poll conducted by YouGov, perhaps not entirely coincidentally well-timed to announce its results just before well-loved author Terry Pratchett was permitted to use his fame and the (exceptionally-well-publicised this year) platform of the BBC's annual Richard Dimbleby Lecture to air his euthanistic views. YouGov is not, officially, a politically-sponsored organisation, but was founded in May 2000 by Stephan Shakespeare (ne Kukowski), a former Socialist Worker and Conservative Party candidate who owns some prominent political websites including ConservativeHome. He may not be directly controlled by any party (though how far do they differ these days?), but oh, for his contacts book!

An old Nazi writes:

"What is all this nonsense of wives not reporting their criminal husbands? In my day, children could inform on their parents, and quite right, too. I trust the Cossor Ali case will set a valuable precedent.

"It is refreshing to see that after the unpleasantness of the late 1930s and early 1940s, and the vilification of us and our ideas in the decades since then, the principles of right-thinking people are finally being rediscovered and properly valued. Gratifyingly, British political parties have been drawing together for decades, forming a consensus on which the New Society can be built. Once the people have asserted their power to deal with all the fleas that multiply on their backs and weaken them, we shall become clean and healthy again.

"A vital first step was the establishment of the right to make the problem of inconvenient children go away. Some 7 million such problems have been solved in the UK since 1968, the overwhelming majority on legal ground C ("The continuance of the pregnancy would involve risk, greater than if the pregnancy were terminated, of injury to the physical or mental health of the pregnant woman"). You will note, of course, that the "injury" does not have to be grave, and can therefore be interpreted to mean as little as a mild social or financial embarrassment.

"The killing of unborn cripples is covered by ground E, and I see that a fruitful extension of this principle has been called for by doctors as lately as 2006, so that newborns may be included in your cost-effective program. Quite rightly, these doctors draw attention to the interests of the family as a whole, and this offers a promising route to including the needs of society at large, especially when so many families are supported by public funds.

"Crime is another kind of disorder in which society most definitely has an interest, and Freakonomics author Steven Levitt famously argued that abortion has been a great boon in this regard. There are those who say his research is fatally flawed, but even if the details are wrong, surely he was on the right lines. The poor are a great burden, and their lives are so messy.

"But you cannot always tell in advance when someone will turn out to be one of Life's failed experiments. Once we have established postnatal abortion, pre-decline "mercy killings" and the execution by thirst of those in a persistent vegetative state, we should be in a position to reformulate the fundamental principles on which society operates.

"How much longer, for example, must felons be spared - so weakly, so expensively, so anomalously - their worthless and destructive lives? Why should the guilty not share the fate of the troublesome innocents you dispatch in such numbers? This is so illogical of you British; but then, my people used to proud of their ability to think. As Menzel said, "Das sinnige deutsche Volk liebt es zu denken und zu dichten, und zum Schreiben hat es immer Zeit." Only connect, ja?

"Before that becomes possible, (and now, it seems, may be the time) we will have to address the unreliability of courts, juries and the appeals system. I confidently expect the evolution of a form of Volksgerichthof in due course, though before that you may need to reeducate public opinion. Perhaps a first step would be revisionist histories on TV to neutralize the pernicious legacies of Magna Carta, 1688, Common Law, natural justice, equity etc. All this blether about historical rights causes nothing but delay and frustration, and comes from undesirable elements of the community. If the people come together, guided by prominent figures and facilitated by mass communication, and shout long and loudly enough, all such divisive opposition will vanish. We live and work today for a bright, efficient, socially harmonious tomorrow, not for a superstitious and contradictory past."

China extending secret support for USA

Reportedly, China has radically reduced its holdings of US Treasury securities; actually, the truth may be exactly the opposite - see my post on the Broad Oak Blog.

China NOT withdrawing support from the US?

UPDATE (28 Feb): another theory (which I heard on Max Keiser's site yesterday) is that China spent the money on buying IMF gold instead, though that doesn't explain the surge in buying from the UK. We'll see next month whether China resumes its support for Treasuries.
______________________________________________"Foreign demand for US Treasury securities falls by record amount as China reduces holdings"
... That's the AP news story as relayed by the Drudge Report. But is all as it seems?

Looking at the data published by the US Treasury, China's holdings dropped by $34.2 billion between November and December 2009; but at the same time, the UK's holdings increased by $24.9 billion, and Hong Kong's increased by $6.7 billion. (The AP reporter quotes a total drop in foreign holdings of $53 billion that month , but that's for T-bills alone, NOT Treasury securities as a whole, which ROSE by $16.9 billion.)

Back in January 2009, Brad Setser analysed purchases of US Treasuries and Agencies, and concluded that the UK (and, to a lesser extent, Hong Kong) was making proxy purchases on behalf of China.

Here is the picture of US Treasury holdings by Japan, China and the UK between Dec 2008 and Dec 2009 (figures are in billions of US dollars):


Now, here is the same information, but aggregating holdings by China and the UK:



... both have risen by 23% over the 13 months to the end of 2009 - like two horses under one yoke. (Total foreign holdings of US Treasury securities increased by 17%).
Far from "China's pulling out", the story might be read as "All hands to the pump, or we'll all sink".
UPDATE: Jake at Econompic concurs.
SECOND UPDATE: It seems one of POTUS' interns is also interested in this issue, to judge by a fleeting visit 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.

Should a bomb-plotter's wife turn supergrass?

Liquid bomb plot wife Cossor Ali 'did not warn police'

This is a tricky one for libertarians and all others who no longer have a naive trust in the State. Should a wife be expected to act as an informer against her husband?

