The Dow closed yesterday at 13,358.31; ten years before, it stood at 8,254.89. That's a compound annual growth rate of 4.93% (less, when you adjust for inflation).
Or if you take it from the big, big scare of Monday 19 October 1987 (close: 1,738.74, down 508 points from the previous Friday!), it's an average 10.88% compound per year. Does that seem too hot a pace? Unsustainable? But remember that we're starting that run from a real panic. If we took it from the happy close of the Friday before, the average becomes 9.53%.
Still too hot? If nearly 20 years isn't enough to establish a sensible long-term trend, let's look at an even longer period: 30 years from 30 July 1977. Then till now, the Dow's capital growth averages out at 9.45% compound per year. The market's folly can outlast your wisdom.
"Two views make a market", and that's it. Mr Market is making his wares available to you - will you buy at today's prices? (I wouldn't - but obviously others will, or the market would be lower.)
You can play with the figures yourself, on this fine page from Yahoo! Finance.
And please click on the poll opposite, to give your prediction for the year's end.
Tuesday, July 31, 2007
Have I got my sums wrong - or right?
Bill Bonner, in The Daily Reckoning Australia yesterday, quotes Paul van Eeden as saying that gold has kept pace almost perfectly with inflation since the 1920s.
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
We need bad times
iTulip has just issued its latest email newsletter - I do suggest you subscribe, especially since it's free.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
Sunday, July 29, 2007
Gold and M3 (US)
According to GoldPrice, gold today is going for $21,242.64 per kilo. The World Gold Council says that as of June 2007, the USA holds 8,133.5 tonnes of gold. So that means America's gold stock should be worth $172.777 billion.
This site says "as of early 2007, M3 is about $11.5 trillion", which is 66.56 times the value of US gold reserves. So if everybody insisted on having their money out in gold, which they can't do any more, they'd get about 1.5 cents-worth back for every dollar they were owed.
I suppose that's what inflation means.
UPDATE
Wikipedia says, "As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits."
If reserves and loans were all the money we had, then using a ratio of 1:10 for all of it (and it's worse than that!), the nominal value of bank reserves would be something like 6-7 times what they could buy in gold at current rates. Surely I've got this wrong?
This site says "as of early 2007, M3 is about $11.5 trillion", which is 66.56 times the value of US gold reserves. So if everybody insisted on having their money out in gold, which they can't do any more, they'd get about 1.5 cents-worth back for every dollar they were owed.
I suppose that's what inflation means.
UPDATE
Wikipedia says, "As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits."
If reserves and loans were all the money we had, then using a ratio of 1:10 for all of it (and it's worse than that!), the nominal value of bank reserves would be something like 6-7 times what they could buy in gold at current rates. Surely I've got this wrong?
Bargain hunting
I've been looking for something to illustrate how you can take advantage of pessimism.
Here is a blog about Consett, a small town in the North of England that was shattered by the closure of its main employer, a steelworks. The writer says (28 Dec 2006 entry), "I came across a copy of the Consett Guardian from 1983 - the year when you could buy a house for just £10,000..."
I looked on NetHousePrices for houses sold during 2006, to get an idea of the cheapest in a whole 12-month period. A terraced house is one joined to other houses left and right: the lowest individual sale price I could find for last year was £42,000. Yes, it's much lower than the national average for such properties (£186,316 according to the 9 March 2007 article on this site), but had this house in Consett sold for that £10,000 in 1993, the new owner would still be looking at a capital gain of 6% compound per annum. The article just mentioned gives an average Northern terraced property price as £125,058, and the Consett street that had most (27) sales of such properties last year showed an average price of £127,733.
So what happened to Consett? Their MP Hilary Armstrong explains:
...contrary to predictions the people of the district did not let the town die. After the closure, Project Genesis was launched to revive the local economy and regenerate the town. New industries have arrived, such as Derwent Valley Foods and aerospace company AS&T and unemployment is now down to the national average level. The site of the Steel Works has been reclaimed with new housing, a retail park and environmental landscaping. There is still a long way to go but Consett is still very much alive and is now seen as a successful case study in regeneration.
Financial experts like Bill Bonner and Marc Faber have revealed their purchases of cheap agricultural property in selected areas around the world; and sure enough, there's people out there now in the US who have spotted the opportunity in depressed housing areas like Detroit.
The worst hasn't happened yet, in any case - but think of bargains, when others can only see ultimate defeat. Remember Sir John Templeton.
