*** FUTURE POSTS WILL ALSO APPEAR AT 'NOW AND NEXT' : https://rolfnorfolk.substack.com
Wednesday, December 19, 2007
Here we go
Now Governor Schwarzenegger is looking for a 10% cut in expenditures across the board, as the San Diego Union-Tribune reports.
Tuesday, December 18, 2007
What goes around, comes around
Interestingly for me, he relates this action in part to the UK's having taken on so much of US Treasury debt, a matter on which I commented repeatedly some time ago.
Monday, December 17, 2007
Snippets, straws in the wind
Nadeem Walayat predicts another brightening of the FTSE's candle flame, before it flutters again;
Jas Jain says "total household debt growth below $300B annual rate will lead to outright deflation within months" and this is why the Fed has to keep trying to stimulate lending, with ever-diminishing responses;
Ghassan Abdallah counsels against trying to short the market, what with many forces attempting to support it - best to sit out the dance;
AFP interprets the slide in world stocks as a disappointed response to the Fed's limited interest rate cut, and a sign of fear of inflation - something Alex Wallenwein predicted recently;
Finally, Captain Hook plays with ideas that have occupied me for some time (rubric mine):
... If what we are witnessing is at a minimum a Grand Super-Cycle Degree event, then a total collapse of stock, bond, and currency markets world-wide could be in store as the globe reverts back to more regionalized economies, and localized currencies...
... the swings in the markets are enough to curl one's spine these days, so speculator exhaustion could play a role in curbing interest in speculation. This is a natural considering the aging western populations at this point and will play a big role in curbing the demand for financial assets moving forward as retirees attempt to spend their savings.
Sunday, December 16, 2007
What is long-term investment?
Well, I'm not a respected Fleet Street money journalist, merely a no-account bearish personal financial adviser, but I'd suggest that in the exciting investment world of today, maybe a five-year period is not a good basis for comparing long-term results, or conditioning expectations for the future.
I had a client ask my opinion about investments a couple of years ago, because his bank had been showing him their fund's marvellous growth over a three-year period. I took time to explain to my client that over the five years to date (then), the graph (as for the FTSE 100) described a kind of bowl shape, and the period chosen by his bank just happened to draw a line from the bottom of the bowl to the lip.
I then showed him the five-year line in all its loveliness:
I think it's fair to say that these are not ordinary times. There has been a steady build-up of electrical charge, so to speak, over something like a decade (some would say, much longer), and there may well be some powerful bolts unleashed as a result. Where will the lightning will strike next: a steeple, an oak tree, a cap badge - who can tell?
Massive debt; changes in the balance of international trade; demographic weakening of future public finances; sneaky currency devaluation; wild financial speculation; wars and the rumours of wars; imprecisely known ecological limits to growth; declining energy resources; the desperation of the world's poor to join our fantastic lifestyle; our fear that we may lose the comfortable living we used to imagine was our birthright; the corruption, abuse and neglect of the young; the selfishness of their parents and the middle-aged; the increasing burden and growing neglect and abuse of the old.
In all this turmoil, making five-year investment performance comparisons has an air of unreality, like planning tomorrow's menu on a mortally-wounded ocean liner.Friday, December 14, 2007
Lead, kindly light
Perhaps, after the next election, a new US President, with the strength of a fresh mandate, will be also able to act so decisively.
Thursday, December 13, 2007
Denninger: depression, but when?
The other is to keep the door closed until the smell is too bad, and then we have far worse problems - but it could take years. End result: deflationary depression.
Tuesday, December 11, 2007
Collectivized security leads to riskier behaviour
Research into piles of sand grains showed that the timing of sudden collapses is quite unpredictable, but there is an inverse correlation between their magnitude and likelihood. As the sand piles up, "threads" of instability form, that can be triggered by the fall of a single grain in the wrong place. This is akin to the "Butterfly Effect" in catastrophe theory, I suppose.
Mauldin connects this up with a paper published last year, about uncertainty created by humans in the development of their economic structures:...the greater the number of connections within any given economic network, the greater the system is at risk.
