As the crisis continues, the gold bugs cheerily anticipate rocketing gold prices. Some fling about wild notions like $50,000 per ounce, others try to be a bit more sober (or less drunk) and guess at $10,000. But there are so many imponderables, as I comment:
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, June 20, 2010
Email to clients, 20 June 2010
Dear Client
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Soros thinks markets still overpriced
June 11: Multi-billionaire George Soros gives his views on the present systemic crisis. He argues that since complete catastrophe was averted by government action in 2008, free-market discipline (failure and bankruptcy) no longer applies and must be replaced by official regulation and management - or the "superbubble" will eventually burst. I give below some extracts, but the piece is worth reading in its entirety.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.
Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...
When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.
He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, June 15, 2010
Banks - growing worry
There is growing concern about banks again, reflected in what is known as the "Ted Spread" - the difference between the yield (effective interest rate, compared to trading price) of government debt (3-month US Treasury bills) and interbank lending (the LIBOR rate). According to Paul Nolte, the difference has widened over the last three months from 10 basis points (0.1%) to over 50 b.p. (0.5%). In other words, investors are willing to accept a lower income from government debt, in exchange for greater confidence that they will be able to get their money back.
The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.
And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.
Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Monday, June 14, 2010
Credit crunch, bailouts and unemployment - according to Steve Keen
Steve Keen, Australian post-Keynesian economist and one of only about 16 (previously estimated at 12) out of 20,000 econ pros to have predicted the "credit crunch" (aka GFC - Global Financial Crisis), looks at economic models and produces his own. The one I find most striking is the last, Fig. 22:
There are several implications I see here:
1. It is better to bail out borrowers than banks
2. The disruption takes c. 15 years to settle
3. Whatever is done or not done, we are left with permanently elevated levels of unemployment
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, June 13, 2010
Currents in the sea of debt
Michael Panzner, author of "Financial Armageddon" (a book I reviewed 3 years ago when I began to relay advance warnings of the credit crisis), is a great miner of news and comment. Here he has unearthed an article that analyses the apparent improvement in USA household debt figures.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.
One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.
That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".
Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.
The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).
I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Wednesday, June 09, 2010
The Impending Geek Shortage
In his recent editorial (“Why a liberal arts degree? The Big Shaggy”), David Brooks of the New York Times writes, “… many people have the ability to produce a technical innovation; … Very few people have the ability to create a great brand;…”
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
Polite words almost fail me.
Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.
To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.
It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.
This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.
Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.
At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?
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