Here is a blog about Consett, a small town in the North of England that was shattered by the closure of its main employer, a steelworks. The writer says (28 Dec 2006 entry), "I came across a copy of the Consett Guardian from 1983 - the year when you could buy a house for just £10,000..."
I looked on NetHousePrices for houses sold during 2006, to get an idea of the cheapest in a whole 12-month period. A terraced house is one joined to other houses left and right: the lowest individual sale price I could find for last year was £42,000. Yes, it's much lower than the national average for such properties (£186,316 according to the 9 March 2007 article on this site), but had this house in Consett sold for that £10,000 in 1993, the new owner would still be looking at a capital gain of 6% compound per annum. The article just mentioned gives an average Northern terraced property price as £125,058, and the Consett street that had most (27) sales of such properties last year showed an average price of £127,733.
So what happened to Consett? Their MP Hilary Armstrong explains:
...contrary to predictions the people of the district did not let the town die. After the closure, Project Genesis was launched to revive the local economy and regenerate the town. New industries have arrived, such as Derwent Valley Foods and aerospace company AS&T and unemployment is now down to the national average level. The site of the Steel Works has been reclaimed with new housing, a retail park and environmental landscaping. There is still a long way to go but Consett is still very much alive and is now seen as a successful case study in regeneration.
Financial experts like Bill Bonner and Marc Faber have revealed their purchases of cheap agricultural property in selected areas around the world; and sure enough, there's people out there now in the US who have spotted the opportunity in depressed housing areas like Detroit.
The worst hasn't happened yet, in any case - but think of bargains, when others can only see ultimate defeat. Remember Sir John Templeton.
And another thing...
Surely, people who can't afford their mortgages don't have big investments. So aside from default losses impacting on portfolios, I don't see a great need to sell one's holdings (or a wonderful opportunity to buy).
But when the market is worried, private investors tend to get rid of their stocks, which as they drop in price are snapped up by the patient, crocodile professionals. Watch for data on the changing proportion between private and institutional holdings - please let me know when you spot it.
But when the market is worried, private investors tend to get rid of their stocks, which as they drop in price are snapped up by the patient, crocodile professionals. Watch for data on the changing proportion between private and institutional holdings - please let me know when you spot it.
Pessimism overstated?
Seeking Alpha has a useful round-up of stats and news items on the US housing debacle.
I shall try out a contra-contrarian position here.
It's obvious that adjustable-rate mortgages (ARMs) will pose a problem for American borrowers as they emerge into a variable and now-higher interest rate environment. We are approaching a peak in this process around October/November and again, that's known about, so with all the belated hoo-ha in the media now it should be factored-in to the market.
The packaging of mortgages into collateralized debt obligations (CDOs) and their sale to perhaps naive institutional investors, is now better understood and has started a bout of worry that has spread to prime lending, too. So we have a reasonable dose of pessimism in the mixture, with Michael Panzner and Peter Schiff ensuring we're taking the medicine regularly.
One of Michael's posts last week included a detail of a "charming colonial" house in Detroit going for $7,000. Over here in the UK, somebody screwed a 0 to the side of our house prices over recent years, and if I was shown a residential property fund that would snap up streetsful of properties like the one in Detroit and wait for the turnaround, I'd be tempted.
When recession hit the UK in the early 80s, house prices plummeted in Consett, a Northern steelworking town where the local works - the main employer - closed and unemployment rose to 36%. Now the median price is £152,000. This was a working-class town, not a fashionable area, and at that time (1981) the national average house price was £24,188. So even if you'd bought a house in Consett at that price (and because of unemployment and deep pessimism, it would have been far less), you'd have made a 7.3% compound pa capital gain in the 26 years since - plus income from rent, less expenses.
I don't think the housing market runs the economy, it's the other way round. When we have a real economy, our wealth will be more secure. Perhaps the USA needs to wait for a fresh President who can take tough decisions early, in time for the fruits of his/her labours to show and be rewarded with a second term.
It's early days, but the pessimists in my Dow poll (see sidebar) have the upper hand. I still think there may be a small bounce by the end of the year, when we've digested all the bad news and are ready for a sweet. Please cast your vote!
I shall try out a contra-contrarian position here.
It's obvious that adjustable-rate mortgages (ARMs) will pose a problem for American borrowers as they emerge into a variable and now-higher interest rate environment. We are approaching a peak in this process around October/November and again, that's known about, so with all the belated hoo-ha in the media now it should be factored-in to the market.
