Gold: speculative investment vs store of value

White Star Line's "Olympic", launched 20th October 1910 (big picture)

Yet again, the Dow drops (about 2%), and gold limps after the pack (down about 0.3%). Until there's a major financial disaster, or it is returned to currency status, gold will not be able to make up its mind whether it's a quality investment or an emergency provision - a liner or a lifeboat.

Money supply, shares and property

Here's a 22 May article by Cliff d'Arcy in The Motley Fool, comparing house prices and the FTSE 100. From mid-1984 to December last year, the FTSE has outperformed by 7.4% compound per year versus 7.2% for houses. But as he points out, houses are "geared" by mortgages, whereas most of us don't borrow to buy shares.

From September 1984 to the end of 2006, the money supply as measured by M4 showed an annualised average increase of 11.64%. Looking at the growth of M4 as against that of two classes of asset, I wonder where the difference went? Do interest charges roughly account for this?

The money supply, the stockmarket, gold and land

Here's part of an interesting interview with a hedge fund manager in 2003, reproduced in October 2005:

An old interview with Hugh Hendry (2003)

Hendry: What's happening today happened 300 years ago in the French economy when John Law, another Scotsman, was allowed to launch the first government-sanctioned bank, which replaced coins with paper money. Commerce boomed. Politicians recognized this correlation between issuing more money and people liking you. They issued more and more money, but it was a false promise. Nothing intrinsically was being added to the economy except promises, which could never be redeemed. Selling by speculators caused the stock market to correct. The correction encouraged the authorities to print more funny money. Ultimately, the continued pumping of liquidity destroyed the economy, the stock market and France's currency.


More recently, the U.S. came off the gold standard in 1971 and the Dow Jones Industrial Average bottomed in 1974. Over the next 25 years, the Dow goes up 20-fold because every period of economic anxiety brought forward an orthodoxy of generous liquidity. Money has to go somewhere. It seeks to perpetuate itself by going into a rising asset class. This time, it is financial assets. Just like the Mississippi stock scheme in 1720 and the South Sea Bubble in London at the same time.

Hugh Hendry set up Eclectica Asset Management in 2005 and like others I've mentioned before, seems to have discovered an enthusiasm for agriculture; Eclectica's new Agriculture Fund is detailed here.

Elections, inflation and the stockmarket

Here's an interesting 2005 piece from British home lender / banker HBOS/Halifax, correlating periods of government with inflation and share prices. The conclusion:

Martin Ellis, chief economist at Halifax, said:

"Although wider economic conditions clearly play a part in the rise and fall of the stock market, election campaigns do appear to have a marked impact on share prices. The three month period preceding any general election traditionally sees large fluctuations in share prices as the market tries to understand the likely outcome of the election."

I haven't yet tried to relate increases in the money supply to General Elections, but it might be an interesting avenue to explore.

Buy or sell?

FT Alphaville (20 August) summarises an interim (between scheduled GBD newsletters) report by Marc Faber. The gist is that we should be looking for the right moments to sell, not to buy.

Peter Schiff: recession "necessary and inevitable"

Writing in The Market Oracle on Friday, Peter Schiff thinks it's time we took our medicine.

Economic warfare?

Gerard Jackson, in The Market Oracle today, rehearses the economic explanation for what's going on between America and China. He lays the blame on the expansion of credit in the US monetary system, rather than sinister Chinese intentions.

That's not to say that some in China don't see the weakening of America - and the West generally - as a bonus. National pride can be underestimated.

But the real question is whether our democracies can take really tough decisions now, in order to prevent a much greater disaster later.

Enduring Power of Attorney: "October the first is too late"

...to quote the title of a Fred Hoyle novel.

There are big difficulties in handling the affairs of someone who has become mentally incapacited. Even a spouse is not automatically assumed to have the right to sell or otherwise manage property belonging to the affected person - or jointly owned with him/her.

This is where an Enduring Power of Attorney comes in. It gives advance permission for someone to look after your investments and other possessions, if you can't. (This permission can be altered or withdrawn before that event.)

Why not simply use an ordinary power of attorney? Because this power is given on the legal understanding that you can step in and reassume control whenever you wish. Obviously, if you're in a coma, you can't, so normal power of attorney ceases to have effect in such circumstances.

Does it matter? Yes: as well as physical, there can be financial abuse of the mentally disabled and other legal minors, which is why these matters come under the Court of Protection (within the Chancery division - remember Dickens' "Bleak House", which exposed legal abuses of protected persons' estates?)

