Is it worth a shot?

Our Founding Fathers were not all professional politicians. They were farmers, writers, inventors, lawyers and surveyors. They had organized estates, led men into battle, built furniture, and written books.

By contrast, our modern elite have often never generated anything. I believe that is why they find it so easy to destroy things that they don't understand (which is a long list).

Petty officials in Brussels attack the British banger and English chocolate, not by relevant measures such as taste or safety, but using purely arbitrary scales.

In Britain, the well-educated New Labour, demonstrating their reverse snobbery, diminish the Peerage, and complete the destruction of a once-great educational system.

In the US, we have the legions of draft-dodgers who steer high-ticket military contracts to their friends, while our exhausted troops salvage from junk yards. The managers, accountants and lawyers have brought our economy to its elbows by equating the movement of wealth with its generation. Our fragile education system is battered by consultants and administrators who confuse good grades with competent teaching and actual learning.

Perhaps some of this could be improved by adapting some of the Japanese model, where management trainees first must try every job on the shop floor?

My pay/pension's inflation-protected, so I'll be all right... won't I?

Click to enlarge - I hope!

No.

Take the illustrated cases above, where take-home income is 1,000 zlotys (or whatever), and you are exceptionally fortunate, in that your benevolent employer/government gives you annual rises that exactly match the rise in inflation in the preceding 12 months.

The trick is, although the pay hike brings you up to the new level of monthly expenditure (at least, up to the point where inflation was re-calculated), it doesn't compensate for the cumulative losses over the year.

This is is one way they can exploit inflation to steal from you, and balance the public finances.

It's us or Them - and inflation's coming

Paul B. Farrell argues - plausibly - that we're in a life-or-death struggle with the financial elite, and they will "win", until the system can no longer sustain them - or us.

A self-deprecating blogger styled "The Anecdotal Economist" suggests a fight back in the form of switching your savings and borrowings away from these enemies of the people.

htp: Jesse, who has joined the Angry Brigade and whose regularly changed sidebar links for reading ("Matière à Réflexion") are a treasure trove.

Meanwhile, John Williams of Shadowstats says:

We will see inflation levels not seen in our lifetime by as early as the end of this year. Eventually we will see liabilities of $65 trillion – more than four times U.S. GDP, more than global GDP. There will be a hyper inflation where the dollar becomes worthless, where the paper is worth more as wall paper than as currency.

htp: Michael Panzner, who also is a great pre-reader for us. Michael says he's switched swides to the inflation believers, but he's too modest - he himself predicted deflation followed by inflation in "Financial Armageddon".

Deflation? You're joking!

Newpaper headlines: we're in deflation for the first time since x years.

Yes, looking at RPI, which takes into account mortgage costs, which have plummeted since the Bank of England cut the rate to its lowest since the Bank started.

No, if you look at non-mortgage costs of living - another newspaper article says pensioners' experience of inflation is something over 12%.

I can't be bothered to find and link the MSM articles. In my view, Guido is right: journalists have become lazy, uncritical copytakers. Now have a look at Zeal's graph of the money supply, the immediate-demand form of which has doubled in 12 months in America.

I still think we're in a sort of re-run of the 70s. Cash will be forced out of accounts and into the market, where it will still lose value, but nothing like as badly as if left rotting in banks and building societies. The Great Theft is on its way.

If you follow Marc Faber, you'll know that he's currently suggesting holding half your wad as cash, since the bubble hasn't really burst yet; but other than that, he's thinking 10% gold and 40% in a combination of resource and emerging market stocks.

The world's average per capita income is $8k - $9k; as globalisation continues the levelling-out process, the East will never be as rich as we once were, but they'll be less poor. For us, on the other hand, this may be the last chance to put something away for our future.

Life goes on!

Yesterday was a fine day. My wife meets our neighbour's mother, wheeling her 15-month-old granddaughter in the pushchair. The child is holding a measuring jug with an animal fridge magnet in it. "What's with the jug?" asks my wife. "That's mine," says grannie, "we've had to take the pussycat for a walk."

Spam

Anybody else having their post comments invaded by Chinese spam with randomised avatar names?

'Swhat I think...

At some point the equity market will start moving higher and keep going, to fantastic levels perhaps, if a serious inflation sets in. The stock markets in the Weimar Republic were spectacular, if one ignored the reality behind the appearance. We think it is far too early in the game for this, but are keeping an open mind to all possibilities.

