Unemployment - Permanent

Here's a stark view on unemployment from Jim Willie CB, "The Golden Jackass" (I've bold-typed key phrases):

"LABOR ABSOLUTE DISADVANTAGE

"Much hubbub has been made of "comparative advantage" and how the United States benefits from round after round of creative destruction. The hollow message has that in free trade, both sides win, and where a job is lost, new jobs are created. Few if any advantages can be identified in the present framework, whereby lost jobs seem to be replaced mainly by debts inside the USA. Economists badly misinterpret the labor market here in the USA. They incorrectly label the delay in domestic job creation as "short-run friction," when the entire business cycle clearly has been altered, perhaps permanently broken. David Ricardo's doctrines, outlined in 1817, are misunderstood. The US has an absolute disadvantage on labor costs, across the board, which affects manufacturing, service, and more. His principles are discussed in today's light in the May issue, and shown why wealth is lost in the USA and gained abroad.

"As the work of John Maynard Keynes has been misapplied on federal stimulus, so now the work of David Ricardo is being misinterpreted on exported labor. Expect the entire topic of job export and its misconstrued benefits to become a raging explosive issue."

British readers might ask, how is it different in the UK? And where is the sleuth of British bears, growling their warnings?

All original material is copyright of its author. Fair use permitted. Contact via comment. 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; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

ETFs vs Mutual Funds (aka unit trusts, OEICS etc)

The Motley Fool challenges the view that Exchange Traded Funds are preferable to conventional collective investments.

Chinese business can suffer, too

An article in WTOP news says that some areas of Chinese industry are surprisingly vulnerable to the currency exchange rate:

A rise of 10 percent in the yuan could lead to the loss of 5.5 million jobs in China, according to a report by the Chinese central bank. It said companies hardest hit would be those that make textiles, furniture, shoes and toys for export.

"If the yuan rises by another 5 percent, our profits will be totally wiped out," said Li Shaoxiong, deputy general manager of the Fujian Ala Shoe Co., which sold half its 2006 output of 6 million pairs of athletic shoes to American retailers.

Beijing is counting on such labor-intensive light manufacturers to create millions of new jobs. Even though its bustling economy is expected to grow by more than 10 percent this year, a big share of that is in heavier manufacturing and other industries that create fewer jobs.

Perhaps China will take the view that it can tolerate a rise in foreign-trade-related unemployment while it continues to amass capital; as the East gets richer, it will eventually generate its own demand for the products of light industry.

America's debt economy

As part of a longer item explaining why China is becoming the world's most important economy, Puru Saxena crisply summarises America's position:

"...the U.S. is the largest debtor nation the world has ever seen, its debt to GDP ratio is over 400%, it has a negative personal savings rate, its currency is overvalued and its society is heavily dependent on consuming cheap, imported goods."

If you, personally, owed 4 times your annual income and were now supplementing your income by further borrowing ("negative savings rate"), you'd look for debt counselling.

Add this to Jim Willie's comments about the export of jobs, and you can see why The Mogambo Guru is raving in his latest letter.

Unemployment - Permanent

Here's a stark view on unemployment from Jim Willie CB, "The Golden Jackass" (I've bold-typed key phrases):

"LABOR ABSOLUTE DISADVANTAGE

"Much hubbub has been made of "comparative advantage" and how the United States benefits from round after round of creative destruction. The hollow message has that in free trade, both sides win, and where a job is lost, new jobs are created. Few if any advantages can be identified in the present framework, whereby lost jobs seem to be replaced mainly by debts inside the USA. Economists badly misinterpret the labor market here in the USA. They incorrectly label the delay in domestic job creation as "short-run friction," when the entire business cycle clearly has been altered, perhaps permanently broken. David Ricardo's doctrines, outlined in 1817, are misunderstood. The US has an absolute disadvantage on labor costs, across the board, which affects manufacturing, service, and more. His principles are discussed in today's light in the May issue, and shown why wealth is lost in the USA and gained abroad.

