Why safe investments aren't

Michael Panzner's latest explains a point I've learned and repeated here before: "refuge" investments like gold are not as safe and predictable as you might assume. Borrowing money to invest boosts prices, and then when credit becomes tight, forced sales can deflate prices just as rapidly. We're all in a bouncy castle, like it or not.

Property slump or stall?

Karl Denninger says house prices over the last 100 years have averaged three times income. What's the implication for us?

This BBC survey says the average semi (a standard unit of housing, one would think) is "worth" slightly over £200,000; official statistics put household income at £33,492. So houses cost around six times earnings.

That suggests a 50% drop is due. But as Keynes observed with wages, house prices tend to be "sticky downward": no-one is in a hurry to realize a big loss on their home equity. Death, divorce and redundancy may force some sales; others may choose to wait, or go for house swaps.

Or wages could double. Up till recently, it was a standard assumption that "inflation" would run at 2.5% p.a. and wage increases 2% above that. Using the "Rule of 72", it would take 16 years of 4.5% wage increases to double nominal incomes.

Whether wages will always rise in real terms, is another matter. One of the effects of globalization is to hold down wages in the developed countries; and food and energy costs look as though they will continue to rise as the rest of the world gets richer and more populous.

Marc Faber speaks on the crisis

Video here on Bloomberg. Summary and comment on Contrarian Investor. Some points he makes:

Bernanke's policies will destroy the dollar; he should have gone to Zimbabwe. Property assets in a bubble, but bonds (except maybe for some carefully-researched junk bonds!) also likely to be a victim of inflation. Emerging markets worse than the Dow. Deflation may hit the dollar through devaluation, rather than the nominal value of US equities. Commodities (e.g. gold) were at an inflation-adjusted 200-year low in the late 90s, so even after the recent rises they're not overvalued. Derivatives (NOT the packaged ones) will blow up in the next 3 - 6 months. He hope a major bank will fail and reintroduce discipline into the system.

Have you noticed how cheerful gloomy types get when disaster hits?

Another toiler in the vineyard

Safe Haven features an article by "Randy", who predicts that the American economy will go haywire. The good news is that, within a generation, poverty will make the US economically competitive again.

That's not an ironic comment. It seems to me that America's most precious heritage is not her wealth, but her love of liberty and her distrust of power. She has been seduced by Mammon and Empire, and the undoubted difficulties we face may turn out to be the last-minute rescue, the ram caught in the thicket.

Cash is king

Robert McHugh confirms my feeling: sit it out, hold cash.

Deus ex machina

You know you're in trouble when you have to appeal to the Great Leader to do something. Karl Denninger publishes an open letter to the President, the Presidential candidates and others.

1. He complains that 23A exemption letters and the recent TAF facility are being used to hide the scale of banking problems from the public.
2. He points out that over the last 100 years, local house prices trend to 3 times median local income (work that out for your own house).
3. He lists action points to make the system transparent and honest - even though some lenders will be immediately destroyed, like the little slips of flash-burn paper used by spies in Sixties movies.

Being right is not nearly enough - work it out for yourself:

1. Imagine the conversation between interns on receipt of Denninger's fax;
2. List the not-to-be-published reasons why nobody who could solve the problem, will;
3. Compose the official reply.

Now, head for the tree line.

Another Ranter

Alex Wallenwein goes schlock Gothick:

Employment figures, the Thornburg collapse, Carlysle Group troubles, sky-high oil prices, rampant inflation, the dollar-crash, and neverending Fed bailouts of fast failing super banks are pounding the stake deeper and deeper into the global debt-vampire's heart. He will find his much-deserved rest before long. Unfortunately, the portfolios of careless and gullible retail investors, consisting largely of Dracula's debt-spawn, will die along with their master.

I'd give him a "Highly Commended" in the Sackerson's Prose Prize competition for that first, rolling sentence. But he gets pretty apocalyptic, too:

The next Dow-bottom will plumb depths not seen since the early 1990's, maybe even the 1980's!

The early 90s saw the Dow around the 3,000 - 5,000 range. Eat that, Robert McHugh.

Then he shoots for the moon:

... gold can easily go past $3,000 per ounce this year

- and makes a reckless recommendation:

If anyone still has money in any stocks or mutual funds, it's time to exit.

Overstated, I think - but completely wrong? Maybe not.