... which brings us back to gold.

A quote from the Economist article cited yesterday:

real returns from American shares were just 0.1% a year from 1966-81; they fell a dismal 1.3% a year from 1973 to 1981.

Although that performance was much better than the painfully negative returns suffered by holders of government bonds, it was a long way short of the 6-7% returns that shares have historically achieved. Gold was a much better inflation hedge, earning an annual 10.9% in real terms between 1966 and 1981.

Which is, I suppose, what Marc Faber means by recommending gold at this point.

Inflation bad for investors as well as depositors

I wondered recently what was the effect of inflation on shares - are they a hedge? Past history suggests not.

Now there is corroboration from a more distinguished source - the Economist.

And Nicola Horlick says don't buy shares for 2 - 3 years.

Well now, I've been leading the experts for a while. When I call the bottom correctly, it'll be time to start my own hedge fund. Usual terms: 2 and 20.

Government and homelessness

The "Pathfinder" project for urban renewal has come in for some criticism, because so far it's meant a net loss of 9,000 homes and many of those whose houses have been demolished have not received sufficient compensation to buy something similar elsewhere (see here and here, with an attempt at more balanced discussion in the Liverpool Daily Post).

I suspect we don't have a housing shortage, but a housing misallocation. There are lots of old people rattling around in houses too large for them, and too expensive for them to maintain properly. And how many million bedrooms have been converted into domestic gyms, games rooms etc? We simply expect far more space than we used to, and so the "shortage" is a function of our choices.

But there is a limit on land space, if we want to retain the capacity to feed ourselves in hard times. Maybe we should review policies on housing, housing benefit, local taxation etc. And the policy of using foreign labour to keep down wage rates, and so create traps for our working and under-classes. And is there a Gramscian plan to undermine the cultural cohesion of the country by means of deliberate negligence in border controls, with the side-effect of worsening the pressure on accommodation?

Governments have a talent for creating problems that will long survive them. After four centuries, Northern Ireland still has its difficulties. And look at Fiji, where a century ago British planters imported Indians for indentured service periods of ten years. By the end of their contractual decade, quite naturally the labourers had married, had children and put down roots in the island. The historical result is festering resentment between ethnic groups, leading to outbursts such as George Speight's rebellion in 2000.

Similarly, covering England's green and pleasant land with concrete, tarmac and brick will also have persistent unpleasant consequences. And is there any way to change it back? Could we put a foot depth of earth along a disused motorway to convert it to arable use? So, new building on agricultural land, flood plains etc is tricky, and now we are seeing some of the problems of brownfield development.

But there's a huge number of houses built in the Thirties that need refurbishment. There may be a boom in plumbers, plasters, electricians and bricklayers; while at the same time we may see growing white-collar unemployment, as a result of outsourced information-processing. Maybe the working class will be victorious, after all, while the chattering classes fill holes in their shoes and jumpers with old copies of the Guardian.

I know it can happen, because it did happen in the Thirties - read Helen Forrester, whose debt-burdened middle-class father made the mistake of leaving London post-Crash, to return to his Liverpool birthplace, where the parish had no statutory obligation to support him. Helen wrote that if the Depression comes again, the things to stock up will be newspapers, razor blades and soap. And in her case, a purse inside her clothes so that her own family couldn't steal her meagre savings.

What are recessions and bear markets?

I'm reading picky definitions, e.g. a bear market is one that drops 20% in two months, and a recession is two quarters of negative GDP.

Says who?

What we're in now waddles and quacks like a duck, and darned if it isn't a duck. I say we're in a recession and a bear market, and have been so since the year 2000. A recession, because our manufacturing industries are in steeper decline and will take the rest of the economy down slowly with them*; a bear market, because the stockmarket is more likely to go down than up, over the course of the next year or two.

I once paid for a repair to a slow leak in one of my tyres, and only when I ran over a nail did I discover that the repair had been effected using an old-fashioned inner tube. It went totally flat in two seconds. Thank goodness I wasn't on the motorway. Now, any problems, I get a new tyre.
Monetary inflation was used as an inner tube to repair the economy from around 2003 on. Subprime was the nail.

* For corroboration see "Alice" on the UK current account deficit and our declining trade.

Make the punishment fit the crime

After this, and this, I begin to think about about the return, not only of capital punishment, but the gibbet. I really never thought I'd get to this stage; but I never thought society would, either.

Blaming the prophets

In this week's Spectator, Christopher Fildes discusses the way short-sellers get blamed for market falls, although they take hair-raising risks in doing so. He paraphrases Fred Schwed on the unfairness of such criticism: "In good times, he said, nobody minded the short sellers except their families, who minded going bankrupt. In bad times they were a receptacle for blame." I'd go back further:

But who wants to be foretold the weather? It is bad enough when it comes, without our having the misery of knowing about it beforehand. The prophet we like is the old man who, on the particularly gloomy-looking morning of some day when we particularly want it to be fine, looks round the horizon with a particularly knowing eye, and says:

"Oh no, sir, I think it will clear up all right. It will break all right enough, sir."

"Ah, he knows", we say, as we wish him good-morning, and start off; "wonderful how these old fellows can tell!"

And we feel an affection for that man which is not at all lessened by the circumstances of its NOT clearing up, but continuing to rain steadily all day.

"Ah, well," we feel, "he did his best."

For the man that prophesies us bad weather, on the contrary, we entertain only bitter and revengeful thoughts.

"Going to clear up, d'ye think?" we shout, cheerily, as we pass.

"Well, no, sir; I'm afraid it's settled down for the day," he replies, shaking his head.

"Stupid old fool!" we mutter, "what's HE know about it?" And, if his portent proves correct, we come back feeling still more angry against him, and with a vague notion that, somehow or other, he has had something to do with it.

Jerome K Jerome: "Three Men In A Boat", Chapter 5

So, don't blame me, please, but I still think investors won't be out of the woods until 2010.

Credit default insurance and murky dealings

You have to have car insurance, it's a legal requirement. So it occurred to me a long time ago that you could make some money selling very low-cost car insurance that (when you looked at the fine print) promised nothing, thus making a safe profit for the company, fooling the regulators and satisfying the cheapskate customer, all at the same time. Fine, till the regulators find out.

According to Karl Denninger today, this is exactly what's happened in the case of UBS insuring one of its mortgage debt packages against default losses. The insurer, it's alleged, has totally inadequate capital for the insurance it's undertaken, but the insurance suited UBS because it permitted the stinking package to be left off the balance sheet.

Oh, to be a lawyer now.