This underscore the concerns I hinted at in an earlier post. The potential for catastrophic change is building up, and we can't predict what will be the trigger. Therefore, all the connections we are forming with each other need to be balanced by provisions for disconnecting, or for insulating one region from changes occurring in another.
To use an analogy, the supertankers that take oil around the world's oceans are internally divided into compartments. It would be cheaper, and so more profitable, not to install the internal compartments. But without them, a large wave hitting the ship could cause a movement in the liquid cargo that would shift the balance and quite possibly sink the vessel altogether.
So there is a trade-off between efficiency and survival.
Another aspect is how human behaviour changes in relation to risk perception. For example, research shows that when road junctions are widened and vision-obscuring vegetation cleared, drivers compensate for the extra security by going faster and less carefully. I understand that each of us has his/her our own preset level of risk tolerance, and when circumstances change, will seek to bring things back to that level .
But what if you don't fully understand the new circumstances? A miscalculation as to the level of security inherent in the situation could lead to your behaving more dangerously than you realise. The complexity and obscurity of CDOs, derivatives and credit default swaps are examples in the world of finance and economics, but surely this applies to other fields, too.
Perhaps conservative instincts are not just laziness, stupidity and timidity, but survival instincts. Have you noticed how those maddeningly slow drivers don't have dents in their old, lovingly-polished cars?
Maybe I'll get a hat, for driving.
The Fed may trigger off a run on Treasury bonds, says Wallenwein
Wallenwein suspects that the Fed has been buying longer-term US Treasury bonds to sustain demand and so keep interest rates low, but he thinks that once others scent the Fed's fear, there will be a massive dump that will throw more on the market than the Fed can mop up. This, he thinks, will send longer-term interest rates soaring.
His conclusion is that gold will perform its usual function of a safe haven in times of uncertainty.
As I pointed out this summer, the UK has (fairly recently) become the third-largest holder of US Treasury bonds.
Monday, December 10, 2007
A run on non-banks
Jim in San Marcos explains that it's probably not the banks we need to worry about, but the financial entitities that are NOT covered by Federal deposit insurance.
And Karl Denninger also details other areas threatened by financial contraction.
Sunday, December 09, 2007
Little boxes
It would have made no difference had it been a tin of cloned credit cards. You don't need to know what's in the box, or how it works; you need to know what it does, and who it's for.
Once you start thinking along these lines, things get so much clearer. For example, you don't have to be a "quant" like Richard Bookstaber, to know that derivatives are about risk. More precisely, they're for increasing risk.
Supposedly, a derivative reduces risk; but if you look at its use, it's a box that tells lenders and gamblers how far they can go. Seeing the fortunes that can be made in high finance, there is the strongest temptation to push the boundary.
My old primary school had a lovely little garden behind it, where we played at morning break. One game was "What's the time, Mister Wolf?". You went up to the "wolf" and asked him the time; he'd say nine o' clock; to the next child he'd say ten o'clock and so on, until he'd suddenly shout "Dinner time!" and chase you. Obviously, the game was not about telling the time.
So it is with financial risk models that service the need to maximise profits: always another trembling step forward. There's only one way to find out when you've gone too far.
But what if you could ask the time, and know that someone else would end up being chased? I think that explains the subprime packages currently causing so much trouble.
The bit I don't understand is why banks started buying garbage like this from each other. Maybe it's a case of the left hand not knowing what the right hand is doing, since these organisations are so big. Or maybe it's that everyone has their own personal box.
Then there's credit default swaps, and other attempts to herd together for collective security. They don't work if the reduction in fear leads to an increase in risk-taking. United we fall: no point in tying your dinghy to the Titanic's anchor-chain.
In fact, I think this opens up a much wider field of discussion, about efficiency versus survivability. In business, economics and politics we might eventually find ourselves talking about dispersion, diversity and disconnection.
Saturday, December 08, 2007
Liberty update
As Chumbawumba sang:
I get knocked down
But I get up again
You're never going to keep me down
We'll be singing
When we're winning
We'll be singing
... good luck.
Thursday, December 06, 2007
Better to be rich and mis?
So I'd ask whether economic progress is more important than being happy and optimistic. Read "Insurance - The White Man's Burden" and decide.