I thought that under English law, a wife is not a compellable witness against her husband in most criminal cases, although a change in the law of Scotland was proposed in 2006. If she cannot be forced to testify against him, why should she be expected to act as a spy or agente provocateuse?

Is this another way in which the State can use a hard case to make a bad law? Is this part of a general modern assault on the natural law of family, so that the State (and, eventually, the Party) will reign supreme in all things?

Swindon twins with Disney

I hear via Classic FM that Disneyworld Florida have twinned with Swindon. Would that be because the Council takes the mickey and the inhabitants are goofy?

It's Inevitable

There was an interesting social science paper a few years ago.

Subjects were given a skills test. Without knowing the results, they were asked to evaluate their own performance. They were then shown someone else's test, and asked to re-evaluate.

The consistent result was that the worst performers consistently evaluated themselves as much better than average, and even upped that evaluation when shown the other paper. The complete opposite was true for the over-achievers.

US students have close to the worst performance in mathematics in the industrialized world, yet rate themselves as 'A'. The South Koreans, who are the best, rate themselves as 'C'.

My own experience with students and faculty supports this. Poor students usually assume that they are doing well. The most educated of my colleagues are hesitant outside their areas of expertise.

That feeling of inadequacy of the best and brightest drives them to excellence. I always think of M.C.Escher, and his quote that 'I wish I could draw better'. Many other famous scientists and artists expressed similar sentiments, and produced wonders.

The fact that our brains appear to be hard-wired to equate confidence with leadership means that we are much more likely to pick our managers and politicians on the basis of self-assurance, rather than ability. This is supported by other studies, showing that taller and better-looking people earn more money and are promoted more often.

This habit of choosing confident 'feel-good' individuals over hesitant problem-solvers goes a long way to explain why US voters overwhelmingly rejected President Carter in favour of Ronald Reagan.

Optimistic pessimism, investor realism

We are in a phase previously seen in the early 80s and early 90s, where commentators and politicians are on the look-out for "green shoots". The 0.1% growth in British GDP for the last quarter is hailed as the official end to the recession, ignoring the painful fact that for 2009 as a whole the economy has suffered a major contraction. That fraction of a percent quoted is so slim as to invite re-examination, and doubtless once one's factored-in margins of error in definition and reporting it might not even be a positive figure after all.

Reported marginal increases in turnover glosses over the fact that companies have been selling off surplus stock at discounted prices, so the profit per unit of production has decreased. Sooner or later, a fall in profits per share will press the markets down again, prompting further layoffs and site closures. This will hit commercial property rents and valuations; and with more unemployed, consumers' mood will become yet more cautious. The cost of the health and welfare system will fall more heavily on a reduced workforce and business base, leading to further pressure to cut costs and maybe move production abroad. That's not just industrial production: with lightspeed communications systems and millions of well-educated, English-speaking people in overseas labour forces, white-collar workers should not imagine that they are safe, and that it is only blue-collar workers and menial employees who must worry about their jobs.

Something must give, and the public sector and the welfare system are in the firing line. However, it is a moot question whether politicians in our democratic systems are able to make tough enough decisions, fast enough. They will look for some other way out, and many will cheer them on- we're already seeing calls for monetary reflation, as though more of the same will cure us.

My self-imposed brief is not to play Cassandra, but to stop my clients and my readers being suckered in the last money grab before the economies restructure. I note that Money Week has finally come round to my view:


Where should you place what little money you have?

Jeff Clark, of Casey Research, says: "We currently recommend our subscribers keep 1/3 of their assets in cash, 1/3 in physical gold, and 1/3 in other investments, including top-notch gold proxies and stocks."
The emphasis on physical gold is significant, because there's much more being traded in promises than can be delivered - if everyone demanded sight of their gold, there'd have to be a sort of pass-the-parcel game for all the contracts to be fulfilled. For the first time in many years, central banks have become net buyers of gold, and China has declared her intention to increase her own stocks from 1,000 tones to 6 or 10 times that in the next decade (China is now the world's largest producer of newly mined gold). There's also a scare story doing the rounds, about some (how many?) bullion bars being nothing more than tungsten coated with a thickish layer of gold; and US Congressman Ron Paul may yet succeed in his campaign for a full audit of the Federal Reserve, which might reveal, among other things, just how little gold is still in the Fed's vaults. It's true that gold has risen very sharply in price over the last few years, and is now above its long-run average in real terms, but that's not surprising at a time of growing unease and distrust of the money system and government in general. Whether the price will explode as some of the gold bugs say, is another matter. Gold is a small market and the speculators are playing in it with cheap borrowed money. (UPDATE: see this article on how gold has changed its behaviour and is now going up and down like other investments - a sign, perhaps, that the speculators are now running the show in gold.)
My approach is to make a distinction between investment and speculation. Investment, I'd suggest, is putting your money where it will grow largely in line with the overall growth of the economy; speculation is trying to achieve more, which must be at someone else's expense. The latter is therefore a gamble, and gamblers often lose.
You should also review your money objectives in the light of your personal circumstances and goals. Do you need to gamble? Remember that there are still fairly secure ways to protect yourself against inflation or default - various National Savings products in the UK, and Treasury products in the US.
I've suggested many times that we will eventually see a much deeper decline in the stockmarket - maybe 4,000 on the Dow and 2,000 on the FTSE - though when, who knows? Given my belief that we are in a "secular" (long-lasting) bear market, then clearly I think that at any point, there is a greater chance that stocks will go down than that they will rise. The odds are against us, and I think that will be true for the next 5 - 10 years. Gamblers will be looking for short-term recoveries, but you may have heard of the formerly big-time successful gambler (can't remember his name) who ended up selling his binoculars for one last bet at the track.
My view is ultimately hopeful, otherwise I shouldn't have bothered relaunching my brokerage this year. If you want a more spine-tingling view, here's an example - but that plays to an unrealistic, dramatic melancholy tendency in us. Even Hitler and his henchcreatures couldn't take the whole of the German people with them into Götterdämmerung. The United States has 300 million people, vast land not fully and efficiently used, mineral and energy resources, a huge and diverse skills base, and the light of freedom in its mind. There may well be uncomfortable change, but you'll never be shoving the bears out of caves to scratch a shivery living in the wilderness.

