Michael Panzner refers us to a Financial Times article on the (overdue) dwindling confidence among our youngster trading community. The piece includes this paragraph:
Unlike past housing crises, the banking sector is far less well equipped to cope with the fallout because of the wave of banking consolidation in the last decade. [...] This means the pain has become concentrated among a small handful of institutions, all of whom play a crucial role in keeping all markets liquid.
I recently quoted this Contrary Investor article, which includes a graph of the ballooning exposure of American banks to credit default swaps (CDS), under which arrangement everybody insures everybody else. The risk is 99%+ concentrated into only SIX banks.
Who benefits from such concentrations? I commented on Panzner's site:
Concentration of finance into an ever-smaller number of giant banks is inherently dangerous. You reduce the risks of small hazards, but you increase the potential damage from a Black Swan / fat tail event. Systemic safety is in diversity, dispersion and disconnection.
There is increasingly a conflict of interest between those who benefit from concentrations of power and wealth (think of the bonuses and cushy jobs), and the general populace. Wasn't the US Constitution itself specifically designed to prevent such concentrations?
In my view, the sub-prime contagion is not only spreading to other sectors of the economy, but beginning to call into question how big government, high finance and monstrous companies impact on the fundamental values of our (systematic and real in the USA, ramshackle and sham here in the UK) democracies.
It seems to me that small-scale democracy-cum-economy is not only an historical reaction to the centralist authoritarianism of George III (who meant well, I am sure), but a kind of imitation of Nature, which has endured the most massive disruptions (a planet encased in ice, or burning from a massive meteor strike) because of my alliterative trio of survival traits: diversity, dispersion and disconnection.
Saturday, March 08, 2008
Friday, March 07, 2008
Ten years after the stock market bounce
The FTSE is currently at 5,664.60. It stood at 5,782.90 at the end of trading on 6 March 1998. Has your wealth kept pace with inflation?
There's lots of ways to figure inflation. Monetary inflation is like pumping up an air bed (or a Space Hopper): if you squmph one end down, another part will swell, and that makes it hard to estimate the effect in any particular sector. So let's go back to the major source of inflation, and assume M4 (bank lending) has increased by an average 10% p.a. - I don't think that's far off.
According to this article (which also predicts even lower returns in future years) the total return on equities over the last 100 years has averaged 10.1%. That'd be nice. Now let's assume dividends averaged 3% - and let's assume you kept it all, instead of what really happens, which is you pay much of it to intermediaries, stockbrokers, fund managers and the taxman. To get the rest of this monetary-inflation-matching total return, we'd have to see 7% p.a. capital growth.
7% compounded for ten years makes 96.7%. So if you had bought the FTSE ten years ago, it would need to be worth around 11,375 today. After taxes, fees and charges. And then it would have to be worth even more, to make up for the fact that you don't keep all of your dividends, either.
Oh.
Thursday, March 06, 2008
From soup to nuts
Steve Moyer gives a pretty clear (occasionally a bit aerated) potted history of the woeful train of events, over the ten years from the start of the technology stock boom to the popping (and it's only just started) of the real estate bubble.
Nobody had to invest in tech stocks, but we all have to live somewhere. A bubble in housing is really pernicious, because it has implications for almost everyone.
Low interest rates inflated property prices, which led to much larger mortgages. Deflating valuations by raising interest rates would trap many mortgage-holders who have taken on big loans and kept up a good credit history so far.
Therefore, unless the government is willing to deal with the political pain of accelerated mortage defaults, interest rates must now stay low-ish for a long time. So I guess that credit risk will be adjusted not by price, but by access: it will simply get harder to find a willing lender. If there is less lending, then that (it seems to me) is deflationary.
I don't believe that the burden of the monster mortgage will be reduced by rapid general inflation of both wages and prices as in the 70s and 80s. Increased world demand for food and energy will inflate prices, but globalisation means that for many - especially the poorer sort - wages won't keep up. The cost of housing will be a generation-long millstone around the neck.
Inflating the currency won't help. It will reduce the wealth of savers, but if we are importing not only luxuries but (increasingly) necessities, inflated wages will be gobbled up by inflated import prices.
Some may argue that currency debasement will make our exports more competitive. But for a long time now, manufacturing industry has been disappearing like snow in midsummer. Even if our export prices should become more competitive because of foreign exchange rates, domestic productive capacity has shrivelled: whole factories and shipyards have gone abroad, and the related human resources have withered, too. You can't reconstruct the proletariat and their workplaces overnight. Gone are the days when the Midlands engineering worker tinkered with metal in his garden shed, showing his son how to use the tools. Half a mile from where I live, one of the big engineering plants set up by the Birmingham-based Lucas family was taken over first by the Italian Magneti Marelli, then by the Japanese super-corp Denso, and now it's been stripped of its machines and will be demolished to make way for... housing. Goodness know how the mortgages on them will be paid.
I think Karl Denninger is right: the banks must be made to eat some of the debt they fed us. Either they will be ruined, or we shall be.
Nobody had to invest in tech stocks, but we all have to live somewhere. A bubble in housing is really pernicious, because it has implications for almost everyone.
Low interest rates inflated property prices, which led to much larger mortgages. Deflating valuations by raising interest rates would trap many mortgage-holders who have taken on big loans and kept up a good credit history so far.
Therefore, unless the government is willing to deal with the political pain of accelerated mortage defaults, interest rates must now stay low-ish for a long time. So I guess that credit risk will be adjusted not by price, but by access: it will simply get harder to find a willing lender. If there is less lending, then that (it seems to me) is deflationary.
I don't believe that the burden of the monster mortgage will be reduced by rapid general inflation of both wages and prices as in the 70s and 80s. Increased world demand for food and energy will inflate prices, but globalisation means that for many - especially the poorer sort - wages won't keep up. The cost of housing will be a generation-long millstone around the neck.
Inflating the currency won't help. It will reduce the wealth of savers, but if we are importing not only luxuries but (increasingly) necessities, inflated wages will be gobbled up by inflated import prices.
Some may argue that currency debasement will make our exports more competitive. But for a long time now, manufacturing industry has been disappearing like snow in midsummer. Even if our export prices should become more competitive because of foreign exchange rates, domestic productive capacity has shrivelled: whole factories and shipyards have gone abroad, and the related human resources have withered, too. You can't reconstruct the proletariat and their workplaces overnight. Gone are the days when the Midlands engineering worker tinkered with metal in his garden shed, showing his son how to use the tools. Half a mile from where I live, one of the big engineering plants set up by the Birmingham-based Lucas family was taken over first by the Italian Magneti Marelli, then by the Japanese super-corp Denso, and now it's been stripped of its machines and will be demolished to make way for... housing. Goodness know how the mortgages on them will be paid.
I think Karl Denninger is right: the banks must be made to eat some of the debt they fed us. Either they will be ruined, or we shall be.
They knew it was coming
Karl Denninger looks at the cash-rich balance sheets of non-financial companies, many of which could now pay off all their bank debts from the kitty. Whatever they may have been telling you, it looks as though they've been voting with their wallets.
Tuesday, March 04, 2008
Eat what you cooked
Karl Denninger comments on the proposals to make banks write down some outstanding capital on loans, to secure what's left of the banking system. Painful, but it might save the day.
I wouldn't say it's impossible. America has more resilience and capacity to renew than its envious enemies wish to believe.
Good luck.
I wouldn't say it's impossible. America has more resilience and capacity to renew than its envious enemies wish to believe.
Good luck.
Sunday, March 02, 2008
Subprime hitting GSEs
Karl Denninger comments trenchantly on a new scheme by "Fannie Mae", the government-sponsored mortgage lender: "Homesaver Advance" takes the borrower's missed mortgage payments and puts them into an unsecured loan, thus "healing" the credit history so that home lending can continue as if (as if!) everything were normal. Denninger sees this as a signal to "short" Fannie Mae.
But over a period, Denninger has moved on from trying to exploit such market weaknesses, to urging his fellow citizens to protest about the corruption of the financial system. His tone is now getting darker - like Jeffrey Nyquist, he's beginning to worry about international relations, for example the way that China's population pressure may threaten Russia's land. Lhasa 1950, Khabarovsk and Irkutsk when?
But over a period, Denninger has moved on from trying to exploit such market weaknesses, to urging his fellow citizens to protest about the corruption of the financial system. His tone is now getting darker - like Jeffrey Nyquist, he's beginning to worry about international relations, for example the way that China's population pressure may threaten Russia's land. Lhasa 1950, Khabarovsk and Irkutsk when?
Which crank are you?
In turbulent times, we get an increase in prophets, astrologers, clairvoyants, magicians and mountebanks. Perhaps we can place more reliance on the significance of their appearing, than on the things they have to say.
"Deepcaster", who I think of as the Nostradamus of finance, often refers to a shadowy clique he calls The Cartel; if only one could identify them - or him! But there is some basis for the paranoid - for example, who owns the Federal Reserve does indeed seem to be a secret; though I doubt the chairman strokes a white cat. Here are some of Deepcaster's tips for economic survivalism:
Keep a significant portion of your wealth in tangible assets including Precious Monetary Metals (in amounts subject to timing considerations) and Strategic (e.g. Crude Oil) and select agricultural commodities which the public needs and regularly uses...
Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearing house guaranteed? And how strong is the clearing house?
“Go local” in banking, and commercial, and essential goods supply relationships. “Self reliance” and “local reliance” are key goals...
Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel-initiated takedowns...
Stay informed...
Since we're going back to the Seventies, here's Al Stewart's 1973 cult Nostradamus lyric (from Past, Present and Future). There's always a little frisson in old mortality. Speaking of which, Jeffrey Nyquist returns to his Cassandran theme of America as ancient Athens on the brink of the Peloponnesian catastrophe.
I shouldn't laugh too much at all this. The vibrations of the First World War were, I think, felt in the art and music of the years before it; and the millennarian gloom of Eliot's Waste Land (1922) was also only a few years ahead of economic, social and military turmoil. The current flock of seers and chanters may be like the restless sheep before the earthquake.
"Deepcaster", who I think of as the Nostradamus of finance, often refers to a shadowy clique he calls The Cartel; if only one could identify them - or him! But there is some basis for the paranoid - for example, who owns the Federal Reserve does indeed seem to be a secret; though I doubt the chairman strokes a white cat. Here are some of Deepcaster's tips for economic survivalism:
Keep a significant portion of your wealth in tangible assets including Precious Monetary Metals (in amounts subject to timing considerations) and Strategic (e.g. Crude Oil) and select agricultural commodities which the public needs and regularly uses...
Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearing house guaranteed? And how strong is the clearing house?
“Go local” in banking, and commercial, and essential goods supply relationships. “Self reliance” and “local reliance” are key goals...
Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel-initiated takedowns...
Stay informed...
Since we're going back to the Seventies, here's Al Stewart's 1973 cult Nostradamus lyric (from Past, Present and Future). There's always a little frisson in old mortality. Speaking of which, Jeffrey Nyquist returns to his Cassandran theme of America as ancient Athens on the brink of the Peloponnesian catastrophe.
I shouldn't laugh too much at all this. The vibrations of the First World War were, I think, felt in the art and music of the years before it; and the millennarian gloom of Eliot's Waste Land (1922) was also only a few years ahead of economic, social and military turmoil. The current flock of seers and chanters may be like the restless sheep before the earthquake.
A pound to a penny
Adrian Ash points out that against gold, the British pound is now less than 1% of its value in 1931.
Why there are no customers' yachts
Hedge fund and investment trust managers sit on a big pile of money and a small percentage creamed off still means a handsome living. But Daniel Amerman maintains that's not the biggest advantage they have over you. As he shows with worked examples, shrewd use of the rules of the game can turn a real investment loss into a substantial gain.
By borrowing money at preferential interest rates, and writing-off the interest as a business expense, they can multiply the amount invested, reduce taxation and massively boost the return on the original capital. All is well as long as prices go up, and Amerman sees this a huge incentive to continue the inflation in financial assets: the system demands it.
His conclusion, in general terms, is to ignore the usual fairytales told to the small investor, work out how the con really operates, and exploit it. He thinks you should be in tangible assets, and understand the implications of taxation and inflation for your portfolio .
Michael Kilbach echoes that with respect to commodities, though like me, he thinks there'll be a step back before the next jump:
In the long term we believe prices are heading much higher and we are therefore looking for pessimism in the precious metals market before adding to our positions. We sell into extreme optimism. We understand that we could miss out on an opportunity to have more invested for a short term move higher, and we are willing to risk losing that opportunity. Rather than trying to catch up to the current markets move we try to anticipate the next markets move.
By borrowing money at preferential interest rates, and writing-off the interest as a business expense, they can multiply the amount invested, reduce taxation and massively boost the return on the original capital. All is well as long as prices go up, and Amerman sees this a huge incentive to continue the inflation in financial assets: the system demands it.
His conclusion, in general terms, is to ignore the usual fairytales told to the small investor, work out how the con really operates, and exploit it. He thinks you should be in tangible assets, and understand the implications of taxation and inflation for your portfolio .
Michael Kilbach echoes that with respect to commodities, though like me, he thinks there'll be a step back before the next jump:
In the long term we believe prices are heading much higher and we are therefore looking for pessimism in the precious metals market before adding to our positions. We sell into extreme optimism. We understand that we could miss out on an opportunity to have more invested for a short term move higher, and we are willing to risk losing that opportunity. Rather than trying to catch up to the current markets move we try to anticipate the next markets move.
Don't take on gunslingers
A client raised an important point some weeks ago: when he decides to sell or switch his holdings in a collective investment (e.g. an insurance bond or pension), the company wants to receive the authorisation in writing, by which time it could be too late. The traders can act straight away, on the price they see on their screens.
Paul Lamont echoes this in SafeHaven:
The Wall Street Firms will know if the Ambac deal fails long before investors. We commented last April: "As the editor of The Commercial and Financial Chronicle in November of 1929 reported on the Great Crash, 'the crowd didn't sell, they got sold out.' The trading desks of the Wall Street Firms will cash out as the panic develops, the lady in Omaha will be stuck on the phone with a busy signal... To avoid this, investors should be moving now to financially healthy institutions and buying U.S. Treasury Bills."
You can't outdraw the fast hand, but you can get out of town when you hear he's coming.
Paul Lamont echoes this in SafeHaven:
The Wall Street Firms will know if the Ambac deal fails long before investors. We commented last April: "As the editor of The Commercial and Financial Chronicle in November of 1929 reported on the Great Crash, 'the crowd didn't sell, they got sold out.' The trading desks of the Wall Street Firms will cash out as the panic develops, the lady in Omaha will be stuck on the phone with a busy signal... To avoid this, investors should be moving now to financially healthy institutions and buying U.S. Treasury Bills."
You can't outdraw the fast hand, but you can get out of town when you hear he's coming.
Creak... squeak... pop!
This and more is in the latest ContraryInvestor piece on SafeHaven. Almost all of the above is concentrated in a mere five banks.The tone is not doomster:
The world is not about to come to an end. Through adversity is born opportunity for those prepared both emotionally and financially.
As with Northern Rock, I expect that when calamity strikes, the bank directors and financial regulators will still have good payoffs and pensions. What a tolerant society we live in.
Friday, February 29, 2008
What the rubber mat said
I sat in my clients' office yesterday afternoon, waiting for them to arrive. The office had lovely new desks; as it turned out, not new, but taken from another business that has recently closed.
The reason for the delay - at least for one of the directors - was a last-moment requirement for tico rubber, needed next morning for anti-vibration matting under a five-ton machine that was being re-sited. The usual supplier, a major international concern, has recently shut down the closest depot to Birmingham. Rationalisation. Outsourcing. Globalization.
So while waiting, I tried to help my client find the material somewhere else. Googling away, we found it in the far north of England, or Cornwall; too far. Maybe just possibly in Market Harborough or Leicester? On calling the nearer companies, specifications and stock levels were doubtful.
My clients' business is contrarian: they move machines, and although originally that meant from one UK site to another, more often now it involves sending them abroad. As the decline of British manufacturing industry has accelerated, they've been very busy recently. For obvious reasons, the bonanza will end sometime.
But back to the matting. Once, suppliers of components you needed would be close at hand. Now we could be looking at journeys to the ends of the country - meaning cost, delay and maybe, sometimes, a lost contract.
The Pearl River in China is now home to myriads of small manufacturers, and the synergy improves everyone's productive capacity. Like it used to in Birmingham, "city of a thousand trades". But now in the UK, we could be dropping below the threshold of economic viability for manufacturing industry.
That's what the mat said to me.
The reason for the delay - at least for one of the directors - was a last-moment requirement for tico rubber, needed next morning for anti-vibration matting under a five-ton machine that was being re-sited. The usual supplier, a major international concern, has recently shut down the closest depot to Birmingham. Rationalisation. Outsourcing. Globalization.
So while waiting, I tried to help my client find the material somewhere else. Googling away, we found it in the far north of England, or Cornwall; too far. Maybe just possibly in Market Harborough or Leicester? On calling the nearer companies, specifications and stock levels were doubtful.
My clients' business is contrarian: they move machines, and although originally that meant from one UK site to another, more often now it involves sending them abroad. As the decline of British manufacturing industry has accelerated, they've been very busy recently. For obvious reasons, the bonanza will end sometime.
But back to the matting. Once, suppliers of components you needed would be close at hand. Now we could be looking at journeys to the ends of the country - meaning cost, delay and maybe, sometimes, a lost contract.
The Pearl River in China is now home to myriads of small manufacturers, and the synergy improves everyone's productive capacity. Like it used to in Birmingham, "city of a thousand trades". But now in the UK, we could be dropping below the threshold of economic viability for manufacturing industry.
That's what the mat said to me.
What's your house worth?
Home prices WILL contract so that the median house is 2.5-3x the median income
says Karl Denninger. Now do your sums.
Some interesting comments and suggestions (including my usual twopenn'orth) on this post at the Capitalists@work blog - people seriously discussing inflation hedging and survivalism, here in the UK. We're getting beyond ivory-tower discussion.
says Karl Denninger. Now do your sums.
Some interesting comments and suggestions (including my usual twopenn'orth) on this post at the Capitalists@work blog - people seriously discussing inflation hedging and survivalism, here in the UK. We're getting beyond ivory-tower discussion.
