I looked up an important official today, of whom most of us may not have heard. His job is to review on government spending and report to Parliament. His name is Sir John Bourn and his title is the Comptroller and Auditor General, at the National Audit Office.
Now imagine that this person was so worried about the unravelling of the country's finances that he began touring the country, warning the general public and trying to get the issue onto the agenda for the General Election. I think you'd start to worry, too.
This is exactly what's been happening in the USA, as commented on by Michael Panzner in his website. David M Walker, the Comptroller General, has been playing Cassandra for months. To see the 60 Minutes video about this man, click here.
Could someone tell me the situation here in the UK? We don't seem to have such frank and authoritative public discussion as in the US.
UPDATE
In the CBS video, David Walker notes not only the expense of US medical care, but how many people are uninsured, and the rate of medical error. If you'll also read some of my comments in the globalization thread on Cafe Hayek, you'll see I'm of the view that we should start taking better care of ourselves, rather than trust to Dr Kilpatient.
Monday, June 25, 2007
Planning for the crash
The Contrarian Investor's Journal reveals Part 3 of its thoughts on the crash-to-come, and addresses the dilemma of whether we are to prepare for inflation, or deflation.
I think I agree with the writer's analysis that it may play out as follows:
1. The current inflation will continue until some big scare or crisis starts the run
2. Then there will be deflation, but governments will try to get out of it by printing even more money
3. Printing more money won't work, because people will have lost faith in the currency, so (if you follow the link provided by the writer) we will eventually get to a surge in the price of gold
But we don't know when stage 1 will end, and holding cash may reduce your wealth relative to other assets. So where do you invest?
Buying gold now may mean a long wait before the market comes round to your point of view (if it ever does) and as some (e.g. Peter Schiff) have pointed out, even if you're right, you may find the government forces you to give up your gold, as it did before.
Houses are overpriced, but rather than a general sell-off of real estate I could imagine a long period of house price stagnation, with people staying put if possible. You haven't lost money till you've sold, or the bank has forced you to sell. If you really have nerve, you might sell, live in a tent and buy a bargain when (if!) the housing market tanks - but would your partner agree? Christopher Fildes was suggesting (in the Spectator magazine) moving into a hotel, some years ago - but look at what's happened to London house prices since then.
Some businesses continue even during a depression, if they provide essential services. It's interesting that Warren Buffett and George Soros have both bought into railways recently.
I can't call the play - personally, I am looking to reduce debt and trim personal expenditure, increase cash savings, and otherwise invest with a weather eye on the macroeconomic situation.
I think I agree with the writer's analysis that it may play out as follows:
1. The current inflation will continue until some big scare or crisis starts the run
2. Then there will be deflation, but governments will try to get out of it by printing even more money
3. Printing more money won't work, because people will have lost faith in the currency, so (if you follow the link provided by the writer) we will eventually get to a surge in the price of gold
But we don't know when stage 1 will end, and holding cash may reduce your wealth relative to other assets. So where do you invest?
Buying gold now may mean a long wait before the market comes round to your point of view (if it ever does) and as some (e.g. Peter Schiff) have pointed out, even if you're right, you may find the government forces you to give up your gold, as it did before.
Houses are overpriced, but rather than a general sell-off of real estate I could imagine a long period of house price stagnation, with people staying put if possible. You haven't lost money till you've sold, or the bank has forced you to sell. If you really have nerve, you might sell, live in a tent and buy a bargain when (if!) the housing market tanks - but would your partner agree? Christopher Fildes was suggesting (in the Spectator magazine) moving into a hotel, some years ago - but look at what's happened to London house prices since then.
Some businesses continue even during a depression, if they provide essential services. It's interesting that Warren Buffett and George Soros have both bought into railways recently.
I can't call the play - personally, I am looking to reduce debt and trim personal expenditure, increase cash savings, and otherwise invest with a weather eye on the macroeconomic situation.
Globalisation - is it having an impact on our wealth?
Please see this article on wages and fringe benefits in the US, in which the free-marketers try to show that free trade has not made American wage-earners worse off. I put in a few comments to suggest that healthcare is not a benefit in the same way as cash. I also try to disturb the free-traders' complacency about globalisation.
Thursday, June 21, 2007
On the bright side
Time to count our blessings. Here's an essay by Don Boudreaux of the "Cafe Hayek" blog, showing how much wealthier we are than we used to be. And that was 7 years ago.
Nassim Taleb on "Black Swans"
A very interesting article today in The Daily Reckoning Australia by Nassim Taleb, on asymmetric outcomes.
As the Daily Reckoning put it on May 14th, "...the importance of any event is equal to the likelihood TIMES the consequences." Most people underestimate the impact of rare events and so their risk calculations are skewed.
They may also miscalculate the probability of such an event occurring. I believe this was a factor in the 1986 Space Shuttle disaster. As Wikipedia puts it:
...NASA's organizational culture and decision-making processes had been a key contributing factor to the accident. NASA managers had known that [the] design of the [booster rockets] contained a potentially catastrophic flaw, but they failed to address it properly. They also ignored warnings from engineers about the dangers of launching on such a cold day and had failed to adequately report these technical concerns to their superiors.
We could use this a metaphor for the economic system and its technical risks, of which some of our bears continue to warn.
