Michael Panzner interview

Some salient points in Michael's answers:

• The crisis could continue for another decade;
• investors will have to tread carefully and consider the risk of dealing with others;
• dividend yields could increase 2 - 4 times (suggesting that current stock prices could halve or quarter);
• after some more deleveraging during this year, it may be useful to accumulate precious metals

Read it all here; htp: Abnormal Returns

Also linked on AN is a story about Warren Buffett's firm insuring third parties against a long-term market drop. Berkshire Hathaway has taken $4 billion in bets; are they right? Or are they right only in the sense that nominal prices will hold, while inflation will mask the real reduction in value?

U.S. Bankruptcy Map

(source; htp: footnoted.org)

The banking crisis: did we have a choice?

Could any of the leading nations have retained their moral fibre during the monetary inflation of the last decade and more? Wouldn't prudent, restrained lenders have lost out to foreign sellers of "liar" and "fog a mirror" loans? Wouldn't the currency have risen and crippled exports? Could considerations like this form part of the "don't shoot me" defence of our busted banks and discredited politicians?

Or would it have been a trial by fire, where the virtuous are rewarded at the end? Denninger: "It is also increasingly clear that there are literally hundreds of midsize and smaller banks that are perfectly fine. They did not lever up, they did not write a bunch of crap commercial or residential construction paper that cannot be serviced and they most certainly did not drink the KoolAid of securitized synthetic garbage debt. Even in bad economic times traditional banking is a very profitable business - so long as you lend money to people who can pay you back or you have sufficient collateral so that if they default you don't lose your shirt."

In which case, the original offence of reckless finance has been compounded by the failure to punish it. The bailouts whisk away the deserved reward of the good, and teach a hugely damaging lesson to all onlookers: you can Get Away With It.

Of course, you can't - or rather society can't, though individuals will. And when injustice finally falls, it will take down with it many of the good, the poor and the powerless.

Not Chicken Little: the sky could really be near falling

Jesse is not an air-filled doomster, yet here he has become really sombre. Pound heading for parity with the Euro, major banks insolvent, action ineffectual, hush-hush all around so the common people don't realize the gravity of the situation. It's rumour, but rumour that Jesse, clearly an experienced financial man, finds plausible.

Like I said, you've had your warning. Prepare for the worst, hope for the best.

Every picture tells a story

Money and life

The previous post is a summary of Brad Setser's views on China and the dollar. What with the oil price coming down and the trade deficit reducing because of declining demand, it seems reassuring for Americans. But Michael Panzner also returns to one of his themes, the inflationary phase that he (and many others) fear may succeed the recession-depression.

Marc Faber has observed that this is the first time in history that economies around the world are affected simultaneously, since we are now much more inter-connected. So if inflation should take hold, perhaps it will not be fully reflected in the exchange rates - it might be that the dollar remains relatively buoyant against the pound, Euro, renminbi etc.

So maybe the real victims of global inflation, or hyperinflation, will not be this nation or that, but cash savers as a class. They have set aside some of the rewards of work, instead of spending it, and will come back to the cupboard to find it turned half-rotten, as happened in the 70s (if they'd put it in the stockmarket instead, it would only have been a bit mouldy).

How is it that China can award death sentences to those who adulterate milk with melamine, but adulterating the currency - the accumulation of millions of years of human labour - is not even punishable by loss of office? In the year George Washington took Presidential Office, "coining" in England was treason, and perpetrators were accordingly hanged, drawn and quartered (or, in the case of women, burned).

Money is stored life, and devaluing money is stealing life. Next month will be the 20th anniversary of my becoming a financial adviser, and the people I have advised would mostly not bother with investments if only their cash savings could hold their real value. What a scam this all is.

The Greenback is Red-backed

Brad Setser returns to a favourite theme, China's investment in the US. If I can summarise:

1. China buys American bonds directly, but also via the UK. Practically all the UK's purchases are on behalf of China.

2. American government bonds are either Treasuries (debts of the government of the USA) or Agencies (debts of US States and local government). Concerned about risk, China has recently been selling Agencies to buy Treasuries, because the latter are backed by the Federal Government.

3. China will continue to invest in the US, because this keeps up demand for the dollar and so keeps down the Chinese currency, the Renminbi. This means that Chinese exports to America will remain very competitive in terms of price.

4. China's continuing support will stop the US dollar from collapsing in the world currency market, as many have feared. Other countries who are also running a trade deficit and need financing, have much more reason to worry.

Dow 2,000: confessions of an optimist

Karl Denninger looks at one of the shapes chartists use to guess market movements, and concludes that a Dow fall to 2,000 points is one possible outcome.

