Marc Faber and others give their investment views today on The Market Oracle. A quote from Faber:
We are now at the onset of a major bear market in bonds worldwide that should bring interest rates above the level in 1981 when US Treasuries were yielding over 15 per cent. But this process will take at least 10 years. In this environment stocks will not do well in real terms but will rise in nominal terms. How high will depend on (US Federal Reserve chairman Ben) Bernanke's money printing presses.
I think I have already suggested that, adjusted for inflation, stockmarkets have already fallen far below their 1999 positions, and this looks like confirmation that more of the same is expected.
Wednesday, June 27, 2007
Is gold a bargain?
In Monday's The Daily Reckoning, Richard Daughty notes that annually, the US is creating 24 times more new money than the world is producing in new gold at current prices, and he comes to the obvious conclusion: "Planetary Super Bargain".
But there are other ways to do the figures. The same edition of TDR reveals that we already have 150,000 tonnes of gold above ground, so 2,500 new-mined tonnes per year represents 1.67% p.a., compared with the 12% increase in the US M3 money supply. Okay, that looks like a mismatch of supply and potential demand, but this particular ratio is 7.2 times, rather than 24.
Another thought: gold and paper notes are not the only two things in the economy. People have other things to spend their money on, such as their rapidly-growing debts. And if we accept the worst-case future scenario, maybe tins of baked beans and boxes of ammunition will be in even greater demand.
Also, how far has the gold price already factored-in inflation? Using figures from Kitco.com's website, I've compared the average London PM fix in June 2002 with today's New York spot price. Per ounce, gold has gone from $356.53 to $642.50 in 5 years, a rise of around 80% overall. This equates to some 12.5% compound per annum - rather similar to the M3 figure previously quoted. So maybe gold is doing its traditional thing of storing value, more or less, rather than being a sort of asset Cinderella about to hit the big time.
But then again, I could be wrong.
But there are other ways to do the figures. The same edition of TDR reveals that we already have 150,000 tonnes of gold above ground, so 2,500 new-mined tonnes per year represents 1.67% p.a., compared with the 12% increase in the US M3 money supply. Okay, that looks like a mismatch of supply and potential demand, but this particular ratio is 7.2 times, rather than 24.
Another thought: gold and paper notes are not the only two things in the economy. People have other things to spend their money on, such as their rapidly-growing debts. And if we accept the worst-case future scenario, maybe tins of baked beans and boxes of ammunition will be in even greater demand.
Also, how far has the gold price already factored-in inflation? Using figures from Kitco.com's website, I've compared the average London PM fix in June 2002 with today's New York spot price. Per ounce, gold has gone from $356.53 to $642.50 in 5 years, a rise of around 80% overall. This equates to some 12.5% compound per annum - rather similar to the M3 figure previously quoted. So maybe gold is doing its traditional thing of storing value, more or less, rather than being a sort of asset Cinderella about to hit the big time.
But then again, I could be wrong.
Making money out of disaster?
The Contrarian Investors' Journal concludes its series on exploiting the possibility of a crash, by suggesting a series of short-term bets on the drop. It's a gamble, of course, but appeals to the Black Swan types who look for an "asymmetric outcome" - a disproportionately large payoff if the unlikely event happens. In other words, if the event has 100-1 odds against occurring, but the bet is offering 500-1, it seems worth taking - if you're a gambler.
But there's another risk involved: the "bookie" may not be willing, or able, to pay out. A prudent investor should consider counterparty risk.
But there's another risk involved: the "bookie" may not be willing, or able, to pay out. A prudent investor should consider counterparty risk.
More credible warnings
The Bank for International Settlements is joining its voice to the chorus, warning of excesses and a Thirties-style crash, as reported in the Wall Street Journal for 25 June.
Monday, June 25, 2007
Double indemnity
Dan Atkinson in the Mail on Sunday begins with what seems to be praise for the Chancellor's control of the economy, but goes on to note our growing indebtedness. The Bank of England figures he cites, comparing January 2000 with April 2007, show an increase in combined mortgage and consumer debt of around 116%; earnings rose only 31.7% over the same period.
To put it another way, as I calculate it, average indebtedness, adjusted for earnings, has increased by 63.9%. That's an awful lot of future spending power thrown away. The UK appears to have similar problems to the USA.
To put it another way, as I calculate it, average indebtedness, adjusted for earnings, has increased by 63.9%. That's an awful lot of future spending power thrown away. The UK appears to have similar problems to the USA.
