Looking at the current field for the 2008 US Presidential race (and trying to set aside other important issues), which candidate's economic ideas make the most sense for America? Unless the questions are asked, they won't come high on the agenda.
I have tried to use Blogger's new poll facility, which allows for more than one answer, but there's a glitch at the moment, so it's a one-shot question for now.
Your comments on the candidates, their ideas and the issues are welcomed.
Saturday, August 04, 2007
Friday, August 03, 2007
An alternative reserve currency?
As America's balance of trade continues to weaken it, and the dollar's value erodes, the question arises, what could replace the greenback as the world's trading currency?
Assuming that gold reserves are relevant to trust in the currency, it's interesting to note that Germany has almost half as much as the US, and its balance of trade is not so unhealthy. Interesting also that the German mark, although currently in a fixed exchange rate with the Euro, still has a nominally separate existence.
Julian Phillips (GoldForecaster.com) says in his 29 June article, "Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it."
Here are the four greatest world holdings of gold (June '07 World Gold Council figures):
United States 8,133.5 tonnes
Germany 3,422.5 tonnes
IMF 3,217.3 tonnes
France 2,680.6 tonnes
France has a negative balance of trade, and has reduced its gold hoard by around 11% since 2000, but nevertheless, between them the last three on the list above have gold reserves totalling 14.5% more than the US. Politically, France and Germany are the Western core of the EU. If things change radically, who knows what the new world order may look like?
Assuming that gold reserves are relevant to trust in the currency, it's interesting to note that Germany has almost half as much as the US, and its balance of trade is not so unhealthy. Interesting also that the German mark, although currently in a fixed exchange rate with the Euro, still has a nominally separate existence.
Julian Phillips (GoldForecaster.com) says in his 29 June article, "Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it."
Here are the four greatest world holdings of gold (June '07 World Gold Council figures):
United States 8,133.5 tonnes
Germany 3,422.5 tonnes
IMF 3,217.3 tonnes
France 2,680.6 tonnes
France has a negative balance of trade, and has reduced its gold hoard by around 11% since 2000, but nevertheless, between them the last three on the list above have gold reserves totalling 14.5% more than the US. Politically, France and Germany are the Western core of the EU. If things change radically, who knows what the new world order may look like?
The gold question
Here's a couple of articles by Julian D. W. Phillips at GoldForecaster.com. They're extracts and the entire text is only available if you subscribe to the site.
But because they are freebies, and have much interesting and relevant information, I reproduce the extracts here. The first is a response to the recent sale of some gold reserves by Switzerland. It appeared in BullionVault on June 29:
WITH THE Swiss central bank selling 250 tonnes of its gold reserves, the classic question has to be asked again, what is the price of gold? If we answer that it's worth a certain number of Dollars, then we have to ask the next question:
Just what is the price of a Dollar?
Is the US Dollar such a reliable a store of value that it can be used as a measure of gold's value? To ask would be to question the very foundation of the paper currency system. Can one trust the Dollar or even the international monetary system? It’s all a question of degree.
The US government itself holds mainly gold in its reserves, because it is the issuer of the world’s reserve currency. This does imply that it is completely dependent on its own currency, the Dollar, in the global economy. As the foundation of the world’s monetary system, should this currency lose the confidence of its own or other nation’s citizens, the international money system – and trade relations across the world – will be damaged severely. It is thought that this process is well under way.
The Eurozone community’s Central Bank drew off 15% of its reserves in gold from its members. This does not mean it intends to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the Euro. But the question of how to measure 15% of reserves is raised.
From the beginning of the Central Bank Gold Agreement, the European Central Bank decided to sell a fixed tonnage of 235 tonnes of the reserves it inherited from its member banks in return for paper currencies. Ostensibly, this was to keep gold's proportion in the ECB's reserves roughly fixed. The ECB is fully aware of the dangers of measuring gold in the Dollar – and in the Euro for that matter – but for the sound functioning of our paper-currency world, it is crucial that gold be subject to measurements in paper currency terms, and not the other way around.
With gold now higher from seven years ago, bullion is now around 25% of the ECB's reserves. Perhaps that's a level the Frankfurt policymakers prefer?
Germany, who gained the right to sell up to 500 tonnes of its gold under the CBGA, has not taken this option yet, citing that “gold is a useful counter to the swings in the Dollar.” Of course, a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the German Bundesbank; its reserves are there for a rainy day. They are not a pension fund scheme requiring profitable investment.
Certainly, growing a nation's reserves through investment and trading can be a secondary objective, but it should never take over first place. The reserves have to be credible in times of distress, and they have to acceptable to all trading partners.
Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it.
Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn’t make it more valuable. It’s only the buying power that counts.
So will the Dollar today, with interest added over the next decade or two, be worth more than today’s equivalent in gold in a decade or two?
The Swiss Franc has always been one of the most stable of the globe’s currencies, based upon one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a ‘safe haven’ for foreigner’s savings. So it is almost a source of safe money and financial security in itself.
The Swiss concept of a rainy day contains far less moisture than most other countries fear. Switzerland is therefore financially more secure and less dependent on its reserves than other countries, whilst also being small enough to adjust its reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in the Swiss National Bank's portfolio, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles.
It is of little account whether the Swiss sell some more gold or not. We see their latest move – announcing the sale of 250 tonnes by 2009 – as a gesture of support for the paper currency system. The SNB no doubt sees it as a gesture to protect its overall reserves portfolio.
Again a key question: Why sell gold at all – or more pertinently, why sell a little gold and retain sufficient for rainy days ahead? It is to ensure the retention of value in the overall portfolio. The SNB is not the getting rid of the gold content therein.
Clearly Switzerland – with its constantly sound position as banker to the wealthy of Europe, alongside its dependence on the banking industry – has a vested interest in a mix of global paper currencies. It retains a greater vested interest than those nations with an unsound Balance of Payments, smaller reserves, and facing greater economic risks in the global economy. Besides the United States, nations now suffering a poor balance of payments include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and many others.
The big question: will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark – or indeed the US Dollar –have internationally? Remember, forgery is one of the acceptable weapons of war. And what value did gold have? No contest.
With economic power shifting Eastwards, and the Asian nations growing away from their dependence on the US economy, it is inevitable that reserve currency dependence such as we are used to with the Dollar is now changing. It is fragmenting, with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different leading world currencies.
Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend further still.
Prime Minister Brown of the UK went the same way that Switzerland is, once again, going to go. Looking for a more profitable content to the UK’s gold and foreign exchange reserves in 1999, the UK paid a heavy price that continues to grow as the gold price rises. Did Brown act for political reasons in support of the Euro and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did then.
After all, if we measured the proceeds achieved from the last sale – and the total value plus the interest thereon – what would the shortfall be against today’s value of gold?
The mix of foreign exchange and gold reserves is essentially a gamble on the future.