- Jesse

But before then, I think we have a date with Mr Stockmarket Crunch. I just don't know when that date is.

Time for a Little Socialism?

It is a long-standing argument by US conservatives that progressive taxation is unfair, and that the answer to our economic ills is tax cuts for the wealthy.

In support of that argument, the often-quoted figure is that the top 10% of earners pay 40% of the taxes. That sounds unfair, doesn't it?

According to the IRS, in 2005, the top 10% of earners had 48.5% of the income. The top 1% had 21% of all income.

In other words, the top 10% earned about 8.5 times the average of the bottom 90%, the top 1% earned 26.3 times the average of the other 99%.

In addition, when calculating the taxes per dollar earned, using the conservatives' own figures, the lower 90% pays at a rate which is 1.4 times that of the top 10%.

Still not the truth

J. S. Kim (htp: Jesse) considers the $700 trillion derivatives market (worth maybe 23 times all the stockmarkets in the world), and notes that it's being used to disguise the true woeful state of the banking system. It is as though, when listing his personal assets, a compulsive big-time gambler could include all his current Lottery tickets and horse-racing betting slips:

"... when FASB suspended mark-to-market accounting rules recently, major international banks were allowed to re-value some of their derivative products closer to their notional value on their books to pad their balance sheets. Due to this change in accounting law, I can almost guarantee you that before market open Friday, Citigroup will announce better than expected financial results as they carried huge amounts of illiquid mortgages and financial derivatives on their balance sheets."

I fear that many major banks may be thoroughly ruined, and until the lying stops, effective action cannot be taken.

Straws in the wind, the flight of birds

Yesterday, I read the entrails and thought the market was due to tank. Today, the FTSE drops 102 points, the Dow 290. Tomorrow - "¿Quien sabe?"

The deflationary bust

Looking around "Financial Sense"...

Professor Antal E. Fekete revisits his deflationary theory: we have passed a crucial point in debt accumulation. From now (actually, from 2006, he says) onward, the more politicians attempt to stimulate it with debt, the faster the economy will shrink. Gold, the machine's "governor" that set limits to debt, was decoupled from the system a century ago - it got in the way of war financing.

Stephen Tetreault says if there's a rise in stocks, sell: "I do not see a positive bullish catalyst in the making as we head into the earnings sector other than a potential short squeeze, relief rally that should which should be sold into." He notes that deflation means those that can, are paying down debt, but also lenders are widening the margins between the interest they pay and the interest they charge, which gives further impetus to deflation.

Tony Allison says, sooner or later energy is going to cost more. He's thinking about the right point to speculate, the rest of us should consider the effect of higher energy costs on family budgets, and therefore on how reduced disposable income will be allocated.

Captain Hook foresees a time when "the public finally gives up the ghost on stocks in general, correspondingly they will fully embrace the likelihood of deflation, which will trigger a temporary collapse in commodity prices, led by their paper representations." He thinks this will be the time when physical gold will win; I wonder whether that is so, when most of us are so dependent on an electronic system. We're not farmers, selling corn and cattle to each other; the machine cannot be allowed to stop. That's why I think there will be, for a time, a switch to currency inflation; then perhaps a rerun of the early Eighties, as someone public-spirited in public life takes unpopular action to prevent the dive into the abyss.

For E. M. Forster's extraordinarily accurate vision of the future, written in 1909, please click the last link above. Telephone, TV, a populace paralysed by lethargy and wealth in its bedrooms...

How much is left in the banking system?

Mark Wadsworth refers us to this US banking information, from which I extract and interpret the following:

This information is a year out of date - more, in the case of credit unions. I wonder where we are now? Ambrose Evans-Pritchard reports that US housing has dropped 29% from peak. Is the system, as some say, basically bust?

Kill the old

Not my idea; but I saw it as a graffito on the back of a bus seat on the upper deck, where the schoolchildren gravitate - more than 20 years ago.

Now the FT comments on how longevity (plus the old's passion for killing the unborn and preventing conception) is going to ruin us. We think the young are selfish, and don't dare glance at their elders, who imagine they can quit their jobs in the prime of life and live like kings on the backs of their progeny and remoter descendants - or such few of them as the old permit to survive.