Is this a rare eventuality that you can afford to ignore? No. Here's some statistics:

Although there are no precise statistics about the number of people who may lack capacity in the country, the Mental Capacity Act Implementation Programme has estimated a range of 1 – 2 million, including some of the following:

• Over 700,000 people with dementia (rising to 840,000 by 2010)
• 145,000 people with severe learning disability and 1.2 million with mild to moderate learning disability
• 1% of the population with schizophrenia, 1% with bipolar disorder and 5% with serious or clinical depression at some stage in their lives
• 120,000 people living with the long-term effects of a severe head injury

Source: MHCA Briefing Paper, 2005

At the moment, it's a short and fairly simple form, that only needs the names of your potential attorney/s and a couple of signatures. So it's easy -often part of a legal services package offered by professional will writers - and therefore cheap. 22,508 EPAs were registered with the Public Guardianship Office last year (source: PGO Annual Report 2006-2007). Should the need arise, the named responsible person/s take the form and have it registered with the PGO (see Alzheimer's Society information on EPAs and their successors).

But from October 1st, it will be replaced by "Lasting Power of Attorney". This will be over 20 pages long and much more expensive to arrange - one legal firm estimates up to £600 instead of their current fee of £75 (see Daily Mail article, 22 August).

So it looks like a good idea to do it now.

By the way...

There will be two types of Lasting Power of Attorney. The first is the new and more expensive version of an Enduring Power of Attorney; the second is a form of what is known as an Advance Directive, or "Living Will".

An Advance Directive gives permission to others to make decisions about your healthcare if you're disabled - the life-support machine question, for example. There are serious ethical and religious issues about this, and I'm a bit suspicious of these two quite different legal documents being given the same name from October - it's as though the government is keen to get you to sign away your right to life (e.g. perhaps for budgetary reasons).

And isn't is a little revealing that a Court (of Protection) has been replaced by an Office (of the Public Guardian)? Perhaps part of the airbrushing of the Monarchy out of our Constitution - more revolution by stealth.

Wells Fargo in deep water

Wells Fargo Stage Coach by Sven Ohrvel Carlson

It seems that, encouraged by new US accounting rules, some companies are resorting to optimistic subjective estimates of their own value, in order to reassure their investors. Jonathan Weil reported on this in Bloomberg yesterday.

Let's hope the wheels don't come off! And thanks to Michael Panzner for spotting the article.

Is your money safe in the bank?

Mike Shedlock, in The Daily Reckoning Australia today, raises a point we should all consider - how far your cash deposits are protected by law. This is NOT an academic question - a hard-working and thrifty truck driver has recently lost over $300,000 of his life savings in the Metropolitan Savings Bank in Lawrenceville.

For British savers, here is the current position:

"Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) was created and put into operation in December 2001. It was brought in to replace the Building Societies Investor Protection Scheme, Deposit Protection Scheme and several other schemes previously in place. The FSCS was introduced to protect customers of firms that go into liquidation or out of business.

The scheme is activated when an authorised firm goes out of business or the Financial Services Authority (FSA) considers that an authorised firm is unable or unlikely to be able to repay their customers.

Most customers are partially protected under this scheme and are entitled to the following amount of compensation:

100% of the first £2,000
90% of the next £33,000

The maximum amount of compensation each individual can receive is £31,700.

The compensation limit applies to individuals and covers the total amount of all their deposits held with that firm. Each individual in a joint account is eligible to receive compensation up to the maximum limit in respect of his or her share of the deposit. The FSCS assumes the account is equal and splits it 50:50 unless evidence shows otherwise.”

Source: http://www.moneysupermarket.com/savings/GuideToSavings.asp (accessed 17 Aug 07)

From this you can see that for your savings lodged with any one deposit taker, any excess over £35,000 for a single account holder, or £70,000 for joint (50:50) holders, is not protected.

Some may say, "It can't happen here", but it did in the Isle of Man in 1982, where the Savings & Investment Bank collapsed, losing £42 million of depositors' money. International bank BCCI collapsed in 1991 with debts of £10 billion, hitting 6,500 British depositors - and the legal case against the bank ultimately collapsed as well.

Savings schemes are not safe, either. About £41 million was lost in the Farepak Christmas hamper collapse last year.

The strategy is to know your rights, and to diversify. As Antonio says in The Merchant of Venice:

My ventures are not in one bottom [i.e. ship's keel] trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year:
Therefore my merchandise makes me not sad.

