Gold and the Dow

The Dow has certainly varied in its relationship with gold. The monthly low points since 1928 were February 1933 (1.95 ounces) and March 1980 (1.24 ounces).

As of 1st April, it was the equivalent of 8.4 ounces. So although gold has risen substantially since the 2000 watershed, one could argue that either gold still has a long way to rise, or the Dow a long way to fall, before the next bottoming-out.

More on bonds, and an alternative view

Antal E. Fekete is a professor of money and banking in San Francisco (such a beautiful place, too). He has a pet thesis about the bond market, which is that every time interest rates halve, effectively the capital value of (older) bonds doubles, to match the yield on new bonds.

So as long as we expect the government to try to stimulate the economy by lowering interest rates, there's a killing to be made in the bond market. Theoretically this could go on forever, even in a low-interest environment - the logic holds if rates go from 0.25% to 0.125% - provided the Treasury doesn't simply go straight to zero interest, of course.

Anyhow, his latest essay says that the monetary stimulus will simply be used to settle debts, since debt gets more and more burdensome in a deflationary depression; and settling debt instead of making and buying more stuff, continues to drive deflation. In this enviroment, few businesses will want to take on more debt (certain and fixed) in the hope of increasing their profits (far from certain, and very variable). On a national level, and following the ideas of Melchior Palyi, he now sees every extra dollar of debt as causing GDP to contract.

Therefore, valuations of most assets will continue to decline - except for bonds, which are now the focus for speculators. To this extent, he agrees with Marc Faber (cited in the previous post): we now have a bubble in government bonds.

But something will go bang. The real world shies from the inevitable conclusions of mathematical models. I think it will come as a crisis in foreigners' confidence in the dollar - there will be a reluctance to buy US Treasuries (we've already seen failed sales of government bonds in the UK recently, and when the next one succeeded, that's because it was a sale of index-linked bonds). Even now, the Chinese have switched from Agencies (debts of States and municipal organisations) to Federal debt, and within the latter, from longer-dated bonds to shorter-dated ones. If government debt was an aircraft, the Chinese would be the passenger insisting on a seat next the emergency exit near the tailplane.

To use a different analogy (one I've used before), drawn from the Lord of the Rings, the rally in the dollar and the flight to US Treasury debt seems to me like the retreat to the fortress of Helm's Deep: a last-ditch defence, doomed to be overwhelmed. Can we see a little figure about to save the day by dropping the Ring of Power into the lava in Mount Doom? We can hope; but you don't make survival plans based purely on optimism.

I therefore expect a transition from deflationary depression to inflationary depression, at some point. Perhaps a sort of 1974 stockmarket moment: an apparent turnaround, which when analysed can be shown to continue the real loss of value for some years. Only when national budgets are brought under strict control, will there be the environment for true growth. I don't see a willingness to tackle that, on either side the Atlantic, so disaster will have to be our teacher.

Prepare for a bond rout

What Mr. Greenspan and Mr. Bernanke have achieved is historically quite unique. They have managed to create a bubble in everything, everywhere in the world: in real estate, equities, commodities, art, worthless collectibles; even bond prices continued to rise as interest rates fell due to loose monetary policy. Since 2007 and 2008, everything has collapsed. But government bond prices continue to rise, and went ballistic between November 2008 and December 2008, when 10- and 30-year Treasury yields collapsed. So my view would be that this was the last bubble they managed to inflate. From here on, the government bond market will fall. In other worlds, the trend will be for interest rates to actually go up.

(Highlight mine.) Read the rest of Peter Schiff's interview with Marc Faber here.

PS: Faber indicates something like the following portfolio to Schiff:

Commodities (e.g. oil, agriculture): 20%
Emerging markets: 10% - 20%
Gold (in physical form): 10%
Cash (the US dollar, for now): 50%

Past, present, future

Gold and the Dow - chart

Thirty years on

2009: Ian Tomlinson
1979: Blair Peach

When Britain turns to Fascist methods, it employs them totally incompetently. And this is the Left at work, too; we are led by people who themselves were on the picket line and putting the "chicks up front" so the "pigs" couldn't clobber the guys.

Interlude

Off air for a few days - back soon. In the meantime, can anybody find me a picture of "Three Homes" Geoff Hoon that makes him look fully alive? I've had my doubts for a long time.