Tuesday, February 26, 2008
Beyond gold
This blog by Thomas H. Greco looks interesting. The author, an American, has taken the trouble to address a convention in Malaysia on currency issues,and you'll recall that they're trialling the gold dinar in the province of Kelantan.
Greco thinks that modern technology may let us keep accounts of exchanges without having to resort to traditional forms of currency. I suppose this could be similar to Local Exchange Trading Systems. It's also interesting that he's featured and commented on Ron Paul's proposal that currency systems should be allowed to compete. Greco even looks at Air Miles as one candidate!
Greco thinks that modern technology may let us keep accounts of exchanges without having to resort to traditional forms of currency. I suppose this could be similar to Local Exchange Trading Systems. It's also interesting that he's featured and commented on Ron Paul's proposal that currency systems should be allowed to compete. Greco even looks at Air Miles as one candidate!
Going down
Another grizzly, this time Captain Hook:
You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.
[...] Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market. Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. [...] It's a simple numbers game, where an aging population is less prone to take on debt.
He considers the possibility of a Japanese-style asset deflation, which gels with my earlier thoughts regarding a generation-long UK property slump.
You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.
[...] Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market. Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. [...] It's a simple numbers game, where an aging population is less prone to take on debt.
He considers the possibility of a Japanese-style asset deflation, which gels with my earlier thoughts regarding a generation-long UK property slump.
Monday, February 25, 2008
Place your bets
Peter Navarro lays out three global economic scenarios and their effects on different asset classes. The grid looks a bit like the betting board for roulette, or possibly craps. At any rate, a good tool for helping you decide.
To me, decoupling seems the least likely at this stage; I don't feel the rest of the world has yet built up demand sufficient to be unaffected by the loss of the American consumer. But what do I know.
I'm guessing the first scenario for a while, followed by the third when governments panic.
To me, decoupling seems the least likely at this stage; I don't feel the rest of the world has yet built up demand sufficient to be unaffected by the loss of the American consumer. But what do I know.
I'm guessing the first scenario for a while, followed by the third when governments panic.
Sunday, February 24, 2008
... and I thought I was a bear!
The end of democracy
Simon Watkins and Helia Ebrahimi in The Mail on Sunday (p.58) give a graph showing that sovereign wealth funds (SWFs) purchased over £20 billion worth of British business in the last three years, and report a prediction that SWFs will own £6 trillion of world assets by 2015.
Wikipedia estimates the world's stockmarket capitalisation at $51 trillion and bonds at $45 trillion. Taken together, in sterling terms, that's about £49 trillion. So in seven years' time, sovereign funds are expected to control 12% of the market. This is significant: you'll recall that and EU countries require declarations of shareholdings at various levels between 2 and 5 per cent (3% in the UK), as seen in Appendix 5 of this document, and anyone owning over 1% of a company's shares has to declare dealings if the company is the subject of a takeover bid.
My hazy understanding of democracy is that it includes two crucial elements, namely, the vote, and the right to own personal property. We're losing both. What is our freedom worth when collectively, governments not only employ large numbers of people directly, but many more of them indirectly, through ownership of the businesses for which they work?
What does the vote matter? Here in the UK, we have had a coup by a small, tightly organised (and unscrupulous, even if and when principled) group who have realised that what matters is the swing voter in the swing seat, and nothing else. "What works is what matters" - a slogan that, superficially, seems simply pragmatic, but actually slithers away from identifying the principal objective: you can only tell if it works, when you know what you want it to do. And under our first-past-the-post system, with constituencies determined (how? and who is on the committee?) by the Boundary Commission, I could vote for the incumbent or the man in the moon, but I'm going to get a Labour Party apparatchik in my ward.
And I don't think the system will be reformed if "the other lot" get in, either: "Look with thine ears: See how yond Justice rails upon yond simple thief. Hark in thine ear: Change places, and handy-dandy, which is the Justice, which is the thief?" Structural issues matter: we are cursed by the psephologists, spin doctors and databases.
And as for property, when sovereign wealth funds go from being the tail that wags the dog, to becoming the dog, multinational businesses will be less concerned to satisfy the local shareholder, who may also be an employee. Big MD (or Big CEO) will have his arm around the shoulders of Big Brother.
We worry so much about wealth, and forget what it's for: not just survival, but independence, respect, liberty. Now, the peasants are fed, housed, medically treated, given pocket money, have their disabilities catered for, their children taught, and their legal cases expensively considered. So many of them are fat, enforcedly idle, addled with drink and drugs, chronically ill and disabled, negligent of their offspring and familiar to the point of contempt with the legal system. Despite (because of) their luxuries, they suffer, like the declawed, housebound cats in some American dwellings.
What matters is what works; these outcomes don't matter, except that they work for a class - which I think is becoming hereditary - that seeks, retains and services power. I have said to friends many times that we are seeing the reconstruction of a pan-European aristocracy, disguised as a political, managerial and media nexus.
The American Revolution was about liberty, not wealth, and it is one of the few major nations where the mice did, for a long time, succeed in belling the cat; there was a period here, too, when Parliament could call the King's men to a rigorous account. Now, even in America, the abstract networks of money and power are turning the voters into vassals of the machine that sustains them. As here, the political issues there will soon be welfare, pensions, Medicare and other elements of the badly-made pottage for which we sell our birthright.
As for Bombardier Yossarian in Catch-22, the first step back to our liberty is to stop believing in the benevolence of the system.
Wikipedia estimates the world's stockmarket capitalisation at $51 trillion and bonds at $45 trillion. Taken together, in sterling terms, that's about £49 trillion. So in seven years' time, sovereign funds are expected to control 12% of the market. This is significant: you'll recall that and EU countries require declarations of shareholdings at various levels between 2 and 5 per cent (3% in the UK), as seen in Appendix 5 of this document, and anyone owning over 1% of a company's shares has to declare dealings if the company is the subject of a takeover bid.
My hazy understanding of democracy is that it includes two crucial elements, namely, the vote, and the right to own personal property. We're losing both. What is our freedom worth when collectively, governments not only employ large numbers of people directly, but many more of them indirectly, through ownership of the businesses for which they work?
What does the vote matter? Here in the UK, we have had a coup by a small, tightly organised (and unscrupulous, even if and when principled) group who have realised that what matters is the swing voter in the swing seat, and nothing else. "What works is what matters" - a slogan that, superficially, seems simply pragmatic, but actually slithers away from identifying the principal objective: you can only tell if it works, when you know what you want it to do. And under our first-past-the-post system, with constituencies determined (how? and who is on the committee?) by the Boundary Commission, I could vote for the incumbent or the man in the moon, but I'm going to get a Labour Party apparatchik in my ward.
And I don't think the system will be reformed if "the other lot" get in, either: "Look with thine ears: See how yond Justice rails upon yond simple thief. Hark in thine ear: Change places, and handy-dandy, which is the Justice, which is the thief?" Structural issues matter: we are cursed by the psephologists, spin doctors and databases.
And as for property, when sovereign wealth funds go from being the tail that wags the dog, to becoming the dog, multinational businesses will be less concerned to satisfy the local shareholder, who may also be an employee. Big MD (or Big CEO) will have his arm around the shoulders of Big Brother.
We worry so much about wealth, and forget what it's for: not just survival, but independence, respect, liberty. Now, the peasants are fed, housed, medically treated, given pocket money, have their disabilities catered for, their children taught, and their legal cases expensively considered. So many of them are fat, enforcedly idle, addled with drink and drugs, chronically ill and disabled, negligent of their offspring and familiar to the point of contempt with the legal system. Despite (because of) their luxuries, they suffer, like the declawed, housebound cats in some American dwellings.
What matters is what works; these outcomes don't matter, except that they work for a class - which I think is becoming hereditary - that seeks, retains and services power. I have said to friends many times that we are seeing the reconstruction of a pan-European aristocracy, disguised as a political, managerial and media nexus.
The American Revolution was about liberty, not wealth, and it is one of the few major nations where the mice did, for a long time, succeed in belling the cat; there was a period here, too, when Parliament could call the King's men to a rigorous account. Now, even in America, the abstract networks of money and power are turning the voters into vassals of the machine that sustains them. As here, the political issues there will soon be welfare, pensions, Medicare and other elements of the badly-made pottage for which we sell our birthright.
As for Bombardier Yossarian in Catch-22, the first step back to our liberty is to stop believing in the benevolence of the system.
BTW: the man who wrote "The Anarchist Cookbook" later converted to Christianity. The one thing not to do with the system is to try to smash it - you'll only get something worse.
Saturday, February 23, 2008
Flat Broke and Berserk
Stagflation? Who can say?Paul Kasriel says no to seventies-style stagflation, for two reasons: oil supplies aren't being choked off, and unions are weak. He may be right.
But I understand that the Saudis are keeping oil production at an unsustainably high level, even though this is damaging the quality of the remaining underground reserves. In French wine-growing terms, this is known as "faire pisser les vignes". And given the Peak Oil issue, we're going to find that countries like Russia and Iran may use their energy supplies to further their own agendas.