The second is issued today on GoldSeek:
As the move to keeping what nations have already Protectionism is in full swing. This will inevitably disturb the currency world, who quite rightly will look to something that will protect them from the rising volatility in the currency markets alongside seeping confidence from the U.S $. This ‘something’ will include gold and gold investments. Both Protectionism and Capital Controls will enter the scene as this happens as testified to by history.
Will the States do such a thing? Of course it would. The games played to prevent China acquiring U.S. oil companies with reserves in Central Asia demonstrated this aptly, last year. U.S. patriotism will ensure this happens wherever it is obvious. The necessary legislation is in position already, albeit in a seemingly unrelated form. It is always hard for Politicians to pass unpopular or freedom-inhibiting measures, so they are best attached to causes that persuade individuals and Congress to accept such limitations, such as the recent powers over troublesome individuals in Iraq. This paves the way for full control over financial markets of all types. Here is an example of how a popular cause can be used in this way from the White House itself.
“Pursuant to the International Emergency Economic Powers Act, as amended (50 U.S.C. 1701 et seq.)(IEEPA), I hereby report that I have issued an Executive Order blocking property of persons determined to have committed, or to pose a significant risk of committing, an act or acts of violence that have the purpose or effect of threatening the peace or stability of Iraq or the Government of Iraq or undermining efforts to promote economic reconstruction and political reform in Iraq or to provide humanitarian assistance to the Iraqi people……….. In these previous Executive Orders, I ordered various measures to address the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative, and economic institutions in Iraq.
My new order takes additional steps…………by blocking the property and interests in property of persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to have committed, or to pose a significant risk of committing……… The order further authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to designate for blocking those persons determined to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for.
I delegated to the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, the authority to take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA as may be necessary to carry out the purposes of my order. - “ GEORGE W. BUSH “
Such moves seem reasonable in this case. Our reason for the inclusion of this quote is to clarify just how quick and easy it is to impose restrictions on the spending of the U.S. $ in the hands of any person, institution or nation, not acceptable to the U.S. Administration, [whether he be a foreign national or a U.S. citizen, just as it is in any other nation’s hands [Whether it be Germany, or China itself or any other nation – this is the power a politician has always].
Capital Controls
In all the historic instances of either Protectionism or Capital Controls, but in particular Capital Controls, such measures were and can be imposed overnight and became an instant unchangeable reality. Protectionism appeared to be the most reasonable and less dramatic but produces softer but similar consequences in each case. Applied globally [and nations hit, usually respond by imposing their own protectionist measures] they rupture the smooth flowing of trade and finance.
Capital Controls are more draconian than Protectionism however broadly spread, causing huge swings in currency values, so are halted as quickly as possible so as not to damage what is left of a nation’s economy. However, in the case of Britain, where a dual currency system was instituted it stayed for a couple of years. In South Africa where Exchange Controls have been present for more than 30 years now, the Capital Control component lasted for around 20 of these years. In both cases a main component of these controls covered investments of all kinds, loans and any transaction of a Capital nature. In both cases the “discount” on the value of the sales of shares for the repatriation of Capital reached 30%.
Bear in mind that as far as we can see ahead Asian and other nations’ surpluses will continue to burgeon. As they become so bloated that they pose a threat to the $ by the sheer risk of their movement from the U.S. Consequently the possibility of even a partial exit of foreign nation’s surpluses from the $ becomes almost inevitable. So, the nation will, at some point, just have to impose Capital Controls, if only over the removal of foreign nation’s surpluses from the Treasury market.
If such Capital Controls were imposed in the U.S., which would be an almost certainty at some point in the future as money floods from the country, the entire global money system would be irreparably damaged and a flight to hard assets [lead by gold, silver and other precious metals] certain. The break in confidence in currencies themselves would be savage.
Much to chew on here.
But because they are freebies, and have much interesting and relevant information, I reproduce the extracts here. The first is a response to the recent sale of some gold reserves by Switzerland. It appeared in BullionVault on June 29:
WITH THE Swiss central bank selling 250 tonnes of its gold reserves, the classic question has to be asked again, what is the price of gold? If we answer that it's worth a certain number of Dollars, then we have to ask the next question:
Just what is the price of a Dollar?
Is the US Dollar such a reliable a store of value that it can be used as a measure of gold's value? To ask would be to question the very foundation of the paper currency system. Can one trust the Dollar or even the international monetary system? It’s all a question of degree.
The US government itself holds mainly gold in its reserves, because it is the issuer of the world’s reserve currency. This does imply that it is completely dependent on its own currency, the Dollar, in the global economy. As the foundation of the world’s monetary system, should this currency lose the confidence of its own or other nation’s citizens, the international money system – and trade relations across the world – will be damaged severely. It is thought that this process is well under way.
The Eurozone community’s Central Bank drew off 15% of its reserves in gold from its members. This does not mean it intends to only hold 15% of its reserves in gold, nor does it imply that there is a rigid exchange rate between gold & the Euro. But the question of how to measure 15% of reserves is raised.
From the beginning of the Central Bank Gold Agreement, the European Central Bank decided to sell a fixed tonnage of 235 tonnes of the reserves it inherited from its member banks in return for paper currencies. Ostensibly, this was to keep gold's proportion in the ECB's reserves roughly fixed. The ECB is fully aware of the dangers of measuring gold in the Dollar – and in the Euro for that matter – but for the sound functioning of our paper-currency world, it is crucial that gold be subject to measurements in paper currency terms, and not the other way around.
With gold now higher from seven years ago, bullion is now around 25% of the ECB's reserves. Perhaps that's a level the Frankfurt policymakers prefer?
Germany, who gained the right to sell up to 500 tonnes of its gold under the CBGA, has not taken this option yet, citing that “gold is a useful counter to the swings in the Dollar.” Of course, a doubling in the price of gold since making this decision is paying off handsomely. We commend the pragmatism of the German Bundesbank; its reserves are there for a rainy day. They are not a pension fund scheme requiring profitable investment.
Certainly, growing a nation's reserves through investment and trading can be a secondary objective, but it should never take over first place. The reserves have to be credible in times of distress, and they have to acceptable to all trading partners.
Germany is aware that the times they are a-changing, and so it is keeping one eye on the future of the global economic and monetary order – and guarding against it.
Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian Lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn’t make it more valuable. It’s only the buying power that counts.
So will the Dollar today, with interest added over the next decade or two, be worth more than today’s equivalent in gold in a decade or two?
The Swiss Franc has always been one of the most stable of the globe’s currencies, based upon one of the most stable and constant of economies. In times of global war or uncertainty, this peaceful anti-war country becomes itself a ‘safe haven’ for foreigner’s savings. So it is almost a source of safe money and financial security in itself.