The packaging of mortgages into collateralized debt obligations (CDOs) and their sale to perhaps naive institutional investors, is now better understood and has started a bout of worry that has spread to prime lending, too. So we have a reasonable dose of pessimism in the mixture, with Michael Panzner and Peter Schiff ensuring we're taking the medicine regularly.
One of Michael's posts last week included a detail of a "charming colonial" house in Detroit going for $7,000. Over here in the UK, somebody screwed a 0 to the side of our house prices over recent years, and if I was shown a residential property fund that would snap up streetsful of properties like the one in Detroit and wait for the turnaround, I'd be tempted.
When recession hit the UK in the early 80s, house prices plummeted in Consett, a Northern steelworking town where the local works - the main employer - closed and unemployment rose to 36%. Now the median price is £152,000. This was a working-class town, not a fashionable area, and at that time (1981) the national average house price was £24,188. So even if you'd bought a house in Consett at that price (and because of unemployment and deep pessimism, it would have been far less), you'd have made a 7.3% compound pa capital gain in the 26 years since - plus income from rent, less expenses.
I don't think the housing market runs the economy, it's the other way round. When we have a real economy, our wealth will be more secure. Perhaps the USA needs to wait for a fresh President who can take tough decisions early, in time for the fruits of his/her labours to show and be rewarded with a second term.
It's early days, but the pessimists in my Dow poll (see sidebar) have the upper hand. I still think there may be a small bounce by the end of the year, when we've digested all the bad news and are ready for a sweet. Please cast your vote!
Saturday, July 28, 2007
Who's got the gold?
According to latest World Gold Council figures (June), these are the biggest gold hoards held by individual nations and organisations, in descending order (countries not listed have less than 1% each):
United States, Germany, IMF, France, Italy, Switzerland, Japan, ECB, Netherlands, China, Taiwan, Russia, Portugal, India, Venezuela, Spain, United Kingdom, Austria, Lebanon.
The first 3 above account for nearly 49% of the world's stock, with the USA alone (since the dollar is the world's reserve currency) owning 26.77%.
The Central Bank Gold Agreement organises the buying and selling of gold by its member countries, to provide some price stability. Since the start of this year, the main change has been Spain's sale of 19.11% of its stock.
Figures are available from Q1 of 2000 onward. From then until now, here are the significant moves:
SALES (expressed as a percentage of each country's stock held as at Q1 2000):
Switzerland 50.19%
UK 47.25%
Portugal 36.94%
Spain 35.60%
Netherlands 29.71%
Austria 29.14%
ECB 14.14%
France 11.37%
Russia 4.95%
Germany 1.33%
On average, all gold-holding countries reduced their stock by an average of 9.89% over these 90 months; signatories to the Central Bank Gold Agreement reduced theirs by around 16 to 17%.
ACQUISITIONS (expressed as a percentage of each country's stock held as at Q1 2000)
China 51.89%
Venezuela 14.71%
Japan 1.55%
Venezuela has less than 360 tonnes; Japan hasn't added much percentage-wise. So the odd man out is China. China now has 600 tonnes and is in 10th place, rising from 395 tonnes (16th place) in 2000. It made major purchases of about 100 tonnes each at the end of 2001 and 2002.
United States, Germany, IMF, France, Italy, Switzerland, Japan, ECB, Netherlands, China, Taiwan, Russia, Portugal, India, Venezuela, Spain, United Kingdom, Austria, Lebanon.
The first 3 above account for nearly 49% of the world's stock, with the USA alone (since the dollar is the world's reserve currency) owning 26.77%.
The Central Bank Gold Agreement organises the buying and selling of gold by its member countries, to provide some price stability. Since the start of this year, the main change has been Spain's sale of 19.11% of its stock.
Figures are available from Q1 of 2000 onward. From then until now, here are the significant moves:
SALES (expressed as a percentage of each country's stock held as at Q1 2000):
Switzerland 50.19%
UK 47.25%
Portugal 36.94%
Spain 35.60%
Netherlands 29.71%
Austria 29.14%
ECB 14.14%
France 11.37%
Russia 4.95%
Germany 1.33%
On average, all gold-holding countries reduced their stock by an average of 9.89% over these 90 months; signatories to the Central Bank Gold Agreement reduced theirs by around 16 to 17%.
ACQUISITIONS (expressed as a percentage of each country's stock held as at Q1 2000)
China 51.89%
Venezuela 14.71%
Japan 1.55%
Venezuela has less than 360 tonnes; Japan hasn't added much percentage-wise. So the odd man out is China. China now has 600 tonnes and is in 10th place, rising from 395 tonnes (16th place) in 2000. It made major purchases of about 100 tonnes each at the end of 2001 and 2002.
