Place your bets

The Dow Jones Industrial Average closed yesterday at 13,785.07. Where will it go? Please see the survey on the right.

Here's an idea: the doomsters may be correct in their analysis, but wrong in their prognosis. If sovereign wealth funds continue to grow, we may see a new type of massive institutional investor, one that has no plans to retire or die. So ownership of American, British and other Western countries' businesses will shift to the East.

Initially, this will seem to make little difference, except that the markets may become better-supported against falls and may trend upwards, long-term (in currency terms; I'm not so sure about inflation-adjusted terms). But the dividends on foreign-owned shares will not accrue to the host countries, and so the US and UK will bleed from two wounds: trade deficits and accelerating loss of investment income.

If small businesses are eaten by big businesses, and big businesses have been taken over by sovereign wealth funds of other nations, the result for us may be not only economic impoverishment, but a form of slavery, since we will have lost control of our means of production. All we will have left is our labour, and in world terms, you and I are grossly overpaid. There is an developing Eastern middle class that can and will do everything better, faster, harder and cheaper than you. Many of them speak better English than the English.

Look at the businesses these sovereign wealth funds are going for. China: $3 bn for a 9.9% stake in giant US hedge fund Blackstone in May this year, and now (with Singapore) 10% of Barclays Bank (UK); Qatar: Sainsbury's (UK supermarket chain). These investments involve commercial property, finance and retail distribution. I've recently relayed James Kynge's statement that Chinese manufacturing only gets them 15% of the end price; now they're after the other 85%. I shouldn't be surprised if we start to see acquisitions in marketing and advertising firms, too.

What to do? I think:

• Work hard and earn as much as you can, while you can.
• Look after your health. Better not to get sick in the first place, than hope for "healthcare" to put Humpty Dumpty back together.
• Live simply and well within your means. Do you need a car? One that size?
• Pay off debts as fast as possible.
• Save and invest.

And if you have time and don't mind potential official surveillance and bullying, give your politicans earache about their incompetence, which is on a scale that to some might seem almost treacherous.

They are the masters now - or will be soon

The BBC Ten o' Clock News last night featured an article about China's purchase of a share in Barclays Bank. I have posted a video of part of Chris Mayer's speech at Vancouver (see below), where he discusses "sovereign wealth funds".

China, India and Japan have enormous surpluses of money from their trade. They have bought US Treasury securities (bonds, i.e. loans to the US), but this is a thing governments do to park money that they might need back in year or two, when the trading balance has altered. Since the US/UK (etc) trade deficits are long-running, these eastern countries can now start thinking like young private investors, in which case equities become attractive - offering income from dividends AND the potential for capital growth.

These countries are turning our debt into their ownership, like an old Punch cartoon where a plumber took his customer's house in payment for his work.

This issue is big.

Prohibition: Uncle Sam beat Eliot Ness

Don Boudreaux, of Cafe Hayek fame (see blogroll), writes that Prohibition ended, not because of popular demand, but because the US government was running short of tax money in the Depression.

It's an interesting theory. I have long thought that the UK government is more hooked on cigarettes than the smokers. If they really wanted to ban smoking, they'd start by cutting the tax, so as to wean themselves off financial dependence. But how would they replace the lost revenue?

Familar themes, and a sales pitch (not mine!)

This is NOT a recommendation, but you may be interested in the general trend of thinking it reveals: The Daily Reckoning features a sales spiel for a newsletter from Tim Price, which passes on pessimistic comment on the near future of the markets, and indicates four areas for investment:

"Portfolio insurance"
Infrastructure (e.g. roads, railways)
Gold
Oil

We are seeing these themes crop up again and again among the contrarians. Though I'm not quite sure what is meant by the first - unless it's futures and options, which make me nervous.

Chris Mayer at Vancouver, on China

"Daniel" has responded to an earlier post re rail revival, to say that Chris Mayer's speech at the Agora Financial symposium in Vancouver has now been put on YouTube. Here it is, with my thanks to Daniel:

Plunge Protection Team trying to keep precious metals low

An extraordinary (to me) comment by Michael Misunas, responding to Michael Panzner's post in Seeking Alpha today - do read it. He says that the US Government's "Plunge Protection Team" has not only punted huge sums into derivatives to support the stockmarket each time it falls significantly, but has recently been rigging the market against gold and silver.

Assuming that you can't buck the market forever, it looks like an opportunity to buy precious metals.

More on US Treasury bonds

Another concise overview by David Galland in today's Daily Reckoning Australia. Part of it goes like this:

Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government - that of the U.S. - have been accumulated in such massive quantities for the reserves of other governments. And we're not just talking China but virtually the world. And the world is getting nervous.

To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:

"Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies."

This is why I am theorising that the UK's massively increased support for US Treasuries may be an emergency measure by the British Government. Though it has been pointed out to me that this money may have also come from hedge funds and conventional funds - the Treasury stats don't say that the purchases are official.

Another country that has significantly increased its US bond holdings is Brazil (145% up, from $33.3 bn to $81.6 bn). Maybe that's to do with its increasing oil exports. According to the US government's Energy Information Administration, Brazilian production is projected to rise long-term.

Coming back to the Treasury bond stats: of those who previously held at least 1% of total foreign-held US Treasury debt, the top five reductions are:

Caribbean Banking Centres
Mexico
Korea
France
Switzerland

The top three in this list account for almost $50 bn of the total $72 bn that foreigners withdrew. I thought the conspiracy theorists believed Caribbean Banking Centres were part of the US government's secret plan for supporting the dollar? Perhaps somebody would kindly pay for me to go on a "fact-finding mission" to the Caribbean. Please.