"As the work of John Maynard Keynes has been misapplied on federal stimulus, so now the work of David Ricardo is being misinterpreted on exported labor. Expect the entire topic of job export and its misconstrued benefits to become a raging explosive issue."

British readers might ask, how is it different in the UK? And where is the sleuth of British bears, growling their warnings?

End of the dollar bill will mean the end of the dollar

Here's an article about the introduction of a dollar coin. Bad idea. We have a pound coin in the UK. A friend remarked on this to his wife when it came in; she replied, "It's so people will expect less."

Richard Daughty worries about absence of increased debt!

The Mogambo Guru worried yesterday about a lack of increase in the money supply - maybe a first for him! But as he explains, in an inflation-sustained stockmarket it's a bit like a halt in the flow of blood round your system.

More bears - one British, one Chinese

Two more bears worry about the current state of the markets: a fund manager from Fidelity is concerned about easy credit terms and poor investment value; Asia's richest man is nervous about the Chinese stockmarket (up 85% so far this year).

Michael Panzner warns again of systemic risk

Michael Panzner continues to warn of a possible financial earthquake. His 17 May article in Seeking Alpha (see my link list) quotes the NY Fed Reserve President as saying "consolidation of global financial firms, increased leverage and increased complacency all have raised the risk of a systemic shock" - what I'd call the BBC syndrome (big, borrowed heavily and complacent about system risk).

Bigness is no guarantee of security, rather the reverse - think of hedge fund Long Term Capital Management, or indeed the Titanic; on borrowing, the bears have warned until they are hoarse; and complacency has been fostered by increases in the money supply.

Perhaps the complacency is the most dangerous part. People like Michael Panzner and Peter Schiff are like the architect in the 1974 movie "Towering Inferno", worried about a potential disaster because of bad wiring; but the warnings are ignored because there's extra profit in trimming security.

It's noteworthy that the Fed Reserve President, Timothy Geithner, was addressing his remarks to a conference on derivatives, which according to Mr Panzner are another source of instability in the world economy. Derivatives use highly complex mathematical tools, but as far as I can make out their purpose is simple: to see how near to disaster you can go without crossing the line. In other words, trimming security.

China announces changes to interest and exchange rates

As I said on 16th May. Though it didn't take a genius to foresee: the Chinese are careful to flag up their intentions so as not to scare anyone. The interest rate increase means the yuan/renminbi will rise against the dollar.

The other move looks like part of a longer-term strategy: the band within which the yuan moves against the dollar is to widen from 0.3% to 0.5% (maximum per day - over time, unlimited), presumably partly to accommodate appreciation of the Chinese currency in response to the interest rate. This may please America, as a lower dollar will reduce the price advantage of Chinese good.

But I think it's also signalling the stage at which one partner tapes their favourite music, before they pack their bags and leave home for good. Having more flexibility in the dollar-yuan exchange may suit China's bigger plan, to move away from dependence on the US market.

Goodbye dollar, hello Euro?

Richard Daughty worries about absence of increased debt!

The Mogambo Guru worried yesterday about a lack of increase in the money supply - maybe a first for him! But as he explains, in an inflation-sustained stockmarket it's a bit like a halt in the flow of blood round your system.

All original material is copyright of its author. Fair use permitted. Contact via comment. 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; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Michael Panzner warns again of systemic risk

Michael Panzner continues to warn of a possible financial earthquake. His 17 May article in Seeking Alpha (see my link list) quotes the NY Fed Reserve President as saying "consolidation of global financial firms, increased leverage and increased complacency all have raised the risk of a systemic shock" - what I'd call the BBC syndrome (big, borrowed heavily and complacent about system risk).

Bigness is no guarantee of security, rather the reverse - think of hedge fund Long Term Capital Management, or indeed the Titanic; on borrowing, the bears have warned until they are hoarse; and complacency has been fostered by increases in the money supply.

Perhaps the complacency is the most dangerous part. People like Michael Panzner and Peter Schiff are like the architect in the 1974 movie "Towering Inferno", worried about a potential disaster because of bad wiring; but the warnings are ignored because there's extra profit in trimming security.