Peter Schiff: US Treasury less creditworthy
Peter Schiff in FXStreet today mounts a vigorous defence of his record of warning us that subprime problems would spill over into other credit areas. The market appears to be waking up to this, but he says there's worse to come:
A much larger disaster looms for holders of U.S. dollar denominated assets in general. It will not be long before our foreign creditors realize that Uncle Sam is the biggest subprime borrower of them all and will similarly mark down the value of its debts as well.
Once again, why has Britain recently become the third-largest holder of American debt? Our exposure is now 3 times higher than about a year ago.
A much larger disaster looms for holders of U.S. dollar denominated assets in general. It will not be long before our foreign creditors realize that Uncle Sam is the biggest subprime borrower of them all and will similarly mark down the value of its debts as well.
Once again, why has Britain recently become the third-largest holder of American debt? Our exposure is now 3 times higher than about a year ago.
New Growth Theory and Friedman's "Flat Earth"
Here's an interview with Thomas Friedman in Yale Global Online (18 April 2005). Some quotes, with the issues I see in them italicised:
Lean thinking:
Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.
International trade vs local social costs:
The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.
New Growth Theory issues:
What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.
And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.
Security:
The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...
Trade, nationalism and peace:
...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.
Anti-globalization:
The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.
Intellectual property rights:
Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.
Failure of Western technical education:
There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.
Lean thinking:
Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.
International trade vs local social costs:
The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.
New Growth Theory issues:
What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.
And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.
Security:
The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...
Trade, nationalism and peace:
...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.
Anti-globalization:
The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.
Intellectual property rights:
Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.
Failure of Western technical education:
There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.
New Growth Theory: should we pay handsomely to make ideas free?
When Tony Blair became Prime Minister, his slogan was "education, education, education". We thought he was merely reflecting our discontent with schools, but now I'm not so sure.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
- education (a key slogan in Tony Blair's election campaign)
- skills training for workforces (a UK government initiative currently advertised on TV)
- intellectual property rights (relevant to design and patent theft by foreign manufacturers)
- free trade/globalisation
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
Friday, July 27, 2007
A Bluffer's Guide, Part Zero
The new British Prime Minister, Gordon Brown, has a reputation for being fearsomely intellectual. In a speech back in 1994 he referred to "post neo-classical endogenous growth theory", a shut-'em-up phrase if ever there was one.
Except with Members of Parliament, who are no strangers to bull, many of them having buffed up their chatter muscles at Oxford and Cambridge. Michael Heseltine (Pembroke College, Oxford), then President of the Board of Trade for the Conservative government, suspected Brown (Edinburgh) had gotten this showy material from his economic adviser, Ed Balls, and drawled, "It's not Brown, it's balls."
For in most cases, you can say it more simply. Or if you prefer, you can go ahead and hit people over the head with it, but be prepared to clarify if challenged.
So I've looked for relatively simple explanations of EGT (shall we who are now in the know agree to use this outsider-excluding acronym?). Here's what I've got so far:
Endogenous growth theory - from Investopedia
And here's something else worth reading, by Gladys We. It is a few pages long, but it explains it well enough so I can understand it - I think.
Politically, it seems EGT can be used as an argument against free trade and intellectual property rights. For the latter, see page 5, point 5; okay to steal someone's ideas, refine them and then copyright them. I'm sure there's Far Eastern firms that'd be fans of this policy; something to advocate amiably over the pre-prandial sherry in the Senior Common Room - until you put it into practice by plagiarizing the Master's work.
UPDATE (Saturday morning):
It's now called "new growth theory". EGT is so last evening.
Except with Members of Parliament, who are no strangers to bull, many of them having buffed up their chatter muscles at Oxford and Cambridge. Michael Heseltine (Pembroke College, Oxford), then President of the Board of Trade for the Conservative government, suspected Brown (Edinburgh) had gotten this showy material from his economic adviser, Ed Balls, and drawled, "It's not Brown, it's balls."
For in most cases, you can say it more simply. Or if you prefer, you can go ahead and hit people over the head with it, but be prepared to clarify if challenged.
So I've looked for relatively simple explanations of EGT (shall we who are now in the know agree to use this outsider-excluding acronym?). Here's what I've got so far:
Endogenous growth theory - from Investopedia
And here's something else worth reading, by Gladys We. It is a few pages long, but it explains it well enough so I can understand it - I think.