The Swiss concept of a rainy day contains far less moisture than most other countries fear. Switzerland is therefore financially more secure and less dependent on its reserves than other countries, whilst also being small enough to adjust its reserve holdings within the foreign exchange markets capacities at present. With the mix of gold and currencies in the Swiss National Bank's portfolio, you can be sure they have covered their backs on the risk front and stand to gain either way the cookie crumbles.
It is of little account whether the Swiss sell some more gold or not. We see their latest move – announcing the sale of 250 tonnes by 2009 – as a gesture of support for the paper currency system. The SNB no doubt sees it as a gesture to protect its overall reserves portfolio.
Again a key question: Why sell gold at all – or more pertinently, why sell a little gold and retain sufficient for rainy days ahead? It is to ensure the retention of value in the overall portfolio. The SNB is not the getting rid of the gold content therein.
Clearly Switzerland – with its constantly sound position as banker to the wealthy of Europe, alongside its dependence on the banking industry – has a vested interest in a mix of global paper currencies. It retains a greater vested interest than those nations with an unsound Balance of Payments, smaller reserves, and facing greater economic risks in the global economy. Besides the United States, nations now suffering a poor balance of payments include Australia, New Zealand, Britain, France, Italy, Greece, Spain, Czech Republic, Poland, India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa and many others.
The big question: will gold have a greater real value in times of distress than yield earning national currencies? In the last world war, what value did the Deutschmark – or indeed the US Dollar –have internationally? Remember, forgery is one of the acceptable weapons of war. And what value did gold have? No contest.
With economic power shifting Eastwards, and the Asian nations growing away from their dependence on the US economy, it is inevitable that reserve currency dependence such as we are used to with the Dollar is now changing. It is fragmenting, with other currencies coming onto the scene and with national interests clashing and exerting pressure on the different leading world currencies.
Should these pressures grow beyond a certain almost indefinable point, then paper currencies will not garner the same level of confidence as they do now, and the unquestionable international reliability of gold as a measure of value will ascend further still.
Prime Minister Brown of the UK went the same way that Switzerland is, once again, going to go. Looking for a more profitable content to the UK’s gold and foreign exchange reserves in 1999, the UK paid a heavy price that continues to grow as the gold price rises. Did Brown act for political reasons in support of the Euro and the more controllable paper currency system? We believe Switzerland may be following the same line of reasoning as Brown did then.
After all, if we measured the proceeds achieved from the last sale – and the total value plus the interest thereon – what would the shortfall be against today’s value of gold?
The mix of foreign exchange and gold reserves is essentially a gamble on the future.
The second is issued today on GoldSeek:
As the move to keeping what nations have already Protectionism is in full swing. This will inevitably disturb the currency world, who quite rightly will look to something that will protect them from the rising volatility in the currency markets alongside seeping confidence from the U.S $. This ‘something’ will include gold and gold investments. Both Protectionism and Capital Controls will enter the scene as this happens as testified to by history.
Will the States do such a thing? Of course it would. The games played to prevent China acquiring U.S. oil companies with reserves in Central Asia demonstrated this aptly, last year. U.S. patriotism will ensure this happens wherever it is obvious. The necessary legislation is in position already, albeit in a seemingly unrelated form. It is always hard for Politicians to pass unpopular or freedom-inhibiting measures, so they are best attached to causes that persuade individuals and Congress to accept such limitations, such as the recent powers over troublesome individuals in Iraq. This paves the way for full control over financial markets of all types. Here is an example of how a popular cause can be used in this way from the White House itself.
“Pursuant to the International Emergency Economic Powers Act, as amended (50 U.S.C. 1701 et seq.)(IEEPA), I hereby report that I have issued an Executive Order blocking property of persons determined to have committed, or to pose a significant risk of committing, an act or acts of violence that have the purpose or effect of threatening the peace or stability of Iraq or the Government of Iraq or undermining efforts to promote economic reconstruction and political reform in Iraq or to provide humanitarian assistance to the Iraqi people……….. In these previous Executive Orders, I ordered various measures to address the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative, and economic institutions in Iraq.
My new order takes additional steps…………by blocking the property and interests in property of persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to have committed, or to pose a significant risk of committing……… The order further authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, to designate for blocking those persons determined to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for.
I delegated to the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense, the authority to take such actions, including the promulgation of rules and regulations, and to employ all powers granted to the President by IEEPA as may be necessary to carry out the purposes of my order. - “ GEORGE W. BUSH “
Such moves seem reasonable in this case. Our reason for the inclusion of this quote is to clarify just how quick and easy it is to impose restrictions on the spending of the U.S. $ in the hands of any person, institution or nation, not acceptable to the U.S. Administration, [whether he be a foreign national or a U.S. citizen, just as it is in any other nation’s hands [Whether it be Germany, or China itself or any other nation – this is the power a politician has always].
Capital Controls
In all the historic instances of either Protectionism or Capital Controls, but in particular Capital Controls, such measures were and can be imposed overnight and became an instant unchangeable reality. Protectionism appeared to be the most reasonable and less dramatic but produces softer but similar consequences in each case. Applied globally [and nations hit, usually respond by imposing their own protectionist measures] they rupture the smooth flowing of trade and finance.
Capital Controls are more draconian than Protectionism however broadly spread, causing huge swings in currency values, so are halted as quickly as possible so as not to damage what is left of a nation’s economy. However, in the case of Britain, where a dual currency system was instituted it stayed for a couple of years. In South Africa where Exchange Controls have been present for more than 30 years now, the Capital Control component lasted for around 20 of these years. In both cases a main component of these controls covered investments of all kinds, loans and any transaction of a Capital nature. In both cases the “discount” on the value of the sales of shares for the repatriation of Capital reached 30%.
Bear in mind that as far as we can see ahead Asian and other nations’ surpluses will continue to burgeon. As they become so bloated that they pose a threat to the $ by the sheer risk of their movement from the U.S. Consequently the possibility of even a partial exit of foreign nation’s surpluses from the $ becomes almost inevitable. So, the nation will, at some point, just have to impose Capital Controls, if only over the removal of foreign nation’s surpluses from the Treasury market.
If such Capital Controls were imposed in the U.S., which would be an almost certainty at some point in the future as money floods from the country, the entire global money system would be irreparably damaged and a flight to hard assets [lead by gold, silver and other precious metals] certain. The break in confidence in currencies themselves would be savage.
Much to chew on here.
Out and in
Another quote, this time from Ludwig von Mises (via the Daily Reckoning Australia):
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Like any sane person, my preference is the first option.
I have no idea how much longer this expansion will continue, but we've asked to take our modest holdings today. Maybe we'll miss out on a further commodity boom in the next few weeks, though it seems that when the market gets skittish gold runs with the herd for a while. We plan to come back in soon enough, on a regular premium basis; but unless Monday sees a significant drop, we've done all right over the last couple of years. Thank you, Mogambo Guru and others.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Like any sane person, my preference is the first option.