It's noteworthy that the Fed Reserve President, Timothy Geithner, was addressing his remarks to a conference on derivatives, which according to Mr Panzner are another source of instability in the world economy. Derivatives use highly complex mathematical tools, but as far as I can make out their purpose is simple: to see how near to disaster you can go without crossing the line. In other words, trimming security. A

ll original material is copyright of its author. Fair use permitted. Contact via comment. 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; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

China: a turning point?

Please read this news article, about US-Chinese economic relations. It's a rehash of an essay by China's Vice Premier Wu Yi in yesterday's Wall Street Journal. To me, the very polite tone and careful emphasis on mutual benefit make it clear who's wearing the trousers now. The subtler they are, the more they mean it.

Listen with your inner ear to the statement "Attempts to politicize trade issues should be resisted," bearing in mind who is making it. I sense some kind of turning point. If you play the oriental game Go, the term is "sente", meaning that the initiative has passed to the other player.

All original material is copyright of its author. Fair use permitted. Contact via comment. 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; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

What is Alan Greenspan doing?

Recently, ex-Federal Reserve Chairman Alan Greenspan has been sounding warnings about the US economy and is now aware that his back-seat driver comments may affect the market (see end of this article). It must be irritating for Ben Bernanke to deal with a boat-rocker whom some blame for creating the problems that Ben now faces.

And what is Mr Greenspan now doing? One of his new roles is as an adviser to investment managers PIMCO - see here for their latest US report. The style of the report is an uncomfortable combination of stuffy and jazzy, but the substance is interesting. Here's a few extracted phrases:

Currently there's a "virtuous circle favoring capital at the expense of labor", which only "a global financial bubble popping of sorts, an accelerated decline of U.S. housing in the short run, or a U.S.-led trade policy reversal that could precipitate counter-attacks from Asian exporters" could stop;

there are "inflationary pressures" in the US and an "asset bubble";
if a housing slump hits the American consumer economy, "anti-trade [i.e. protectionist] legislation may or may not become a reality";

"The emphasis on emerging market currencies rather obviously suggests relative weakness of the U.S. dollar. We continue to believe that U.S. growth will descend towards the lower quartile of countries within a broad global composite. Such U.S. growth, despite relatively favorable demographic labor force trends spiked by immigration, will suffer due to reduced U.S. consumption and the need for higher savings. Even in the face of resistance by Chinese authorities vis-à-vis the Yuan and the Japanese via artificially low interest rates, this lower growth speaks to a weaker dollar and lower relative asset price appreciation in comparison to the rest of the world. PIMCO portfolios will therefore likely feature increasing international diversification in foreign currency terms.";

PIMCO thinks that "sustainable global growth with perhaps an early cyclical slowdown appears to be the likeliest outcome. Those who “own” this growth as opposed to those who lend to it will benefit."

Not hard to boil this down. But potentially rewarding for an alert and adventurous investor. And Mr Greenspan the poacher will act as your gamekeeper, if you go with PIMCO.

China: a turning point?

Please read this news article, about US-Chinese economic relations. It's a rehash of an essay by China's Vice Premier Wu Yi in yesterday's Wall Street Journal. To me, the very polite tone and careful emphasis on mutual benefit make it clear who's wearing the trousers now. The subtler they are, the more they mean it.

Listen with your inner ear to the statement "Attempts to politicize trade issues should be resisted," bearing in mind who is making it. I sense some kind of turning point. If you play the oriental game Go, the term is "sente", meaning that the initiative has passed to the other player.

The Dollar vs the Euro

Adrian Ash in the Daily Reckoning Australia: even if the Euro is capable of replacing the US dollar as a trading currency, it has similar problems!

China to watch US interest rate and exchange policies

... and from the other side, a thoughtful opinion by Zhang Ming in today's Chinese People's Daily online edition. It notes that changes in the US interest rate might have to be matched by China, but another option is for the US to devalue the dollar. Should the latter occur, it would affect flows of capital between the countries, but (in the writer's view) not so much the Chinese stockmarket, which is mainly powered by domestic investment.

