How long will the bear market last?

Jesse quotes this comparison of the current bear market with three previous ones, mixing stats for the Dow and the S&P 500:

But taking similar periods for the Dow only, adjusting for CPI inflation, and adding the long period from 1966 to 1982, we get this:

I'd suggest we should look at when the recent bubble really burst - end 1999, then desperately disguised by monetary inflation from 2002/03 onwards; if that's right, we have maybe another 6 years to go through.

The shapes of these two lines do sort of rhyme, don't they? And if so, looking at where the end of the red line is, maybe a bear market rally is now due, like the c. '75 - '76 mini-recovery.

End point in real terms this time, my guess, is the equivalent of 4,000 points today. However, there are features unique to the present situation, especially the size of debts, the loss of much of the West's manufacturing base, and the interconnectedness of modern world markets and economies.

Cash (equivalent) and gold - iTulip

Our primary concern at this stage is no longer our readers' portfolios but their ability to weather a US dollar crisis if one erupts. In response, we are increasing our gold allocation to 30% and moving all Treasury holdings to the very shortest maturities, to three month Treasury bills, until we see indications that conditions are stabilizing. We encourage you to engage with the community to actively discuss strategies that are appropriate for you.

The rest is here.

Good luck, right action

Reportedly, George Soros doesn't see the bottom of the market yet. We judge by recent experience and think ourselves hard done by, yet look at the following chart, which takes the Dow and adjusts it for inflation:

All that has happened is that the illusory gains of the last 12 years, more than accounted for by extra debt taken on in that time, have now unwound. Yet we're still nowhere near where we were in 1987, which (if you were around then) we thought of as an exciting time for investment. To get back to that peaklet in real terms, the Dow would have to drop below 5,000 points.

But to return to the low point of the recession that preceded it - around July 1982 - the Dow would have to break down below 1,800. Even then, that miserable score is a big advance on the low of 50 years before that (July 1932: CPI-adjusted Dow would equate to c. 833 points).

Karl Denninger has said recently that he sees 2,000 points as a possibility; I've suggested a low of c. 4,000, because in these 40-year cycles, each peak and each low has been higher than in the previous cycle.

However, seeing how unbelievably high the Dow went in recent years (way above anything that could have been extrapolated from the highs of 1929 and 1965!), maybe a correspondingly low low is not out of the question.

So why am I planning to set up a new brokerage on my own? Why don't I send a copy of this blog to all my clients, together with news of my retirement from the industry and a valedictory "Good luck, because you're going to need it"? (Actually, I have repeatedly advertised this blog to clients; I only wish the viewing stats could show me that they all read it.)

The Mogambo Guru has taken to signing off his rants with a sarcastic "Wheee! This investing stuff is easy!" - he recommends gold, silver and oil. Over on Financial Sense a couple of days ago, Martin Goldberg opines, "The important question for most investors is whether to be in cash or gold" (cash for now, he thinks). Marc Faber has long been saying that we are entering a long bull market in commodities, and has just said he thinks an ounce of gold will one day be worth more than the Dow.

What they're really talking about is inflation. Debt, which is fixed in nominal terms, becomes cruelly heavier as the assets pledged against it become worth less and less. The pain will get so bad that the government will crack, as it always does, and debauch the currency. Holding cash just now is great, for those lucky enough to have it; but if Robin Hood can't confiscate it through taxation, he'll bleed it white by printing lots more fiat currency for himself (and the people who keep voting for him), so sucking real value out of your money. If you can't face investing, be prepared to spend like a sailor on shore leave when inflation hits town.

My clients generally aren't traders. In the same interview cited above, Faber said:

Recently I bought some U.S. stocks for the first time in a long time. If you buy Intel , Cisco , Yahoo! , Oracle and Microsoft , you will do much better in the next 10 years than you would with Treasuries. These stocks will double and even triple -- before going to zero.

That's not for my clients - they like the idea of the double and triple (who doesn't?), but not enough to risk the "going to zero".

