Friday, June 08, 2007
Peter Schiff: China will dump the dollar
Peter Schiff predicts China must de-link from the dollar in today's Market Oracle. Because their economy is robust (based on actually making things), they will cope with the disruption and thrive; the USA will face the reckoning for its folly.
Thursday, June 07, 2007
No easy way out for the US economy
Martin Hutchinson at Prudent Bear gave his view on Monday - the way out of the crisis will either be long and difficult, or short and painful:
...the choice is between a short sharp depression, albeit presumably less severe than 1929-33 (unless the forces of protectionism take a hand as well) or a lengthy period of stagflation like the 1970s, probably with a deeper dip than 1973-75. The third possible pattern, a prolonged period of stagflation like Japan in the 1990s, now seems rather unlikely.
...the choice is between a short sharp depression, albeit presumably less severe than 1929-33 (unless the forces of protectionism take a hand as well) or a lengthy period of stagflation like the 1970s, probably with a deeper dip than 1973-75. The third possible pattern, a prolonged period of stagflation like Japan in the 1990s, now seems rather unlikely.
Marc Faber: cash may be king
Please read this thoughtful essay by the modest Marc Faber yesterday. He looks at the zooming valuations of the Zimbabwe stockmarket and explains that it's because local investors' money has nowhere else to go if it doesn't want to lose value. He says the rest of us have a similar problem.
Currently, Faber is cautiously bearish about most types of asset:
...it will become increasingly important for investors not only to decide which asset-class train they want to board, but also, and even more importantly, whether they want to board ANY of the asset trains.
...a peculiar feature of the bull market in asset prices since 2002 has been that all asset prices around the world have appreciated in concert, as a result of highly expansionary monetary policies, which has led to excessive credit growth and a credit bubble of historic proportions. Therefore, if my theory of slower credit growth in the future holds, it is conceivable that, for a while at least, all asset markets (with the exception of bonds and cash) could come under pressure, albeit with different intensities.
In fact, asset markets would come under pressure, even if credit growth continued at the present rate and didn't accelerate. In this instance, investors would be better off not boarding any investment train at all and, instead, staying at the station loaded up with cash. (However, they would still have to decide what kind of cash to hold.) U.S. dollars might not be the very best choice.
Currently, Faber is cautiously bearish about most types of asset:
...it will become increasingly important for investors not only to decide which asset-class train they want to board, but also, and even more importantly, whether they want to board ANY of the asset trains.
...a peculiar feature of the bull market in asset prices since 2002 has been that all asset prices around the world have appreciated in concert, as a result of highly expansionary monetary policies, which has led to excessive credit growth and a credit bubble of historic proportions. Therefore, if my theory of slower credit growth in the future holds, it is conceivable that, for a while at least, all asset markets (with the exception of bonds and cash) could come under pressure, albeit with different intensities.
In fact, asset markets would come under pressure, even if credit growth continued at the present rate and didn't accelerate. In this instance, investors would be better off not boarding any investment train at all and, instead, staying at the station loaded up with cash. (However, they would still have to decide what kind of cash to hold.) U.S. dollars might not be the very best choice.
Wednesday, June 06, 2007
The Ditching of the Dollar begins...
See David Galland's article in the Daily Reckoning Australia here.
Boom or bust? Cash, shares, property, government promises, or commodities?
The latest posting from The Daily Reckoning Australia includes this exchange:
We got this note the other day, "You say in part, "In markets today, to get along, you have to go long. And if you don't, well you're out of luck." Are you no longer worried about a melt down in the short term? How long is long? One year or two? Your past words of imminent doom had me very worried with its effect on my investment actions, (or inaction ) are you now changing your timeline? I am a daily reader of your investment letter and look forward to your response."
We answer that a melt-down must be preceded by a melt-up. Or in economic terms, a deflationary bust characterised by over production and capacity surpluses must be preceded by an inflationary boom.