The truth will out: it WAS fraud

William K. Black, a former financial regulator who has written a book about the U.S. Savings & Loan disaster of the 1980s, is unequivocal: the banks defrauded us. It was deliberate and with full knowledge of what they were doing. How much longer before mass trials are set up?

Worse, the regulators didn't even start to investigate until the crash, whereas in the S&L crisis they were making preparations even while the lenders were boasting of record profits.

Black says the current mess is at least 100 times worse than the S&L debacle. In his view, Bernard Madoff is a mere "piker", not even in the first rank of the fraudsters responsible for all this.

(htp: Michael Panzner)

Divination by horses

Hippomancy is an ancient art, still alive in the Grand National. My wife's uncle was in Liverpool in 1959 when the workforce at Oxo all backed the horse of the same name: it won at 8-1. He says the town was lit that night.

Well, I backed Golden Flight and down it went at the first fence - though the name is Delphic: will gold flee or take wing? For adherents of cash, Offshore Account stayed the course, but lost ground as the pace picked up, miming the effect of inflation.

On a political note, I was pleased that Eurotrek failed to complete. And we bloggers should not have been surprised to see Fleet Street unseated.

The winner, against all expectation, was Mon Mome (= "my kid"), perhaps a sign that we should be thinking of the next generation, as skewed demographics meets declining GDP. The trainer, Venetia Williams, was sporting a striking golden coat...

Who ruins Britain?

It's not just the bankers and the politicians. I'm reading Robert Peston's book "Who runs Britain?" and I'm wondering about the social benefits of private equity entrepreneurs.

Take store group Arcadia, for example. In the year 2000, it was acquired by Stuart Rose, at which time it had a turnover of £2.5 billion, debts £250 million and a market capital value somewhere around £100 million. "The business was viewed as dead meat when he arrived." Two years later, the turnover was down to £2 billion, but all the debt was cleared and the group was making an annual profit of £106 million.

Rose then sold out to Philip Green for a reported £850 million (Peston says £775 million), of which Green's personal investment was only £9.2 million.

In 2005/2006, Arcadia's sales were down to £1.8 billion, but profits had risen to £300 million, according to Peston. Green then made it declare a £1.3 billion dividend, £1.2 billion of which went to his wife - who by then was, technically, domiciled in tax-free Monaco. This record-breaking payout was funded by bank loans to Arcadia totalling £1.35 billion, with the result that the group's net asset position went from plus £303 million (in August 2004) way into the red - minus £807 million. You'll see that the dividend accounted for the decline in Arcadia's net worth, and more besides.

Stuart Rose is like a man who buys a sick donkey, nurses it back to health and sells it at a profit. Green appears to me like the new owner who nurtures it further, then suddenly puts back-breaking quantities of heavy stone in its panniers and wanders off on other business, whistling merrily while the poor, over-laden beast staggers behind him in the wilderness. If it should stumble...

I can see what's in it for the bankers (less so, their shareholders). I can certainly see what's in it for Philip Green. But what's in it for us? We work, earn money, pay taxes and what is left we spend in stores that export our capital.

If this is to be the pattern for British business, we are finished. I don't see Johnny Foreigner making plans to take on the obligations of our Welfare State when we no longer make anything he wants; if he's looking for maltreated, ill-bred, indolent slaves, he'll find all he needs closer to home.

Are we making a nation fit for Marxists?

That sinking feeling

(Big figure )
(Little figure)

Back a winner!

Grand National today. There's something superstitious about the naming of the horses - remember winners Party Politics (1992) and Earth Summit (1998)? On that basis, my monkey (well, maybe a quid each way) will be riding Golden Flight.

Follow the Money

I grew up in a British army family during the Cold War. During that period,we were bombarded with the message that the Russians had a vast and powerful military machine. By contrast, when I read about the USSR, the discussion was always that their equipment broke down all the time. This week, I talked with an ex-Soviet tank commander, who told me that his tank was inoperable every three days.

The source of this disparity was a combination of the arms manufacturers, faced in the late 1970's with their first downturn since 1939, and Leo Strauss' neo-conservative movement. Their propaganda assured us that the Soviets had invisible and powerful secret weapons that we had to counter. Under Reagan, the US engaged in the biggest peacetime arms build-up in history.
When the USSR collapsed, so did the need for all of our weapons. Just in time, we had the War on Terror. Rather than a counter-terrorist operation, we managed to turn it into a massive conventional war, when we chose to invade Iraq.