As to union wage demands, yes, the brothers are no longer so united; but the voters may yet get together behind a politician who promises to maintain living standards. I predict this will be achieved by writing checks/cheques on the future, i.e. inflation. That's after the current bout of monetary deflation, of course.
Which brings us to currencies. It's a good week for readers of Julian Phillips: here he discusses how in rural India, the rupee is on a flexible gold standard to avoid the depredations of taxation and bribery; and here he looks at possible plans by G7 nations to place your money under house arrest, to prevent it fleeing the country.
Is this back to the 70s, or the 60s? As Wikipedia reminds us, "In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. "
Pursuing my "sell up and get a (possibly horse-drawn) caravan" theme, I note it's a tradition of the Romanies to collect large pieces of Royal Crown Derby pottery - beautiful, thickly patinated with gold, easily identifiable in the event of theft, and impossible to melt down. Soon it'll be time to join the raggle taggle gypsies, O.
Until then, I have to have a replacement car (they tell me Fiat stands for "Fix It Again Tomorrow"), so I'm off to a second-hand auto supermarket today. Let's see if there is any real sign of recession hitting big-ticket items.
Friday, February 22, 2008
The low interest trap
The UK's residential housing stock is now worth an estimated £4 trillion. But this valuation is powered by £1.2 trillion in mortgages, an average first time buyer loan of £140,000, a loan/income multiple of 3.61 and the base interest rate at 5.5%.
In 1987, the average first-time buyer borrowed £25,000, with a loan/income multiple of 2.1 and the base interest rate at 10.5%.
So the modern housebuyer now takes on 72% more debt in relation to income. Interest rates (and house values) may go up and down, but the amount borrowed is a hard - and now heavy - number. All this for the same thing we had 20 years ago - a safe place to sleep.
One might think that the true value of our housing is the gross less debt, i.e. (4 - 1.2 =) £2.8 trillion. That approach would work, if each house had the same proportion of debt. But it must be far less than that, since most of the debt is on the shoulders of the young(ish) - if they halved their initial borrowing, there would have to be a severe impact on house prices generally.
What would houses be worth if no-one could borrow more than 2 years' income against them? What if there were no mortgages at all? What will happen - what will the multiplying effect be - when the housebuying generation finds itself so burdened with taxes and high food and energy costs, that it cannot afford to take on such large home loans?
In whose interest has all this money-lending operated?
In cartoon-caveman times, chasing the bear or sabre-toothed tiger out and seizing the cave would be a day's work. Now it takes 20-25 years (sometimes far more) to chase out the bank. Have we progressed?
In 1987, the average first-time buyer borrowed £25,000, with a loan/income multiple of 2.1 and the base interest rate at 10.5%.
So the modern housebuyer now takes on 72% more debt in relation to income. Interest rates (and house values) may go up and down, but the amount borrowed is a hard - and now heavy - number. All this for the same thing we had 20 years ago - a safe place to sleep.
One might think that the true value of our housing is the gross less debt, i.e. (4 - 1.2 =) £2.8 trillion. That approach would work, if each house had the same proportion of debt. But it must be far less than that, since most of the debt is on the shoulders of the young(ish) - if they halved their initial borrowing, there would have to be a severe impact on house prices generally.
What would houses be worth if no-one could borrow more than 2 years' income against them? What if there were no mortgages at all? What will happen - what will the multiplying effect be - when the housebuying generation finds itself so burdened with taxes and high food and energy costs, that it cannot afford to take on such large home loans?
In whose interest has all this money-lending operated?
In cartoon-caveman times, chasing the bear or sabre-toothed tiger out and seizing the cave would be a day's work. Now it takes 20-25 years (sometimes far more) to chase out the bank. Have we progressed?
Thursday, February 21, 2008
Will sovereign wealth funds support the market?
BBC Radio 4 broadcast an interesting programme on sovereign wealth funds tonight. Is it not possible the oil exporting and trading surplus nations will be looking for a home for their capital, at the same time as private investors and overborrowed institutional investors are trying to cash out?
If so, the real story is not yet another impending market crash, whose effects may in any case be softened by an influx of new money that has political motive and so is not so narrowly focussed on a fair market price; instead, the major issue may be that, just as the West's industrial base has been hollowed-out, so its equity base may be attenuated in the same way.
In other words, our countries are like a man who has lost his job and is just about to find out that his pension scheme has been raided.
If so, the real story is not yet another impending market crash, whose effects may in any case be softened by an influx of new money that has political motive and so is not so narrowly focussed on a fair market price; instead, the major issue may be that, just as the West's industrial base has been hollowed-out, so its equity base may be attenuated in the same way.
In other words, our countries are like a man who has lost his job and is just about to find out that his pension scheme has been raided.
Laying it on the line
Some people will act beyond their self-interest. Karl Denninger is an expert investor, but is moved to be an economic prophet for his country and like other prophets, despairs of the passivity of his people:
This financial weapon of mass destruction is going to detonate.
It will make it impossible for the government to pay your Medicare and Social Security benefits.
It will result in double the tax burden you have now being laid on your children and grandchildren, OR MORE.
And when that happens, if I am still alive I'm going to spend MY MONEY on a full page advertisement in The Wall Street Journal (or whatever the "mainstream media" is at that point) telling your kids (who will then be adults) that you scr*w*d them on purpose because you were too much of a cheap j*ckoff to get on a plane and go raise h*ll in Washington DC to put a stop to this cr*p!
I wonder what their reaction will be to "Dear Old Dad" when they're living in poverty as a direct consequence of you fiddling while Rome burns?
I wonder if Moses used expletives when he came down off the mountain and found the people worshipping a statue of an ox?
Good man.
This financial weapon of mass destruction is going to detonate.
It will make it impossible for the government to pay your Medicare and Social Security benefits.
It will result in double the tax burden you have now being laid on your children and grandchildren, OR MORE.
And when that happens, if I am still alive I'm going to spend MY MONEY on a full page advertisement in The Wall Street Journal (or whatever the "mainstream media" is at that point) telling your kids (who will then be adults) that you scr*w*d them on purpose because you were too much of a cheap j*ckoff to get on a plane and go raise h*ll in Washington DC to put a stop to this cr*p!
I wonder what their reaction will be to "Dear Old Dad" when they're living in poverty as a direct consequence of you fiddling while Rome burns?
I wonder if Moses used expletives when he came down off the mountain and found the people worshipping a statue of an ox?
Good man.
Wednesday, February 20, 2008
Cut and run?
Atash Hagmahani does pessimism in a flowery and Orientally allusive way, but the bottom line is familiar: stagflation is on the way, if not here already, thanks to financial imprudence and the offshoring of work.
His action points are interesting, including starting to save hard (and I agree that's technically possible, though many people might find this hard to sell to their life-partners) and (more controversially) not wasting money on a college education for your children:
They will spend vast amounts of money (much of it borrowed) on an education that is economically worthless; the jobs they could not get out of high-school will still be out of reach after college.
I think that recommendation needs qualification. It seems to me that in poor countries, the well-off are even better-off. Surely it's more important to ensure that your children, if capable and hard-working, either pursue courses that train them for well-paid work, or at least go to universities that raise their ambitions and help them make useful social connections.
But I think he's right to think that we'll soon find we're in a game of musical chairs with most of the seating removed. Another of Hagmahani's options is simply to quit the country. It's time to really think out of the box.
His action points are interesting, including starting to save hard (and I agree that's technically possible, though many people might find this hard to sell to their life-partners) and (more controversially) not wasting money on a college education for your children:
They will spend vast amounts of money (much of it borrowed) on an education that is economically worthless; the jobs they could not get out of high-school will still be out of reach after college.
I think that recommendation needs qualification. It seems to me that in poor countries, the well-off are even better-off. Surely it's more important to ensure that your children, if capable and hard-working, either pursue courses that train them for well-paid work, or at least go to universities that raise their ambitions and help them make useful social connections.
But I think he's right to think that we'll soon find we're in a game of musical chairs with most of the seating removed. Another of Hagmahani's options is simply to quit the country. It's time to really think out of the box.
Sunday, February 17, 2008
All our banks are sub-prime
The Mail on Sunday reports plans by the British Government to borrow money from the Middle East, on Islamic Sharia terms - that is, without, technically, paying interest.
Never mind the Islamophobic subtext: Islam is not the only religion to object to charging interest (which was illegal in France up to the Revolution of 1789). According to The Merchants' Magazine and Commercial Review by Isaac Smith Homans, William B. Dana (1849) (found by Google search here):
The Jewish law prohibited all usury between Jew and Jew, although it was allowed between Jews and foreigners. (Ex. 22 : 25 ; Levit. 25 : 36, 37 : Deut 23 : 19, 20. Compare Ps. 15 : 5 ; Ezek. 18 : 8, 13, 17, Ac.) The reason of this distinction, according to Father Ambrose, was, that God designed usury as one of the ways of making war upon the Canaanites and other heathen nations.
The Canon Law, as it is called, i. e., the ecclesiastical law of the Roman Catholic Church, pronounces the taking of interest, even the least, to be a mortal sin, and declares those who defend the practice to be heretics.
The interpretation of usury as a form of warfare is resonant.