Back in November, I did my own work on the "in-real-terms" Dow (i.e. adjusted for CPI), and if history repeats itself, a fall to below the equivalent of 2,000 points would merely be a repetition of what happened twice in the 20th century. But the second low (1982) was not so deep as in 1932, and in December I re-drew the graph with (sort of) reassuring curvy lines, which suggested that maybe the low point next time might only be c. 4,000 points.

This latter attempt of mine sturdily ignored two facts: debt, and its recent monetization (look at Tim Iacono's second graph here) have gone far past all previous levels; and so did the Dow in its "twin peaks" episode of years 2000 and 2007. Maybe the next low will be as devastatingly deep as the last peaks were dizzyingly high.

I will comfort myself with the illusion that the Dow will merely halve, until reality proves me wrong.

An answer to global warming

Grow Azolla.

Preparing for the Abolition of Freedom in the USA

How many Americans are aware of this?:-

Establishing Martial Law in the United States

(htp: Global Research; referred to me by Paddington)

UPDATE: see this from Jesse re New Hampshire's Resolution HCR 6! Freedom is in the air again!

New Market Terms

[Making the rounds]
CEO --Chief Embezzlement Officer.
CFO-- Corporate Fraud Officer.
BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.
BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING -- The art of buying low and selling lower.
P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.
BROKER -- What my broker has made me.
STANDARD & POOR -- Your life in a nutshell.
STOCK ANALYST -- Idiot who just downgraded your stock.
STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.
FINANCIAL PLANNER -- A guy whose phone has been disconnected.
MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.
YAHOO -- What you yell after selling it to some poor sucker for $240 per share.
WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.
INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse. PROFIT -- An archaic word, no longer used.

Radical chic

(Pic left: Ken Kesey's bus)

QandO has a good go at Bill Ayers, an education prof who once led the violent radical underground Weathermen movement (and is married to a former member). For those who want to know about one strand of the Baby Boomers, Ayers (born 1944) may be a touchstone.

The connection between radicalism and education is a very old one; modern mass communications also come under this category of vectors of revolution. Readers might like to consider how many other Ayerses there are, not actually getting their hands dirty anymore but getting well-paid and respected for influencing the agenda in classrooms, TV and the print media.

I'm not quite going to take the simplistic guntoting redneck line on them. People like this meant well, but they thought in abstracts, always dangerous with earthbound Man. If there is one thing we must learn from the past 40 years, it's that meaning well isn't enough. But they always wanted to do well for themselves out of doing good to others, and have fun doing it - isn't that human.

Is "double jeopardy" wrong?

My apologies to readers who may find the following a bit scrappy in style - it is Sunday and I ought to be doing other things in my real life!

Scotland, where the murder rate is double that south of the border, is now considering allowing “double jeopardy”; that is, trying someone more than once for the same offence (this has been possible in England since 2005). Libertarians will worry that the State can persecute individuals using judicial process; even that possibility is something of an extra burden on the citizen.

Penalties for the most serious crime, murder, are not so severe as they once were. There is no death penalty, and life imprisonment rarely turns out to be that: the average time served for mandatory lifers in the UK is 14 years. (Other, non-mandatory life sentences end up as 9 years served, on average.)

Perhaps one could work out the change in penalty as some kind of life-related formula. Let's assume for the sake of argument that life in prison is the same as no life at all. In that case, the death penalty is the loss of 100% of the rest of one's life, irrespective of the time between conviction and execution.

By contrast, how much of the criminal's life does life imprisonment take away? It depends on how old he is when the crime is committed, and how long he might be expected to live afterwards. I can't easily find statistics on the average age of murderers in the UK, but in the US it appears to be around 27. In the UK, life expectancy at birth varies for males according to social class, from 80 to 73 years (further complicated, I should expect, by variations in infant and juvenile mortality rates). Thus the penalty of life imprisonment represents 14/(73 - 27)% = 30% of remaining life.

I've read that before capital punishment was abolished, British juries were more reluctant to convict in cases where the death sentence might be imposed, but I can only guess at how far this might alter the probability of a "guilty" verdict. Shall we say, a difference of 20%? That would mean a penalty factor of (100*0.8)=80% for the death penalty, versus 30% for "life".

The discrepancy may well be less than this, since for many convicts, prison is safer and healthier than the life they face outside. The retired prison doctor "Theodore Dalrymple" has often noted how his patients throve "inside", where largely they were off illegal drugs and were reasonably well-fed. If after serving his time the ex-convict lives a shorter (nastier, more brutish) life, then his prison sentence has consumed a greater proportion of his post-conviction existence.

Wrongful conviction is always a concern. In Parliament in 2006, Mr O'Hara asked "how many miscarriages of justice there have been in capital cases which have resulted in a payment of compensation in the last 30 years", to which the answer was, that there were only four cases. Perhaps it's because forensic science has advanced very considerably since 1964, when the last execution was carried out in England. But the American experience suggests other factors masking miscarriages of justice, including: "Lawyers in many capital cases are lousier than the norm." There's no making up for a mistake, in the case of capital punishment (unless we return to the ancient principle of "weregeld").

