A trenchant interview with Doug Casey in Financial Sense today. Some highlights:
At some point there’s going to be a panic out of the dollar. When it happens, it’s likely to be the biggest financial upset since the 1930s. Part of the question is what they’ll panic into. The euro? As I have said many times, if the dollar is an “I owe you nothing,” the euro is a “Who owes you nothing?”...
If an American doesn’t get significant assets outside the U.S. now, it may be impossible in the future. The best thing to do is buy real estate abroad, since it’s currently not reportable, like bank and brokerage accounts, and they can’t very well make you repatriate it...
We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode...
Markets are about trade... At some point the Chinese will want payment in something other than dollars. In the meantime the yuan will go higher...
What do I think is likely? Certainly a depression, probably of the inflationary type. But if there are widespread defaults in the mortgage market because of a housing bust, hundreds of billions of dollars worth of buying would disappear, which is deflationary. You could have both things happening at once, in different parts of the economy...
I hate making predictions, but if things continue down this path, I think we could see gold going over $1,000 within the next 12 months, and maybe even before year-end. And then the mania starts for the mining stocks.
Saturday, August 11, 2007
Funny money to the rescue
Stanley Berkeley's "Gordons and Greys to the front", also known as the Stirrup Charge at Waterloo; a deed to stir any man's heart. Apologies for the trivial use.Friday: what looked like a hairy day on the Dow saw a rescue in the last hour of about 80 points. Was it the vast volumes of cash shovelled into the system by central banks, or the fabled Plunge Protection Team (aka Ronald Reagan's Working Group on Financial Markets? If only we all had such understanding bankers.
Friday, August 10, 2007
Could the Dow drop 50%?
"Two views make a market," goes the adage, so there's no "right" value for the Dow. But as I showed yesterday, the Dow has had an extraordinary rise in the last 20 years, about double what has happened with the FTSE.
It doesn't seem related to average income (American average earnings have grown more slowly than in the UK); if it relates to greater inequality of income, then presumably if the market turns, rich bears will be capable of pushing it down as fast as it rose. And I doubt that American multinationals have exploited subsidiaries in the Far East that much more than British-based multinationals - or have they?
Or is it money invested through the carry trade, borrowing cheaply from Japan? Then maybe it will unwind when Japanese interest rates rise. Is it the benefit of low American interest rates, thanks to huge foreign support for US Treasury securities? That love affair is coming to an end.
Let's do a thought experiment. 1987 seems a reasonable base year for our measurements, since the markets weathered the "Crash" of October and still ended up ahead by the end. From the end of 1986 to close of business this last Wednesday, the FTSE had grown by some 280%. That works out at around 6.7% capital growth compound per annum, for the whole period; add-in dividends and the reasonable investor should be satisfied.
If the Dow had done exactly the same as the FTSE, it would have grown from 1,895.95 to around 7,200. Instead, it closed on Wednesday last at 13,657.86.
Maybe there's still a lot of air in that balloon.
It doesn't seem related to average income (American average earnings have grown more slowly than in the UK); if it relates to greater inequality of income, then presumably if the market turns, rich bears will be capable of pushing it down as fast as it rose. And I doubt that American multinationals have exploited subsidiaries in the Far East that much more than British-based multinationals - or have they?
Or is it money invested through the carry trade, borrowing cheaply from Japan? Then maybe it will unwind when Japanese interest rates rise. Is it the benefit of low American interest rates, thanks to huge foreign support for US Treasury securities? That love affair is coming to an end.
Let's do a thought experiment. 1987 seems a reasonable base year for our measurements, since the markets weathered the "Crash" of October and still ended up ahead by the end. From the end of 1986 to close of business this last Wednesday, the FTSE had grown by some 280%. That works out at around 6.7% capital growth compound per annum, for the whole period; add-in dividends and the reasonable investor should be satisfied.
If the Dow had done exactly the same as the FTSE, it would have grown from 1,895.95 to around 7,200. Instead, it closed on Wednesday last at 13,657.86.
Maybe there's still a lot of air in that balloon.
Reading the signs
I have often wondered about chartists - investment analysts who look for patterns in trading to predict future developments. Here's a video posted on YouTube by Inthemoneystocks.com, an outfit set up this year. The report comments on yesterday's dramatic drop in the Dow.