There is also the unreligious technical point, that the money supply must increase to cover the interest charged. Either that, or ultimately all the money in the world will end up in the hands of the money-lenders.
This may not have mattered quite so much when the world was not so monetized - when we built our own houses, grew our own food, drew water from wells and rivers, and made our own clothes. It has to be said that none of it, generally, was as nice as today (though at least water didn't come in plastic bottles that took seven times as much water to make); but as more and more of reality nowadays has a price ticket on it, the inexorable demands of interest must either create unbounded inflation, or by seizing all our assets, enslave us. Perhaps usury is indeed a form of aggression.
Which leads me to wonder where money came from in the first place. How can you invent something, define the world with reference to your new creation (and possession), and use it to claim - to seize - ownership of the world? This is to make the money-issuer - originally the King or Emperor - lord of all the Creation he can control. So is power the only game in town? Maybe civilised life, the quiet enjoyment of one's own hard-won personal property, is merely an illusion, a time-out in the game. But impoverish the middle class and all bets are off - as Germany found out in the 20s and 30s. How foolish must a State be, to allow its mismanagement of finance to threaten the social order. Still, the Germans weren't entirely responsible for the WWI peace treaty that led to the total wreck of their economy; by contrast, look at this latest from Karl Denninger on the current, State-permitted mess.
The power of the State to coin money is nothing to the way the banks multiply it. Something like a mere 3% of all money is in notes and coins; the rest is deposits and credit - i.e. promises. Instead being charged a modest fee for guarding your cash (which is, I understand, the practice of the traditional Swiss bank), you're paid what you think is a nice rate of interest - but thanks to fractional reserve banking, your deposit can be multiplied and loaned out, at even higher rates. No wonder the banks always seem to have the nicest locations, including converted Tudor houses in little Warwickshire villages.
Swelling the capital within the economy ultimately pushes up prices, though as money-lenders become more cautious and call loans back in, the opposite happens; but meanwhile, the expanded money supply also builds-in massive future inflation, because interest must come back, as well as all the existing capital. Even if some of this fake capital is lost because of asset write-offs, the lenders will seek to make up for it by charging more interest on the loans that haven't defaulted. And the difference between the small interest paid out to you on your little deposit, and the larger interest demanded on the much greater loan base, pays for all the overheads and leaves over enough, and more than enough.
Meanwhile, the temporarily bloated money supply inflates assets, including assets that really you must have, such as a roof over your head. In the UK, the M4 measure of money supply has approximately doubled since 2000 - and house prices have done almost exactly the same. But I don't have the power to say, I don't believe in borrowing money so I won't pay so much for your house. And since you (quite understandably) will refuse my lower offer, I will have to rent instead - at a rate that reflects the price of houses. What would houses cost - what would rents be - if home loans were illegal?
So now, in the wake of sub-prime (and other, earlier financial bubbles), we're all clapping our hands to save Tinkerbell's life. The government pumps yet more funny money into the economy to shore up the confidence tricks of bankers, and in the case of Northern Rock, their own voter base. If we understood what this "Tinkerbell" is really like, and what she's been up to, perhaps we'd be better off letting her die.
Except the law's on her side, and she'd take us and our families down with her. After all, by agreeing to borrow, we fix an obligation in nominal terms, even if (owing to events beyond our control, but not necessarily beyond that of the money-makers, and money-fakers) the assets decline in nominal terms. In fact, by first expanding and then contracting the money supply, it is possible for lenders to take your assets and any additional capital that you personally contributed, then reinflate the assets later. Hey presto, they've grabbed your cash. No wonder some Americans trash the house before mailing back the keys.
I think that for those who have the liberty to do so, escape comes in two stages: get your cash out, then buy whatever you need so that in future, you depend on the money system as little as possible. You should also stay mobile - the State needs captives, and a house is an excellent way to tie you by one leg. And the licence plate on a car is the next best thing to a tag clipped onto your ear. Unfortunately, in an overcrowded island like ours, this doesn't seem realistic, but maybe that's why an Irish girl told me, years ago, that farsighted (and typically pessimistic) Germans were buying into rural Ireland. Perhaps in America, or some other land blessed with a lower ratio of population to fertile land, we may escape with the raggle taggle gypsies. Velvet-clad slavery, or freedom and poverty?
What care I for a goose-feather bed?
With the sheet turned down so bravely, O!
For to-night I shall sleep in a cold open field
Along with the raggle taggle gypsies, O!
Never mind the Islamophobic subtext: Islam is not the only religion to object to charging interest (which was illegal in France up to the Revolution of 1789). According to The Merchants' Magazine and Commercial Review by Isaac Smith Homans, William B. Dana (1849) (found by Google search here):
The Jewish law prohibited all usury between Jew and Jew, although it was allowed between Jews and foreigners. (Ex. 22 : 25 ; Levit. 25 : 36, 37 : Deut 23 : 19, 20. Compare Ps. 15 : 5 ; Ezek. 18 : 8, 13, 17, Ac.) The reason of this distinction, according to Father Ambrose, was, that God designed usury as one of the ways of making war upon the Canaanites and other heathen nations.
The Canon Law, as it is called, i. e., the ecclesiastical law of the Roman Catholic Church, pronounces the taking of interest, even the least, to be a mortal sin, and declares those who defend the practice to be heretics.
The interpretation of usury as a form of warfare is resonant.
There is also the unreligious technical point, that the money supply must increase to cover the interest charged. Either that, or ultimately all the money in the world will end up in the hands of the money-lenders.
This may not have mattered quite so much when the world was not so monetized - when we built our own houses, grew our own food, drew water from wells and rivers, and made our own clothes. It has to be said that none of it, generally, was as nice as today (though at least water didn't come in plastic bottles that took seven times as much water to make); but as more and more of reality nowadays has a price ticket on it, the inexorable demands of interest must either create unbounded inflation, or by seizing all our assets, enslave us. Perhaps usury is indeed a form of aggression.
Which leads me to wonder where money came from in the first place. How can you invent something, define the world with reference to your new creation (and possession), and use it to claim - to seize - ownership of the world? This is to make the money-issuer - originally the King or Emperor - lord of all the Creation he can control. So is power the only game in town? Maybe civilised life, the quiet enjoyment of one's own hard-won personal property, is merely an illusion, a time-out in the game. But impoverish the middle class and all bets are off - as Germany found out in the 20s and 30s. How foolish must a State be, to allow its mismanagement of finance to threaten the social order. Still, the Germans weren't entirely responsible for the WWI peace treaty that led to the total wreck of their economy; by contrast, look at this latest from Karl Denninger on the current, State-permitted mess.
The power of the State to coin money is nothing to the way the banks multiply it. Something like a mere 3% of all money is in notes and coins; the rest is deposits and credit - i.e. promises. Instead being charged a modest fee for guarding your cash (which is, I understand, the practice of the traditional Swiss bank), you're paid what you think is a nice rate of interest - but thanks to fractional reserve banking, your deposit can be multiplied and loaned out, at even higher rates. No wonder the banks always seem to have the nicest locations, including converted Tudor houses in little Warwickshire villages.
Swelling the capital within the economy ultimately pushes up prices, though as money-lenders become more cautious and call loans back in, the opposite happens; but meanwhile, the expanded money supply also builds-in massive future inflation, because interest must come back, as well as all the existing capital. Even if some of this fake capital is lost because of asset write-offs, the lenders will seek to make up for it by charging more interest on the loans that haven't defaulted. And the difference between the small interest paid out to you on your little deposit, and the larger interest demanded on the much greater loan base, pays for all the overheads and leaves over enough, and more than enough.
Meanwhile, the temporarily bloated money supply inflates assets, including assets that really you must have, such as a roof over your head. In the UK, the M4 measure of money supply has approximately doubled since 2000 - and house prices have done almost exactly the same. But I don't have the power to say, I don't believe in borrowing money so I won't pay so much for your house. And since you (quite understandably) will refuse my lower offer, I will have to rent instead - at a rate that reflects the price of houses. What would houses cost - what would rents be - if home loans were illegal?
So now, in the wake of sub-prime (and other, earlier financial bubbles), we're all clapping our hands to save Tinkerbell's life. The government pumps yet more funny money into the economy to shore up the confidence tricks of bankers, and in the case of Northern Rock, their own voter base. If we understood what this "Tinkerbell" is really like, and what she's been up to, perhaps we'd be better off letting her die.
Except the law's on her side, and she'd take us and our families down with her. After all, by agreeing to borrow, we fix an obligation in nominal terms, even if (owing to events beyond our control, but not necessarily beyond that of the money-makers, and money-fakers) the assets decline in nominal terms. In fact, by first expanding and then contracting the money supply, it is possible for lenders to take your assets and any additional capital that you personally contributed, then reinflate the assets later. Hey presto, they've grabbed your cash. No wonder some Americans trash the house before mailing back the keys.
I think that for those who have the liberty to do so, escape comes in two stages: get your cash out, then buy whatever you need so that in future, you depend on the money system as little as possible. You should also stay mobile - the State needs captives, and a house is an excellent way to tie you by one leg. And the licence plate on a car is the next best thing to a tag clipped onto your ear. Unfortunately, in an overcrowded island like ours, this doesn't seem realistic, but maybe that's why an Irish girl told me, years ago, that farsighted (and typically pessimistic) Germans were buying into rural Ireland. Perhaps in America, or some other land blessed with a lower ratio of population to fertile land, we may escape with the raggle taggle gypsies. Velvet-clad slavery, or freedom and poverty?