As Mark Steyn puts it:

“Over the next decade,” Frau Merkel pointed out, “we will undergo a massive demographic change, and, therefore, borrowing is a greater burden for the future than in a country with a much more continuously growing population, as in the United States of America.”

Translation: America can rack up multi-trillion-dollar deficits and stick it to its kids and grandkids. But in Europe there are no kids and grandkids to stick it to—just upside- down family trees: in Germany, Spain and Italy, four grandparents have two children have one grandchild. The Financial Times noted last week that the demographic death spiral is a far greater threat to fiscal solvency than the present economic downturn. And yet, despite Germany, Japan and Russia already being in net population decline, the G20 had not a word to say about it.

That bill's going to come in, and Herod himself can't prevent it. In fact, he caused it.

The market is going to tank

How do I know? I don't.

But I read this piece in the Grumbler.

Picture it. You are a rich broker - floated your company in May 2007 (how's that for timing?). Predicting good times ahead, you... sell £47m of your shares.

You say it's for "private projects", and throw the Mail journalist a tidbit about your beloved foopball club. The Mail journalist writing down your copy at least thinks to ask you how much of this cash will go towards the new stadium. You "decline to say".

Meanwhile, Charles Hugh Smith describes (April 18) the thinking that has led him to punt on a financial bear fund.

Straws in the wind, I'm thinking.

Will we ever learn?

With Sackerson away, Paddington will post some (possibly) off-topic comments.

The technology that enables 7 billion of us to survive, and provides creature comforts to those in the industrialized world, is due to a tiny percentage of talented and creative scientists, together with a core of engineers who adapted and refined the results, and a larger number who actually produce the products that we use.

Despite that, I am hard-pressed to find a society anywhere that gives those people the level of respect or adulation awarded to sports figures and entertainment personalities. The monetary rewards are far less than for the average investment or insurance agent, lawyer, accountant, or medical doctor.

In the extremist Muslim world, much of science is decried as 'anti-Islam'. Evolution, physics, and geology are under attack in at least 37 US states by creationists. Much of science is also discounted by the New Age thinkers, who don't like facts to get in the way of their own comfortable beliefs.

Yet our leaders believe that the answer to our economic meltdown is to throw money at the people who caused the crisis, and who produce nothing at all. Even at universities, where some rational thinking should be expected, the sciences are de-emphasized, since they are 'hard' and unpopular, while we build programs in psychology and business management.

Without a cultural change in these attitudes, I am fearful that we may see the end of technological civilization within a few generations.

Extralude

Off again - back in a week.

Protecting against inflation

Before we start, please read my disclaimer above!

How do we protect our little wealth against inflation? The gold bugs still enthuse, and it's true that if you'd sold the Dow and bought gold at the start of 2000, and bought back into the Dow now, you'd have multiplied your investment by 5:

But looking at the historical relationship between the Dow and gold, it seems the Dow is already below par.

When Nixon closed the "gold window" (15 August 1971), gold ceased to be a currency backing and became just another thing you could choose to invest in, so let's compare these assets from a little before that turning-point, onwards:

The gold-priced Dow is now well below average. So what are we to make of (I think) Marc Faber's recently-expressed view that an ounce of gold will buy the Dow?

That depends on whether you read this as a statement about gold, or about the Dow. I looked at the Dow in inflation (CPI) terms a while back (December 2008):

If we are in a downwave, then the Dow's bottom is still a lot lower than where it stands now. Extrapolation is always risky, but my curve indicates maybe 4,000 points as its destination. Having said that, the highs of the years 2000 and 2007 are so much higher than might have been extrapolated, that maybe the low will be correspondingly lower. A real pessimist might argue that, adjusted for inflation, the Dow might test 1,000 or 2,000 points sometime in the next few years.

Back to gold-pricing: it's also notable that the Dow is currently still worth some 8 ounces of gold, but in previous lows (Feb. 1933, March 1980) fell below 2 ounces:

So should we still pile into gold, as a hedge against the further collapse of the Dow?

I think not. Firstly, the Dow may well have a rally, since it's fallen so sharply in such a short time. And secondly, this is missing the point, which is that we are looking to protect wealth against inflation, not against the Dow.