Politically, it seems EGT can be used as an argument against free trade and intellectual property rights. For the latter, see page 5, point 5; okay to steal someone's ideas, refine them and then copyright them. I'm sure there's Far Eastern firms that'd be fans of this policy; something to advocate amiably over the pre-prandial sherry in the Senior Common Room - until you put it into practice by plagiarizing the Master's work.
UPDATE (Saturday morning):
It's now called "new growth theory". EGT is so last evening.
October 1987 revisited
I'm trying to work out whether making an historical analogy with 20 years ago is valid.
Let's have a look at what has happened to prices. Cliff D'Arcy in The Motley Fool (22 May 2007) does a very informative comparison between houses and the FTSE 100. He reminds us that although the FTSE-100 dropped dramatically on "Black Monday" (19 October 1987), it ended about 2% higher over the year as a whole. If we take his figures for 1987 to 2006, house prices increased 287%, and the FTSE 263%. This would suggest that house prices and stock prices have increased about equally (though houses cost money to run, whereas shares pay dividends).
Are British people over-borrowed? This Bank of England research document from September 2004 says not, in relation to house prices. Yes, debt-to-income has gone up, but interest rates are now low. And despite its name, the latest survey from UK site HousePriceCrash indicates a general belief that house prices will continue to rise in the months ahead. (But recent first-time buyers will be more vulnerable, having little equity and probably a high income multiple for their loan.)
I find the monetarist arguments intuitively persuasive, but I'm puzzled by the disparity between prices and monetary inflation. Using the UK's M4 stats, over the 78 quarters from Dec 1987 to March 2007, the average annualized increase in the money supply is about 10.48%. Compounding that figure, we get about 7 times more borrowed money in the system today than in 1987. Yet houses and shares are only 3-4 times higher.
What does seem clear is that we have borrowed more in relation to income, and this makes it even more important not to lose your job, or be hit by high interest rates. It's worrying when you have to depend on things carrying on as they are, indefinitely.
Let's have a look at what has happened to prices. Cliff D'Arcy in The Motley Fool (22 May 2007) does a very informative comparison between houses and the FTSE 100. He reminds us that although the FTSE-100 dropped dramatically on "Black Monday" (19 October 1987), it ended about 2% higher over the year as a whole. If we take his figures for 1987 to 2006, house prices increased 287%, and the FTSE 263%. This would suggest that house prices and stock prices have increased about equally (though houses cost money to run, whereas shares pay dividends).
Are British people over-borrowed? This Bank of England research document from September 2004 says not, in relation to house prices. Yes, debt-to-income has gone up, but interest rates are now low. And despite its name, the latest survey from UK site HousePriceCrash indicates a general belief that house prices will continue to rise in the months ahead. (But recent first-time buyers will be more vulnerable, having little equity and probably a high income multiple for their loan.)
I find the monetarist arguments intuitively persuasive, but I'm puzzled by the disparity between prices and monetary inflation. Using the UK's M4 stats, over the 78 quarters from Dec 1987 to March 2007, the average annualized increase in the money supply is about 10.48%. Compounding that figure, we get about 7 times more borrowed money in the system today than in 1987. Yet houses and shares are only 3-4 times higher.
What does seem clear is that we have borrowed more in relation to income, and this makes it even more important not to lose your job, or be hit by high interest rates. It's worrying when you have to depend on things carrying on as they are, indefinitely.
2007 = 1987?
Greg Silberman in Safe Haven yesterday uses the chartist approach to suggest an analogy with the lead-up to the 1987 crash.
I don't know. Over the late '86/early '87 period I watched my little investment soar and began to wonder how everybody could get rich at the same time. I heard reports that people were borrowing against their houses to trade, and schoolboys were making money on the market. I don't read quite that degree of crazy optimism and greed today.
Maybe the difference is reflected in the degree of monetary inflation. In the UK, the 3 years leading up to October 1987 showed an average annualized increase in M4 of 18.59%, compared with an average 12.07% annualized over the 12 quarters to March 2007. And over here at least, people are much more leery of investments and pensions than they were then.
But there's loads more debt now. It could be that a drop happens, not because of a change in investor confidence, but on account of running short of spending cash.
I don't know. Over the late '86/early '87 period I watched my little investment soar and began to wonder how everybody could get rich at the same time. I heard reports that people were borrowing against their houses to trade, and schoolboys were making money on the market. I don't read quite that degree of crazy optimism and greed today.