Martin Weiss: bull in a China shop

Martin Weiss' 14 May newsletter reminds us of the big picture: wealth transfer from the US to China - and the opportunities for investors.

Read this: Maggie Mahar at TPM Cafe

A good article by Maggie Mahar at cybersheet TPM Cafe - comments about Warren Buffett, David Tice, market bubbles and their aftermath.

Yuan to rise soon?

China is giving more signals of its plans to let the Yuan/Renminbi rise.

Premier Wen referred to "improving the Renminbi exchange rate mechanism, giving greater scope to the role of the market and introducing greater interest rate flexibility".

The Kondratieff Cycle

Some investment analysts are "chartists" - they try to predict the future short-term movement of the markets, using patterns they think they've seen in the past. There are longer-term patterns too: we commonly talk of a "business cycle" of say 8 or 10 years.

Could there be really long cycles? Nicolai Kondratieff (or Kondratiev) (see Wikipedia article) thought so. His wave takes around 50 years and predicts decades of booms and depressions. His theory still excites professional investors today - see this article about Marc Faber, and Shane Oliver at AMP.

Of course, the question is how exactly to fit the pattern to our present situation. There is a nice graphic presentation here, showing past data and extrapolating to 2010. But look at other sites, too, like this one from 1998 - here the analysis suggests we have already hit the bottom.

Maybe the answer is that such patterns do exist, but the turning points are impossible to predict, so chartists stretch the waves. For example, you'll see in the second chart above (about technology, related to Kondratieff), that the first 3 cycles are set at 50 years, and the fourth at 40.

Sometimes an unexpected dramatic event starts the change, e.g the murder of Archduke Franz Ferdinand in 1914. And British history would have been very different if Guy Fawkes' 1605 plot to blow up King and Parliament hadn't been leaked. So you can't get the timing perfect.

But you can prepare. The two books recently reviewed on this blog explain why we should worry about the state of the US economy (and the UK has similar problems, maybe on a different scale). You don't need to know when the fire will start, as long as you've planned how to leave the building in an emergency.
 

All original material is copyright of its author. Fair use permitted. Contact via comment. 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; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

The Kondratieff Cycle

Some investment analysts are "chartists" - they try to predict the future short-term movement of the markets, using patterns they think they've seen in the past. There are longer-term patterns too: we commonly talk of a "business cycle" of say 8 or 10 years.

Could there be really long cycles? Nicolai Kondratieff (or Kondratiev) (see Wikipedia article) thought so. His wave takes around 50 years and predicts decades of booms and depressions. His theory still excites professional investors today - see this article about Marc Faber, and Shane Oliver at AMP.

Of course, the question is how exactly to fit the pattern to our present situation. There is a nice graphic presentation here, showing past data and extrapolating to 2010. But look at other sites, too, like this one from 1998 - here the analysis suggests we have already hit the bottom.

Maybe the answer is that such patterns do exist, but the turning points are impossible to predict, so chartists stretch the waves. For example, you'll see in the second chart above (about technology, related to Kondratieff), that the first 3 cycles are set at 50 years, and the fourth at 40.

Sometimes an unexpected dramatic event starts the change, e.g the murder of Archduke Franz Ferdinand in 1914. And British history would have been very different if Guy Fawkes' 1605 plot to blow up King and Parliament hadn't been leaked. So you can't get the timing perfect.

But you can prepare. The two books recently reviewed on this blog explain why we should worry about the state of the US economy (and the UK has similar problems, maybe on a different scale). You don't need to know when the fire will start, as long as you've planned how to leave the building in an emergency.

Buffett's currency choice: the Yuan?

Seeking Alpha thinks Warren Buffett may have chosen the Yuan!

A blog that finds information sources for investors

Value Blog Review collates useful sources of information for investors - you may wish to add it to your favourites.

Renminbi (Chinese Yuan) to rise soon?

A Chinese news report here details the current Chinese investment frenzy. The market doubled last year and has grown 50% so far this year. The interest on bank accounts is less than inflation, which is running at 3%, so private investors are raiding their accounts for money to speculate on stocks. One way to cool things down is to raise interest rates.