As the Daily Reckoning put it on May 14th, "...the importance of any event is equal to the likelihood TIMES the consequences." Most people underestimate the impact of rare events and so their risk calculations are skewed.
They may also miscalculate the probability of such an event occurring. I believe this was a factor in the 1986 Space Shuttle disaster. As Wikipedia puts it:
...NASA's organizational culture and decision-making processes had been a key contributing factor to the accident. NASA managers had known that [the] design of the [booster rockets] contained a potentially catastrophic flaw, but they failed to address it properly. They also ignored warnings from engineers about the dangers of launching on such a cold day and had failed to adequately report these technical concerns to their superiors.
We could use this a metaphor for the economic system and its technical risks, of which some of our bears continue to warn.
Further concern re derivatives
The Contrarian Investor's Journal continues its series on crash preparation. Part 1 showed how you could lose your shirt on shorts; now part 2 sounds a warning on derivatives - like Peter Schiff, Michael Panzner and Richard Bookstaber.
Michael Panzner: risky lending and expert complacency
Michael Panzner usefully quotes and comments on an article in the Wall Street Journal (the WSJ online edition charges a fee). The piece is by Steven Rattner, a private equity investment manager, and its theme is risky lending. Here are a couple of snippets:
In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%... money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower...
...The surge in junk loans has also been fueled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets. The price-to-earnings ratio for the S&P 500 index is currently hovering right around its 20-year average of 16.4, leagues below the 29.3 times it reached at the height of the last great equity bubble in 2000.
Some portion of this phenomenon seems to reflect tastes in Asia and elsewhere, where much of the excess liquidity resides: Foreign investors own only about 13% of U.S. equities but 43% of Treasury debt.
I think this tends to support what I suggested yesterday. The tide of money has not risen evenly on all shores - in real terms, equities have failed to keep up. Some bearishness is now already built into the price of shares.
But not, perhaps, sufficient bearishness, so the market is not an accurate measure of the health of the economy. Much investment wealth is in the hands of the over-50s, the golden generation who had good pensions and in many cases got early retirement. They also rode the inflation train on their houses and have paid off their mortgages. At least in my country, many of that generation don't bother to keep a close eye on their investments, because they don't depend on them much. For them, ignorance is bliss.
For institutional investors, ignorance is well-paid. That's putting it a little harshly, but Panzner's piece, and his most recent post, comment on the complacency of analysts and investment managers, suggesting that it may be self-serving (when do they tell you to cash-in?). Besides, many are relatively young, so their optimism is supported by a lack of direct experience of truly dark days, and by the general health and strength of youth. When the market drops, they will look for what they think are support levels and buy-in for the long term. Bad markets often see a transfer of investments from private to institutional investors, I believe; it's a kind of vampirism. The average private investor sells too late, and buys too late.
But institutional support may explain why a major equity descent takes years: it's the jerky learning curve of the naturally upbeat investment manager.
And in any case, the equity market is more often the vic than the perp, to put it in police jargon. The Wall Street Crash was, I understand, the consequence of a banking crisis, itself created by years of monetary inflation, according to Richard Duncan.
So now it's the banks and the money supply we have to watch. And that's why we need to listen to the analysts of the money system, before the investment analysts.
In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%... money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower...
...The surge in junk loans has also been fueled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets. The price-to-earnings ratio for the S&P 500 index is currently hovering right around its 20-year average of 16.4, leagues below the 29.3 times it reached at the height of the last great equity bubble in 2000.
Some portion of this phenomenon seems to reflect tastes in Asia and elsewhere, where much of the excess liquidity resides: Foreign investors own only about 13% of U.S. equities but 43% of Treasury debt.
I think this tends to support what I suggested yesterday. The tide of money has not risen evenly on all shores - in real terms, equities have failed to keep up. Some bearishness is now already built into the price of shares.
But not, perhaps, sufficient bearishness, so the market is not an accurate measure of the health of the economy. Much investment wealth is in the hands of the over-50s, the golden generation who had good pensions and in many cases got early retirement. They also rode the inflation train on their houses and have paid off their mortgages. At least in my country, many of that generation don't bother to keep a close eye on their investments, because they don't depend on them much. For them, ignorance is bliss.
For institutional investors, ignorance is well-paid. That's putting it a little harshly, but Panzner's piece, and his most recent post, comment on the complacency of analysts and investment managers, suggesting that it may be self-serving (when do they tell you to cash-in?). Besides, many are relatively young, so their optimism is supported by a lack of direct experience of truly dark days, and by the general health and strength of youth. When the market drops, they will look for what they think are support levels and buy-in for the long term. Bad markets often see a transfer of investments from private to institutional investors, I believe; it's a kind of vampirism. The average private investor sells too late, and buys too late.
But institutional support may explain why a major equity descent takes years: it's the jerky learning curve of the naturally upbeat investment manager.
And in any case, the equity market is more often the vic than the perp, to put it in police jargon. The Wall Street Crash was, I understand, the consequence of a banking crisis, itself created by years of monetary inflation, according to Richard Duncan.
So now it's the banks and the money supply we have to watch. And that's why we need to listen to the analysts of the money system, before the investment analysts.
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