Crisis report from a very credible source
I looked up an important official today, of whom most of us may not have heard. His job is to review on government spending and report to Parliament. His name is Sir John Bourn and his title is the Comptroller and Auditor General, at the National Audit Office.
Now imagine that this person was so worried about the unravelling of the country's finances that he began touring the country, warning the general public and trying to get the issue onto the agenda for the General Election. I think you'd start to worry, too.
This is exactly what's been happening in the USA, as commented on by Michael Panzner in his website. David M Walker, the Comptroller General, has been playing Cassandra for months. To see the 60 Minutes video about this man, click here.
Could someone tell me the situation here in the UK? We don't seem to have such frank and authoritative public discussion as in the US.
UPDATE
In the CBS video, David Walker notes not only the expense of US medical care, but how many people are uninsured, and the rate of medical error. If you'll also read some of my comments in the globalization thread on Cafe Hayek, you'll see I'm of the view that we should start taking better care of ourselves, rather than trust to Dr Kilpatient.
Now imagine that this person was so worried about the unravelling of the country's finances that he began touring the country, warning the general public and trying to get the issue onto the agenda for the General Election. I think you'd start to worry, too.
This is exactly what's been happening in the USA, as commented on by Michael Panzner in his website. David M Walker, the Comptroller General, has been playing Cassandra for months. To see the 60 Minutes video about this man, click here.
Could someone tell me the situation here in the UK? We don't seem to have such frank and authoritative public discussion as in the US.
UPDATE
In the CBS video, David Walker notes not only the expense of US medical care, but how many people are uninsured, and the rate of medical error. If you'll also read some of my comments in the globalization thread on Cafe Hayek, you'll see I'm of the view that we should start taking better care of ourselves, rather than trust to Dr Kilpatient.
Planning for the crash
The Contrarian Investor's Journal reveals Part 3 of its thoughts on the crash-to-come, and addresses the dilemma of whether we are to prepare for inflation, or deflation.
I think I agree with the writer's analysis that it may play out as follows:
1. The current inflation will continue until some big scare or crisis starts the run
2. Then there will be deflation, but governments will try to get out of it by printing even more money
3. Printing more money won't work, because people will have lost faith in the currency, so (if you follow the link provided by the writer) we will eventually get to a surge in the price of gold
But we don't know when stage 1 will end, and holding cash may reduce your wealth relative to other assets. So where do you invest?
Buying gold now may mean a long wait before the market comes round to your point of view (if it ever does) and as some (e.g. Peter Schiff) have pointed out, even if you're right, you may find the government forces you to give up your gold, as it did before.
Houses are overpriced, but rather than a general sell-off of real estate I could imagine a long period of house price stagnation, with people staying put if possible. You haven't lost money till you've sold, or the bank has forced you to sell. If you really have nerve, you might sell, live in a tent and buy a bargain when (if!) the housing market tanks - but would your partner agree? Christopher Fildes was suggesting (in the Spectator magazine) moving into a hotel, some years ago - but look at what's happened to London house prices since then.
Some businesses continue even during a depression, if they provide essential services. It's interesting that Warren Buffett and George Soros have both bought into railways recently.
I can't call the play - personally, I am looking to reduce debt and trim personal expenditure, increase cash savings, and otherwise invest with a weather eye on the macroeconomic situation.
I think I agree with the writer's analysis that it may play out as follows:
1. The current inflation will continue until some big scare or crisis starts the run
2. Then there will be deflation, but governments will try to get out of it by printing even more money
3. Printing more money won't work, because people will have lost faith in the currency, so (if you follow the link provided by the writer) we will eventually get to a surge in the price of gold
But we don't know when stage 1 will end, and holding cash may reduce your wealth relative to other assets. So where do you invest?
Buying gold now may mean a long wait before the market comes round to your point of view (if it ever does) and as some (e.g. Peter Schiff) have pointed out, even if you're right, you may find the government forces you to give up your gold, as it did before.
Houses are overpriced, but rather than a general sell-off of real estate I could imagine a long period of house price stagnation, with people staying put if possible. You haven't lost money till you've sold, or the bank has forced you to sell. If you really have nerve, you might sell, live in a tent and buy a bargain when (if!) the housing market tanks - but would your partner agree? Christopher Fildes was suggesting (in the Spectator magazine) moving into a hotel, some years ago - but look at what's happened to London house prices since then.
Some businesses continue even during a depression, if they provide essential services. It's interesting that Warren Buffett and George Soros have both bought into railways recently.
I can't call the play - personally, I am looking to reduce debt and trim personal expenditure, increase cash savings, and otherwise invest with a weather eye on the macroeconomic situation.
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