That said, investment - including in commodities - is going to be part of their fight back against the attempt to take away everything they've saved. Inflationary periods do sap the real value of shares, they hit cash even worse. Look at the position of the man who invested in the (dollar-denominated) Dow from the start of 2008 up till last Friday's seeming debacle, compared with the poor chap who "played safe" and held good old British pounds:

The picture will change when the dollar dives, of course; though maybe the pound will dive along with it. To hold what you have, you'll have to keep on your feet, balancing the relative merits of currencies and asset classes. For me and most of my clients, it won't be about getting rich; it'll be about not getting robbed.

I'd have been happier with a world where money kept its value, and I'm not alone. The blogosphere is now crowded with people who have their own schemes for a fair and just economic world. But none of these ideal arrangements will enter into reality. There's too much to be made out of destroying it, by a handful of traders, and the politicians - and the bankers who will eventually employ the politicians when they leave office. We must take, not the right action, but the appropriate action.

Good luck, because you're going to need it.

Interlude

Sackerson is on holiday; back soon.

Can we do it?

We live in an era in which every one of us needs massive amounts of technology just to survive, and lots more to stay as comfortable as we are. Yet, paradoxically, there is a great deal of denigration in the UK and US for mathematics, science and engineering and the people who have skills in those areas, which discourages many from those fields of study. It is to the point where there are sometimes two jobs per graduate.

Can we make the cultural shift to nurture and reward those people, or are we doomed to drop backwards?

Yet another conversation with a wealthy parent (she pushes papers, he is a corporate lawyer) does not give me much hope. All the ones that I have talked to assume that we need such specialists, who will be someone else's children, but their own will go to college, graduate in non-technical fields, and then have successful high-paying careers. I cannot make these parents understand that we have run out of the wealth to get the technology from elsewhere, so we have to make it here. Without a manufacturing base, those nice parasitic managerial and service jobs just won't exist.

Or perhaps I'm wrong, and should have gone into accounting, instead of mathematics teaching and engineering research.

Where is Paul Moore's bonus?

Paul Moore, former head of risk management at HBOS (which, by the way, has just cratered its new owner, Lloyds Bank), was sacked in 2005 by Sir James Crosby, allegedly for warning about the bank's excessive lending.

Whistleblowers generally suffer for speaking out. Under the Public Interest Disclosure Act 1998, there is no limit for compensation paid by industrial tribunals in whistleblower cases; but I should very much like to know what is the average paid out under such circumstances, and the most that has ever been paid.

Mr Moore has received "substantial damages" but was also gagged, so I regard whatever he was paid, as merely a recompense for his silence. I doubt whether the damages come anywhere close to the "compensation" paid to some greedy, corrupt and incompetent senior executives at top banking and financial firms; and I think it should.

The OFT has introduced a scheme to award up to £100k for cartel-breaking snitches. Big, fat, hairy deal: five bankers spent £44,000 on wine alone on a single evening in 2001.

Maybe demobureaucracy doesn't work; maybe we should go back to old-fashioned kingship. In Shakespeare's Henry V, the King goes about his camp in disguise before the crucial battle:

KING HENRY V: I myself heard the king say he would not be ransomed.

WILLIAMS: Ay, he said so, to make us fight cheerfully: but when our throats are cut, he may be ransomed, and we ne'er the wiser.

KING HENRY V: If I live to see it, I will never trust his word after.

WILLIAMS: You pay him then. That's a perilous shot out of an elder-gun, that a poor and private displeasure can do against a monarch! you may as well go about to turn the sun to ice with fanning in his face with a peacock's feather.

After the battle, the King calls a trembling Williams out of the ranks and reveals himself as the anonymous interlocutor of the night before; but instead of dealing with his frankly-spoken subject as one might expect of a ruthless Plantagenet monarch, he returns Williams' challenge-glove, filled with gold coin from the royal treasury.

And how might King Solomon have adjudicated a dispute between a CEO and his erstwhile employee? Is it not possible that, in some cases, he would have taken years of earnings from one and passed it directly to the other? Where are the mega-bonuses for those who risk their careers to defend their firm, its shareholders and the general public?