I'm more worried about my own country, Britain; but at least we don't have bears.

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.

Farage: EU's "sado-monetarism" towards Greece

Three cheers for Nigel Farage; and another three for The Huntsman, where I found the clip below today. Farage's clear. forthright diatribe has the ring of truth and the note of conviction.

The end is not nigh?

Journalist, author and personal investor Charles Hugh Smith does some technical analysis on the Dow Jones that suggests the market bottom may be years away, perhaps in 2020-2022.

For some time, I've suggested that we are in a period analogous not to the 1930s but the 1970s, and there was a long (16 years) decline in the Dow, in real terms, between 1966 and 1982. It then took another 17 or 18 years to the market peak of end 1999.

That's not to say that the current decline will follow the same sort of timetable, or even the same trajectory. The human mind is good at seeing patterns, even where (like the canals of Mars) they don't exist; and the human wallet is vulnerable to being thrown at such patterns.

However, part of my reason for recommencing my financial services brokerage now is that I believe we have some years of (on average) decline, during which I can be gradually building my clientele and preparing to help them take advantage of a real long-term upswing later. Meantime, I want to help them avoid losing money in the "sucker rallies" of a secular bear market.

Day traders and other gamblers, good luck; I'm sitting out, for now.

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.

Alistair Campbell displays "weakness"

Just seen a clip of Alistair Campbell's "overcome by emotion" bit on Andrew Marr's show. Fake. No doubt. Wimped-out version of the Stanislavski Method: break eye contact, look down and to the right so the cameras can't drill into the gaze, puff out air, mild apology for allowing oneself to be momentarily overwhelmed. He's what he's always been, an aggressive second rater with a good little black book.

Britain's creditworthiness declines further

CMA have published their fourth quarter of 2009 report on the sovereign debt market, and the UK's implied credit rating has gone down further, to "AA". This now puts us in the same category as Italy, Spain and Portugal; of the "PIIGS" group of risky major Western European countries, only Greece and Ireland are in a worse position (and both of those have worsened considerably in the six months since Q2 of 2009).

The costly economic stimulus appears to be failing, from a longer perspective. Some think (see previous post) that the latest central bankers' meeting in Australia is in the nature of a secret emergency conference, despite having been planned last year.

Secrecy is worrying - I am somehow reminded of the closed session of the US House of Representatives Congress in March 2008 (only its sixth secret session in nearly 200 years). Ostensibly this was about anti-terrorist measures, but some of the conspiracy buzz this caused on the Internet turns out to have been justified in the light of subsequent developments.

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.

Something's up: the bankers are gathering

Australian newspaper the Herald Sun reports on what looks like an emergency meeting of some of the world's most important bankers (hat-tip to the Contrarian Investors' Journal):

_______________________________

Secret summit of top bankers

THE world's top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.
Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.
The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.
The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.
Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.
Australia's ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.
Asian share markets were also pummelled, with Japan's Nikkei 225 down almost 3 per cent and Hong Kong's Hang Seng slumping 3.3 per cent.
The damage was also being felt by European markets last night with London's FTSE 100 down sagging 1 per cent in early trade.
Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.
"This does feel like '08 and '07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,'' said H3 Global Advisors chief executive Andrew Kaleel.
"Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.''
It wasn't all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.
The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.
The outlook for global growth is likely to be a key theme of the high level central bank talks.
The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.
A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.
Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.
Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

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 little humour

From David Colquhoun's excellent dcscience.net:

"VENTURE CAPITALISM – AN ICELANDIC CORPORATION

You have two cows.

You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.

The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company.

The annual report says the company owns eight cows, with an option on one more.

You sell one cow to buy a new president of the United States, leaving you with nine cows.

No balance sheet provided with the release. The public then buys your bull."

UK housing still heavily overpriced?

Mike Shedlock discusses a recent international survey of housing affordability, and where the UK is concerned he notes:

Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0.

This suggests that if prices returned to their long-term relationship with income, houses would lose 40%-plus of their current valuation. Yes, the housing market varies around the country, but "The United Kingdom had no affordable markets and no moderately unaffordable markets."

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Gold: NOT a no-brainer choice this time? The Chinese may not agree...

Australian blogger The Contrarian Investor points out differences between now and the 1930s that mean gold is merely another speculative investment, not the sure-fire winner it was then.

Having said that, there is a strong psychological / political / historical / economic strand in gold, and it is significant that central banks are now net purchasers. And China recently announced its intention to increase holdings from 1,000 tonnes to 6 or 10 times that over the next decade, having already boosted them from a level of 600 tonnes in 2003. China is now the world's largest producer of mined gold.

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 Brits are dumber than the Yanks; and Keynes will always beat Hayek

Shakespeare's plays imply a great deal about his audience, and so does the video below (hat-tip to Nathan Martin). I have not seen material like this made by and for the British market. Why not?