Invisible earnings may disappear

The UK's trading balance has been substantially assisted by the money flowing through the City of London's financial community. Martin Hutchinson's 20 August essay in PrudentBear explores the possibility that the City will eventually lose its eminence, and the loss of revenue will have to be replaced by higher domestic taxation.

Twang money revisited

John Rubino's 19 August article in GoldSeek supports my contention that since credit works like money, a credit contraction destroys money, and this undermines our ability to make sound financial assessments:

"Prudent Bear’s Doug Noland has for years been pointing out that one of the drivers of the credit bubble has been the ever-broadening definition of money. As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money."

Now that lenders are pulling in their horns, central banks are creating more cash to replace the "loss", and the result must be a dilution of value in the currency.

UK debts mounting

And Rob Mackrill in today's email edition of The Daily Reckoning reveals that Britain has problems that, relative to the size of our economy, stand comparison with America's:

UK consumer debt now weighs in at £1,345bn - a sum that exceeds our entire output of goods and services, according to accountants Grant Thornton in a note this morning.

Official receivers and trustees in bankruptcy generally seem to do rather well out of this kind of mess - perhaps rather too well.

I had some clients who wound up their firm but pulled out all the stops to collect all debts and pay creditors as much as possible themselves; both clients and creditors benefited far, far more than if they had yielded to the usual arrangements - which I saw in other cases. Ordinary people are shaved going into debt and skinned coming out.

Safety first

Dan Denning comments on the recent rush for cash and safe bonds in The Daily Reckoning Australia today. He also repeats Marc Faber's point about an "earnings bubble" that skews p/e ratios:

Be careful about using low P/E ratios as a buying indicator. We read in this morning's paper that the average P/E on the ASX 200 is the lowest its been in 12 months. That doesn't automatically mean stocks are "good value." In fact, in the past, low P/E ratios have been a sign of the market top. Why?

At the height of an economic cycle, corporate earnings are high. When earnings rise faster than share prices, the P/E ratio will look low, flashing a "buy" signal. But this may be just the time that earnings themselves have peaked. That's definitely not the time to buy a stock.

And even commodity shares have to be chosen with care, when you factor-in rising costs.

Twang money

Richard Daughty (aka The Mogambo Guru) writes in The Daily Reckoning (21 August):

The big, big problem with the whole subprime/CDO/Armageddon market thing is that while the values on these assets can go down, the debts incurred to buy the assets don't.

Quite so. And since much of our money has been created ex nihilo by banks, then presumably it can also be reduced quickly by a credit crunch, so we have potential volatility in the money supply as in other things. Assessing things in money terms now seems to be like going to a tailor who makes all his measurements with an elastic band.

David Tice bearish on commodities

Prudent Bear's boss is cautious about natural resources - though still in the market for energy and precious metals (see page 2) - Institutional Investor article dated 14 August.

Marc Faber profile

Marc Faber at home in Chiangmai, Thailand (from Asia Inc profile - see below)

Marc Faber is a very highly respected financial analyst and commentator. Listed below are some items by him, or about him, that may help you to get a sense of his character, outlook and opinions. I shall update this page from time to time.

SELECTED ARTICLES & INTERVIEWS

Article by Marc Faber in Whiskey & Gunpowder 21 December 2006: "Will the US become a banana republic?"

Round-table discussion on Jim Puplava's Financial Sense Newshour 9 February 2003

BIOGRAPHIES AND PROFILES

Profile of Marc Faber by Graham Lees in Asia Inc Sept/Oct 2006

Profile of Marc Faber by Jean Louis Richard in Le Temps (Switzerland) 20 May 2006

Interview and profile in BusinessWorld (India) 13 October 2003

Biographical entry from Marc Faber's GloomBoomDoom website

Wikipedia biographical entry

REFERENCE SECTION

Home

CARRY TRADE, THE

May 22, 2007: Professor Antal E. Fekete (exchange of letters in The Market Oracle)

CHARITIES

September 30, 2007: World Children's Fund - questions about value for money

CHINA

Sept 25, 2007: China's growing class of advertising and media professionals
Sept 23, 2007: China may use its trade surplus for political/military advantage
Aug 09, 2007: Growing inequality of income in China
Aug 06, 2007: China's near-$1 trillion ownership of US assets
July 18, 2007: James Kynge (my review of his book, "China Shakes The World")
June 19, 2007: James Kynge (article in The Alchemist, November 2004)
May 23, 2007: Intellectual property rights in China
May 21, 2007: China's sovereign wealth fund