Should we leave the EU?

Is this a fair picture of our relationship with the Far East and Europe? If so, what happens if we disconnect from "ever-closer union?" Wouldn't they just throw away the straw and drink straight out of the glass?

The middle class world view

Confusion

America gets het up about a mother of 14, but feeds over 160 million cats and dogs daily. I must say, Nadya Suleman's website is a work of art, though.

Let them eat dirt

It begins, but so much sooner than I expected.

A panicky middle class moves from worrying about its bank account, to railing against those richer and stronger than itself, to turning on those poorer or weaker than itself. Then it seeks to connect the two:

"However you slice it this is ridiculous. FOURTEEN children as a single parent? Assuming she has medical "insurance" from somewhere, exactly how does a desire to have as many kids as humanly possible entitle her to this sort of abuse of that insurance? If she doesn't have insurance, who's footing the bill? And how do you possibly go out and earn a living while raising fourteen kids?

This is what the nation is up against.

This is why California is broke."

"...there are two Americas. A poor America on socialism and a wealthy America on capitalism...

A vast sea of perhaps well intentioned government programs, all initially set into motion in the 1960's, that were going to lift the nation's poor out of poverty.

A benevolent Uncle Sam welcomed mostly poor black Americans onto the government plantation. Those who accepted the invitation switched mindsets from "How do I take care of myself?" to "What do I have to do to stay on the plantation?""

"Because society no longer believes that it's appropriate to let these children die because of the gross irresponsibility of the mother, the only humane way to prevent this sort of stuff from happening again is to require sterilization of anyone who would receive food stamps or other sorts of welfare. "

Long ago, bailouts were unheard of; failure meant starvation, perhaps death. Consider the caveman: Ug's tribal chief couldn't afford to say, "It OK Ug no kill deer this week. It not Ug's fault. Tribe will bail out Ug."

If he wants his tribe to stick around, the chief must say, "Ug no kill deer: Ug family starve."

(For a moment, one has a vision: Ug family no starve; Ug family kill, eat Virginian economics professor.)

But the tendency... We must punish the wicked rich, correct the feckless poor, do something about the swelling ranks of the disabled, and then we'll all be jolly, prosperous and middle class. Without the bad, sad and mad, everyone would be happy. Patriotic citizens must form a united front... The communists are a deadly threat, and must be firmly suppressed... It's for the working man and the national good that we must for a while band together, almost as though we were socialists...



The clouds were boiling red and yellow over the Alps. Standing on the balcony of the Leader's retreat, the party gazed awestruck. A woman said to Him, "Das bedeutet blut, blut, und mehr blut." The Leader paled, trembled violently and said, "Wenn das sein musss, dann lass es sein."

So proud and lofty is some sort of sin
Which many take delight and pleasure in
Whose conversation God doth much dislike
And yet He shakes His sword before He strike

Symmetry; asymmetry

"China’s January surplus ($39.1b) is roughly the same size as the United States’ December deficit ($39.9b). It is reasonable to think it will roughly match the United States January deficit as well.

The extreme symmetry captures something real. Deficits and surpluses are shrinking globally now that the price of oil is at levels that roughly cover the oil exporters imports. Right now China’s (growing) surplus is clearly the main counterpart to the United States’ (shrinking) deficit" - Brad Setser

"I believe there is a greater than 25pc chance of a departure from the Eurozone given the social and economic behaviours of some countries within it" - John Moulton on the UK and the Euro.

Crime and punishment

Congressman Michael E. Capuano does his job today, flaying the banks (htp: Jesse). I tried to email congratulations to him, but I haven't got a Massachusetts zip code.