Economists are still warbling the lays of the free market, but I haven't seen them explain how Western prices and incomes can dwindle on the global market when our debt is huge and fixed. I think the best we can hope for is to manage our fall in average living standards, so that it happens more slowly.



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.

Investors to turn from the US to emerging markets?

Last October, James Quinn, senior director of strategic planning at The Wharton School of University of Pennsylvania, reviewed the US as an economy in which to invest, and he concludes:

An aging country dependent upon oil and debt for sustenance is not the ideal place to invest, and that may be the conclusion that many come to, giving a boost to emerging economies. Domestically, technology – including medical technology - and alternative energy look to provide the best chance for the United States to regain some of its lost prosperity, and therefore are potential areas of focus for investors.

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.

UK GDP and forcing the money supply: flogging a dead horse?

A few days ago, I charted the relationship between GDP and the money supply as measured by M4 (bank lending to the private sector). We now hear that estimated GDP for 2009 was negative 4.8% (the worst since 1921) and the Bank of England's website shows bank lending grew in the first 3 quarters of 2009 by 5.1% annualised.

The BoE's figures for M4 only go back to the spring of 1963, and in all the time since then GDP has never been negative, yet with all this stimulus (and the enormous central bank quantitative easing that forced it) it still fell, so who knows what might have happened without it.

It seems to me that the doctor has been disguising the symptoms, and the illness still has a long way to run.

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 only

If only Judge Judy could be asking the questions at the Chilcot Enquiry today.

"Don't bother me with this nonsense."
"Are you on medication?"
"Speak not!"
"I don't believe you."
"That's not what I asked you, sir."
"I don't give a rat's tutu for your pain and suffering."
"Baloney!"
"On my worst day, I'm smarter than you on your best day."
"What you have said doesn't make sense, and I'll tell you why."
"Quiet! When my lips start to move, your lips stop."
"Are you chewing gum?"
"Stop messing with your papers. Look into my eyes, that's how I know if you're telling me the truth."
"Is English your primary language, sir?"
"They don't pay me enough for this." (Bert, quietly: "Oh, yes, they do.")
"Goodbye, have a nice life."

Oh, if only...

Investment review (and is cash a good investment?)

FURTHER UPDATE

Reportedly, Swiss-born and Thai-resident investment guru Marc Faber has recently repeated his view that the US cannot escape crisis (e.g. in pension funding) and will be forced to increase the money supply, so further weakening the dollar, at which point, he says, it will become necessary to invest in equities in order to mitigate the effects of inflation. But not yet...

"In that situation you are better off in equities. I am not saying that you should buy equities today. But the dollar will go down, they will have to print a lot of money."

Meanwhile, a sober Australian blogger-commentator opines that the UK may face a currency crisis within the next 3 - 5 years, followed by Japan and the USA (though Portugal, Ireland, Italy and Greece may have their crises before all these three).

UPDATE

Since writing this article today, I have read Steve Keen's discussion of the causes of the Great Depression and how our situation now is worse than it was then. Professor Keen, one of the very few to predict the credit crunch, says:

"...since debt today is so much larger (relative to GDP) than it was at the start of the Great Depression, the dangers are either that the fall in demand could be steeper, or that the decline could be much more drawn out than in the 1930s."
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An industry expert writes

Howard Marks, chairman of a large investment firm, publishes his quarterly report to investors (hat-tip to Michael Panzner).

Panzner picks out a couple of points - the stock market rally is not based on improvement in economic fundamentals, and commercial real estate looks to be a difficult area for some time yet - but Marks concludes, I think a little tentatively, that "most assets are valued about fairly today". This conclusion dovetails with Marks' business, which is sifting and selecting stocks that his company judges are good buys.

Market manipulation?

Like Panzner, however, I tend to be more bearish - I am part of that "wall of worry" that the American investment establishment is desperate for us all to climb up, or over. It seems to me that, as others have said before, nothing that led to the present crisis has yet been fixed. Some days ago, I looked at the relationship between bank lending and Gross Domestic Product (GDP) in the UK, and I reproduce below a graph I made to represent year-on-year percentage changes in both:



