A lesson from 1721

The South Sea Bubble ended in the imprisonment of the Chancellor of the Exchequer, John Aislabie:

The South Sea Company had been built on high expectations which it could never fulfil, and it collapsed in August 1720. An investigation by Parliament found that Aislabie had been given £20,000 of company stock in exchange for his promotion of the scheme. He resigned the Exchequer in January 1721, and in March was found guilty by the Commons of the "most notorious, dangerous and infamous corruption". He was expelled from the House, removed from the Privy Council, and imprisoned in the Tower of London.

Aislabie was replaced by Robert Walpole, who became in effect Britain's first modern-style Prime Minister - who earlier had spent six months in the Tower in 1712, as a result of unjust impeachment by his political enemies.

Now, who will be properly prosecuted and properly punished for a man-made disaster that has undermined the world's banking system?

More dire warnings

Karl Denninger is predicting a bond and currency crash in the US if banks aren't forced to disclose exactly what they do and don't have, so we can let the insolvent go down and release the liquidity into the right channels.

I hope the right path is taken, because my brother lives there.

By the way, in body language terms I read Hank Paulson as a hell of a bully. He looks like a totalitarian danger to me.

Rally? The smart money's been moving out for a long time

Read Michael Panzner here. Reminds me of when Jimmy Goldsmith sold all his holdings on the Paris Bourse in the Summer of 1987, and recently how Warren Buffett was reported to be holding massive amounts of cash.

Now Buffett has bought $5 billion of Goldman - but as preferred stock with a 10% dividend (and with warrants representing an instant capital gain from day one); and Philip Green is buying £2 billion of Baugur's debt. Note that these wise men are NOT buying stock market ordinary shares: they are betting on a sure thing, pretty much.

I think bear market rallies are when the pros sell to the amateurs. When the amateurs realise the pros have gone, and there are no more bigger fools, the panic proper starts. And then the pros are there, waiting for the bottom prices. I think this is what is behind legs 4 and 5 of the Elliott Wave.

A note on gold

Some commentators on the gold market predicted that the price would come down, or at least be restrained, because leveraged speculators would have to sell assets to raise money to clear some of their borrowing.

As the credit market continues to remain tight and the prospects of quick killings made on the back of increasingly-expensive borrowed money become less plausible, watch for the gold price to bottom-out (I read one claim yesterday that this has already happened). Then when continued liquidity injections from governments start to work their way into prices, my guess is that gold will make a steeper and steadier rise, as it becomes not a find-a-bigger-fool speculation but a flight to security, away from devaluing currency.

I may soon get back in myself, with some of my small savings.

And yes, I did indeed start drawing my "cash stash" yesterday, and plan to take more out today. Can anyone believe the blanket guarantees for deposits at banks, especially under the present economic and monetary conditions? You think disasters can't happen, but as a young woman my mother suddenly found herself fleeing the country alone, with two horses. Hope for the best, plan for the worst.

Cassandra couldn't run Troy

Thanks to Michael Panzner at Financial Armageddon, we can read for free an interview with 70-year-old money manager Jeremy Grantham. Grantham points out that business is run by managers, not by Old Testament prophets, and so he philosophises that crises will recur.

He also believes that this one isn't over yet:

The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap... it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.

My 26 June guess at the trend for the Dow was c. 7,000 - 10,000:

If that means a midpoint of 8,500 and the overcorrection is 20%, then the momentary low point could be around 6,800, which at least suggests that the gap between my two red lines is approximately correct.

Friday's lowest point during the day was 7,773.71, still 10% away from the theorised minimum; and the Dow closed at 8,451.19. Yesterday it remained above the latter figure throughout, and rose to 9,387.61.

In short, Grantham must be reading this as a bear market rally, and it's not very silly to think that the Dow could come back to 7,000 at some point.

Good luck to the day traders, I haven't the nerve and speed to try to make a fortune on the bucking-bronco stage of the market.

All clear

Dow up 936, FTSE up 324: so it's all okay again. Isn't it?

Except here in the UK, the Prime Minister wants banks to carry on lending like they did last year. Is there a touch of madness in this?

Surreal. That's the feeling.

I see Mish has the same feeling.

Dow falls are only at interim stage

Jesse relays a couple of charts from Steve Williams at CyclePro, and adds one of his own. As I read it, the implication of the CyclePro charting is that the end-point for the Dow at the bottom of the bear market could be around half its present value, in a process that might take 8-10 years.

Jesse's chart relates the Dow to the price of gold, and the implication of his is a drop of some 60% - but that could be achieved by a rise in gold, as well as a fall in the Dow.

Perhaps it is time for us to be making quiet, regular withdrawals from the cashpoint and building up a stash of truly instant-access cash. I shall start today.

And when inflation hits?