I have no idea how much longer this expansion will continue, but we've asked to take our modest holdings today. Maybe we'll miss out on a further commodity boom in the next few weeks, though it seems that when the market gets skittish gold runs with the herd for a while. We plan to come back in soon enough, on a regular premium basis; but unless Monday sees a significant drop, we've done all right over the last couple of years. Thank you, Mogambo Guru and others.
Official market intervention?
Interesting quote from today's Daily Reckoning Australia:
Meanwhile, is the Plunge Protection Team (PPT) hard at work in the US? For the second day in a row, Wall Street rallied over 100 points in the last hour of trading.
You can interpret this in one of two ways. First, bulls and bears are earnestly engaged in combat for control of the market. Bears are winning the field for most of the day, with the Bulls rallying late.
The other, more sinister theory is that there exists in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile. We take no position on the matter. But it sure does look weird on a chart.
This could be connected up with the UK's surge in US Treasury security purchases over the last year. The conspiracy theory here would then be that the plane is already in trouble, and the stewardesses (I've forgotten the PC term) are walking the aisles to reassure the passengers.
Time to take gains?
Meanwhile, is the Plunge Protection Team (PPT) hard at work in the US? For the second day in a row, Wall Street rallied over 100 points in the last hour of trading.
You can interpret this in one of two ways. First, bulls and bears are earnestly engaged in combat for control of the market. Bears are winning the field for most of the day, with the Bulls rallying late.
The other, more sinister theory is that there exists in the financial market a buyer of last resort who comes in to goose the indexes at critical times, when investor confidence is especially fragile. We take no position on the matter. But it sure does look weird on a chart.
This could be connected up with the UK's surge in US Treasury security purchases over the last year. The conspiracy theory here would then be that the plane is already in trouble, and the stewardesses (I've forgotten the PC term) are walking the aisles to reassure the passengers.
Time to take gains?
Hiding Public Debt
In response to comments from "City Unslicker" (see previous post), a Business Wire article trawled via Highbeam (subscription required) reveals that in the UK, the equivalent of US $98 billion of projects have already been agreed under the Private Finance Initiative.
These are, apparently, also known as BOT (build-operate-transfer) projects. Half are to do with transport, but PFI is also used for schools and hospitals.
These are, apparently, also known as BOT (build-operate-transfer) projects. Half are to do with transport, but PFI is also used for schools and hospitals.
From: In the UK, under the Government's "Private Finance Initiative" Launched in 1992, BOT Projects with a Value of GBP 48.3 Billion Had Been Signed by March 2006.
Source: Business Wire, January 15, 2007. Via: 
The Independent (June 6) reports on a National Audit Office finding that many PFI projects are poor value. This kind of financing has been controversial for a long time, and seems like another way of burdening future generations while pulling the wool over the eyes of the present electorate. It seems to me like another sign that governments are losing control of our money and trying to pretend they're not. The pretence merely prolongs and increases the problems.
From: Half of PFI deals fail 'good value' test ; Business News IN BRIEF
Source: The Independent - London, June 6, 2007. Via:
...and now a high-profile project in London, servicing the underground railway system, has suffered financial collapse, leaving behind extra costs and political embarrassment:
From: Tube's 17bn upgrade at risk as Metronet collapses ; Mayor will need to find 50m a week by DICK MURRAY
Source: Evening Standard - London, July 18, 2007. Via:
Thursday, August 02, 2007
Poll update
Early responders seem to prefer gold and silver to foreign currencies, as stores of value. As Shylock correctly pointed out, "thrift is blessing, if men steal it not", and the fear of inflation's theft appears to be greater than the promise of interest on foreign bank accounts. The "breed of barren metal" is winning at the moment.
Please vote in the polls opposite.
Please vote in the polls opposite.
Gold stocks heading for a postwar low
I've looked at the World Gold Council's long-term series from 1948 on. Current gold stocks held by governments are at a low not seen since before 1949: WGC figures for June 2007 total 30,374 tonnes (another 9 tonnes down from last December).
In 1948, official world gold reserves weighed 30,182.6 tonnes; in 1949 they were 30,623 tonnes, more than today's holdings. From then on, the hoards increased, reaching a peak in 1966 (38,283.6 tonnes). In 1967, they dropped suddenly to 36,900.9 tonnes.
Then the slow slide, taking these periods to lose around 1,000 tonnes at each stage:
1968 - 1978 (11 years): 36,000 - 37,000 tonnes
1979 - 1992 (14 years): 35,000 - 36,000 tonnes
1993 - 1996 (4 years): 34,000 - 35,000 tonnes
1997 - 2000 (4 years): 33,000 - 34,000 tonnes
2001 - 2002 (2 years): 32,000 - 33,000 tonnes
2003 - 2004 (2 years): 31,000 - 32,000 tonnes
2005 - 2006 (2 years): 30,000 - 31,000 tonnes
You'll see that the rate of loss steepened from 1993 onwards, and accelerated further from 2001. We're now approaching the lowest point since these records began, 59 years ago.
Are gold stocks a measure of world economic progression and regression?
In 1948, official world gold reserves weighed 30,182.6 tonnes; in 1949 they were 30,623 tonnes, more than today's holdings. From then on, the hoards increased, reaching a peak in 1966 (38,283.6 tonnes). In 1967, they dropped suddenly to 36,900.9 tonnes.
Then the slow slide, taking these periods to lose around 1,000 tonnes at each stage:
1968 - 1978 (11 years): 36,000 - 37,000 tonnes
1979 - 1992 (14 years): 35,000 - 36,000 tonnes
1993 - 1996 (4 years): 34,000 - 35,000 tonnes
1997 - 2000 (4 years): 33,000 - 34,000 tonnes
2001 - 2002 (2 years): 32,000 - 33,000 tonnes
2003 - 2004 (2 years): 31,000 - 32,000 tonnes
2005 - 2006 (2 years): 30,000 - 31,000 tonnes
You'll see that the rate of loss steepened from 1993 onwards, and accelerated further from 2001. We're now approaching the lowest point since these records began, 59 years ago.
Are gold stocks a measure of world economic progression and regression?
Where's the gold gone?
Looking again at World Gold Council stats, there's something odd: a heck of a lot of gold has disappeared.
In seven years, from the first quarter of 2000 to the last quarter of 2006, the total tonnage held by countries and the IMF and World Bank has declined from 33, 375.1 to 30,383.8. That's a total reduction of nearly 9%, 2,991.3 tonnes of gold to be exact. At today's price ($21,426.87 per kilo), that's $64.09 billion gone off the radar.
Or to put it another way, at this rate of attrition, there will be no officially-held gold in the world at all in about 71 years' time, less than the lifespan of an average American.
The people must be voting in the only way that makes much difference these days, squirreling away pieces of gold. Or does anyone have a better explanation?