Sometimes I think it's like astrology; but there may be a grain of truth in it. If relevant market information is already known, then (barring catastrophic surprises) some change happens because of the variable mood of the investors and their predictions of each others' behaviour. Perhaps this chart-reading is less a science and more a pragmatic art related to mass psychology and game-playing strategies.
It's an ill wind... Marc Faber cheers up
As the stockmarkets gyrate, Marc Faber is still optimistic about Asian real estate. Tientip Subhanij, in today's Bangkok Post, says:The optimism over Asian property has been tested in recent months following the volatility in the global equity markets. The woes of the US sub-prime market have already started to shake confidence. Experts have predicted a major crash in US real-estate prices that would trigger defaults and spread the contagion to most emerging markets.
Many with true faith in Asian property, however, dispute any suggestion of an overheated market in the region. Their contention is that the party has just started for regional property, given that prices in many areas have yet to exceed the peaks they achieved before the Asian financial crisis in 1997.
Marc Faber, the well-known author of Tomorrow's Gold: Asia's Age of Discovery, also believes that while stock markets are vulnerable, Asian real estate presents tremendous opportunities. He thinks that most property assets in Asia are still far below their pre-1997 highs.
Thursday, August 09, 2007
Sound counsel
Today's Daily Reckoning (I've just received it by email) offers some tips for managing your wealth in the current circumstances:
When trends turn negative, it is better to buck them...to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.
That is what we think may be coming soon - with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to 'go with the flow,' in other words. The flow will not be going where you want to get.
As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:
First, you should focus on your own private business...or your own source of revenue. (Bonds, rents, retirement fund, dividend yields...whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand...something you can see with your own eyes, run by people you trust. If you don't really understand it...or if it involves any form of "enhanced leveraged credit"...dump it.
Second, own the property you want to own, not the property you're hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.
Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilise, but you can't be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into gold too.
Fourth, once your finances are secure you can begin to think about speculating. But don't confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can't know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don't speculate with money you're not prepared to lose.
This all seems pretty sensible to me, especially since the Dow's dropped 300 points.
UPDATE
Dow down 387 at close.
When trends turn negative, it is better to buck them...to head in a different direction. This is particularly so when the bad trends approach their inevitably catastrophic consequences.
That is what we think may be coming soon - with falling asset prices and falling standards of living in America, and probably in most of the other Anglo-Saxon countries. This is not a time to 'go with the flow,' in other words. The flow will not be going where you want to get.
As a practical matter, the course of action that is best in easy times is essential in hard times. Here, we spell it out for you:
First, you should focus on your own private business...or your own source of revenue. (Bonds, rents, retirement fund, dividend yields...whatever.) Make sure it is solid, protected, efficient and productive. Make sure it is something you understand...something you can see with your own eyes, run by people you trust. If you don't really understand it...or if it involves any form of "enhanced leveraged credit"...dump it.
Second, own the property you want to own, not the property you're hoping will go up in price. Begin, of course, with your own house. Is it the house you really want to live in for the next 5, 10, 20 years? Think long-term; the housing slump could easily last 10 years or more. Then, think about the other property you own. Would you still want to own it is if it went down 30% in price? If not, you might want to reconsider.
Third, make sure your savings and investments are diversified out of the dollar. Most experts now expect the buck to stabilise, but you can't be sure. Ten years from now, the dollar could easily be worth only 10% of its value today. Put some money into euro and yen deposits. Put some into gold too.
Fourth, once your finances are secure you can begin to think about speculating. But don't confuse speculating with investing. You speculate for entertainment, not as a serious way to finance your family. Are stock prices going up or down? You can't know. Nor can you know what prices land, commodities, currencies or anything else will sell for in the future. Don't speculate with money you're not prepared to lose.
This all seems pretty sensible to me, especially since the Dow's dropped 300 points.
UPDATE
Dow down 387 at close.
Is the Dow more overvalued than the FTSE?
I've compared the growth of the Dow and the FTSE with the increase in national annual average earnings in each country. As you see, the Dow has advanced much more rapidly.UK earnings are calculated as 52* weekly wages. UK stats here, USA stats here. Dow and FTSE stats from the Yahoo! finance website - see sidebar.
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