Trouble ahead

The money-lender's pleasant dream

Market Ticker reports that a bank has borrowed $75 million at exceptionally high interest rates, suggesting that the collateral they were offering wasn't sound enough to be acceptable. And there are futures contracts being taken out that indicate some traders expect a major financial dislocation.

In other words, this bet is one that the credit markets will go supercritical.

And it wasn't made by just one firm, one speculator, or one guy.

A few months ago I pointed out that every big equity market dump - every last one of them - has started in the credit markets. It always starts there, simply because of the volume of business transacted and the sensitivity to problems. In the equity markets one company can go "boom" and it doesn't mean much. But in the credit markets "systemic risk" - that is, a refusal to trust people as a foundational principle - once it takes hold is very, very difficult to tamp back down.

Read the whole post here. And here's the evidence (source):

"Dow 9,000", UK loans to US, poll, doom

Not as bad as this, we trust...

Dow 9,000 update

The Dow is currently at 13,806.70, up slightly from its July 6 valuation of 13,611.69. But gold has risen from $647.75 to $783.50 in the same period - up 21% in 113 days, or around 85% annualised. This means the "gold-priced Dow" is worth 11,414.54. At this rate, Robert McHugh's prediction will be fulfilled by March 8 next year.

UK holdings of US Treasury securities

The dollar has dropped by 1.8% against the British pound since July 6, which may not seem like much, but is equivalent to 5.72% annualised. The capital loss pretty much wipes out the income payable to the UK.

I have tried to publicise Britain's recent heavy increase in ownership of US debt, but it seems nobody wants to make political capital out of it. Perhaps this is because some think the pound will eventually drop even faster than the buck. Or maybe the silence is because the markets are jittery enough already, without further evidence of American financial crisis.

Poll

Please take part in the "Wall of Worry" poll (sidebar)!

Hogarth on corrupt electioneering practices

Doom

Some people are so Eeyorish that you start to cheer up. Although an American, Jeffrey Nyquist gave us a good dose of Northern European apocalyptic prophecy in Financial Sense yesterday: computer viruses, Russia and China on the march, debt, war - the lot. Pass Pappy the liquor, son, and go git mah fiddle.

Bluegrass

Having said that, the (commendably) idealistic young and their left-wing Pied Pipers should learn more about the real nature and continuing threat of communism. George Orwell said the British Left played with fire and didn't know that it was hot. I suspect that happiness for the many is more likely to come from a restrained, green-conscious form of capitalism, than from the destructive dreams of millenarian socialists.

I also suspect that a major theme this century will be the contest between Marxism and Islam. I hope for a bloodless final end to the former, which has caused such suffering to so many millions in the last century; and the ascendancy of the civilised, cultured, intellectual and tolerant traditions within the latter.

Kicking through the slush

Here's something from Seeking Alpha about the proposed new post-subprime mess bank rescue fund, the "Master-Liquidity Enhancement Conduit" or MLEC for short.

The way I remember this acronym is to imagine (falsely, of course) that MLEC stands for Merrill Lynch Emergency Cash.

By the way, Joseph Heller pointed out in Catch-22 that "enhance" does not mean "increase", it means to make something stand out against a background. No Sackerson Prose Prize for this $75-billion mealy-mouthed monicker: too much perfume in it, not enough soap.

Sovereign wealth funds and national prosperity

I have had a comment (on an earlier piece about sovereign wealth funds) from a Shromon Das, who gives his view on SWFs here and a follow-up today here.

Without pretending to technical expertise in this area, I can envisage implications for a growing ownership of equities by governments. One effect may be to reduce volatility in large-capitalisation stocks, since national treasuries can take a longer view than the individual investor.

But there must also be concern about the possible use of ownership for political purposes. For example, I wonder at the UK's having allowed foreign enterprises to take over some of our energy and water supply companies.

I began this blog for investors, but increasingly I think the real story is not about how some may make (or protect) their fortunes, but about the implications for ordinary citizens.


Today I drove past the site of the former Rover car plant in Longbridge, Birmingham. The firm was on its way out years ago and a venture capital company called Alchemy offered to take it over, cut its size and specialise in a line of sports cars. The rest of the land could be redeveloped - housing and retail. The surplus workers would have their pension rights and redundancy payouts honoured, and some could still look around for employment in other plants.