In seven years, from the first quarter of 2000 to the last quarter of 2006, the total tonnage held by countries and the IMF and World Bank has declined from 33, 375.1 to 30,383.8. That's a total reduction of nearly 9%, 2,991.3 tonnes of gold to be exact. At today's price ($21,426.87 per kilo), that's $64.09 billion gone off the radar.
Or to put it another way, at this rate of attrition, there will be no officially-held gold in the world at all in about 71 years' time, less than the lifespan of an average American.
The people must be voting in the only way that makes much difference these days, squirreling away pieces of gold. Or does anyone have a better explanation?
Bad news update; listen to Grandad
Peter Schiff has been quoted in various sources, e.g. the LA Times, as predicting oil at $100 a barrel.
Michael Panzner refers us to a site called Grandfather Economic Report, which like me is concerned about the impact of bad economics on families and the next generation.
Michael Panzner refers us to a site called Grandfather Economic Report, which like me is concerned about the impact of bad economics on families and the next generation.
Money and crime
The Mogambo Guru (Richard Daughty) posts a long one on The Daily Reckoning, including the text of his speech at the recent Agora Financial "Rim of Fire" conference in Vancouver. He writes and speaks like a Ranter from the English Civil War, or a Cassandra who has already dug her secret emergency escape tunnel out the back of Troy, away from the Greek lines.
But underneath the Vincent Price-like, self-parodying Gothic melodrama, I feel he's right. The answer to the question in my previous post is yes, because as money continues to be produced, of course everything will go up in nominal terms, for a time. The turning point will come when people realise that their money is going to be worth noticeably less every month, and trust in the currency will be in danger of collapse.
I also think he's right in saying that this systematic abuse suits the powerful, and their lesser friends and servants. Much of human misery is the result of people's unwillingness to do genuine work, so oarsmen will be replaced by coxes until the crew is entirely composed of steersmen and the boat stops. You do not have to be a member of the National Rifle Association to think that ever-increasing government is a problem.
Where I disagree, is the bit about looking forward to being a complacent gold bug while your neighbours suffer. Not for moral reasons, but from the practical point of view that in such a situation, your life and property would not be safe.
I remember that in the early nineties, when recession was chewing on us in the UK, one hard-working and decent small-businessman client was starting to talk, only half-jokingly, about turning to crime, just to survive. Until then, it had never occurred to me that some "stand-up guys" could be driven that way; I'd always assumed that criminals were simply a type. But I could tell he was getting serious - many a true word is spoken in jest. Fortunately for him and the rest of society, the economy improved, his house increased in value, and he sold up and emigrated to the Far East. I hope it's working out okay for him.
Back here, and in the US, I'd like to see economic reform now, not social breakdown later.
But underneath the Vincent Price-like, self-parodying Gothic melodrama, I feel he's right. The answer to the question in my previous post is yes, because as money continues to be produced, of course everything will go up in nominal terms, for a time. The turning point will come when people realise that their money is going to be worth noticeably less every month, and trust in the currency will be in danger of collapse.
I also think he's right in saying that this systematic abuse suits the powerful, and their lesser friends and servants. Much of human misery is the result of people's unwillingness to do genuine work, so oarsmen will be replaced by coxes until the crew is entirely composed of steersmen and the boat stops. You do not have to be a member of the National Rifle Association to think that ever-increasing government is a problem.
Where I disagree, is the bit about looking forward to being a complacent gold bug while your neighbours suffer. Not for moral reasons, but from the practical point of view that in such a situation, your life and property would not be safe.
I remember that in the early nineties, when recession was chewing on us in the UK, one hard-working and decent small-businessman client was starting to talk, only half-jokingly, about turning to crime, just to survive. Until then, it had never occurred to me that some "stand-up guys" could be driven that way; I'd always assumed that criminals were simply a type. But I could tell he was getting serious - many a true word is spoken in jest. Fortunately for him and the rest of society, the economy improved, his house increased in value, and he sold up and emigrated to the Far East. I hope it's working out okay for him.
Back here, and in the US, I'd like to see economic reform now, not social breakdown later.
Could the Dow AND gold BOTH go up?
In unusual circumstances, normal behaviour changes, as Richard Bookstaber recently observed. If the dollar's decline continues, and gold maintains its "real" value, a 17% dollar devaluation would mean a corresponding 20.48% increase in the price of gold, carrying the yellow metal over the $800 threshold.
A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.
It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.
The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.
Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.
There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.
Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.
Meanwhile, please place your bets in the two polls opposite!
A weaker dollar makes imports more expensive - both finished goods and raw materials - but is a stimulus to some exports. Maybe, if it didn't all happen too suddenly and scare everyone off the market, the Dow would rise.
It would also mean paying back foreigners with cheaper money, a trick played on the world by Britain's Harold Wilson in the devaluation of 19 November 1967, when the pound's foreign exchange value was cut abruptly by 14%.
The US Treasury's figures for May 2007 show there's a total of $2.18 trillion in foreign-held securities. A Brit-style 14% devaluation would lose Uncle Sam's partners about $305 billion. John Bull's share of that loss would be some $23 billion, or around £11.5 billion.
Maybe that would finally get the British news media to notice the recent huge UK support for US government debt. I can hardly wait. Be still, my beating wallet.
There's a political price to pay, but US Presidents can't serve more than two terms anyway, not since they changed the Constitution to stop another Roosevelt reign.
Harold Wilson resigned in 1974, citing ill health, but I did once hear a rumour that the IMF, which bailed us out in 1975, had made Wilson's resignation a precondition of the loan. In these document-shredding and email-deleting times, a paranoid would say you know it's the truth when it's officially denied.
Meanwhile, please place your bets in the two polls opposite!
Good advice
An amusing e-letter from Investment U today. Its strapline is "What no books, no schools, no brokers will teach you".
With good reason, if the content is anything to go by - it seems that all you have to do for a comfortable retirement is invest in stocks that go up like rockets. And it gets better: the best way (it seems) to choose those stocks is to look at how they've done in the past.
The figures are great, too. To create $100k per year in 10 years' time, they say you'll need a fund of $2 million. Apparently there's no such thing as inflation. Because if there is, and it rolls on at a sedate 2.5% compound per year, you'll need 28% more in 10 years' time.
In actuality, assuming you want your retirement income to be inflation-proofed, your fund will have to be not 20 times the planned income you want, but closer to 40. Partly it's because we're living longer (and retiring earlier), but mostly it's because the life insurance companies have cottoned on to the fact that our governments are (a) losing control of our finances and (b) lying heroically to us about it.
So maybe we're aiming at a fund of $5 million.
The rate of return shown is wild - a mere 29.6% per year. One would have to be "in denial" to postulate a steady 30% a year in America's train-wreck economy, when the great Warren Buffett has been sitting on billions in cash for years and has recently started to hedge against the dollar. Doug Casey has something that he says is "going to the moon", but that's gold - a speculation if ever there was one.
