When will the bear market end? How bad will it get?

Tim W. Wood at Financial Sense reckons the last bull market ran from 1974 to 2007 (extended by government interference or support, depending on your point of view). His research tells him that bear markets last one-third as long as the preceding bull market, so he sees the present stockmarket rally as a "dead cat bounce".

That's my gut feeling, too, though I'm aware of the dangers of confirmation bias.

Below, I give two charts showing the course of the Dow from August 1929 (close to its pre-Crash peak) to August 2010, 82 years later. The first shows the raw index, which as you see only breached the 2,000 mark in the late 80s, making the last 20 years look freakish.



The second adjusts the Dow for inflation as measured by the CPI, so we can see where we are "in real terms" in comparison to the great speculative bull market of the late 1920s. Note that the recent low point (March 2009) is above the high point of the bull run that ended in January 1966, whereas the low of June 1982 was less than 40% of the 1929 peak.


If the eventual market bottom this time has the same relationship to the 1966 peak, as 1982 had to 1929, the Dow should go below 5,200 points (adjusted for inflation between now and the future low point).

So much has changed over the last 3 generations that the attempt to turn historical data into predictable cycles may be fruitless. On the one hand, debt is now an even greater burden than in 1929; on the other, big companies are multinational and the fortunes of Wall Street are less bound up with those of Main Street.

Yet global trade means that the fortunes of sovereign nations are increasingly interconnected, and while China is set to overtake Japan in size of economy, it is also (apparently) heading for a Western-style banking bust; should China choose to raid its overseas investments to tackle such a crisis, then the American markets (where China holds over $1 trillion of assets) are in trouble.

I still feel that a major breakdown is on the way, I just don't know exactly when. It's like waiting for the Big One in California: every day it's "not today", yet it's never "never".

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.

Killer facts about the British standard of living

Average income in the UK is lower than in the Falkland Islands.

Iceland's per capita income is 14 rungs higher than ours.

Norwegians earn 2/3rds more than we do.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html?countryName=Iceland&countryCode=ic&regionCode=eu&rank=20#ic

Gold, inflation and the Dow Jones Industrial Index

Republished from the Broad Oak Blog:

I give below two charts that look at how gold has fared since President Nixon de-linked it from the dollar in 1971. In inflation terms (as measured by the US CPI-U), gold now worth is almost twice as much as its long-term average; but in turn, the Dow is still running very high against gold.

It may or may not be the case that gold is overpriced (perhaps we should be looking at inflation as measured by average earned income, or GDP, or something else) but either way, the Dow is still extraordinarily high. It does indeed look as though there was a "new paradigm" from the early 1990s; but perhaps a dangerously misleading one. Will gold double? Will the Dow halve?

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.

Gold, inflation and the Dow Jones Industrial Index

I give below two charts that look at how gold has fared since President Nixon de-linked it from the dollar in 1971. In inflation terms (as measured by the US CPI-U), gold now worth is almost twice as much as its long-term average; but in turn, the Dow is still running very high against gold.

It may or may not be the case that gold is overpriced (perhaps we should be looking at inflation as measured by average earned income, or GDP, or something else) but either way, the Dow is still extraordinarily high. It does indeed look as though there was a "new paradigm" from the early 1990s; but perhaps a dangerously misleading one. Will gold double? Will the Dow halve?

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.

Gold and Goldman Sachs

Republished from the Broad Oak Blog:

It appears that Goldman Sachs will simultaneously predict a rise in the value of gold, and a fall, depending on how valuable a client you are. Mind you, that could reflect the difference between the advice one gives to active traders as opposed to buy-and-holders, so it's not enough evidence to convict, I think.

I looked at gold's longer-term price history in February of last year, starting in 1971 when President Nixon finally severed the official link between the US dollar and the precious metal on which it used to be based. Since then, and adjusted for the American Consumer Price Index, gold has averaged 2.8 or 2.9 times its September 1971 price. I reproduce the graph below:

In September 1971, gold was trading at $42.02 per ounce, when the CPI index was at 40.8 . As I write, the New York spot price is $1,232.40 and July 2010's CPI figure is 218.011. So "in real terms" gold is now worth 5.49 times as much as in the autumn of 1971, i.e. nearly twice its long-term, inflation-adjusted trend.

As I've said before, we're now not looking at gold as a "good buy" because it's undervalued, which it isn't (it was, 10 years ago). Instead, it's assuming its role as a form of insurance against economic breakdown. I've noted recently, as doubtless you have too, how shops and internet sites have been springing up, offering to buy your gold. There must be a reason - though remember that these purchasers often don't give you the full melt-down value of your jewelry, so there's a profit margin for them already.

It may be a sign of the times, but that also means that it's a temporary phenomenon. Unless you're willing to keep a sharp eye out for price movements and can sell fairly quickly when you have made a gain, perhaps you should keep out of this speculative market.