And Karl Denninger also:

If the law enforcement agencies in this nation do not start prosecuting the fraudsters in our banking and investment industry that caused this economic collapse (and "token prosecutions" like Madoff will not cut it), and our lawmakers (and President) do not stand up darn soon and call for this prosecutorial action in public there is a very real risk that a repeat of those sordid affairs will soon arrive...
This much is clear to me - high-dollar white-collar crimes, certainly those with an impact greater in aggregate than we currently value a single human life (which various estimates put somewhere between $5 and $50 million each) are deserving of punishment equivalent to murder, meaning either (depending on state law) life imprisonment without possibility of parole or a sentence of death.
We need to put this change into the law as a deterrent against such acts in the future.

They're coming round to my point of view, as expressed e.g. here.

Remember

It was the strength forged in fighting his personal Black Dog, that Churchill lent to us when we most needed it. And the poem he quotes in this broadcast has that mingling of suffering, determination and joyous tears. I give Clough's text in full after the link.

Churchill's War Time Speeches.

A Difficult Time.

'Westward, Look, the Land is Bright'

BBC London

27th April 1941


Say not the Struggle Naught availeth

SAY not the struggle naught availeth,
The labour and the wounds are vain,
The enemy faints not, nor faileth,
And as things have been they remain.

If hopes were dupes, fears may be liars;
It may be, in yon smoke conceal'd,
Your comrades chase e'en now the fliers,
And, but for you, possess the field.

For while the tired waves, vainly breaking,
Seem here no painful inch to gain,
Far back, through creeks and inlets making,
Comes silent, flooding in, the main.

And not by eastern windows only,
When daylight comes, comes in the light;
In front the sun climbs slow, how slowly!
But westward, look, the land is bright!

Arthur Hugh Clough

Deflation, inflation, distress

The Contrarian Investor gives a lucid explanation of the potential consequences of deflation.

In Australia (as in the UK, as I think I showed here), the nation owes more money than it has in savings, so it depends on foreign investment.

If interest rates fall, foreign capital will go away to where it can earn more. This reduces the demand for our currency and makes it cheaper. So goods we sell to foreigners get cheaper, and things they sell us get more expensive. They buy more from us, we buy less from them (or they have to cut their prices so we can afford their stuff). More money comes into our economy; all well again.

Except...

• What if , thanks to decades of spending lots without earning much (and borrowing the difference), we no longer make things foreigners want?

Then we become "distressed gentlemen". As the money runs low, we run up accounts at the tailor and the wine merchant, and write IOUs which we hope will not be presented to us soon. Maybe we begin to cut a few luxuries, but old habits die hard, not to mention ingrained addictions.

• What if they sell us things we can't do without, and won't cut their prices?

The money runs out. Unless we are Royalty, and too dangerous to dun, eventually the bailiffs must arrive. In the modern world, the sovereign wealth funds, perhaps.

What can they take? In Australia, there are mineral deposits the Chinese will want, thinks the Contrarian Investor. Here in the UK, maybe some remaining profitable businesses and valuable technical expertise, maybe patents and secret technologies. And it's not only the Chinese that have been lending us their surpluses. We have other creditors.

Then, as the laden carts depart and the keys of the mansion are handed to the new owners, the decayed gentry become vagrants and vagabonds.

Unless we are too dangerous to dun. Perhaps America is; can we be so? And what if our creditors are not certain of our might? Uncertainty can trigger inappropriate actions. There is a Chinese saying, I believe: fear a weak enemy. Catastrophe can be avoided, but unless our leaders are tough with us now, we will learn a harder way later.

But if the master has become poor, what of his servants?

What if, like me, you're not one whose power and social status protects him from the worst effects? Do you believe that democratic societies can do the right thing? If not, this is a time for individuals to make their own quiet plans and preparations.

Historic inflation in the USA and UK compared

Just for interest...

The, er, credit, er, crunch

UK M4 official data here

No wonder most of us have difficulty understanding the financial equivalent of the matter-antimatter drive powering the USS Enterprise. You'd think lending would have decreased, wouldn't you? Smoke and mirrors...