Another expert expects Swiss franc to strengthen

The Daily FX speculates that the Swiss franc may rise if the stockmarkets run into problems:

"The Swiss currency is still being undermined by global stock market optimism and this trend could continue in the very short term, but there is an increasing threat of market instability which would tend to strengthen the franc sharply."

Another gold bug

Wall Street Window is bullish on gold.

Don't worry - make plans.

A useful formula from yesterday's Daily Reckoning: "...the importance of any event is equal to the likelihood TIMES the consequences."

Buffett speculating on the Yen? Or the Swiss Franc?

The Financial Times theorises that Warren Buffett's secret buy is the Yen.

But he lost nearly a billion betting against the dollar two years ago. Foreign exchange speculation is a casino game and Buffett is famous for caution.

What if his currency purchase is linked to his search for a large company to buy? In other words, Buffett could be looking to protect the purchase price from inflating because of a fall in the dollar. In that case, discovering the currency he's chosen might also hint at the company he's stalking; and vice versa.

Yuan to rise against the dollar - official advice

A Chinese central bank adviser is urging China to allow the yuan to rise gradually, rather than resist and then shoot upwards, Reuters reports. This, says the adviser, would ease some of the strain on US trade but also help control inflation in China.

China's private investor boom

And the Chinese have got stock market fever - see here. The headline modestly plays it as a drop in bank deposits, but nearly 5 million new trading accounts were opened in April alone. I hope they're putting it into the right stocks.

Would China dump the dollar?

Puru Saxena thinks so.

Chinese imports blocking California's ports

The Christian Science Monitor notes that Chinese exports to the US have grown so fast they can't get them through California's ports. The CSM tries to take a positive, passive-protectionist angle on this story.

Okay, so the goose gets stuffed more slowly; but it'll still be cooked. Meanwhile, what does this imply for investment in port facilities?

Buffett to buy Zurich insurance group?

Warren Buffett is holding $46 bn in cash and was recently reported to be speculating in a foreign currency. He has also been saying he's like to buy a big company, perhaps in insurance. Zurich Financial Services rose 3.2 percent and is valued at $45 bn - see Bloomberg.

That currency hedge wouldn't happen to be Swiss francs, would it?

China can afford a dollar drop

Further to our last, Chuck Butler in The Daily Reckoning points out that China's trade balance with America doubled last month, and the Renminbi has already risen 8% against the dollar since de-pegging 2 years ago.

The exchange rate could alter far more before China lost its pricing edge - just Google up the phrase "China price". Besides, Western industry is getting to the point where it couldn't take up the slack. We have a shortage of skilled labour, and even our factories are being shipped abroad.

China's US trade surplus was slightly over $16 bn in April - oddly enough, just about the same as the increase in Federal Reserve credit.

Deficit up or dollar down?

China View quotes the Bush administration's plan to clear the budget deficit by 2012, but Reuters on 1st May quoted the Levy Economic Institute as saying this is unlikely, "barring a massive -- and unlikely -- further depreciation of the dollar".

Maybe that's the key, though. The Institute's April 2007 Strategic Analysis observes that a drop in the dollar leads to a nearly-equal increase in exports:

"Since the price elasticity of demand for U.S. exports is, by our reckoning, around 0.9, we expect quite a large positive response of export volumes to dollar depreciation."
However, the Congressional Budget Office's assumptions also imply a continuing increase in private borrowing, whereas the Institute expects the American consumer to cut back spending instead. If US household debt stabilises, the Institute's model deduces lower US economic output and a long period of higher unemployment, thus shrinking tax revenues. In that case, instead of being cancelled by 2012, the budget deficit increases.

A possible alternative government policy is depreciation of the dollar. Here is what the Institute says about that:

"... it would be quite unsafe to rely on this as an adjustment mechanism. First, we would have to be looking at a depreciation in the region of perhaps 30 percent, compared with the dollar’s most recent peak in 2002, and it might become impossible to ignore the inflationary consequences of such a great fall in value.