Two things stand out: firstly, the banks consistently increase the money supply more than the growth of GDP, which a monetarist would say is inflationary. Secondly, the general trend since the mid-1970s appears to be a slowing of economic growth, despite all the monetary stimulus. Instead, the extra cash (aka "liquidity") went into a combination of spending on imports (how much of the stuff in your house and on your driveway was made here?) and rising asset prices (houses and shares). Now the tide has turned, unless we're prepared to return quickly to our former reckless borrowing.
A third observation, is that the worst monetary inflation in the last 25 years occurred not under spendthrift Socialist governments, but supposedly prudent Conservative ones (this also holds true for the United States). I wrote a letter to the Spectator magazine to point this out, but they didn't find space for it (perhaps a factor in that decision is that the "Lawson boom" was engineered by a former editor of the Spectator, though the graph above shows the expansion began much earlier than Lawson's 1986 budget; they did print this one, however, which warned of the crash in banking shares).
Another commentator whom I recently referenced, says that the recent US stockmarket recovery is mostly owing to intervention by institutional investors, who own 20% of the market, the implication being that they are trying to encourage the other 80% (the private investors) to join in and, presumably, be fleeced as the former cash-out.
Cycles
A recent study of national economies in the last 800 years (hat-tip to John Mauldin) by Reinhart and Rogoff strongly suggests (as common sense would also suggest) that when debts are very heavy, the economy tips over into recession as we try to repay loans and rebuild savings. Mauldin discounts fears of inflation, because if consumer demand should pick up, there are plenty of resources to meet it. Our problem at the moment is oversupply, which is reflected in the precarious state of airlines, cruise companies, car firms etc - the ad pages tell the story.
Pressure to invest vs. pressure to borrow money
There is pressure to invest, not least because as the populations of developed countries live longer, pension funds have to create more income for the retired. For example, Leo Kolivakis comments on calls for Japan's public pension fund to move money out of bonds and into shares, aiming for higher growth. The fund is worth some $1.4 trillion but only 20% of it is in stocks, about equally divided between Japanese and foreign.
However, according to this source, total world stockmarkets were worth about $46.5 trillion last month, so even if that Japanese fund switched a further 20% into shares, that would only be worth 0.6% of the value of global shares; and even in Japan there are counter-calls to stay safe with bonds. Also, the Japanese are a patriotic lot, and if more of their pension money were to switch into equities (shares) I would expect them to press for a bias in favour of Japanese companies. The effects could therefore be localised, which may be an interesting proposition for the bolder investor.
Even then, there is the question of currency movements. The yen has been held down on the foreign currency exchanges, in an attempt to keep Japanese exports competitively priced, but if Western countries (with all their economic problems) devalue their currencies faster than the yen, it will hit shares in export-oriented Japanese companies. And the managers of Japan's public pension fund must be worrying about this possibility.
Meanwhile, in the USA there has been talk of forcing pension investors out of shares and into annuities, partly (many suspect) because this would create extra demand for Treasury bonds, at a time when the US Government is running out of willing buyers for its debt.
As you can see, there are contrary currents in the oceans of finance.
Will the stimulus money work?
The vast sums loaned to banks have not flowed out into the economy as hoped. Partly it's because banks are still trying to rebuild their reserves (because they loaned far too much during the boom), and partly (I think) because they know that only about half of their losses have been publicly exposed. When the full story is known and its effects felt, there will be more businesses going to the wall. So banks are going to be very careful about who they lend to, and how much; and will charge as much as they can in order to carry on mending their own deficits.
Meanwhile, there's fudging going on. As the Washington Post reported last August, accounting rules had changed in the Spring so that "Under the new rules, banks are not required to set aside money against the portion of a loss judged to be temporary." This appeared to offer a way out of having to show all one's "toxic assets" - all you had to do was maintain (in some plausible way) that valuations would eventually increase again. The catch with a subsequent proposal reported by that Post article, is that long-term loans would have to be fairly valued, i.e. stated as worth what someone else would now pay to take them over. As you may imagine, this has led to much argument and lobbying.
Journalist and investor Charles Hugh Smith thinks we have now got to the end of the line, and the game will play out as follows: a market correction to 6,500 or lower on the Dow Jones Index; a rally up to September; then a fresh, much sharper decline after the November elections "to depths few foresee".
How low could the market go?
Who knows? This is the point at which people start to look for patterns - in the investment world they're known as "Chartists". Back in December 2008, I looked at the progress of the Dow Jones Index since the heady days before the Wall Street Crash of 1929, and adjusted the figures for inflation as measured by the Consumer Prices Index (CPI). Here's the result:
I think it does show the effect of all the above-GDP-growth-rate monetary stimulus that started in the early 1980s. I think monetary inflation explains why the peaks of end-1999 and 2007 were so extraordinarily high; and I fear that it may lead to a correspondingly extraordinary low.
It is a result against which the political and financial establishment will struggle mightily, because it spells disaster for many of them and most of us.
But my cash isn't earning anything!
Oh yes, it is. It may not be earning much interest, but it could be increasing in value, in a way that is particularly useful if you're a taxpayer.
Let's say you've sold an asset for £100,000, and all such assets then drop in price by 20%. You could, if you judge the price to have hit bottom, repurchase for £80,000 (let's ignore dealing costs, please!). Effectively, you've gained £20,000. Had that £80k asset given you income of £20k, that's a 25% return. A 40% taxpayer would be charged £8k, leaving a net return of £12k, or 15%.
But making a "gain" through asset devaluation doesn't get taxed as income, so you enjoy the full 25% tax-free! The government hasn't yet got round to confiscating capital, so enjoy. (That is, until inflation lets rip, in which case you'll probably want to buy things to get rid of your cash.)
Deflation or inflation?
That's the key question, and no-one has the certain answer, and certainly not as to timing. My personal view is that after ups and downs, we will see that we are in a deflationary period, but there is a danger that governments will somehow find a way to expand the monetary base to devalue their (and our) debts. It takes a while for inflation to work its way through the system, so I suppose the danger can be partially averted by keeping a weather eye out for signs of inflation, and then acting accordingly. I don't see inflation as imminent.
Don't blame me!
I'm trying to help you - and clarify my own thoughts - with what I've read and learned. But no-one has that crystal ball - of some 20,000 professional economists, only some 12 foretold the Credit Crunch! - and this is not personal advice to you. The best it can do, is stimulate and inform your own thinking, research and decisions. So, please note my disclaimer, reproduced below and elsewhere.
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.

GIGO

The light may be dawning for some of our leaders.

In the recent Congressional hearings with the financial industry, it became quite clear that their evangelical belief in the unregulated free market had blinded them to the simple fact that money is only a medium of exchange, and that wealth cannot be created by the push of a button.

These wizards have cousins in industry, the pointy-haired boss of the Dilbert cartoons, who have been trained by Management specialists to believe that process matters more than productivity, and meetings more than manufacturing.

Their relatives in Education are just as deluded and dangerous. Since it became a university discipline, Education graduates have taken most of the administrative jobs in universities and schools and related ones in government. As each new Education 'paradigm' is introduced, we in the US and UK fall farther behind the Far East, where they teach the 'old way'.