But there was an election coming (2000), so the government chose to encourage a management buyout instead. Thousands of jobs were saved, supposedly. Besides, it was said (I seem to recall) that the site was too polluted for residential development, anyhow.

Well, Rover did go bust anyway (after a £6.5 million "bridging loan" to prevent its collapse immediately before the 2005 General Election). The workers didn't get the redundancy payments they'd have had from Alchemy in 2000, and their pensions were hit too. Anyone still interested in car work elsewhere would then be five years older, in an industry that some believe discriminated on the basis of age prior to new legislation in 2006.

A Chinese firm, SAIC, has picked over the carcase, with special attention to any designs and other paperwork that might help with setting up an alternative in the Far East. And now the site is being cleared - for residential and retail development.

There is a big, shiny new building on the Bristol Road in Longbridge - a JobCentre Plus.


Where, in all this, were the working people's long-term interests really considered, even by their political representatives?

Normal service will be resumed as soon as possible

The Potter's Wheel

Off for a short break - back soon. But what a time to pick - the Federal Reserve having just granted maybe $100 billion of special exemptions to major banks (see yesterday's post).

Dollars, gold and words

A couple of useful items from Financial Sense:

Gary Dorsch (October 18) explains that a falling dollar helps the S&P 500, "which earn roughly 44% of their revenue from overseas, mostly in Euros", and supports house prices in the US; but it also raises the price of oil, gold and agricultural commodities. While the US seems set to cut rates further, the Eurozone may raise theirs to control inflation. In five years, the Brazilian real has doubled against the dollar! Oh, to have been a currency trader.

Meanwhile, Doug Galland at Casey Research explains that gold was dipping together with shares, because institutional investors were scrambling for cash in the unfolding credit crisis. His view is that in the longer term, these sectors will diverge and gold will soar. He supplies an eloquently simple graph:

Speaking of eloquence, financial writers know their business but many need to hone their writing, so I propose a new prize: Sackerson's Prose Trophy. The first winner is Doug Galland, with the following simile:

Though admittedly impatient to see the gold show get on the road, we were largely unconcerned by gold’s behavior. That’s because our eyes remained firmly fixed on the perfect trap set over the years for Bernanke’s Fed.

Like hunters of antiquity watching large prey grazing toward a large covered pit, the bottom of which is decorated with sharpened sticks, we watched the handsomely attired and well-groomed Bernanke and friends shuffle ever closer to the edge, their attention no doubt occupied by pondering the flavor of champagne to be served with the evening’s second course.

One minute pondering bubbly, the very next standing, wide-eyed and hyperventilating, on thin cover with decades of fiscal abuse cracking precariously under their collective Italian leather loafers. We can’t entirely blame Bernanke for the dilemma he now finds himself in; it was more about showing up to work at the wrong place at the wrong time.

The second paragraph is splendid in its anticipation, and the phrasing conveys both the anguished expectation of the hunters and the relaxed, expansive mood of the prey. The denouement is a little disappointing: "pondering" is a repetition and the syntax is too florid; a short sentence would be better, contrasting the suddenness of the fall with the slowness of the approach.

Further nominations for Sackerson's Prose Trophy are welcomed.

The (scientific) pursuit of happiness

Cast Iron Gilt Buddha's hand, in the Jnana Mudra, gesture of teaching.

It seems that happiness, like health, is not what you have, but something you do.

In November 2005 I watched a BBC2 TV series by the psychologist Dr Richard Stevens, called "Making Slough Happy". He showed that you can increase your happiness in practical ways, and he demonstrated them on volunteers in Slough. It worked, even for the grumpies.

For more background, please click on the title below - but you may prefer to start the program straight away.

Happiness tools

1. Take half an hour of exercise three times a week

2. Count your blessings. At the end of each day, reflect on at least five things you are grateful for

3. Have an hour-long, uninterrupted, conversation with your partner or closest friends each week

4. Plant something: even if it’s in a window box or pot. Keep it alive!

5. Cut your TV viewing by half

6. Smile at and say hello to a stranger at least once a day

7. Make contact with at least one friend or relation you have not been in contact with for a while and arrange to meet

8. Have a good laugh at least once a day

9. Give yourself a treat every day. Take time to really enjoy this

10. Do an extra good turn for someone each day