We are in the boom phase. And like it or not, related to real value or not, prices are going to rise as global money and credit creation booms. If you're in the markets, you've got to make a choice with your money. So we'll be choosing assets with tangible value that are in economic demand as well.
This is the quandary for a cautious investor. During the inflationary period, cash is not a store of value. In a fair world, if the money supply expands by 13%, then the interest rate on deposits should increase to, say, 16% (allowing for tax) - anything less, and your wealth is being sucked out by an irresponsible government. Which it is. Paradoxically, to be cautious about your wealth, you have to get away from exclusive reliance on cash.
This is because inflation is not transmitted evenly throughout the economy. For example, I estimate that in the last 6 or 7 years, the money supply as measured by M4 (bank private lending) has expanded by around 80% in the UK. Deposits have certainly not returned 80%, but house prices have doubled.
However, borrowing must be repaid sometime - with interest. If a crunch comes and everyone has to pay up, then there will be a desperate shortage of ready money. Even houses can fall in value - whatever you treat like an investment will behave like one. So in the long term, it looks as though the saver has had the last laugh. Cash will be king again.
But the paupers have votes. So democratically-elected governments have a very powerful incentive to print money to put into the voters' hands - even if this means stealing the value of other people's accumulated savings.
No-one knows the timetable for all this, except that it's human nature to delay facing unpleasant situations, so we expect more fudging for a while yet.
Speaking of fudging, how does the government calculate inflation? Do its own "inflation-linked" products really store your wealth safely? Should you buy Treasury Inflation-Protected Securities (TIPS) in the US, or National Savings And Investments Index-Linked Savings Certificates in the UK? If the government gets your taxes and your savings and your investments, it's pretty much got you altogether. Do you trust it that completely?
How about equities? What shares would you buy? If you went into business yourself, how would you try to run it in this very unpredictable situation? Would you borrow cash to expand, risking suddenly having to repay it just as your customers disappeared because of their own money problems? Other than making profits by exporting jobs to low-wage countries (and slowly impoverishing the West), what good business opportunities exist in our wildly gyrating economies?
The Australian bear quoted above is indicating commodities, since the demand for natural resources isn't going to disappear entirely. Intrinsic value is an important consideration for him. If inflation continues, then presumably the price of commodities inflates; if deflation strikes, there will still be some money paid for commodities. Car companies can go bust, but iron and steel will only vary in price.
In a nutshell, it looks as though there's no one type of asset to hold in all conditions. The question instead is, what mix should you have?
We got this note the other day, "You say in part, "In markets today, to get along, you have to go long. And if you don't, well you're out of luck." Are you no longer worried about a melt down in the short term? How long is long? One year or two? Your past words of imminent doom had me very worried with its effect on my investment actions, (or inaction ) are you now changing your timeline? I am a daily reader of your investment letter and look forward to your response."
We answer that a melt-down must be preceded by a melt-up. Or in economic terms, a deflationary bust characterised by over production and capacity surpluses must be preceded by an inflationary boom.
We are in the boom phase. And like it or not, related to real value or not, prices are going to rise as global money and credit creation booms. If you're in the markets, you've got to make a choice with your money. So we'll be choosing assets with tangible value that are in economic demand as well.
This is the quandary for a cautious investor. During the inflationary period, cash is not a store of value. In a fair world, if the money supply expands by 13%, then the interest rate on deposits should increase to, say, 16% (allowing for tax) - anything less, and your wealth is being sucked out by an irresponsible government. Which it is. Paradoxically, to be cautious about your wealth, you have to get away from exclusive reliance on cash.
This is because inflation is not transmitted evenly throughout the economy. For example, I estimate that in the last 6 or 7 years, the money supply as measured by M4 (bank private lending) has expanded by around 80% in the UK. Deposits have certainly not returned 80%, but house prices have doubled.