Here in the heavily-regulated UK, the maximum pension growth that can legally be illustrated is 9%, but that's including fund management charges. "Stakeholder" pensions have a maximum annual charge of 1%. So let's assume an (optimistic) annual growth rate of 8%.
Using our revised end-point, our legally-restricted growth rate and working backwards, as in the example provided, we need to start with a lump sum of $2,315,967. Not $194,400.
The article does make some serious points:
How did it do that? Much depends on the type of fund you're in - a fund whose name includes the word "recovery" or "opportunity" is usually one that concentrates on smaller companies, the shy, creeping things that are the first to emerge from the undergrowth after the storm. These are also damaged more easily than the big beasts by economic downturns. So the real lesson is, be in the right type of asset at the right time. Getting into a recovery fund in '02-'04 was a good choice, then.
And how about highlighted stocks? "Starbucks, Franklin Resources, General Dynamics, Amazon, Citigroup… These companies have posted average returns in excess of 30% a year, for more than a decade."
...I'm now reading Benjamin Graham, the man who taught Warren Buffett, and a note to the latest edition points out that in 2000 and 2001, Amazon. com lost 85.8%. If you'd been one of the victims and had to re-start with 14.2 cents for every dollar you had originally, you'd have to post a 704% gain just to get back where you started (and even then, you'd still be behind inflation, and interest earned safely on deposits). The first principle of investing is not to lose your money.
If you're going to risk a fortune on individual stocks, maybe you should blow your wad at the track instead - it'll be more fun. A nice day out, a bit of champagne, and you can sell your binoculars for the fare home.
There's an adage in law: "Free advice is worth what you pay for it". If you want advice, seek out a broker and pay for it. The poor sap is then liable for all your losses, while any gains are down to your wisdom in picking him.
Seriously, though, read financial newsletters with caution, and read the disclaimers first.
With good reason, if the content is anything to go by - it seems that all you have to do for a comfortable retirement is invest in stocks that go up like rockets. And it gets better: the best way (it seems) to choose those stocks is to look at how they've done in the past.
The figures are great, too. To create $100k per year in 10 years' time, they say you'll need a fund of $2 million. Apparently there's no such thing as inflation. Because if there is, and it rolls on at a sedate 2.5% compound per year, you'll need 28% more in 10 years' time.
In actuality, assuming you want your retirement income to be inflation-proofed, your fund will have to be not 20 times the planned income you want, but closer to 40. Partly it's because we're living longer (and retiring earlier), but mostly it's because the life insurance companies have cottoned on to the fact that our governments are (a) losing control of our finances and (b) lying heroically to us about it.
So maybe we're aiming at a fund of $5 million.
The rate of return shown is wild - a mere 29.6% per year. One would have to be "in denial" to postulate a steady 30% a year in America's train-wreck economy, when the great Warren Buffett has been sitting on billions in cash for years and has recently started to hedge against the dollar. Doug Casey has something that he says is "going to the moon", but that's gold - a speculation if ever there was one.
Here in the heavily-regulated UK, the maximum pension growth that can legally be illustrated is 9%, but that's including fund management charges. "Stakeholder" pensions have a maximum annual charge of 1%. So let's assume an (optimistic) annual growth rate of 8%.
Using our revised end-point, our legally-restricted growth rate and working backwards, as in the example provided, we need to start with a lump sum of $2,315,967. Not $194,400.
The article does make some serious points:
- baby boomers are facing a retirement crisis (Richard Bookstaber mentioned that in his interview with Jim Puplava, and thinks it'll be one of the drag factors on investments for many years to come)
- longer-term investments can afford to be riskier than short-term investments
- in the long run, we normally expect equities to outperform bonds
- investing earlier reduces the required rate of return to achieve your end-point target, so start early
How did it do that? Much depends on the type of fund you're in - a fund whose name includes the word "recovery" or "opportunity" is usually one that concentrates on smaller companies, the shy, creeping things that are the first to emerge from the undergrowth after the storm. These are also damaged more easily than the big beasts by economic downturns. So the real lesson is, be in the right type of asset at the right time. Getting into a recovery fund in '02-'04 was a good choice, then.
And how about highlighted stocks? "Starbucks, Franklin Resources, General Dynamics, Amazon, Citigroup… These companies have posted average returns in excess of 30% a year, for more than a decade."
...I'm now reading Benjamin Graham, the man who taught Warren Buffett, and a note to the latest edition points out that in 2000 and 2001, Amazon. com lost 85.8%. If you'd been one of the victims and had to re-start with 14.2 cents for every dollar you had originally, you'd have to post a 704% gain just to get back where you started (and even then, you'd still be behind inflation, and interest earned safely on deposits). The first principle of investing is not to lose your money.
If you're going to risk a fortune on individual stocks, maybe you should blow your wad at the track instead - it'll be more fun. A nice day out, a bit of champagne, and you can sell your binoculars for the fare home.
There's an adage in law: "Free advice is worth what you pay for it". If you want advice, seek out a broker and pay for it. The poor sap is then liable for all your losses, while any gains are down to your wisdom in picking him.
Seriously, though, read financial newsletters with caution, and read the disclaimers first.
Wednesday, August 01, 2007
Poll: how would you hedge against a dollar fall?
...and for extra marks (especially if you're putting your money on it!), let's see what currency or precious metal looks like the best store of the value of your dollars.
Warren Buffett recently revealed he's hedged against the greenback, and gold and silver bugs are contesting the merits of their respective hoards. If your preference is for currency but you wonder about the backing, remember that Germany has the world's second-largest stock of gold, whereas Switzerland and the UK have been persuaded to get rid of about half their gold holdings since 2000.
Meanwhile, Japan and China are both struggling to hold their currencies down, to protect their export markets. Russia seems keen on claiming half the Polar region and is already able to use its energy supplies as an economic weapon. India is developing fast, and may turn out to be an interesting rival for China.
Here's our starting point today, using the figures from the Currency Converter widget on the sidebar. $1,000 will currently buy:
729.74 Euros
1,427.25 German Marks (there's a glitch in the currency converter, so I've done this in two stages)
119,080 Japanese Yen
7,581.23 Chinese Yuan or Renminbi
492.40 British Pounds
40,383 Indian Rupees
25,548.20 Russian Roubles
1,203.70 Swiss Francs
An ounce of gold costs $665.03
An ounce of silver costs $12.92
Where would you hold your savings until the New Year?
Warren Buffett recently revealed he's hedged against the greenback, and gold and silver bugs are contesting the merits of their respective hoards. If your preference is for currency but you wonder about the backing, remember that Germany has the world's second-largest stock of gold, whereas Switzerland and the UK have been persuaded to get rid of about half their gold holdings since 2000.
Meanwhile, Japan and China are both struggling to hold their currencies down, to protect their export markets. Russia seems keen on claiming half the Polar region and is already able to use its energy supplies as an economic weapon. India is developing fast, and may turn out to be an interesting rival for China.