UPDATE
...and a nice little thread in Market Ticker's forums section, on rat-race dropouts who've taken to the beaches in Hawaii
The Dow is a shape-changer
An argument for betting on the index, if you're not an attentive stock-watcher.
This, I suggest, is one to bookmark, or print and put in in your wallet.
A moment of sanity
My grandfather used to say, things are never as good as you hope or as bad as you fear. As I reported some while ago, members of the Chicago Stock Exchange in 1934 papered their club room with what they thought were now worthless stock certificates, but within five years were steaming them off the walls again.
The Thirties crash hit debtors, unwary investors (especially those trading with borrowed money) and insolvent banks. The lessons from this are easy to learn.
Wednesday, December 05, 2007
Unreal
Two problems: one is, I can't visualise anything with many zeroes, so it's not real for me. More importantly, if there's a major meteor-strike financial bust (i.e. deflation), I'd have thought cash in hand is what everyone will want.
Unless a crazed government opts for hyperinflation. In which case, I'd rather have pallets of canned baked beans, boxes of ammunition and many brave, loyal friends. You can't eat gold.
But as with all truly terrible imaginings, the mind bounces off this like a tennis ball from a granite boulder, and we turn back to normal life with determined optimism.
The Fed and King Canute
... the problem with the U.S. financial system ... is not liquidity, but the solvency of mortgage loans and securitized debt. The Fed's actions are not likely to have material impact on this.
This, plus Larry Lindsey's comments noted in my previous post, adds weight to Karl Denninger's continuing theme of inevitable deflation.
Larry Lindsey: extraordinary rendition
Ed Steer (Financial Sense) relates his October experience of an unusually frank speech, and answers to questions, by President Bush's former economic adviser. According to Steer (I paraphrase), Lindsey's views include:
- The Fed knew home loans were getting dumb, but didn't want to spoil the party
- Banks are going to have to revalue their property holdings realistically
- Hedge funds will have to take what comes, and probably will
- America has offloaded zillions in toxic-waste loan packages to other countries, and ha, ha !
- House prices will plummet
- Don't trust the government CPI figures
- Gold dumping is coming from European central banks, not the US
- America could handle a 20-30% dollar devaluation
... loads of beef in that burger, where's the fluffy bun?
Tuesday, December 04, 2007
The end of usury
He points out - as do others, including proponents of Islamic sharia banking - that however much money is created through credit, more must be created to cover the interest charged. Usury endlessly blows up the balloon, which must eventually pop, before the cycle begins again.
Lenders do want their money back, and so generally take security for the loans they grant. At some point - and Denninger believes it's now very close - lenders will become unwilling to lend further, and/or borrowers will retrench or become unable to service their debts. In short, borrowers will have to pay up or be ruined, together with the more reckless lenders.
Can the government print extra money to solve this? Not according to Denninger, who says that the effect of bad money will be to drive out private lenders (who would demand very high interest rates for lending in an inflationary environment). Since the government itself runs partly on borrowed money, it's not an option.
Conclusion: cash will be king; get out of debt now.
Sunday, December 02, 2007
Ted Spread
Michael Panzner shows a couple of ominous graphs:
One is the "TED spread" - the difference between interest rates charged by banks to each other, and short-term (and safe) Treasury bonds. A wider margin indicates that the market is charging more because it considers lending to be more risky, and the current TED spread is approaching 1987 levels.
The other shows the ratio of amount loaned out, to amounts of cash on deposit. Lenders are now very stretched.
Saturday, December 01, 2007
The Angriest Guy In Economics
Karl Denninger, on the other hand, is very emphatic that our economic woes are no laughing matter. Here he calls for all the "off-book" items to be included in lenders' accounts, and if that bankrupts them, so be it: a cleansing of the financial system, condign punishment for the perpetrators and a warning to others. This is similar to Marc Faber's position: he says the crisis should be allowed to "burn through and take out some of the players". Gritty.
And concrete. Denninger supplies a photo of a customer-empty store at 6 p.m. on a Sunday evening, to underscore his point.
Now that's something we can put to the test - look at the shops in your area and work out how crowded you'd normally expect them to be at the beginning of December.