Maybe the difference is reflected in the degree of monetary inflation. In the UK, the 3 years leading up to October 1987 showed an average annualized increase in M4 of 18.59%, compared with an average 12.07% annualized over the 12 quarters to March 2007. And over here at least, people are much more leery of investments and pensions than they were then.
But there's loads more debt now. It could be that a drop happens, not because of a change in investor confidence, but on account of running short of spending cash.
Cycles and charts
For the analytical, here's an essay on Kress Cycles in Safe Haven.
This, together with Kondratieff cycles and other patterns used by market chart-interpreters, has one flaw to my not-quite-so-mathematical mind: predicting human behaviour involves feedback loops. If I secretly write down what I think you're going to do tomorrow, I could be right every time; but if I reveal my thoughts to you, that changes the situation. It's a sort of Heisenberg uncertainty principle: to observe is to be involved, and therefore part of the nexus of causes.
Having said that, human behaviour does have patterns, and I believe some have theorised that the growth of our brains is in response to the competition to predict the other person's behaviour better than he can predict yours.
This, together with Kondratieff cycles and other patterns used by market chart-interpreters, has one flaw to my not-quite-so-mathematical mind: predicting human behaviour involves feedback loops. If I secretly write down what I think you're going to do tomorrow, I could be right every time; but if I reveal my thoughts to you, that changes the situation. It's a sort of Heisenberg uncertainty principle: to observe is to be involved, and therefore part of the nexus of causes.
Having said that, human behaviour does have patterns, and I believe some have theorised that the growth of our brains is in response to the competition to predict the other person's behaviour better than he can predict yours.
Gold - or cash?
Brady Willett in Safe Haven (yesterday) warns us off some "bright ideas" for preserving wealth in a market drop. He notes that gold is a hedge when everyone wants out of cash, and that's been quite some time.
I guess his position is close to that of Marc Faber, who said recently that all asset classes are inflated and on the whole, he'd prefer to stand on the platform rather than get on any of the waiting trains.
I guess his position is close to that of Marc Faber, who said recently that all asset classes are inflated and on the whole, he'd prefer to stand on the platform rather than get on any of the waiting trains.
Is the credit system cracking up?
Bob Hoye, in Prudent Bear (yesterday), discusses "the Unholy Trinity of central banking, derivatives and artificial rating of credit". He sees these as systemic risks - I'll say more about that when I come to Richard Bookstaber's interview on Financial Sense last Saturday.
Should US Treasury bonds be downgraded?
iTulip's President, Eric Janszen (Wednesday) goes over the now-familiar arguments for a coming period of US recession/inflation, caused by the trade, budget and fiscal deficits.
He also links to Paul Farrell's article in Marketwatch (Monday), which questions America's creditworthiness as a result of having to finance the war in Iraq. Maybe we're going around the same track as with Vietnam, which burned up money (I remember a contemporary American cartoon of a steam engine with dollars being shovelled into the firebox).
Has the UK tied one of its little boats to the anchor chain of the Titanic? I calculate its loan to Uncle Sam's Treasury to be worth $2,757.65 per capita (British heads), or £1,345.99.
My wife and I could have a nice little holiday on that, which would be more fun, or a day at the races, which might get us a better return.
He also links to Paul Farrell's article in Marketwatch (Monday), which questions America's creditworthiness as a result of having to finance the war in Iraq. Maybe we're going around the same track as with Vietnam, which burned up money (I remember a contemporary American cartoon of a steam engine with dollars being shovelled into the firebox).
Has the UK tied one of its little boats to the anchor chain of the Titanic? I calculate its loan to Uncle Sam's Treasury to be worth $2,757.65 per capita (British heads), or £1,345.99.
My wife and I could have a nice little holiday on that, which would be more fun, or a day at the races, which might get us a better return.
Desperately holding down gold
Jim Willie of the Hat Trick Letter thinks that bank selloffs of gold are to make dodgy bonds look better than they are. If the mortgage bonds unravel, there's a lot of fast talking to be done by banks and brokers.
More on US housing woes
An informative piece in Dr Housing Bubble on the various factors that are turning the housing market upside down.
If I read the first graph rightly, there's a peak in the numbers of temporarily-fixed US mortgages that are due to come back onto the current variable rate in November this year, which suggests we may have a difficult autumn ahead. Further cutbacks in discretionary spending, presumably.
If I read the first graph rightly, there's a peak in the numbers of temporarily-fixed US mortgages that are due to come back onto the current variable rate in November this year, which suggests we may have a difficult autumn ahead. Further cutbacks in discretionary spending, presumably.
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