However, borrowing must be repaid sometime - with interest. If a crunch comes and everyone has to pay up, then there will be a desperate shortage of ready money. Even houses can fall in value - whatever you treat like an investment will behave like one. So in the long term, it looks as though the saver has had the last laugh. Cash will be king again.
But the paupers have votes. So democratically-elected governments have a very powerful incentive to print money to put into the voters' hands - even if this means stealing the value of other people's accumulated savings.
No-one knows the timetable for all this, except that it's human nature to delay facing unpleasant situations, so we expect more fudging for a while yet.
Speaking of fudging, how does the government calculate inflation? Do its own "inflation-linked" products really store your wealth safely? Should you buy Treasury Inflation-Protected Securities (TIPS) in the US, or National Savings And Investments Index-Linked Savings Certificates in the UK? If the government gets your taxes and your savings and your investments, it's pretty much got you altogether. Do you trust it that completely?
How about equities? What shares would you buy? If you went into business yourself, how would you try to run it in this very unpredictable situation? Would you borrow cash to expand, risking suddenly having to repay it just as your customers disappeared because of their own money problems? Other than making profits by exporting jobs to low-wage countries (and slowly impoverishing the West), what good business opportunities exist in our wildly gyrating economies?
The Australian bear quoted above is indicating commodities, since the demand for natural resources isn't going to disappear entirely. Intrinsic value is an important consideration for him. If inflation continues, then presumably the price of commodities inflates; if deflation strikes, there will still be some money paid for commodities. Car companies can go bust, but iron and steel will only vary in price.
In a nutshell, it looks as though there's no one type of asset to hold in all conditions. The question instead is, what mix should you have?
Saturday, June 02, 2007
The monstrous scale of the US and UK trade deficits
Have a look at the table in this article from Market Oracle. The figures speak for themselves!
British readers, please consider the fact that we are only two above the US, although our GDP is far smaller.
British readers, please consider the fact that we are only two above the US, although our GDP is far smaller.
Thursday, May 31, 2007
Globalisation and economic depression - some strategies
China has its problems. Monsters and Critics, quoting UPI, says that 3.5 million jobs could go if the yuan appreciates much more against the dollar. But if it doesn't, the trade imbalance continues and the economy and stockmarket carry on overheating. So China too is between a rock and a hard place.
In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.
Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.
But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.
Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.
Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.
On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?
In the long run and given free global trade, surely low-wage economies will take work from the higher-wage ones, until we reach equilibrium. It's the rate of change that makes it messy. For people like the Chinese, they have to work out how to take over our manufacturing capacity without bankrupting their biggest customers; for the West, how to lose all this work and wealth and remain democracies.
Richard Duncan thinks it can't be done without some original form of intervention - he suggests a steadily rising minimum wage, to give the worker in the developing economies enough money to take over the job of buying things, a job that we in the West thought was ours for life.
But the implication for us seems clear - we must become poorer. The winners among us will be those who are able to extract capital out of their possessions and preserve it. Marc Faber says that there are bubbles everywhere - property, shares, commodities - but I guess that in a deflationary world there must be something that will increase in value relative to most other things.
Cash seems obvious - the deflation of the Thirties was such that in the UK we had the Geddes Axe, actually cutting the wages of public servants to maintain a steady relationship between money and things (UPDATE: I got Geddes wrong - see HERE - sorry). So public servants who had accumulated savings would have done well - if they had saved. For many others, it was unemployment and poverty. To get an idea of the process and consequences, read "Twopence to cross the Mersey" by Helen Forrester, a real-life story about the economic descent of her middle-class family, which had (typically) lived on credit before the Crash.
Some fear that our governments will shudder at the thought of repeating that period and will try to buy their way out of the jam by printing money, in which case we could go from deflation to hyperinflation, and this is where the gold-bugs raise their voices.
On this analysis, I should think the strategy is clear. First, get out of/avoid debt. Then, live simply, and if possible convert unnecessary assets to cash - which you may partly invest in whatever you think will hold its value. And look for the steadiest job you can find?
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