"Second, all of the econometrics indicate that there are long lags between changes in the exchange rate and consequential changes in real exports and imports, which will make it difficult to synchronize the rise in net export demand with the fall in domestic demand.

"Third, currency depreciation can no longer be regarded as a straightforward policy instrument, particularly if major surplus countries like China and Japan remain determined not to let their currencies appreciate."
Unlike the Institute, Warren Buffett, David Tice and Peter Schiff all seem to expect a major dollar drop. With inflationary consequences and, as in the second paragraph quoted above, economic dislocation.

But the third paragraph gives us more to think about. Is the Far East more concerned to maintain its trading advantage with the USA, or to preserve its capital while it builds up demand closer to home? There is already speculation about alternatives to the dollar as the world's reserve currency; I understand that foreign governments are building up their gold hoards; and I wonder whether the Federal Reserve is making contingency plans to issue loads more dollars to buy Treasury bonds if they are dumped by international holders?

Marc Faber's investments

According to the International Herald Tribune's 2 May article here, "[Marc] Faber owns mining stocks, which he declined to name, as well as gold, rare metals and agricultural land".

Faber's firm manages $300 million. Maybe we should learn from this bear.

Dow to fall 50%?

Read The Mogambo Guru's (Richard Daughty - pictured left) latest rave. His insane-cackling style manages to make the news seem funny. I'll put it baldly: Federal Reserve credit rose $16 bn last month, and David Tice at Prudent Bear is predicting a Dow slide before the end of the year, ultimately heading for a total drop of over 50%.

In an interview here, David says he'd thought the bear market started in 2001 or 2002. Once again, the analysis is that it's a bear market masked by inflation.

Book Review: "Crash Proof" by Peter Schiff

Peter Schiff, the principal author, is a broker-dealer and president of Euro Pacific Capital. John Downes is editor of the investment newsletter "Beating the Dow".

"Crash Proof" is something of a job application, since if you accept Mr Schiff's recommendations you will be looking for the kind of services he advertises. In my opinion, he does well at the interview: the book is good enough to re-read. It is clear, concise and authoritative.

In the last three chapters, he explains how to protect your wealth - but you don't have to be very wealthy to use his ideas. I'll give the main tips at the end of this article.

He starts with where we are now, and how we got here. The US has a huge capital account surplus, which sounds good until you know that it's another way of saying Americans owe a fortune to foreigners. The government has encouraged money and credit in the economy to increase, so we think we're well-off; but the country has shifted from producing goods and services to consuming them, and paying for it all by borrowing. One day, it's got to be paid back - with interest.

There's no panic right now, because the government, Wall Street and the news media are failing us. They downplay the trade and budget deficits; fudge figures on inflation, productivity and GDP; and quote the consumer's confidence back at him, instead of telling him the truth: you can't spend your way out of debt.

Mr Schiff is a monetarist. For him, an increase in cash and credit is inflation; price rises are merely the effects. These price changes give misleading signals to producers, so they make too much of the wrong stuff and go broke. So inflation causes cycles of boom-and-bust. The US dollar was once backed by gold, but now there is no such restraint on the Federal Reserve, which Schiff terms "an engine of perpetual inflation". Money is simply created at will - the dollar is a "fiat currency".

The greenback hasn't yet had its bluff called; one reason is that it is still used as the world's international trading currency. But it could be replaced, for example by the Euro. In that event, trillions of dollars would come home and the real extent of inflation would be revealed. Import prices would rise, and although the weaker dollar would make exports more competitive, US industry has shrunk and couldn't take full advantage of increased foreign demand, so domestic costs would rise as well. Belts would tighten and non-essential services would be hit. You could get hyperinflation and an economic slump at the same time.

"In the perspective of previous bear markets, notably those of the 1930s and the 1970s, the prospects look even worse. Economic conditions now are as bad as or worse than what existed then." (p. 114)
The implication for US investors? Schiff estimates (p. 95) the Dow ought to drop 30% from its end-2006 valuation (David Tice at Prudent Bear recently predicted a 50% fall - see next posting above), and a weaker dollar will magnify the loss.