My opinion is that every one of these ideas is doomed to failure, since they rely on two false assumptions:

1. We can magically train our mediocre students to become the teachers of the best and brightest.

2. The 'secret' to improving results is to change the way that teachers do their jobs, rather than changing the way that students behave.

Still on for deflation

This article, and others that it refers to, takes the view that the currently very high debt-to-GDP ratio, plus plenty of unused or under-used resources, indicate deflation rather than inflation. Cash (or long term US government debt) is king, for these American writers.

As I understand it, the British economy suffers even worse debt problems and also has excess productive capacity, so much the same argument would seem to apply here, too.

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.

Kraft, Cadbury's and the mystery of M&A

Company A buys Company B, using bank borrowing to finance almost 50% of the purchase, which loan it will repay by stripping Company B. Loss of jobs, skills, quite possibly alteration to product quality at some point, quite possibly lower overall profitability for the conglomerate as a result of the takeover (this is, I believe, quite common).

Cui bono? Should there be a rule against financing takeovers with bankster cash?

A straw in the guano; "When Giants Fall" by Michael Panzner

After his prescient book "Financial Armageddon", in which Michael Panzner identified four major threats to our economic security, he wrote another called "When Giants Fall", which I have been planning to review for a year now.

The latter is more complex and harder to summarise, but as I see it, essentially it views America's loss of power and prestige as leading to a sort of Balkanization of the world, just as after the death of Tito, Yugoslavia and other Eastern European countries fractured and fought. I once visited a pet shop where there was a large rabbit sitting among the guinea pigs; when I asked why, they told me that guinea pigs will fight to the death for dominance, but one look at the rabbit told them they had no chance and so they decided to get along peaceably.

This global fracture is now under way, with major nations like China and Russia playing a 21st century version of The Great Game, and we see it in little ways as well as the more obvious ones. Mark Steyn, a sharply witty Canadian journalist, comments on the curious case of a South Pacific islet (Nauru) taking it on itself to recognise the nationhood of Abkhazia, currently a province of the Caucasian republic of Georgia (Stalin's birthplace). Naturally, it's for a consideration, in this case money from President Putin, who wants to reabsorb Georgia.

Should we take it seriously? Aren't both these little nations a bit like the Duchy of Grand Fenwick in the film comedy "The Mouse That Roared"?

A single match can start a forest fire. When some Serbs decided to break off from Croatia in the 1990s, they may have started as a rather small, contemptibly scruffy and ill-equipped band, but other players and suppliers got involved and things fell apart very nastily. When there are powerful interests at stake, nothing is insignificant: Russia quibbles about the definition of its continental shelf to lay claim (in 2001) to fossil fuels near the North Pole; China goes back to the 13th century to justify its claim to Tibet, and by extension the (currently) Indian province of Arunachal Pradesh - both containing valuable natural resources that the Chinese need. Relatively small amounts of money and support can recruit votes that matter in international politics and law.

Panzner's book examines all sorts of potential consequences of the weakening of the "world's policeman", and no-one knows how matters will progress. The situation is so complex that chaos theory could be relevant - the flutter of the butterfly's wings triggering a hurricane thousands of miles away.

So what can we do about it? I think all we can do, is to become generally more cautious and store resources to cope with emergencies. Like Boy Scouts, we must "be prepared"; as our grandparents would say, "don't put all your eggs in one basket".

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.

Mrs Thatcher and inflation: a letter to the Spectator

Sir;

Sir Peregrine Worsthorne (Letters, 16 January) may have been right to support Mrs Thatcher for confronting the unions, but I believe he is wholly mistaken when he says she tackled inflation. Thanks to the opening up of global markets, consumer prices have been lowered by cheap foreign labour, indirectly by the importation of goods, and directly by the deliberately uncontrolled immigration of low-paid workers. However, behind the scenes there has been massive long-term monetary inflation, the woeful consequences of which we are now merely beginning to suffer. Economics may seem rather dry, but its implications are correspondingly fiery and so I hope your magazine will allow room for explanation.

Comparing GDP with (M4) bank lending figures from the Bank of England’s website, which gives data from 1963 on, we see that annual increases in lending almost always outstrip increases in GDP, but sometimes far more so than others. The worst was in 1972, when M4 increased by 35% (GDP grew by only 12%); the fear of monetary inflation and its potential effect on exchange rates may have been a major factor in OPEC’s decision to hike oil prices in 1973, which triggered years of high price inflation in the UK and the humiliating IMF rescue in 1976. Lending increases dropped below GDP between 1974 and 1977, then resumed ascendancy, though not in time to rescue James Callaghan’s premiership.

But inflation did wonders for Mrs Thatcher. The average annual excess of M4 growth over GDP in 1964-79 was 2%; from 1979-1990, the “Thatcher years”, it averaged 8% (and about 4% p.a. thereafter). The results have included overspending on luxuries; the loss of jobs and industrial skills; the export of machinery and tools; and a huge exaggeration of property and stock valuations. Worse, we now have a large class of economic dependants, both home-grown and recently imported, whose support costs cannot be externalised as easily as our manufacturing capacity.
Sir Peregrine may not divine in Mr Cameron the architect of our rescue, but I fear the situation may now have developed well beyond any man’s power to amend without reform on a scale that may not be entirely possible in a democratic society.

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.

Debt, the financial sector and economic growth

Someone who occasionally reads and comments on my older blog has a formulation of real growth: increase in GDP less increase in debt. I've finally taken the bait and invested time to look at this, for the UK, and it's intriguing.