What care I for a goose-feather bed?
With the sheet turned down so bravely, O!
For to-night I shall sleep in a cold open field
Along with the raggle taggle gypsies, O!
Friday, February 15, 2008
UK public debt twice as bad as America's
David Walker, the US Comptroller General, reckons the debts and unfunded liabilities of the USA amount to some $53 trillion, which assuming GDP of $13.75 trillion means a debt-to-GDP ratio of 3.85. Mr Walker, now retiring, has taken his "Fiscal Wake Up Tour" round America for two years, warning Cassandra-like of the woe to come if things don't change soon.
"Wat Tyler" of the redoubtable blog Burning Our Money reckons UK debts and unfunded liabilities to be some £9 trillion, which assuming GDP of $2.472 trillion (c. £1.26 trillion today) means a debt-to-GDP ratio of 7.16. Sir John Bourn (74) is the UK's equivalent of David Walker, and recently left office after a tenure of 20 years. A Google news search using the terms "Sir John Bourn", "debt" and "warning" yielded nothing today.
We worry about mortgages, but according to this site:
"Recent figures from the Council of Mortgage Lenders (CML) showed average first-time buyers borrowed 3.24 times their income - the highest level ever recorded...Many lenders will calculate a debt income ratio, which as a rule of thumb should not exceed 40%. " (i.e. 0.4; my highlights)
"Wat Tyler" of the redoubtable blog Burning Our Money reckons UK debts and unfunded liabilities to be some £9 trillion, which assuming GDP of $2.472 trillion (c. £1.26 trillion today) means a debt-to-GDP ratio of 7.16. Sir John Bourn (74) is the UK's equivalent of David Walker, and recently left office after a tenure of 20 years. A Google news search using the terms "Sir John Bourn", "debt" and "warning" yielded nothing today.
We worry about mortgages, but according to this site:
"Recent figures from the Council of Mortgage Lenders (CML) showed average first-time buyers borrowed 3.24 times their income - the highest level ever recorded...Many lenders will calculate a debt income ratio, which as a rule of thumb should not exceed 40%. " (i.e. 0.4; my highlights)
Bonds: up or down?
Where's safe for your money? It's like a minefield: we seem to be zig-zag running between financial explosions. Housing? Overpriced, full of bad debt. The stockmarket? Due to drop when earnings revert to the mean. The commodity market? Distorted by speculation and manipulation.
How about bonds? Clive Maund thinks US Treasuries are due for a pasting as yields rise to factor-in inflation; but Karl Denning is still firmly of the DE-flation persuasion and thinks a stockmarket fall may be our saviour:
The Bond Market no likey what's going on. The 10 is threatening to break out of a bullish (for rates) flag, which presages a potential 4.20% 10 year rate. This will instantaneously translate into higher mortgage and other "long money" rates, destroying what's left of the housing industry.
There is only one way to prevent this, and that's for the stock market to blow up so that people run like hell into bonds, pushing yields down!
He also gives his own theory as to why the Fed stopped reporting M3 money supply rates:
The moonbats claim that The Fed discontinued M3 because they're trying to hide something. In fact they discontinued M3 because it didn't tell you the truth; it was simply NOT capturing any of the "shadow" credit creation caused by all the fraud (and undercapitalized "insurance" which, in fact, is worth zero), but it sure is capturing the forcible repatriation into bank balance sheets when there is no other when it comes to access to capital for companies and governments.
So, two elephants are riding the bond seesaw: fear of inflation, and fear of losing one's capital. I hope the plank doesn't snap. Antal Fekete reckons the bond market can take all the money you can throw at it - but what goes up will come down.
Cash still doesn't seem like such a bad thing, to me.
How about bonds? Clive Maund thinks US Treasuries are due for a pasting as yields rise to factor-in inflation; but Karl Denning is still firmly of the DE-flation persuasion and thinks a stockmarket fall may be our saviour:
The Bond Market no likey what's going on. The 10 is threatening to break out of a bullish (for rates) flag, which presages a potential 4.20% 10 year rate. This will instantaneously translate into higher mortgage and other "long money" rates, destroying what's left of the housing industry.
There is only one way to prevent this, and that's for the stock market to blow up so that people run like hell into bonds, pushing yields down!
He also gives his own theory as to why the Fed stopped reporting M3 money supply rates:
The moonbats claim that The Fed discontinued M3 because they're trying to hide something. In fact they discontinued M3 because it didn't tell you the truth; it was simply NOT capturing any of the "shadow" credit creation caused by all the fraud (and undercapitalized "insurance" which, in fact, is worth zero), but it sure is capturing the forcible repatriation into bank balance sheets when there is no other when it comes to access to capital for companies and governments.
So, two elephants are riding the bond seesaw: fear of inflation, and fear of losing one's capital. I hope the plank doesn't snap. Antal Fekete reckons the bond market can take all the money you can throw at it - but what goes up will come down.
Cash still doesn't seem like such a bad thing, to me.
Thursday, February 14, 2008
A secular bear market in housing?
It's now generally accepted that houses are overpriced. I think valuations will not only go down, but (notwithstanding bear market rallies) stay down for at least a generation.
Here's some reasons, some having a longer-term effect than others:
A market goes up when more people want to buy, than those that want to sell. Well, all of these first time home buyers have no spare cash for the Stock Market. The Baby Boomers, sometime in the future are going to want to sell. The question arises, "Sell to Whom?"
Returning to houses, there are still those who think valuations will continue to be supported by the tacit encouragement of economic migration to the UK.
Now, although this helps keep down wage rates at the lower end (where is the Socialist compassion in that?), the government is pledging the future for a benefit which is merely temporary, if it exists at all. Once an incoming worker has a spouse and several children, how much does he/she need to earn to pay for the social benefits consumed now and to come later? State education alone runs at around £6,000 ($12,000) per annum per child.
And then there's the cost of all the benefits for the indiginous worker on low pay, or simply unemployed and becoming steadily less employable as time passes. And his/her children, learning their world-view in a family where there is no apparent connection between money and work. The government makes get-tough noises, but in a recessionary economy, I don't think victimising such people for the benefit of newspaper headlines will be any use. I seem to recall (unless it was an Alan Coren spoof) that in the 70s, Idi Amin made unemployment illegal in Uganda; not a model to follow.
So to me, allowing open-door economic migration to benefit the GDP and hold up house prices doesn't work in theory, let alone in practice.
Besides, I maintain that in the UK, we don't have a housing shortage: we have a housing misallocation. There must be very many elderly rattling around alone in houses too large and expensive for them to maintain properly. This book says that as long ago as 1981, some 600,000 single elderly in owner-occupied UK property had five or more rooms; the ONS says that in 2004, some 7 million people were living alone in Great Britain. Then there's what must be the much larger number of people who live in twos and threes in houses intended for fours and fives. Before we build another million houses on flood-plains, let's re-visit the concept of need.
Maybe we'll see the return of Roger the lodger - if he's had a CRB check, of course.
Would I buy a second home now? No. Would I sell the one I live in? I'd certainly think about it - in fact, have been considering that for some years.
Here's some reasons, some having a longer-term effect than others:
- house prices are now a very high multiple of earnings, choking the first-time buyer market.
- presently, there is increasing economic pessimism, which will further inhibit buyers.
- the mortgage burden now lies in the amount of capital to be repaid, rather than the interest rate; that's much harder to get out of, and will prolong the coming economic depression, either through the enduring impact on disposable income, or through the destruction of money by mortgage defaults on negative-equity property - and as valuations fall, there will be more and more of the latter.
- fairly low current interest rates allow little room to drop rates further to support affordability - and at worst, rate drops could sucker even more people into taking on monster mortgage debt. But interest rate reductions are unlikely to benefit borrowers anyway. The banks have survived for centuries on the fact that while valuations are variable, debt is fixed. They got silly with sub-prime, but by George they will remain determined to get all they can of their capital back, and preserve its value. The people who create money literally out of nothing - a mere account-ledger entry - are now tightening lending criteria and will continue to press for high interest rates; for now, they will content themselves with not fully passing on central bank rate cuts, so improving the differential for themselves, as compensation for their risk.
- food and fuel costs are rising, and given declining resources (including less quality arable land annually), a growing world population and the relative enrichment of developing countries, demand will continue to soar, cutting into what's left of disposable income.
- our economy is losing manufacturing capacity and steadily turning towards the service sector, where wages are generally lower.
- the demographics of an ageing population mean that there will be proportionately fewer in employment, and taxation in its broadest sense will increase, even if benefits are marginally reduced.
- the growing financial burden on workers will further depress the birth rate, which in turn will exacerbate the demographic problem.
A market goes up when more people want to buy, than those that want to sell. Well, all of these first time home buyers have no spare cash for the Stock Market. The Baby Boomers, sometime in the future are going to want to sell. The question arises, "Sell to Whom?"
Returning to houses, there are still those who think valuations will continue to be supported by the tacit encouragement of economic migration to the UK.