Here's our starting point today, using the figures from the Currency Converter widget on the sidebar. $1,000 will currently buy:
729.74 Euros
1,427.25 German Marks (there's a glitch in the currency converter, so I've done this in two stages)
119,080 Japanese Yen
7,581.23 Chinese Yuan or Renminbi
492.40 British Pounds
40,383 Indian Rupees
25,548.20 Russian Roubles
1,203.70 Swiss Francs
An ounce of gold costs $665.03
An ounce of silver costs $12.92
Where would you hold your savings until the New Year?
Tuesday, July 31, 2007
Jim Puplava's interview with Richard Bookstaber
Richard Bookstaber's interview on Financial Sense (21 July - audio file) was interesting. He discussed the derivatives market (which is the subject of his book, "A demon of our own design"), in which he has been intimately involved. It's a long interview and I'll just pick out one or two points.
Derivatives are financial bets. Portfolio managers use them as a kind of insurance, which then means that they can safely (they think!) increase their exposure to equities.
But derivatives are complex, and can have unexpected effects. For example, in October 1987 there was a sizeable drop in the stockmarket, and as the prices went down, automated trading programs noted the crossing of pre-set thresholds and this triggered more selling, which took the market below other programmed thresholds, and so on.
Also, to work properly, the derivatives market needs to be "liquid and efficient". Well, when the major turmoil was happening as just described, people held off buying back in - the scale had scared them. So they weren't doing what the system expected them to do, and this change in behaviour meant that there was less support at certain price levels than the system assumed.
Another way in which the system became inefficient at greatest need, was that certain classes of asset behaved in an untypical fashion. For example, normally bonds move together, and in the opposite direction to equities; but in 1987, when it looked like major disaster, poorer-quality bonds fell as though they were equities (because of fear of their defaulting), whereas Treasury bonds (backed by the government) rose.
I have heard that in times of stress, people make unusual mistakes, such as confusing left and right, and it seems that the derivatives market has similar potential in extreme situations. You can't tell how people will react under great pressure.
Then there's "black swan" events that haven't been factored-in, but can still happen, such as Russia's decision to default on its loans, which very nearly did for Long Term Credit Management and much more besides.
On top of that, there's the question of leverage, i.e. borrowing that greatly increases the risk and returns of an investment. The current debacle re mortgages packaged as interest-yielding investments stems from the fact that not only are the packages leveraged by a factor of 10 or 20 to 1, but the hedge funds that bought them might themselves be leveraged by a factor of 5, so magnifying the basic risk of sub-prime lending by a multiple of 50 or 100. So when things go wrong, they really go wrong. As we now see.
There is also the question of inadequate information about derivatives. The method of accounting was originally developed to track rolling stock for railways, not for super-fast, computer-based trading. The data available may not be what you need to assess the situation properly, and will almost certainly be out of date in the moment-to-moment market changes. Bookstaber thinks we need to use modern technologies to get the right data out of the system fast enough to make sensible decisions.
And in assessing risk, people's memories are too short. Fund managers may be too young to remember really bad times like 1989-91, so run the risk of complacency.
Speaking of age, there's a demographic risk, too: the baby-boomers are coming to the point where they'll want money out for retirement, and maybe the market hasn't fully realised this change in the financial climate. It could be a "slow burn" crisis like the one that hit Japan, lasting maybe 15 or 20 years.
Now, many of these periods of turbulence probably don't impact on the individual investor, says Bookstaber; the private investor should buy and hold, not panic.
However, a systemic risk that could have really serious consequences is the possibility of a major failure in the mortgage and credit markets, which could then roll on to the banking sector.
Yet again, we're back to the banks, credit and the money supply. How ever did we come to think of bankers as responsible people!
Anyhow, listen to the audio file and see if I've represented it fairly. And buy the book if you think it's relevant to your line of work or investment.
Derivatives are financial bets. Portfolio managers use them as a kind of insurance, which then means that they can safely (they think!) increase their exposure to equities.
But derivatives are complex, and can have unexpected effects. For example, in October 1987 there was a sizeable drop in the stockmarket, and as the prices went down, automated trading programs noted the crossing of pre-set thresholds and this triggered more selling, which took the market below other programmed thresholds, and so on.
Also, to work properly, the derivatives market needs to be "liquid and efficient". Well, when the major turmoil was happening as just described, people held off buying back in - the scale had scared them. So they weren't doing what the system expected them to do, and this change in behaviour meant that there was less support at certain price levels than the system assumed.
Another way in which the system became inefficient at greatest need, was that certain classes of asset behaved in an untypical fashion. For example, normally bonds move together, and in the opposite direction to equities; but in 1987, when it looked like major disaster, poorer-quality bonds fell as though they were equities (because of fear of their defaulting), whereas Treasury bonds (backed by the government) rose.
I have heard that in times of stress, people make unusual mistakes, such as confusing left and right, and it seems that the derivatives market has similar potential in extreme situations. You can't tell how people will react under great pressure.
Then there's "black swan" events that haven't been factored-in, but can still happen, such as Russia's decision to default on its loans, which very nearly did for Long Term Credit Management and much more besides.
On top of that, there's the question of leverage, i.e. borrowing that greatly increases the risk and returns of an investment. The current debacle re mortgages packaged as interest-yielding investments stems from the fact that not only are the packages leveraged by a factor of 10 or 20 to 1, but the hedge funds that bought them might themselves be leveraged by a factor of 5, so magnifying the basic risk of sub-prime lending by a multiple of 50 or 100. So when things go wrong, they really go wrong. As we now see.
There is also the question of inadequate information about derivatives. The method of accounting was originally developed to track rolling stock for railways, not for super-fast, computer-based trading. The data available may not be what you need to assess the situation properly, and will almost certainly be out of date in the moment-to-moment market changes. Bookstaber thinks we need to use modern technologies to get the right data out of the system fast enough to make sensible decisions.
And in assessing risk, people's memories are too short. Fund managers may be too young to remember really bad times like 1989-91, so run the risk of complacency.
Speaking of age, there's a demographic risk, too: the baby-boomers are coming to the point where they'll want money out for retirement, and maybe the market hasn't fully realised this change in the financial climate. It could be a "slow burn" crisis like the one that hit Japan, lasting maybe 15 or 20 years.
Now, many of these periods of turbulence probably don't impact on the individual investor, says Bookstaber; the private investor should buy and hold, not panic.
However, a systemic risk that could have really serious consequences is the possibility of a major failure in the mortgage and credit markets, which could then roll on to the banking sector.
Yet again, we're back to the banks, credit and the money supply. How ever did we come to think of bankers as responsible people!
Anyhow, listen to the audio file and see if I've represented it fairly. And buy the book if you think it's relevant to your line of work or investment.