What about deterrence? From the foregoing, "life" seems to be perhaps half as onerous as the death sentence. Yet US criminologists appear to agree that the death penalty does not have a significant deterrent effect. Could we argue that in many murder cases, the circumstances of the crime are such the perpetrator simply doesn't consider the potential consequences for himself? Would the same number of such crimes be committed, even if there were no legal penalty at all?

One might argue that deterrence is not the main point, and the penalty, whatever it may be, is simply a punishment that fits the seriousness of the crime. In which case, why is the crime treated so much less seriously than before?

On the other hand, maybe deterrence is an argument, after all. The journalist Peter Hitchens has argued that the murder rate in Britain would be far higher (I think he said, by a factor of about 10), were it not for huge improvements in medical procedures over the last 40 years, that now save the lives of many victims of violent assault. If that is so, then there may well be a correlation between severity of punishment and the crime rate, after all.

Perhaps greater certainty of conviction is the greatest deterrence; but that can't be easily achieved. If re-trial significantly increases the probability of successful and just conviction, it might go some way towards evening-up the odds in terms of deterrence. But I doubt that it will greatly improve conviction rates overall, not least because there will be opportunities for the defence to claim that the outcome has been prejudiced in some way by matters relating to the previous trial and the associated publicity. And I would think there would not be many re-trials approved by the Crown Prosecution Service (or its Scottish equivalent), since they will have to consider the chances of "a result" second time round, and also bear in mind the issue of the presumed-innocent citizen's right not to have his life consumed by legal pestering, for which monetary compensation may never be sufficient.

So I think it's always going to be extremely important to "get it right first time," and I don't think a second pop at the target is going to make enough difference to justify the inconvenience to the accused in cases that don't succeed.

As to sentencing, an incorrect conviction is always wrong, but a death sentence for the innocent is absolutely wrong. Yet for the guilty, the penalty for murder is far less heavy than it used to be, and that, too, seems unjust and quite possibly it has also been one of the reasons for an increase in potentially lethal assaults.

So to me, it would be better to increase time actually served in jail, in cases where the judge determines that consideration of consequences was, or would likely, or (after making allowance for emotion) ought to have been in the criminal's mind at the time of committing the act. (a) I think it would increase the deterrent effect, and (b) opinion may differ, but I think it would be deserved, at least in "serious" cases.

There should also be the swiftest and fairest treatment of appeals, so that where there has been a miscarriage of justice, the innocent should be released as quickly as possible, and compensated handsomely. The State itself needs a deterrent.

You've had your warning

Lord Myners has been criticised for telling the truth too early, i.e. 3 months after the general public could have done anything to save themselves. On October 10, "major depositors" in the USA and Japan were preparing to withdraw their money, and were willing to paying any attached penalty to do so.

For the rest of us, the corralito: "The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals."

Even if they had caught wind of it, would we have learned anything of this from the mainstream media? (Scornful laughs) But what were MPs doing with their own money? Perhaps they'd have abandoned us to our fate, like Lord Jim. (I have often thought that the main reason for getting into politics is the opportunity to trade - in all sorts of ways - on inside information and networking).

Do you think the banks have been saved? Mish doesn't think so. Is the pound safe? Jim Rogers doesn't think so (though this business associate of the sterling-busting George Soros may be playing a nasty little game of market manipulation - which is, scarcely credibly, not an incarcerable crime but merely a civil offence.)

Within the past 12 months, the pound has gone from USD $2.12 to $1.43 and Euros 1.40 to 1.06; to put it another way, imports now cost 48% more from the States , and 32% more from Europe. (O&A typical cash rates)

At least you can still get your hands on your money; but for how much longer? It may be that the crisis is over; but it may be that we are in the eye of the storm. Personally, after settling debts I intend (a) to draw extra cash, keep the slip to prove it's been legally obtained, and store it safely away from a bank; (b) to keep at least some of my money in foreign currencies - perhaps the Yen* and Euro*; (c) to look for a variety of non-cash stores of value - and not all of them with Government guarantees, either.

My trust in banks, politicians and journalists is broken. My faith in them is gone, because they did not keep faith with me.

*Though The Big Picture thinks Japan will move to weaken the yen and the Euro-zone is struggling to hold its members together. So, US dollars?

Where in the World?

Birinyi Associates give their forecast for GDP growth in 2009:

A turning point in the market?

Jesse has been doing some scrying, and perceives that a sudden market move is imminent.

"What's the McClellan Oscillator?" My understanding of this site's explanation is that movements in the share prices of a few large companies, heavily weighted in a stock market index, can mask what is going on in the market generally. And when those large companies quieten down, investors may notice an opposite trend has been developing, and they'll pile in after it.