Now, although this helps keep down wage rates at the lower end (where is the Socialist compassion in that?), the government is pledging the future for a benefit which is merely temporary, if it exists at all. Once an incoming worker has a spouse and several children, how much does he/she need to earn to pay for the social benefits consumed now and to come later? State education alone runs at around £6,000 ($12,000) per annum per child.
And then there's the cost of all the benefits for the indiginous worker on low pay, or simply unemployed and becoming steadily less employable as time passes. And his/her children, learning their world-view in a family where there is no apparent connection between money and work. The government makes get-tough noises, but in a recessionary economy, I don't think victimising such people for the benefit of newspaper headlines will be any use. I seem to recall (unless it was an Alan Coren spoof) that in the 70s, Idi Amin made unemployment illegal in Uganda; not a model to follow.
So to me, allowing open-door economic migration to benefit the GDP and hold up house prices doesn't work in theory, let alone in practice.
Besides, I maintain that in the UK, we don't have a housing shortage: we have a housing misallocation. There must be very many elderly rattling around alone in houses too large and expensive for them to maintain properly. This book says that as long ago as 1981, some 600,000 single elderly in owner-occupied UK property had five or more rooms; the ONS says that in 2004, some 7 million people were living alone in Great Britain. Then there's what must be the much larger number of people who live in twos and threes in houses intended for fours and fives. Before we build another million houses on flood-plains, let's re-visit the concept of need.
Maybe we'll see the return of Roger the lodger - if he's had a CRB check, of course.
Would I buy a second home now? No. Would I sell the one I live in? I'd certainly think about it - in fact, have been considering that for some years.
Sunday, February 10, 2008
Reversion to mean
Echoing recent comments by Vitaliy Katsenelson (also on Barron's), Jeremy Grantham thinks profit margins will decline towards normal and the Standard & Poor's 500 will head from its current c. 1334 to 1100 in the year 2010 - a drop of about 18%.
Grantham is emphatic that borrowed money is not a stimulant to the economy:
I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology.
That last sentence is really pregnant. I'm not sure about the man-hours (the closer we approach peasanthood, the harder we'll work), but I think that on both sides of the Atlantic, we've been falling down on the other three.
In Britain, our government has failed to distinguish between investing in education, and managing it - and where it has tried to do the latter, has pursued a Romantic-heritage political agenda. Capital investment? Going abroad. Technology? Ditto - and eagerly taken up (if not positively filched) by our Eastern trading partners.
I live in what used to be Car City; now, the vast Longbridge site is being redeveloped for housing and shops - in other words, open prison for the new ex-industrial underclass.
But Rome, too, kept control of its plebs with bread and circuses for a couple more centuries, before it fell.
Grantham is emphatic that borrowed money is not a stimulant to the economy:
I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology.
That last sentence is really pregnant. I'm not sure about the man-hours (the closer we approach peasanthood, the harder we'll work), but I think that on both sides of the Atlantic, we've been falling down on the other three.
In Britain, our government has failed to distinguish between investing in education, and managing it - and where it has tried to do the latter, has pursued a Romantic-heritage political agenda. Capital investment? Going abroad. Technology? Ditto - and eagerly taken up (if not positively filched) by our Eastern trading partners.
I live in what used to be Car City; now, the vast Longbridge site is being redeveloped for housing and shops - in other words, open prison for the new ex-industrial underclass.
But Rome, too, kept control of its plebs with bread and circuses for a couple more centuries, before it fell.
Saturday, February 09, 2008
Will monetary inflation be absorbed by the bond market?
In the previous post, I looked at the expectation that interest rates will rise. But it seems that freaky things can happen if the government tries to stimulate the economy by progressively cutting interest rates and pumping more money into the system.
Professor Antal E Fekete thinks that in a deflationary environment, governmental attempts to reflate by introducing more money will be thwarted by the ability of the bond market to soak up the excess liquidity. Higher bond yields result in lower bond valuations, so reducing interest rates inflates the price of bonds. Fekete says that halving the rate doubles the bond price, and since mathematically you can halve a number indefinitely, the bond market can absorb all the fiat money you can create. Therefore, you can have hyperinflation and economic depression at the same time.
This trap is possible because the abandonment of the gold-and-silver standard means that the dollar has no limit to its expansion. And bond speculators have their risk covered by the need of the government to return to the market for renewed borrowing. If the Professor is right, it would be a nasty trap indeed.
But maybe our conclusion should be that this explains why interest rates must rise.
A quibble on style: especially in England, money is regarded as dull. So financial commentators try hard to add flavour, and in the Professor's case, too hard - it has been difficult for me to detect the meat of the argument under its many-spiced similes. Byron's Don Juan comes to mind:
And Coleridge, too, has lately taken wing,
But like a hawk encumber'd with his hood,
Explaining Metaphysics to the nation--
I wish he would explain his Explanation.
Professor Antal E Fekete thinks that in a deflationary environment, governmental attempts to reflate by introducing more money will be thwarted by the ability of the bond market to soak up the excess liquidity. Higher bond yields result in lower bond valuations, so reducing interest rates inflates the price of bonds. Fekete says that halving the rate doubles the bond price, and since mathematically you can halve a number indefinitely, the bond market can absorb all the fiat money you can create. Therefore, you can have hyperinflation and economic depression at the same time.
This trap is possible because the abandonment of the gold-and-silver standard means that the dollar has no limit to its expansion. And bond speculators have their risk covered by the need of the government to return to the market for renewed borrowing. If the Professor is right, it would be a nasty trap indeed.
But maybe our conclusion should be that this explains why interest rates must rise.
A quibble on style: especially in England, money is regarded as dull. So financial commentators try hard to add flavour, and in the Professor's case, too hard - it has been difficult for me to detect the meat of the argument under its many-spiced similes. Byron's Don Juan comes to mind:
And Coleridge, too, has lately taken wing,
But like a hawk encumber'd with his hood,
Explaining Metaphysics to the nation--
I wish he would explain his Explanation.
Warren Buffett's misleading optimism
Jonathan Chevreau reports Warren Buffett's bullishness on the US economy, long-term; but the real gem in this piece is the extensive, but cogent and crunchy comment by Andrew Teasdale of The TAMRIS Consultancy, who analyses Buffett's real approach to equity valuations.
Teasdale points out that although interest rates hit 21% in 1982, there was less debt, higher disposable income and lower valuations: relative to disposable income, debt is a bigger burden today than it was 25 years ago. He summarises his position pithily:
It is also worthwhile remembering that not everyone holds a Buffet portfolio and not everyone has the luxury of a 220 year investment horizon. If I was a long term investor with no financial liabilities arising over the next 15 years equities would be my preferred asset class relative to cash and bonds, but I would be mindful of valuations in determining where I put my money.
Not all the bad debt has yet surfaced, and as Karl Denninger comments, even at this stage Citibank has recently been forced to borrow foreign money at 14%, and other banks at over 7%, in preference to the 3% Federal Funds rate, presumably to keep the scale of their insolvency in the dark.
Inflation is increasing, therefore money-lenders are going to want more income to compensate for risk and the erosion of the real value of their capital. For the yield to rise, the capital value of bonds has to fall.
So I read Teasdale's summary as implying that for now, it's cash rather than either bonds or equities.
Teasdale points out that although interest rates hit 21% in 1982, there was less debt, higher disposable income and lower valuations: relative to disposable income, debt is a bigger burden today than it was 25 years ago. He summarises his position pithily:
It is also worthwhile remembering that not everyone holds a Buffet portfolio and not everyone has the luxury of a 220 year investment horizon. If I was a long term investor with no financial liabilities arising over the next 15 years equities would be my preferred asset class relative to cash and bonds, but I would be mindful of valuations in determining where I put my money.
Not all the bad debt has yet surfaced, and as Karl Denninger comments, even at this stage Citibank has recently been forced to borrow foreign money at 14%, and other banks at over 7%, in preference to the 3% Federal Funds rate, presumably to keep the scale of their insolvency in the dark.
Inflation is increasing, therefore money-lenders are going to want more income to compensate for risk and the erosion of the real value of their capital. For the yield to rise, the capital value of bonds has to fall.
So I read Teasdale's summary as implying that for now, it's cash rather than either bonds or equities.
Thursday, February 07, 2008
The Golden Compass doesn't work
FTSE closed today down at 5,724.10, a point first reached (travelling the other way) in December 1998. The longer-term chart above suggests to me a glass ceiling. Or flogging a dead horse (I can't tell you how some ten-year-olds I know misheard that last saying recently, or how their conversation continued. That generation appears to be developing backwards from middle age.)Adjusted for inflation, the line would look worse, of course. I think my gut feeling was right ten years ago: essentially, we've been going down since the late nineties.
But what inflation measure to use? Gold seems to go down together with equity sell-offs, rather than seesawing against them. And unlike with the Dow, there doesn't seem to be an easily accessible index of the FTSE priced in gold terms; but GATA last week went very public with their theory that gold is being held down by surreptitious selling - and has been quietly disappearing from central bank vaults. This is something I've touched on a number of times before, and MoneyWeek gives its take on it here. Meanwhile, here's the ad:
Tuesday, February 05, 2008
The New World Order: a philosophical objection
A deep essay by Christopher Quigley here, but one I intend to re-read. Marxist philosophy always made my eyes water, practically instantly, as I have little tolerance for prolonged abstract multisyllabic holy-rolling, but I'll steel myself because we have to have some understanding of the madness that seems to have seized our modern conspiratorial ruling class. "Affairs are now soul-size".