Dow survey update
One more day and we'll stop - thanks for your responses. We've seen a little bit of a rally in the last 36 hours and so far (12.35 New York time) the Dow is down 2.55% from its 25 July close. Pessimism is also down a bit - less than two-thirds expect the Dow to be below 13,000 at year end.
Any more votes?
Any more votes?
Dow value afterthought
...and if we remember the heady close of December 1999, before tech stocks burst, the Dow was then at 11,497.12. We've had 7 years and 7 months elapse since, with an average growth of just under 2% compound per year. Adjusted for inflation (or available bank deposit interest rates), we've actually fallen behind; or, from a different point of view, we're not so wildly overvalued.
Actually, what I suspect has happened is that the balloon has a tear in it, and has been kept from falling to earth by massive amounts of extra monetary hot air; but "in real terms" we're still stuck somewhere in 1999. In short, we haven't yet faced up to the problems of our economy.
To use a different analogy, we're still drinking, in order to put off the hangover. But maybe there's lots more "booze" left (i.e. the Fed's printing press, aped by the Bank of England and others) and our "livers" (the real economy of production and jobs) will hold out a while longer.
It's not a strategy I'd recommend. I wonder what you think.
Actually, what I suspect has happened is that the balloon has a tear in it, and has been kept from falling to earth by massive amounts of extra monetary hot air; but "in real terms" we're still stuck somewhere in 1999. In short, we haven't yet faced up to the problems of our economy.
To use a different analogy, we're still drinking, in order to put off the hangover. But maybe there's lots more "booze" left (i.e. the Fed's printing press, aped by the Bank of England and others) and our "livers" (the real economy of production and jobs) will hold out a while longer.
It's not a strategy I'd recommend. I wonder what you think.
What should the Dow Jones be worth?
The Dow closed yesterday at 13,358.31; ten years before, it stood at 8,254.89. That's a compound annual growth rate of 4.93% (less, when you adjust for inflation).
Or if you take it from the big, big scare of Monday 19 October 1987 (close: 1,738.74, down 508 points from the previous Friday!), it's an average 10.88% compound per year. Does that seem too hot a pace? Unsustainable? But remember that we're starting that run from a real panic. If we took it from the happy close of the Friday before, the average becomes 9.53%.
Still too hot? If nearly 20 years isn't enough to establish a sensible long-term trend, let's look at an even longer period: 30 years from 30 July 1977. Then till now, the Dow's capital growth averages out at 9.45% compound per year. The market's folly can outlast your wisdom.
"Two views make a market", and that's it. Mr Market is making his wares available to you - will you buy at today's prices? (I wouldn't - but obviously others will, or the market would be lower.)
You can play with the figures yourself, on this fine page from Yahoo! Finance.
And please click on the poll opposite, to give your prediction for the year's end.
Or if you take it from the big, big scare of Monday 19 October 1987 (close: 1,738.74, down 508 points from the previous Friday!), it's an average 10.88% compound per year. Does that seem too hot a pace? Unsustainable? But remember that we're starting that run from a real panic. If we took it from the happy close of the Friday before, the average becomes 9.53%.
Still too hot? If nearly 20 years isn't enough to establish a sensible long-term trend, let's look at an even longer period: 30 years from 30 July 1977. Then till now, the Dow's capital growth averages out at 9.45% compound per year. The market's folly can outlast your wisdom.
"Two views make a market", and that's it. Mr Market is making his wares available to you - will you buy at today's prices? (I wouldn't - but obviously others will, or the market would be lower.)
You can play with the figures yourself, on this fine page from Yahoo! Finance.
And please click on the poll opposite, to give your prediction for the year's end.
Have I got my sums wrong - or right?
Bill Bonner, in The Daily Reckoning Australia yesterday, quotes Paul van Eeden as saying that gold has kept pace almost perfectly with inflation since the 1920s.
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
My post of 29 July did some figures with US gold stocks, the price of gold and the money supply, and came to an arresting conclusion. A kilo of gold costs x dollars, yet at that price, all US gold could be bought for 1/66th of all US dollars. There'd be a huge pile of spare paper money left over, completely unrelated to gold.
From one point of view, the current gold price is not surprising, if gold is merely one tiny part of the overall economy governed by the dollar system. Yet the ratio in the previous paragraph - 1:66, which is the same as 1.5 cents to 1 dollar - is almost exactly what The Mogambo Guru (Richard Daughty) said is the difference in purchasing power between one modern dollar and one 1913 dollar. According to him, the modern dollar is worth two 1913 cents.
Perhaps Doug Casey is right: if trust in the dollar collapses, gold could be "going to the moon".
We need bad times
iTulip has just issued its latest email newsletter - I do suggest you subscribe, especially since it's free.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
Their thesis this time is that the Dow will NOT continue to rise much, because the private investor isn't going to come in and be fleeced again. It's not just "once bitten, twice shy" but the fact that money's getting tighter (energy and food costs rising, etc) and the value of assets (especially houses) is in question. On the other hand, iTulip are not doomsters, either.
My view, for what it's worth, is that we have to wait for something unexpected to trigger a real correction, but the sooner it comes, the better. While our governments put off the evil day with borrowing and monetary inflation, our productive capacity is being exported. One firm I know is having an (atypical for here) bumper year; but whereas once their business used to be moving other people's machinery from one site to another, now they're shipping it abroad. How do you make a living if you sell your tools? Even administrators in bankruptcy can't force you to do that. But the economic folly of our rulers can.
In the British Midlands where I live, I've heard engineers complain (like Lewis Carroll's Oysters) about industrial decline ever since I attended a British Association for the Advancement of Science conference in 1977, but our leaders have plodded on, chatting comfortably to each other like the Walrus and the Carpenter, while the Oysters' numbers dwindled. I drive past new man-about-town city centre flats where only 17 years ago I was talking to a self-employed woman turning metal parts. The mighty Longbridge car plant is a broken shell, and the surrounding area is turning over to drugs, alcohol, crime, teenage gangs, domestic abuse and all the rest.
The system continues apparently unaffected, but I think it's a fool's paradise. Only last night, I watched a TV programme about India. The city of Bangalore (home to tech giant Infosys) is modernising and booming; its university aims to attract the world's best. When industry and learning have gone East, what exactly will the West have that anyone could want? We'd better start making it again now, and at a price that our trading partners are willing to pay. Or at least, make sure we have what we need to produce what we consume, as locally as possible.
Yes, currency devaluation means inflation and recession, but better that than a full-on, generation-long depression. We've got to take the nasty-tasting medicine while it can still make a difference. But who will force us to do it?
The US Presidential elections are still a year away, and the new President won't take over until January 2009. In the UK, we have a Prime Minister we didn't elect, who could choose to defer the next General Election right up to 2010. If we're going to get the right people to deal with the heavily-disguised crisis we're in today, the economic issues will have to break out into the open within the next 12 months.
In the meantime, investors must prepare for turbulence.
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