For example, if shares in major banks have been crashing, but other companies have been rising, the market as a whole may drift down, but then...

Signs and portents, signs and portents.

Rolling back the State

... won't happen. Only a major disaster is capable of breaking the hands that are strangling us. But maybe that is what is now on its way.

Mish reported yesterday how the banks are insolvent, and in his opinion monetary reflation can't work , for three reasons:

1. Putting more cash into the system to create inflation to reduce the real burden of debt, won't create jobs, raise wages, or stop outsourcing (China's nominal GDP per capita is $2,483, America's $45,725, according to IMF figures).
2. But "quantitative easing" - monetary inflation - will lead to a currency drop (if it succeeds) and the reaction will be a raising of interest rates as lenders try to protect the real value of their loans.
3. And if government creates jobs directly, it again skews the economy, giving higher importance to the objects it chooses than the market would, if left to itself; in short, what economists call "malinvestment".

A longish essay over on Mises looks at how the State has seized the wealth and assumed many of the functions of the private citizen, and how the First World War and subsequent events helped accelerate a process that had begun long before.

Back in the 70s, I came across the work of Ivan Illich. His general thesis was that the State takes over activities that previously we performed ourselves - teaching our children, tending to our sick and injured, etc. These functions are then made into organisations with big buildings, many workers and officials, and large budgets - all paid for by taxation. Sociologists call this "reification". It increases the size and power of the State - and here we are.

They don't even do the job well.

As someone in education (as well as finance), I don't subscribe to the airy assertion that "our youngsters leave school illiterate", but they don't read or write as much or as well as they did, and what the liberals have done to the curriculum in English (for example) is painful to see. Heads of English in secondary schools in the 70s literally burned or threw out their schools' textbooks and coursebooks (I remember hearing of three separate cases); but the temptation to micromanage returned. It's like the historical irony that saw the French kill their King and end up with an Emperor.

And having seen the medical service in action on my wife a few years back, I no longer have the blind faith in doctors that I used to have. Phil Hammond (the GP/journalist/entertainer) tells us that the NHS kills or maims about 10% of its hospital patients, and Illich was ahead of him again (Medical Nemesis, 1974).

That's not to say we don't need doctors or teachers, but once created, institutions develop a will to live and purposes of their own, and can drift perilously off-task. Individuals who join them can become sidetracked by career opportunities and political hobby-horses, and in any case have to accommodate themselves to working in a structure run by others who have already done so and altered the operational rules to fit their interests.

Looks like the banks have done the same.

We have to hope that, however painful, after the coming changes there may be some better balance between the citizens taking care of their families, and that black hole of wealth and power, the State.

Abolish the Federal Reserve

On The Big Picture, a rude but concise video by Neal Fox about the Federal Reserve. As his catchy song points out, its existence defies the Constitution - the same Constitution that made President Obama say his Presidential Oath again.

Yet again, I say economic issues resolve into democratic ones. The Constitution is very clear that the power to create money (using gold and silver) must remain with Congress; yet in 1913 that power was given away to a newly-invented quango, run by people whose names and organisations are not permitted to be publicly known (which secrecy gives rise to some very paranoid theories!)

Why wait until its centenary to abolish it? No "four more years", please.

And while I'm on, let's have a massive cull of quangos in the UK, too.

Very scary

Mish doesn't come across as eager for Armageddon, which make his posts today really worrying. Is it time to get one's cash out of the dispensing machine, to avoid the Argentinian corralito?

Could US interest rates rise?

Brad Setser notes that far from declining in this recession, China's trade surplus is increasing, because although exporting less, it is also importing less. He estimates that China owns $900 billion of US Treasury bonds (and rising), some purchased indirectly via the UK.

However, enormous spending by the US means that it will have to issue a further $900 billion in bonds, and Setser opines, "China isn’t going to double its Treasury holdings in 2009."

If America needs to borrow more than China is willing to lend, the money must come from somewhere else, at a time when it's getting short generally. I have also recently read reports of concerns about the credit rating for US government bonds, which also supports the idea that rates will have to rise to pay for the increased risk of default.

How far will the dollar will be supported by this tendency? At least, in relation to sterling?

The UK is supposed to be an even worse basket case in terms of overall indebtedness, and that may make it politically very difficult to match rates with the US, because it could accelerate the rate of British house repossessions and business bankruptcies, even faster than in the US. So the pound could possibly fall even further against the dollar.

Perhaps Mr Cameron is right to warn that for the UK, the money may run out soon. Then we will have to pay high interest rates after all. And at last, we may be forced to borrow from the IMF and retrench savagely. Back to 1976. And will 1979 return? Cometh the hour, cometh the strong woman?

So, what's the implication of all this for the investor? Sell bonds and buy gold (despite its already high price) now, then reverse the process when high interest rates hit us?