First, I've taken figures for M4 bank lending, from the Bank of England's website. This gives the quarterly increase as a percentage, re-expressed as an annual equivalent figure. I've used Excel to average the four quarters for each calendar year. Since the information is only available from partway through 1963, I use the estimated annual percentage increase from 1964 onwards.

For GDP, I use the Measuring Worth site and the "UK nominal GDP" figures (i.e. x million pounds, not adjusted for inflation), and again give the percentage increase year-on-year (the last available year here is 2008).

Here's the resulting graph for increases in M4 and GDP (click on graph to enlarge):

What is obvious is that apart from a short time in the early 1990s, lending has risen far more than GDP for the last 30 years. That extra money went somewhere, and it seems that all it did was inflate asset prices, in the stockmarket and in housing, at the same time that global trade has kept down wages and consumer prices.
Between 1964 and 1981, GDP increased by an average 12.69% and M4 by 15.16% - a difference of 2.48% per year. But from 1982 to 2008, GDP increased annually on average by 6.63% and M4 by 12.32% - a difference of 5.69% p.a. Compounded up over the past quarter century, that extra difference may explain how financiers have become so large and powerful. In the USA, according to Robert Creamer , the financial sector accounted for 8% of national GDP over the last 10 years, but made 41% of the profits.
I can't say when it will end, but equally I can't see this going on forever. This is why I am inclined to listen to the Jeremiahs who warn us of further economic setbacks, despite strong recent rises in the stockmarkets.
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.

Interactive long-term house price graphs

Via Australian economist Steve Keen, here is a tool from The Economist magazine to help you see how house prices have changed over time. This may help you guess whether current prices are too high, too low or Goldilocks!

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.

Preparing for the worst is not for loners

Charles Hugh Smith offers some sensible general principles for making it through what he sees as likely very difficult, disrupted times ahead. Key recommendations include broadening your skills, and developing social networks. I think he's right - Robinson Crusoe is not the model for how to survive in our populous countries.

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.

More warning signs

Update: see "Jesse" on speculation about recent curious purchases of US Treasury bonds.

__________________________________________

"Mish" looks at two countries experiencing trouble - Argentina and Venezuela - and point out that European banks are exposed to risk in that area.

"George Washington" thinks the recent rise in the stockmarket has been because of activity by "hedgies, pension funds, banks and other institutional investors", including possibly even clandestine intervention by the government itself (I've seen this allegation before). However, in the US 80% of stocks are owned by individuals, not these corporate entities, so the suspicion is that the rally has been engineered to encourage the private investor to return to the market.

It doesn't seem to be working - much of the money withdrawn from stocks has gone into bonds (I think the unfortunate private investor may lose again if - as I fear - interest rates rise and bond values plummet).

I also suspect that if the individual re-entered the market because of what appears to be leveraged (boosted with borrowed money) speculation by the institutions, the latter would then cash-in and leave the individual holding the baby. This pattern is known as a "sucker rally".

But if the private investor is not "suckered" back into the market, then institutions will race to get out again (suckering each other, faute de mieux) and we could see a sharp fall in stocks. This, I assume would confirm the private investor's worst suspicions and lead him/her to pull even more out of the market.

Some, including myself, have suggested that the real bottom (at some point, goodness knows when) in the stockmarket may be somewhere around 4,000 on the Dow and 2,000 on the FTSE (adjusted for inflation, if that takes off). It may never happen, but Google "Dow 4000" and see some quite respectable commentators bandying around that idea.

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.

Measure your pessimism

Hat-tip to Credit Writedowns. I'm relieved to see that I'm still at the Teddy/Cub stage!

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.

Human Nature?

Today, I started my 27th year of teaching at a State-supported US university. Compared with 1984, we have the same number of students, fewer full-time teaching faculty, and twice as many administrators. In the past 8 years alone, the non-academic budget has grown from 44% to 60% of the budget.

This week, we start discussions on increasing teaching loads (which will, of course, require more administrators to 'organize' things).

I see this trend in business, government, medicine and the military. Is it just the human condition that the non-productive take over everything?

I recall that, when the Mongols took over a city, they killed the bureaucrats, and took the scholars home with them. The Allies did much the same in Germany in 1945.

Perhaps they had the right idea?

Climate change and industrial activity

Could the current cold weather be partly related to a downturn in fossil-fuel-powered manufacturing and transportation? I only ask because I seem to recall reading/hearing that big freezes also happened in the 70s, and after both World wars.

Why a turnaround in the economy is not imminent

"Mish" collates a number of emails and comments to reinforce his thesis that we are set for a long and very difficult deflation, for a variety of reasons. One of his respondents is noted Australian economist Steve Keen, one of the dozen or so (out of perhaps 20,000 professional economists worldwide) who foresaw the credit crunch; Keen thinks it would have been better to give money to debtors directly, rather than to the banks, who will simply hoard the cash as so few now wish to borrow the way they used to.

Vitaliy Katsenelson looks at history and finds: "Over the last 200 years, every long-lasting bull market (and we just had a supersized one from 1982 to 2000) was followed by a range-bound market that lasted about 15 years or so (the only exception was the Great Depression)." He expects the market to bounce up and down and "At the end of this wild ride, when the excitement subsides and the dust settles, index investors and buy-and-hold stock collectors will find themselves not far from where they started in 2000," so he recommends that we analyze individual companies and timing our purchases according to when we think their particular stocks are undervalued.

