Cycles and charts

For the analytical, here's an essay on Kress Cycles in Safe Haven.

This, together with Kondratieff cycles and other patterns used by market chart-interpreters, has one flaw to my not-quite-so-mathematical mind: predicting human behaviour involves feedback loops. If I secretly write down what I think you're going to do tomorrow, I could be right every time; but if I reveal my thoughts to you, that changes the situation. It's a sort of Heisenberg uncertainty principle: to observe is to be involved, and therefore part of the nexus of causes.

Having said that, human behaviour does have patterns, and I believe some have theorised that the growth of our brains is in response to the competition to predict the other person's behaviour better than he can predict yours.

Gold - or cash?

Brady Willett in Safe Haven (yesterday) warns us off some "bright ideas" for preserving wealth in a market drop. He notes that gold is a hedge when everyone wants out of cash, and that's been quite some time.

I guess his position is close to that of Marc Faber, who said recently that all asset classes are inflated and on the whole, he'd prefer to stand on the platform rather than get on any of the waiting trains.

Is the credit system cracking up?

Bob Hoye, in Prudent Bear (yesterday), discusses "the Unholy Trinity of central banking, derivatives and artificial rating of credit". He sees these as systemic risks - I'll say more about that when I come to Richard Bookstaber's interview on Financial Sense last Saturday.

Should US Treasury bonds be downgraded?

iTulip's President, Eric Janszen (Wednesday) goes over the now-familiar arguments for a coming period of US recession/inflation, caused by the trade, budget and fiscal deficits.

He also links to Paul Farrell's article in Marketwatch (Monday), which questions America's creditworthiness as a result of having to finance the war in Iraq. Maybe we're going around the same track as with Vietnam, which burned up money (I remember a contemporary American cartoon of a steam engine with dollars being shovelled into the firebox).

Has the UK tied one of its little boats to the anchor chain of the Titanic? I calculate its loan to Uncle Sam's Treasury to be worth $2,757.65 per capita (British heads), or £1,345.99.

My wife and I could have a nice little holiday on that, which would be more fun, or a day at the races, which might get us a better return.

Desperately holding down gold

Jim Willie of the Hat Trick Letter thinks that bank selloffs of gold are to make dodgy bonds look better than they are. If the mortgage bonds unravel, there's a lot of fast talking to be done by banks and brokers.

More on US housing woes

An informative piece in Dr Housing Bubble on the various factors that are turning the housing market upside down.

If I read the first graph rightly, there's a peak in the numbers of temporarily-fixed US mortgages that are due to come back onto the current variable rate in November this year, which suggests we may have a difficult autumn ahead. Further cutbacks in discretionary spending, presumably.

Bank of England investment in US Treasuries; gold

Let's combine the recent mystery about Britain's massive investment in US Treasury securities, with the worldwide asset bubble.

This is Doug Casey speaking to the Agora Financial "Rim of Fire" conference in Vancouver this week, on YouTube (thanks to "Daniel" for alerting me to it).

His view on American bonds? "A triple threat". Why?: (1) interest rates are very low and are going to become very high; (2) credit risk: he says he would not wish to be a lender now, with so much debt everywhere -he refers to a possible "financial credit collapse"; (3) currency risk - he says dollars say "IOU nothing", and compares them to the Argentinian peso 10 years ago.

So, why has the UK invested an extra $112 billion in US-dollar-denominated Treasury bonds, between June '06 and May '07? To dramatise this figure somewhat, let's look at the Forbes list of the richest people in America (Sep 2006): the top 5 billionaires are worth $155 bn between them. Britain is now into America for $167.6 bn. The increase in the last year alone is more than the net worth of Bill Gates and Warren Buffett combined. I wonder (rhetorically) whether they would bet their entire fortunes on US Treasuries?

We already know what Casey thinks about cash held in dollars, and he regards stocks and property as overvalued, too.

So what does he favour? Gold. "It's not just going through the roof, it's going to the moon". He's been a gold bull for the last 7 years. He picks mining stocks, but warns that they are very volatile, even more than Internet stocks. But there are other ways to own gold.

Meanwhile, is there anyone here in the UK who is willing to grill the supposedly independent Bank of England (it wasn't the British Treasury, after all, it seems) about the rationale for its vast punt on "triple risk" US bonds?

Let's finish with Bill Bonner's keynote speech at the same conference, on the difference between the real boom of the Far East and the Ludwig von Mises "crack-up boom" of our inflationary economies: