Defensive investing

Michael Panzner's latest is lucidly entitled "Today's Lesson: Bad Economy = Bad Stock Market". At last, financial analysis I can understand.

I've never understood why the stockmarket seems serenely unrelated to the dire state of the economy. Supposedly the market "looks ahead" around a year, but it can't be seeing what I'm looking at.

Anyhow, Panzner reproduces Dan Dorfman's article in the New York Sun, which reviews what's happened to the market in past recessions and gives tips on strong defensive areas - booze, cigs and "household products". I can understand that, too - or the first two, at least.

Jim Willie goes bowling

Bowling is fun - some would say, too much fun. Apparently, Connecticut passed a law in 1841 banning "ninepin lanes" and so fostered the invention of tenpin. In the old game, still played in England, you set them up manually - it gives you something to do while downing your beer and waiting your turn. The uneven boards of the alley add a pleasantly unpredictable element, too.

Jim Willie stands up nine reassuring statements about the US economy and smashes the lot down. He goes to the back of his mule for material to throw at Greenspan, Wall Street, CNBC etc and concludes that nothing is going to stop the financial melt. So he recommends gold.

He may be right, since on both sides of the Atlantic the authorities have decided to bail out lenders, instead of following Marc Faber's advice to let some of the players be taken out of the game.

However, as Faber has also pointed out recently, gold is an item everyone thinks everyone else supports, without committing themselves (elections have been lost that way). Is it not possible that we could see a continuing uptrend in the (relatively small) gold market, simply because of increased demand from existing fans? In which case, don't come late to the party - you'll have brought fresh beer but missed the fun.

Uncertainty

A trio of articles from Safe Haven: Paul Tustain thinks that inflation, and even hyperinflation are indeed possible, because of support operations for the banking system; Michael Swanson reads the charts and thinks the stockmarket could be teetering on the edge; Adam Oliensis of The Agile Trader is man enough to admit he's baffled:

A couple of things seem pretty clear to me: first, that I haven't lived long enough to have enough experience to know whether the bulls or bears are right about just how far the ripples will spread from the credit market problem; second, that there's never been an economic cycle just like this one, so even the people who have lived long enough to know who's right are speculating at best. (highlight mine.)

So it's not just me that's confused. And we're in distinguished company: Marc Faber also says we are in a new situation, with the possibility of a first-time-ever worldwide bust.

If we're into guesswork, then mine is that for a while, the monetary inflation will offset the credit (or "fiduciary money", as I'm learning to call it) deflation.

And then? Here's what worries me, in my amateurish, hunchy fashion: balance can be achieved in different ways (an empty seesaw is not the same as one with an elephant at each end). There's been a massive buildup of energy within the system, and the question is, can the Xbox take it?

Can democracy resist the hyperinflation route?

The Contrarian Investor thinks that rather than face economic depression, voters will force the US government to destroy wealth by hyperinflation. The arguments are therefore not economic but political.

I'm not so pessimistic; and if I were, investing in gold would be of less concern than physical survival.

Marc Faber: profile and views

Here's a profile of Marc Faber from 18 months ago, describing him as an ace, though I'd say he's a wild card: a hedonist whose philosophy is non-attachment, a lover of life who festoons his website with images of mortality. It's a cavalier, death-spiced duality that women tend to find very seductive.

And here's an interview he gave to Resource Investor 5 days ago. Some snippets:

it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish...

the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth... that leads to poor economic conditions... the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper... at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment...

whenever ... you have relative tightening of international liquidity ... you have a period of dollar strength... I think that we may have for the next three months at least a rebound in the U.S. dollar... I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar...

the global economy will slow down very considerably over the next six to 12 months...

I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure... But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money...

I would like to add to your comments that so many people are bullish about gold... people have actually very little gold in their portfolio... the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.

If he's right, my guesses (23 December) aren't too far off the mark.

Liberty Dollar Update

A news item here about a bill introduced by Ron Paul, to stop the government misusing its power to kill-off rival currencies.

Visions of 2008

Following Dearieme's comment on the previous post*, I'm going to try to visualise a chain of events over the next year - guesswork, of course, with plenty of obvious ones:

USA

a marked deflation in property prices
a reduced demand for luxury goods and services
reduced imports of the above
consequent recession abroad
further interest rate cuts
higher unemployment
higher taxes
higher State and Federal budget deficits
a sell-off in equities
increased demand for bonds
a weakening currency
higher prices for food, fuel and clothing

increase in the price of good-quality agricultural land
consumer price inflation indices will not be able to continue to mask the real increases in costs of living, and this will have further consequences for public finances
public enquiries, leading eventually to a thorough reform of the financial system

UK

much the same as above, except I don't think our house prices will fall so far - the US subprime mess will hit investments, but we will drop our interest rates to devalue the pound to maintain stability against the dollar

Gold

will continue to fluctuate interestingly, but although some smart money is after it, there will be less spare money around generally, and other commodities will offer interesting opportunities for inflation-beaters. It's already above its inflation-adjusted long-term trend, and lenders will make sure that the real value of their loans is not destroyed by hyperinflation

... in short, slumpflation.

UPDATE

*and, by way of comparison, here is Karl Denninger's outlook in his Dec 24 post.
... plus a more sanguine assessment by Nadeem Walayat.

A Merry Christmas to all, and thanks for your visits and comments.