Where does he suggest we invest? Here's some pointers:

Negatives

1. Avoid debt, unless you plan to use the money to make a profit in some way.
2. Get out of the dollar, and out of US stocks.
3. Be wary of Treasury Inflation Protected Securities (TIPS) - the government defines inflation, but it's also the borrower. Schiff says it's like "trusting the fox to guard the henhouse".
4. Think twice about investing in bonds: "[it is] my belief that all governments that issue fiat currency will inflate".
5. Avoid mutual funds, because they add a layer of costs.

Positives

10 - 30% of portfolio: gold, and maybe also silver.

Of this, maybe 20 - 50% should be in bullion, some in your direct possession, some held elsewhere. E.g. Krugerrands and pre-1968 US silver coin; Perth Mint Certificates; GoldMoney.com (banking in gold).

Other investments in gold could include gold Exchange Traded Funds (potential risk: false auditing); gold futures (risk: the firm may buy on margin; also, counterparty risk); gold mining stocks (risk: potential future speculative bubble).

Rest of portfolio: non-US stocks - purchased through a broker (e.g. Mr Schiff!)

This is where the broker would make specific recommendations to the client. In general terms, the author recommends a portfolio of non-US shares, maybe 10 -20 in all, in an assortment of companies, sectors, markets and currencies. He likes conservative, high-dividend stocks (a key principle of the Dogs of the Dow - see John Downes) in developed markets - e.g. Canada, Australia, New Zealand. In the shorter term, he thinks the UK and Europe should do better than the US; in the long run, Asia.

As to favoured sectors: power, commercial real estate, commodities and natural resources (much of this seems to chime with what we have learned about Marc Faber - see second posting above).

This book is not only an investor's survival guide, but a layman's economic primer. It is well worth reading.

Crash Proof, by Peter D. Schiff with John Downes; pub. John Wiley & Sons, Inc; Hoboken, New Jersey, USA 2007

If you wish to purchase this book, the author gives this link.

Puru Saxena on precious metals

No sooner has this blog been launched than Wall Street drops 1%, followed this morning by the Hang Seng.

The modern financial bear, a grizzly on economic fundamentals, is also a bull on industrial metals - see yesterday's excellent Daily Reckoning article by Puru Saxena (pictured) here.

Book Review: "Financial Armageddon" by Michael Panzner

Michael Panzner's new book details four areas of grave concern in the US economy:
1. Ballooning public and private debt.
2. A retirement system (pensions and healthcare) that is financially unsustainable.
3. Government guarantees to banking and financial institutions, which have allowed them to take even bigger risks.
4. Derivatives, a vast system of mutual bets, deals and guarantees that interlink so that failure in one part could spread rapidly and disastrously to all parts.
Although focused on the US, this work has relevance for the rest of the world. According to Panzner, something's got to happen soon, and when it does, it'll be vast and horrible.

He predicts first a credit squeeze, which makes cash king and ruins our credit-dependent lives and businesses wholesale; then hyperinflation, as the government prints money to keep the system from complete collapse.

In this scenario, at first, stocks, corporate bonds, property, commodities (including gold), even government bonds and savings certificates, all decline in value against hard cash as everybody scrambles to settle their own debt, collect what's owed to them and continue to pay the bills. Then the hyperinflation hits and everybody tries to offload their currency.

We could end up with a system of barter and a dangerous social environment. Mr Panzner recommends using the Web to get forewarnings of imminent change, and gives the reader many web and blog addresses.

Is this impossible? Of course not. It may not pan out quite the way he sees it - a perfect financial storm - but mayhem does not have to be perfect.

Naturally, politicians won't want such a disaster on their hands. They can reduce the State's obligations, e.g. by deferring the retirement age; they can limit free medical care for retirees to core essentials, or maybe apply means-testing so that only the poorest get it free. As in the UK, public employees may be made to retire later, and to make higher pension contributions.

But coupled with huge personal and commercial debt, and a trade deficit that looks set to increase indefinitely, such remedies may not be enough.

Michael J Panzner: "Financial Armageddon" (Kaplan Publishing, New York 2007)