So another question is, how does gold hold its value during periods of price inflation? A period some readers may have lived through, is that after the oil price hike of October 1973. Here is what happened in the 5 years from 1974 to 1978:

True, the Dow merely held its value over that time (though it also made some sharp gains and losses) - but gold disappointed. I think this may be because, when prices are roaring up, people start looking for a yield, which of course the inert metal cannot provide.

But let's wind the clock back just a little - let's go back to that closing of the gold window again, and see what happened between August 1971 and the end of 1978:

The massive rise in the price of gold anticipated the inflation of post-1974, and those who got in at the right moment were very well protected. It's also interesting to see what happened to the Dow in the '71 - '74 period - a fall, from which the Dow did not recover (in inflation terms).

Before we start blaming the "G-dd-mn A-rabs" for inflation, let's remember the inadequately-reported fact that monetary inflation was roaring for several years beforehand. The OPEC price rise was a reaction intended to protect the Saudis' (and others') main asset - and you'd have done the same. Yes, it happened suddenly, but like an earthquake, it merely released long-pent-up stresses. Instead, let's blame a goverment that failed to control its finances generally, and spent far too much on war - a retro theme back in vogue today, it seems.

Looking at it from an investor's point of view, once the preceding monetary trend was identifiable, going overweight in gold in the early 70s would have been a sensible precaution.

So I suggest that gold's value as an inflation hedge is for those who anticipate well in advance. And this may be the lesson to draw in relation to the present time:


The inflation protection has already been built-in, for those who bought gold at the right time. The rest of us should note that gold is now above the long-term post-1971 trend:

There may indeed be a spike, as in 1980 - but that's for speculators. For the average person, who wants a "fire-and-forget" longer-term investment, I can't say gold looks like a bargain now.

Nor would I be that keen to get into the stockmarket, unless you're a day-trader. Some may make a killing in the present turbulence, but many will get killed. I'm still looking for that Dow-4,000 moment, and as I explained above, even then it's possible I may lose 50% - 75% in the short-to-medium term.

What else?

Houses? Still too pricey, in relation to average income. Yes, some houses are now selling - it's a thriving auction business at the moment, I understand. But again, housing is above trend.

Bonds? No, indeed. Municipal bonds in the US are offering high yields, for a very good reason; and even national bonds are a worry. The debt has not been squeezed out of the system, since our cowardly politicians have absorbed it into the public finances instead.

Here in the UK, we have National Savings & Investments Index-Linked Savings Certificates (3- and 5-year terms). Between them, a couple could get £60,000 into that haven, and not many of us have that much. I'm not sure about the rules and limits for US equivalent (TIPS), but the general argument applies. Yes, there is the question of how the government will choose to define inflation, but I don't suppose the definition will get too Mickey-Mouse.

Besides, doubtless you'll keep some cash for emergencies (including sudden bank closures), and for bargains (e.g. looking for distressed sales).

And if you've got lots more cash than the rest of us, congratulations, since the rich will get substantially richer. There's no being wealthy like being wealthy in a poor country, or one that's getting poorer. Watch that Gini Index rise.

Conspiracy Theory

How about this as a scenario? Alistair Campbell arranges for the McBride/Draper emails to be leaked to Guido, in order not only to mortally wound both M & D (and neutralise Charlie Whelan for some time to come), but mainly to destabilise Gordon Brown ("how could he not know", "it came from Number 10's system", etc) so that a fresh leader can be installed in preparation for the 2010 General Election. "A cleansing of the Augean stables - New Labour has put its house in order - renewed commitment to our core programs - it was always about policies, not personalities - our narrative was temporarily hijacked by psychologically flawed mavericks" and so on.

Has Guido been used?

Straws in the wind

You feel the change of weather before you see the clouds. The tone is changing. It's getting darker, angrier.

If you follow Cranmer, or Wat Tyler, or Jesse, or even the usually half-clowning Mogambo Guru, you'll see what I mean. Even mainstream journalists like Max Hastings and William Rees-Mogg have adopted language and ideas I would not have expected from them.

I can understand why it's happening, but this does not bode well.

O Freunde, nicht diese Töne!
Sondern lasst uns angenehmere anstimmen
Und freudenvollere!

Alle aussteigen!, Part Two

Karl Denninger opines that the seeming rally is a little game by traders to keep the ball in the air; but in his view, it's going to come down when they stop puffing. A chance to get out and salvage something from the investment wreckage, he thinks - as I've felt for a while too.