To date, we have spent at least $1 trillion in Iraq, $4 trillion on an uneccessary and unworkable Star Wars missile defense, and the military consumes over 50% of the budget.

Had we not been consumed by paranoia and fear, would we have a deficit now?

What goes up

Dow over 8k, FTSE over 4k...

I dont know where Im going
But, I sure know where Ive been
Hanging on the promises
In songs of yesterday
An Ive made up my mind,
I aint wasting no more time
But, here I go again
Here I go again

(Whitesnake)

Maybe the national brokers are right. I don't think so.

The concrete life saver

We Brits are naive with money - we're so unused to having any - our Government has always looked after it for us. Perhaps this is why there are so few Brit blogs that help us understand finance.

Speaking of ruinous government help, Karl Denninger describes a trap that seems likely to bankrupt General Motors.

It seems that people who own GM's corporate bonds have an incentive to let the firm collapse: their losses will be made good by the equally-bankrupt former financial giant AIG, through Credit Default Swaps (CDS), which are insurances against default on loans. In its panicky attempt to keep the financial system functioning normally, the US Government has effectively become the guarantor for AIG's CDS contracts. So creditors of GM can expect 100% return of their capital.

Better still, once GM goes under, the bonds are unlikely to become entirely worthless. So GM bondholders will get 100% PLUS...

And this means that the Government's "help" is about to ruin a huge manufacturer and employer.

Lessons not learned?

Dubious long-term decision-making does not appear to be restricted to the UK and US.

Adu Dhabi is has announced that it will change to coal-fired electricity generation. Dubai is currently building four such plants, with combined output of 4 gigawatts - enough to power 400,000 typical American homes. Oman is contracting with South Korea to build several as well, and Egypt proposes to build at least one on the shores of the Red Sea.

The supposed incentive is that coal from Australia is cheaper than their own natural gas. One wonders why they aren't using the desert for solar power. Perhaps it isn't the panacea that we have been told it is?

China, of course, puts one plant on their grid every 10 days, but at least they have their own mines.

Haven't the Arab nations learned the danger of energy dependence?

Where we went wrong?

I have written earlier this week about my doubts as to the value-added by stockbrokers and other financial administrators.
While this data may be a little old, it may support my impressions that too much money is going to too few people, making the system inherently unstable.
In 2005, there were over 9,000 hedge funds, with over $1 trillion in assets. The managers earn 2% of the assets per year, plus 20% of any profit. Given the performance for those years, that's over $4 million per manager per year. The top three incomes reported in New York Magazine were all for hedge fund managers, with Edward Lampert topping the list at $1.02 billion.
It's what farmers used to call eating your seed corn.

The "correction" will come soon

Michael Panzner reminds us that he predicted hyperinflation to follow after deflation, and quoting Edward Chancellor's recent article, thinks the phase change may be on its way. Chancellor answers the argument about global oversupply by reference to run-down inventories, widespread bankruptcies etc - there is now less productive capacity than there was, and what's left is not running smoothly.

A sleep-deprived Jim Kunstler experiences some of this disruption in a Colorado over-dependent on the vagaries of aviation, and rehearses his central theme that US living standards must (in his view) drop 20 to 50 per cent, whether through deflationary depression or savings-destroying inflation. He thinks the page will turn soon, too - maybe in June.

I said to my brother this weekend, that I think America can cope with being poorer, though the adjustment will be nasty; I didn't think it could survive being so rich. Look at what all that easy, phoney, fraudulent wealth did: that gallery of fat rogues in Wall Street and elsewhere, while the poor were exploited with credit cards and doomed home loans.

Kunstler's healing vision is bucolic, like Alexander Pope's:

Another age shall see the golden ear

Imbrown the slope, and nod on the parterre,

Deep harvests bury all his pride has planned,

And laughing Ceres reassume the land.

Horrifying budget

Fraser Nelson in the Spectator:

To comprehend the scale of the sickening task awaiting George Osborne if he becomes chancellor, consider the following. If he were to raise VAT to 25 per cent, double corporation tax, close the Foreign Office, cancel all international aid, disband the army and the police, release all prisoners, close every school and abolish unemployment benefit he would still be unable to close the gulf between what the UK government spends and what it raises in taxes.

Where does all the money go? How can we get out of this in one piece?

Scene of the crime: US debt acceleration

(Data source)