Will Wikileaks break a US bank?

Which American bank is going to be blown apart by promised revelations from Wikileaks?

Britain's Daily Mail newspaper today reported US speculation that it might be Citigroup, but that doesn't appear in the online edition so maybe it was just a wild guess. Tyler Durden hears that the hard drive of a Bank of America executive casts a shadow over Merrill Lynch and/or Countrywide.

Slightly creepy though Julian Assange may be, it seems he's doing what our journalists over here used to do, before they started to see themselves as part of the New Aristocracy. When the horse-puckey hits the turbo, maybe we could see another Enron-type scandal complete with jailings and business foldups.

But I think there will be other repercussions. One will be, presumably, a drive to "clean up the act" - more regulations to try to bring the rogues under control.

Another will be how discussions are (or aren't) recorded in future. I'm sure that thanks to Assange's latest stunt, many diplomats will now be encoding their gossip prior to transmission.

But the most significant will be how observation will be evaded and rules circumvented.

This has already happened in politics: it's one of the curious features of Tony Blair's decade-long "sofa government" that decisions were often made without civil servants present to take minutes: no name, no pack drill, as they used to say in the Army.

We can expect the same in commercial circles. Again, some smart guys have been doing this all along: Jordan Belfort's book "The Wolf of Wall Street" describes how, in order to carry on share-ramping without the inconvenience of explaining their office telephone transcripts to SEC investigators, his boys would simply tell the client they'd call back, then go out and fire up their personal cellphones for an intimate, no-repercussions sales spiel.

The Sicilian Mafia showed them all the way. Bernardo Provenzano ran the Outfit from a shack, avoiding all electronic communication and typing little notes ("pizzini") on his Olivetti instead.

It's kind of a Darwinian co-evolution of predator and prey. We can expect continued crookery, with heightened secrecy. And a surge in sales of two-colour typewriter ribbons.

DISCLOSURE: No positions. Not even in typewriter ribbons.

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 blind leading the blind ...

I have wondered for some time whether the investment community were a bunch of con artists, or deluded.

I believe that I have my answer.

In the November issue of the US edition of Playboy is an article titled 'How to Destroy a Bank'.

In it, the author interviews several investment bankers. All of them lost a great deal of money in the recent collapse; are convinced that they can make it back with 'hard work'; and see financial Doomsday as impossible.

In other words, they are idiots.

Has gold ended its bull run?

The price of gold has soared in the last decade. Can it continue?

Two views make a market, as the saying goes. in "Gold's Run is Over -- I'd Much Rather Own This Stock", Tim Begany writes:

"Gold is the worst investment around. Anyone buying it now is doing so at their own risk, near the end of a bull run that's apt to end badly.

A major clue gold's time is up: institutions and hedge funds are starting to get out.

In October, for example, these big players reduced their long gold futures by -9%. Meanwhile, small investors added +5% to their long gold positions. It's a familiar pattern in which large investors exit the market of an overheated asset in a timely fashion, leaving the little guy to drive the final run-up to the big pop.

I give gold up to another year, maybe two, before it peaks. From there, it's all downhill."

Tim prefers shares in an ex-bankrupt company - Owens-Corning (NYSE: OC) - that makes insulation for buildings.

Bargain-hunting among distressed firms can be rewarding. The financial journalist George Goodman (aka "Adam Smith") once interviewed a fund manager who'd bought stock in the Santa Fe railroad, then bankrupt. The manager explained that the land, buildings and rolling stock had substantial value that was not yet reflected in the share price. This was decades before Warren Buffett and George Soros (an ex-railway porter) discovered their recent interest in choo-choos - maybe for similar reasons. (But it's worth noting that Soros recently sold his holdings in Canadian Pacific - cold feet?)

And it's true that the ratio of the Dow to gold has dropped below the long-term average since the closure of the "gold window" in 1971:

- though the ratio hasn't fallen to its 1980 low. It's also true that gold has outpaced inflation in a way not seen since the end of the 1970s:

So why do the gold bugs still have a voice?

I'd say it's because, as in 1980, these are not "normal" times. JK Galbraith said "The only function of economic forecasting is to make astrology look respectable" and all their cyclical predictions are junk when an asteroid is spotted coming in our direction. That asteroid is a combination of the vast debts of Western nations, the dependence of much of their populations on wealth transfers within those economies, and globalized trade.

Can we deflect it with rockets of bailout and default? The bailouts appear to be devaluing our currencies and may end with high inflation in necessary commodities; sovereign debt defaults would affect not only international relations but the mutual and pension funds on which many of us hope to live in retirement. If the biggest banks are allowed to fail and their shares go to zero, what will that do to Everyman's portfolio?