Unless you believe the future is rather more catastrophic. In that case, as some are now advising, you may wish to build up your personal holding of the imperishable element. But consider the ancient buried hoards that have been discovered over the last few years by people with metal detectors: presumably those ancients thought they'd come back for their goods, but were overtaken by events. If you really have the disaster-movie outlook, maybe there are other, more useful things you should be doing to ensure that you survive and thrive.

Gold and Goldman Sachs

It appears that Goldman Sachs will simultaneously predict a rise in the value of gold, and a fall, depending on how valuable a client you are. Mind you, that could reflect the difference between the advice one gives to active traders as opposed to buy-and-holders, so it's not enough evidence to convict, I think.

I looked at gold's longer-term price history in February of last year, starting in 1971 when President Nixon finally severed the official link between the US dollar and the precious metal on which it used to be based. Since then, and adjusted for the American Consumer Price Index, gold has averaged 2.8 or 2.9 times its September 1971 price. I reproduce the graph below:

In September 1971, gold was trading at $42.02 per ounce, when the CPI index was at 40.8 . As I write, the New York spot price is $1,232.40 and July 2010's CPI figure is 218.011. So "in real terms" gold is now worth 5.49 times as much as in the autumn of 1971, i.e. nearly twice its long-term, inflation-adjusted trend.

As I've said before, we're now not looking at gold as a "good buy" because it's undervalued, which it isn't (it was, 10 years ago). Instead, it's assuming its role as a form of insurance against economic breakdown. I've noted recently, as doubtless you have too, how shops and internet sites have been springing up, offering to buy your gold. There must be a reason - though remember that these purchasers often don't give you the full melt-down value of your jewelry, so there's a profit margin for them already.

It may be a sign of the times, but that also means that it's a temporary phenomenon. Unless you're willing to keep a sharp eye out for price movements and can sell fairly quickly when you have made a gain, perhaps you should keep out of this speculative market.

Unless you believe the future is rather more catastrophic. In that case, as some are now advising, you may wish to build up your personal holding of the imperishable element. But consider the ancient buried hoards that have been discovered over the last few years by people with metal detectors: presumably those ancients thought they'd come back for their goods, but were overtaken by events. If you really have the disaster-movie outlook, maybe there are other, more useful things you should be doing to ensure that you survive and thrive.

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.

Beating inflation safely

Republished from the Broad Oak Blog:

UK investors who are concerned about the threat of inflation have recently (19 July) lost access to an ideal solution, the NS&I Index-Linked Savings Certificate. Now a building society is offering something to fill that gap in the market.

National Counties are marketing an index-linked cash ISA. This is not quite the same as NS&I's product, because the investment is for a fixed amount (the maximum cash ISA allowance, i.e. £5,100) and no withdrawals are permitted within the 5-year term of the plan. As with NS&I, the return is linked to the Retail Price Index (RPI), plus 1% p.a. For further comment by Citywire, see here.

A lot depends on what you think may happen in terms of inflation, which brings us to the great inflation-deflation debate. Some commentators are saying that Western economies are so indebted that we have reached a turning point and people will spend less and save more (or pay down debt, which amounts to the same thing). Governments are going to have to follow suit, and the UK government is currently busy trying to demonstrate its commitment to do so, fearing that bond markets may lose confidence in our financial management and will then charge higher interest, which would really put us in a pickle.

So demand is reducing. We see this in the recent bankruptcies of UK holiday companies and the pages of cut-price cruise adverts in the middle-class press. If this is the pattern generally, then holders of cash will benefit as prices reduce - the pound in your pocket will grow more valuable, quite safely. Even better, this type of deflationary gain is not taxed, at least not until the government nerves itself up to simply confiscate your savings.

But that's not the whole picture. While demand for luxuries is lessening, there are other things that we still have to buy, especially food and energy. Here, prices are rising. And if interest rates do rise, that will also increase RPI, which unlike the Consumer Price Index (CPI) includes housing costs. So it is quite possible that inflation as measured by RPI could be high, even as the economy slows down. It's worth noting that the government has recently changed rules on private sector occupational pensions so that their benefits will increase in line with CPI instead of RPI, which suggests that our rulers believe that one way or another, RPI will rise faster than CPI in years to come.

The BBC appears to have bought the official line that we should ignore food and energy costs, referring to CPI as "core" inflation and noting that it's now a mere 3.1%, as opposed to RPI which is running at 4.8%. However, unlike the mandarins at Broadcasting House, the rest of us need to eat and keep warm; or, to be a little fairer, food and energy is a more significant part of most people's budgets than it is for the upper echelon of the mediaocrities.

An RPI-linked cash product is a good each-way bet: if prices do reduce, then your money becomes more valuable; if prices increase, the value of your savings is preserved; and either way, you benefit from that extra 1% p.a. sweetener.

Reasons not to? You may find you need access to cash within the 5 year term; and if you're a gambler, you may be looking at investments that could outpace inflation (think of the current fever for commodities such as gold, silver, oil and agricultural products). But you shouldn't put all your eggs in one basket, and most ordinary people aren't gamblers when it comes to their nest-eggs, so this product is worth a look.