September 15, 2008: the secret bank run and corralito

According to Paul Kedrosky (htp: Tim Iacono), Hank Paulson and Ben Bernanke scared the wits out of Congress with references to a potential $5.5 trillion electronic cash withdrawal from the US banking system, which would have led immediately to economic and political Armageddon. Electronic money accounts were closed down to stop the flight and collapse.

I said a month later that Paulson looked like a bully. But when Congress threw out the first bailout plan, he had also looked scared-angry, turning his head this way and that, like a bull throwing off dogs.

Perhaps the scare story was true. Perhaps not. Shame it took the ex-head of Goldman to drive the Bill through. I assume that rescuing the banks also rescued much of his personal $500 million wealth.

It's time for us to leave off discussing the affairs of the Gods, and return to our own interests. We ordinary mortals don't have the luxury of that kind of money transaction facility. If the system had gone down, presumably it would have taken our little all with it. And is anyone so brave as to say that it's been fixed?

Be prepared; don't be panicked (as it seems Congress was), but take what sensible precautions you can.

Denninger: deflation

Belatedly, I refer you to Karl Denninger's end-year review and forecast. He sees continuing deflation, and makes a number of other plausible and worrisome predictions - scroll to the end of his post for the horrid gallery of prognostications.

In short:

...rallies are to be sold, cash is to be raised and prudence is to be practiced in your own personal financial affairs. Don't get creative in all things finance, get stingy and prudent. Your personal financial survival could well depend on it.

So instead of staring at the low interest on your cash balance, think of the real capital appreciation of your money as measured by what big-ticket items it will buy. And for once, the government can't easily tax your capital gain.

You may also want to hold more cash away from a bank ("Round #2 of severe bank instability gets served up on us in the second half of 2009").

And maybe diversify your currency holdings:

The Dollar will not collapse. This is not because we're in great shape or will truly recover, it is because the rest of the world is in worse shape than we are... The rest of the world is literally on the precipice of a full-on collapse. European banks are more-levered and less-transparent than our banks as just one example... I see the potential for the pound and euro to both reach par with the dollar.

I think Denninger on the one hand, and Faber/Janszen on the other, may both be correct. It's a matter of timing - deflation now, debasement of the currency later. Because nominal debt gets relatively bigger as assets and incomes decline in value, something will have to give.

Satire

A very clever essay from the rec.gambling.poker newsgroup:

The Amazing Stimulus Package.

Join us for an enjoyable night of illusion brought to you by Uncle Sam the Magnificent and Fed the Enabler. Sit back, relax while this magical duo performs feats of magic so astounding that they will have you reaching for your wallet, even while knowing neither of them ever left the stage.

Their world famous "Creating Money Out of Thin Air" will have you rubbing your eyes with amazement. Watch closely as they transfer that "Created Money" to the Wall Street elite, third world dictators, and ultimately out of the pockets of the audience. Try not to be caught as they captivate the audience with the hypnotizing phrase "Too large to fail". Try to follow their logic as they magically convince you and most of the rest of the audience that spending your future earnings today will turn their bumbled (or was it intentioned?) handling of the economy from crisis to stability.

Marvel as they nightly obfuscate their positions and purposes while they plunge the world economy into recession, and then depression.

You'll be astonished when they reward each and every member of the audience Gift cards, checks, or direct deposits worth many times their ticket price. You'll leave the auditorium scratching your head wondering how they can continually perform these feats of magic and financially return to continue the show night after night.

But most important be sure to buy tickets for their closing night. You won't want to miss their amazing final show as they make your money shrink and disappear right before your eyes, making even most wealthy people poor as they create a two class economic structure composed of the super rich and the poor. Watch as they finally render the U.S. Constitution a worthless piece of paper while magically converting hundreds of millions of American citizens to citizens of the WORLD with little resistance from a weakened, powerless middle class.

Robert Ladd

Blowing bubbles

Nobody has made economic depression and its consequences seem so inevitable and at the same time so colourful and even attractive, as Jim in San Marcos.

It's a shame that I was counting on my State pension to eke out retirement income. Looks like many of us will be using Hamburger Helper instead.