Gold is a speculation unlike most others: it's a vote of no confidence. As such, it's a systemic indicator, not an ordinary item of trade. At this level of the debate, graphs are meaningless. Among the bears, opinion is divided between people like Peter Schiff who think we can make something out of this crisis, and those like Michael Panzner who believe that when a civilization falls, even the richest citizen can lose all. For example, the biggest-ever hoard of Anglo-Saxon gold was discovered last year, not far from where I live. It's thought to be from the Kingdom of Mercia in the 7th or 8th century. The people who put it there never came back.

We should turn our minds from playing with money to repairing the framework of our nations, and preserving our liberty and democracy.

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 think I'm a bear, read THIS...

By his own account, "Savelife" is a mental health professional who is "a professional investor for a charitable trust" which pays richly for investment analysis by outside experts. Their assessment exceeds the worst I've dared suggest - and it's coming very soon.

"Their call: Markets will crash within two to six months (can happen at any time). First drop, in seven days, 3,000 points on the DOW. Then over six months, DOW will tank to about 1,000 points. Then a unionizing recovery will occur to the upside. Allow a decade or better for total recovery."

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.

Reasons to be fearful: a warning about the stock market

Previously published on Seeking Alpha - the business site with 3m readers monthly:
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This is the time that tests bearish investors.

Interest rates on deposits are lower than inflation, if you look at food and energy costs. Since the 1990s, I have been more cautious than most of my investors and have been careful to suggest that they might like to keep their powder dry. Some listened and switched to cash in 1998 and 1999, and so avoided the fall out of the 2000-2003 decline.

Just when I was beginning to feel that things were getting sensibly priced, interest rates were pushed down and the already-existing house price bubble superinflated from 2003 on, along with much else. And then...

But now there is talk of investors being "forced" into the market by negative real returns on cash - and fears that inflation may rise significantly. I recently displayed a graph from the Now and Futures site, showing how German shareholders survived the Weimar hyperinflation of 1923, after a severe interim drop. "Financial Armageddon" author Michael Panzner justly pointed out that there was a danger that investors in a similar situation might lose their nerve, sell out and miss the market recovery.

It is also very hard to stay out of the market when it has risen dramatically. I was batting away queries from clients in the latter stages of the tech stock boom with warnings of what I strongly suspected was a bubble ready to burst. But there is pressure to get in, not merely because of greed but in the case of fund managers, fear: the fear that your boss will use peer benchmarks to judge you negatively and appoint someone else to take over the portfolio. So you need nerve at more than one level in the organization.

Invesco Perpetual's Neil Woodford has that kind of nerve. During the dot com craze, he stayed out and stuck to his guns despite the stellar tech-invested performances of others' funds - and fortunately the management backed him.

Woodford was very bullish - selectively - in January this year, according to the Daily Telegraph. So how does he feel now? Well, bearish about China this week, according to Investment Week. This, at a time when others are coming late to the emerging-markets party, looking for something to get exciting returns. Surely, we tell ourselves, someone's making money somewhere, and we want a piece. This, I think, is the dangerous time.

It's caught out geniuses before now. During the South Sea Bubble of 1720, Sir Isaac Newton bought in, sold out and made £7000 profit - about £1 million in today's money. Then, seeing the market soaring further, he bought in again. And the scam crashed, costing him £20,000 - the equivalent of nearly £3 million.

Some say the market now has been climbing a "wall of worry", so that really we're not in a mania and reasonable concern has already been factored into valuations. Personally, I fear that this is like a lunatic certifying his own sanity and discharging himself from the hospital - "I'm all right now."

I'm not alone in this fear. In a Financial Sense article by Tim Wood yesterday, he says:

"I continue to believe, based on the evidence at hand, that the rally out the March 2009 low is a large scale bear market rally that should ultimately prove to separate Phase I from Phase II of the much larger and ongoing secular bear market. But, just as I told my subscribers before that low was even made, the longer this rally holds up, the more dangerous it becomes. Reason being, it becomes more and more convincing."

We have interest rates lower than ever, debts higher than ever and a financial sector borrowing cash at giveaway rates and playing games in the market. We now have an interdependent world economy, which is like lashing all the lifeboats together - extra security in a small storm and complete disaster in a big one.

Granted that the situation is such that there is no completely valid basis of comparison - and remembering that the Dow now lists companies that garner much more from foreign earnings than they used to - let's take a look at the Dow adjusted for CPI inflation since the peak before last - the one in January of 1966:

Remember, too, that everyone agrees that we've just had a recession, and many say we're not out of it. Where would you pin the tail on this donkey? Mr Market appears to have stuck it on the back of his neck.

If we are climbing the Wall of Worry, we're starting from very high up. Don't look down.

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 God of small things

Eyelashes growing out of human skin - one of many wonderful electron microscope pictures here.

Should rich people be asking us to think that money isn't everything?

It's a debate here at the moment. I'm only asking.

http://news.bbc.co.uk/1/hi/uk_politics/5003314.stm
http://www.guardian.co.uk/business/2009/sep/20/economics-wealth-gdp-happiness