CURRENCIES / MONETARY INFLATION

Aug 31, 2007: Maastricht provisions for the European Central Bank, post-EMU
Aug 16, 2007: The weakness of the British pound, in gold terms
Aug 15, 2007: The German DM stronger than the dollar, in gold terms
Aug 14, 2007: The weakness of the dollar compared to gold
Aug 03, 2007: The Euro as a possible international reserve currency
July 31, 2007: Mike Hewitt (article on global money supply in The Market Oracle)
May 28, 2007: Richard Duncan (interview on BusinessInAsia.com)
May 11, 2007: Peter Schiff (my review of his book, "Crash Proof")
May 10, 2007: Michael Panzner (my review of his book, "Financial Armageddon")

DEPOSITOR PROTECTION

Aug 30, 2007: Federal Deposit Insurance Corporation (USA)
Aug 23, 2007: Financial Services Compensation Scheme (UK)

DERIVATIVES

July 31, 2007: Richard Bookstaber (interview on Financial Sense, July 21 2007)

ECONOMIC CYCLES & PATTERNS

Sept 16, 2007: Jim Puplava sees crisis in 2009: Peak Oil and other factors
July 27, 2007: Kress cycles
June 28, 2007: Hindenburg omens
May 23, 2007: Olduvai theory
May 16, 2007: the Kondratieff cycle

GLOBALISATION / NEW GROWTH THEORY

Sept 23, 2007: My view that Western economies are facing inflation and recession
Aug 09, 2007: Globalisation and competition from the Far East
July 28, 2007: Thomas Friedman (interview on Yale Global Online, 18 April 2005)
July 28, 2007: Paul Romer (interview on Reason Online, 2001)
July 27, 2007: Wikipedia / Gladys We on New Growth Theory, aka Endogenous Growth Theory July 07, 2007: Thomas Friedman (Edward Leamer's critique)
May 20, 2007: Jim Willie on unemployment caused by globalisation

GOLD

Sept 27, 2007: Marc Faber sees bubbles everywhere, but recommends gold
Sept 25, 2007: More from Frank Veneroso on gold reserves and speculation
Sept 24, 2007: Frank Veneroso thinks speculation has created a bubble in gold
Aug 16, 2007: Mike Hewitt's essay on the global money supply, and gold
Aug 15, 2007: The surreptitious depletion of central bank gold reserves
Aug 07, 2007: The case for owning gold
Aug 02, 2007: The postwar rise and fall of central bank reserves of gold

LEGAL

Aug 24, 2007: Enduring Power of Attorney / Lasting Power of Attorney

MORTGAGES

September 29, 2007: Mortgage lending a key factor in high property costs

PERSONALITY PROFILES

Faber, Marc (Dr)

RISK ASSESSMENT & REDUCTION

Aug 09, 2007: Tips from the Daily Reckoning on defensive investment
June 21, 2007: Nassim Taleb's "Black Swans"
June 15, 2007: Harold Markowitz (inventor of Modern Portfolio Theory)
June 06, 2007: Asset classes
May 11, 2007: Peter Schiff (my review of his book, "Crash Proof")
May 10, 2007: Michael Panzner (my review of his book, "Financial Armageddon")

SOVEREIGN WEALTH FUNDS

Sept 26, 2007: Sovereign wealth funds expected to boost markets - but a threat to Western economies
Sept 22, 2007: Creditor economies switching from bonds to equities
May 21, 2007: China's sovereign wealth fund

STOCKMARKET VOLATILITY

Aug 31, 2007: Robert McHugh's "Dow 9,000" prediction - with updates
Aug 09, 2007: Is the Dow more overvalued than the FTSE?
June 20, 2007: Dow and FTSE past falls


Home

The chef eats his own cooking

News: Indochina Capital Vietnam Holdings Limited is the largest (and LSE quoted) managed fund of Indochina Capital, whose non-executive chairman is Dr Marc Faber. It has just announced that it bought 60,000 of its own shares on Friday. That looks like putting your money where your mouth is.

More on Faber and Vietnam

Marc Faber is, it seems, chairman of a company called Indochina Capital and this report of a meeting in Ho Chi Minh City in April quotes him as saying, "Among emerging economies, Vietnam has the most potential for development."

In an edition of his GloomBoomDoom report dated May 2003 he remarked, "Vietnam... is developing rapidly and will, in my opinion, with its 80 million very hard-working and thrifty people, overtake Thailand economically within the next ten years or so." For those who may be considering subscribing to his newletters, it's interesting to see an example of his reporting style.