David Rosenberg tabulates lots of ways in which the present circumstances are not like those in 1982 (when the market began to turn upwards in real terms):


By the way, that last statistic about median ages startled me, so I looked elsewhere for information on general US demographics, rather than just the "baby boomers". This graph says that the median age of the US population as a whole rose from 26 years in 1929 to nearly 30 post WWII, then fell to below 28 in the late 1960s, after which there was a steady rise to over 34 years by 1994. This site estimates the median age in 2006/2008 at 36.7 years. Demographic change has had and is going to have an enormous impact on government budgets and the stockmarket.
Bill Gross (of PIMCO, which recently announced its plan to be a net seller of UK bonds) laments the corruption of government that makes him wary of trading in the US at present. He thinks that relative to more fiscally responsible governments like Germany, countries like the USA, UK and Japan will have higher interest rates and this will, of course, hit the value of their bonds and stocks.
Finally, Warren Pollock's politico-economic overview sees threats to two key stabilisers in the world economy - Saudi Arabia and China. Problems there could begin a wider unravelling of current arrangements.
So, as I have done for the last 10 years or more, I am urging caution and the making of emergency plans.
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.

NEST - compulsory pension savings for employees

In the UK, many people face an impoverished retirement. Stakeholder Pensions were introduced in 2001 as a simple and cheap form of retirement saving, but even now, nearly 12 million people have no pension plan, or a very small one. There are reasons for this - including being too poor to invest enough to make a worthwhile difference to one's retirement income.

From 2012, this will change. A compulsory scheme will be introduced in workplaces, for people that haven't already joined a scheme. It's been called by different names and has just been rebranded "NEST" - the National Employment Savings Trust. (The logo (see left) reportedly cost £363,000 to dream up - the equivalent of over 100 years' worth of maximum contributions to a NEST plan.)

There was an earlier, and in my view better, scheme mooted by one-man think tank the Rt Hon Frank Field MP, who set up the Pensions Reform Group in 1999 to address the issue. They came up with the idea of a Universal Protected Pension, which has 5 principles:

1. Together with the Basic State Pension, an extra (funded) pension should eventually lift all pensioners permanently above the poverty line, by providing a total minimum income of 25-30% of average earnings. Those who are able and willing, can pay in more to get more.
2. It should be for everybody.
3. It should operate as a redistributive scheme: everybody pays a proportion of their earnings (so higher earners pay more), but everybody will get the same benefits.
4. The layer on top of the Basic State Pension should be funded - i.e. it would become an enormous investment fund. Without this, the whole scheme would be another expensive unfunded Government undertaking and at risk of being cut or abolished when the national budget gets tight.
5. It should be kept independent of the Government, to keep the politicians' hands off it.

Like other ideas by Mr Field, this one has been well thought-out. And like some of his other ideas, it's been ignored, or badly adapted. Perhaps, in this case, it's because politicians understand the temptation of (4) too well to think that (5) would work.

Let's look at (1 - 3) as well. Without compulsion, many workers not only would not join, but might be foolish to join. This is because of the way the benefit system works. If you reach retirement with an income of less than a certain weekly amount, the State will top it up. So if you know that is going to happen, it's not worth saving up out of your earned income - you'll just get less by way of a free top-up, so it's as though your personal provision was being taxed at 100%.

To answer this objection, the State first discounts each pound of income you provided for yourself, then re-awards you a "Savings Credit" of 60p. But this is still, effectively, a "tax rate" of 40% - Higher Rate Tax for the poor. This explains Steve Bee's comment on NEST:

Now all we need is for the government guys to fix things so that the pension savings of low to moderate earners can’t be devalued by the unfortunate way pension savings currently interact with the means-tested entitlements that are provided for the elderly and we’ll be cooking on gas.

Not surprisingly, financial advisers find themselves in a quandary when advising lower-paid people about funding for retirement!

Under Frank Field's group's proposals, there would be no decision to make, since contributions would be compulsory. But also, however little you contributed, you would still attain the overall target income of 25-30% of average earnings and be above the notional poverty line, so the complicated and self-defeating system of Pension Credit and Savings Credit would be redundant.

Instead, the NEST is universal only for those who aren't already in a scheme, and you only get the results of what you and your employer have put in - no redistribution effect. Presumably the employer will take into account what he/she has to contribute to the pension, when calculating what pay rises to give you, so it's not even "free money" from the employer. In effect, we have a variant on the current unsatisfactory system, plus compulsion.

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.

Simon Johnson on the coming disaster

Simon Johnson comments on renewed speculative activity by the banks. He fears that the next bubble-and-pop may be in emerging markets, especially China.

For those who wish to understand more, Simon's website, The Baseline Scenario, offers a beginner's guide to the global financial crisis (GFC).

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.

Which books should we burn?

Welsh pensioners are buying books as fuel. Discounting differences in book size, and assuming you could gather all copies of the same title, which books would you burn?

On his deathbed, the poet Virgil requested his friends to burn his "Aeneid". Does an author have the right to do this?

GDP: friend or foe?

I attended the British Association for the Advancement of Science Conference in Birmingham in 1977, and even then economists were asking whether GDP was a useful measure. The example I remember was eating more sweets and consequently visiting the dentist more often.

Should we be quite so concerned about goosing GDP with quantitative easing etc, or is it just a trap to make us continue misallocating resources?

Marmite Easter Egg

According to a team of astronomers, the Milky Way is surrounded by a shell of invisible "dark matter" (Htp: Yves Smith).

But the supermassive black hole at the centre of our galaxy is gpoing to take longer to shloop us up than we thought previously.

We have a bit more time to eat that strawberry.

Food for thought for libertarians