Gold chart confusion
Here's a chart of gold against inflation as measured by CPI, from Captain Hook, and it suggests that high as it is now, the price of gold is still below its 1973 - 1997 average:
... and here's another from Ty Andros's TedBits, comparing gold to gobal financial liquidity:
Which line of reasoning would you support at this time?
... and here's another reproduced on the Contrarian Investor's Journal (possibly from TedBits, which I'll come to in a moment), which seems to show the opposite:
... and here's another from Ty Andros's TedBits, comparing gold to gobal financial liquidity:Which line of reasoning would you support at this time?
Sunday, February 03, 2008
Why equities should go down
I'm breaking radio silence because of a brilliantly lucid article (from the subscription-only Barron's site) found for us by Michael Panzner.
Vitaliy Katsenelson explains that the current average price-earnings ratio may seem cheap, but that's because recent profit margins have been well above the 8.5% trend. Even allowing for a shift since 1980 away from industry towards the higher-margin service sector, the present 11.9% profit margin should be seen against a longer-term background figure of around 8.9 - 9.2%, which if current p/e ratios continue would imply a downward stock price correction of 22 -25%.
This chimes with Robert McHugh's "Dow 9,000" prediction from last July. And in many fields it's usual for overshoot to occur in the process of regression to a mean, so if it holds true in this case we could see even deeper temporary lows.
Day traders, be warned: this piste is a Black Run.
Vitaliy Katsenelson explains that the current average price-earnings ratio may seem cheap, but that's because recent profit margins have been well above the 8.5% trend. Even allowing for a shift since 1980 away from industry towards the higher-margin service sector, the present 11.9% profit margin should be seen against a longer-term background figure of around 8.9 - 9.2%, which if current p/e ratios continue would imply a downward stock price correction of 22 -25%.
This chimes with Robert McHugh's "Dow 9,000" prediction from last July. And in many fields it's usual for overshoot to occur in the process of regression to a mean, so if it holds true in this case we could see even deeper temporary lows.
Day traders, be warned: this piste is a Black Run.
Friday, January 25, 2008
Au revoir
It looks as though the bear market has begun, though of course, events are liable to make fools of all of us. A recent peak was in October last year and if we take a recession as lasting typically 30 months, we should be grounding by around April 2010.
I've done my best to add my voice to the growing chorus of somethingmustbedonners, and tried to warn investors as I did in the late Nineties - not that I'm wise, but I seek out the wise. This won't put off the day traders, who rush in where angels fear to tread and will try to make fortunes on the rattlesnake-fast turns of bear market rallies; some will get it right, and fair play to you, as they say.
For the rest of us, I don't think I can better the common sense, brevity and clarity of this in the comments section from Jim in San Marcos, answering an investor's query as to what to do:
The basic premise is to pay off your debts and have some spare cash in the bank. There will be layoffs.
Buying a big item right now could tie you to a commitment that could be more than you anticipated. I know of one person already that was surprised by a layoff. They didn't see it coming.
If it gets worse, a lot of people will be selling big ticket items to raise cash. There should be some pretty good deals out there.
Money isn't everything, and there are bigger issues facing us: the growing military as well as economic power of Russia and China; our failure to nurture and educate our young, which points up the selfishness of our adults; the threat to democracy that is big government combined with big business, and the growing divide between an increasingly internationalist managerial class and a resentful, paralysed underclass whose numbers grow while our economies shrink and twist. And perhaps it is not entirely paranoid to suggest that there are many (often well-meaning, by their lights) proto-revolutionaries hacking away at the cultural and social ties that bind us, still dreaming that Bakunin was right when he said that the urge to destroy is also the urge to create.
I now have to take some time out to set my own affairs in order - too many commitments, personal and professional. Good luck to you all, and thanks for reading and commenting.
I've done my best to add my voice to the growing chorus of somethingmustbedonners, and tried to warn investors as I did in the late Nineties - not that I'm wise, but I seek out the wise. This won't put off the day traders, who rush in where angels fear to tread and will try to make fortunes on the rattlesnake-fast turns of bear market rallies; some will get it right, and fair play to you, as they say.
For the rest of us, I don't think I can better the common sense, brevity and clarity of this in the comments section from Jim in San Marcos, answering an investor's query as to what to do:
The basic premise is to pay off your debts and have some spare cash in the bank. There will be layoffs.
Buying a big item right now could tie you to a commitment that could be more than you anticipated. I know of one person already that was surprised by a layoff. They didn't see it coming.
If it gets worse, a lot of people will be selling big ticket items to raise cash. There should be some pretty good deals out there.
Money isn't everything, and there are bigger issues facing us: the growing military as well as economic power of Russia and China; our failure to nurture and educate our young, which points up the selfishness of our adults; the threat to democracy that is big government combined with big business, and the growing divide between an increasingly internationalist managerial class and a resentful, paralysed underclass whose numbers grow while our economies shrink and twist. And perhaps it is not entirely paranoid to suggest that there are many (often well-meaning, by their lights) proto-revolutionaries hacking away at the cultural and social ties that bind us, still dreaming that Bakunin was right when he said that the urge to destroy is also the urge to create.
I now have to take some time out to set my own affairs in order - too many commitments, personal and professional. Good luck to you all, and thanks for reading and commenting.
Thursday, January 24, 2008
We have tracked the beast to his lair
Many an honourable man is underrated. Richard Daughty (aka The Mogambo Guru) takes this opportunity to show that the banks created the problems that some of them are now called upon to solve. It's like that film (Blowback) where the arsonist villain turns out to be a firefighter. Doubtless no-one will suffer condign punishment for using inflation to steal from gullible savers.
Meow boing splat
Both Karl Denninger and Michael Panzner interpret yesterday's rise on the Dow as a bear market rally. There are already references to "dead cat bounce", but we haven't anywhere nearly touched the bottom, I think.
People speak of the crash of 1929, but it took much longer for the crisis to work through and there were lots of opportunities for investors to step off with smaller losses. There were also plenty of traps for those who thought it was time to buy back in.
Here's a chart (source) of the process:
People speak of the crash of 1929, but it took much longer for the crisis to work through and there were lots of opportunities for investors to step off with smaller losses. There were also plenty of traps for those who thought it was time to buy back in.
Here's a chart (source) of the process:
As they say, history doesn't repeat itself, but it rhymes. Today's central banks are acutely aware of this past history and do not wish to be remembered for making the same mistake, i.e. worsening the situation by deliberately contracting the money supply.
However, Denninger and others think we can't stop this contraction anyway, once the credit bubble has been pricked, and attempts to reflate will merely devalue the currency while failing to stimulate the real economy.
Tuesday, January 22, 2008
Dow 9,000 prediction fulfilled
As at the time of writing, the Dow is 11,820.24 and gold $875.90/oz. The Dow/gold ratio is therefore below 13.51 and has (perhaps fleetingly) fulfilled Robert McHugh's prediction.
Whether the Dow falls below 9,000 nominal in the course of a severe recession is something we shall have to see.
Whether the Dow falls below 9,000 nominal in the course of a severe recession is something we shall have to see.
Monday, January 21, 2008
Funny line
Traders described the losses on the FTSE 100 Index as "incredible", with the Footsie at one stage plummeting by as much as 330.7 points.
(Press Association release today.)
Less than 6%. Maybe they should raise the minimum age to be a trader.
Oh, and the PA uses the hack line "More than £x billion was wiped off the value of ... shares". Enough experience for cliche, not enough to remember history.
"See what I mean? Kids!"
(Press Association release today.)
Less than 6%. Maybe they should raise the minimum age to be a trader.
Oh, and the PA uses the hack line "More than £x billion was wiped off the value of ... shares". Enough experience for cliche, not enough to remember history.
"See what I mean? Kids!"
It can't happen here
The US bemoans its fate, but we in the UK have also had something of a crash in the last three months, too. FTSE on 12 October: 6,730.70; now: 5,578.20 - 17% down.
It can't happen here
It can't happen here
I'm telling you, my dear
That it can't happen here
Because I been checkin' it out, baby
I checked it out a couple a times, hmmmmmmmm
(The Mothers of Invention)
There was a period of hip journalism in the 60s and 70s that thought it clever to quote pop trash as if it were Holy Writ, and I'm afraid I couldn't resist the cheek. Retro, but maybe appropriate for a rerun of the econogrind of those years.
It can't happen here
It can't happen here
I'm telling you, my dear
That it can't happen here
Because I been checkin' it out, baby
I checked it out a couple a times, hmmmmmmmm
(The Mothers of Invention)
There was a period of hip journalism in the 60s and 70s that thought it clever to quote pop trash as if it were Holy Writ, and I'm afraid I couldn't resist the cheek. Retro, but maybe appropriate for a rerun of the econogrind of those years.
Trad wins out over Progressive
Jazz is in vogue, and so, it seems, are old-fashioned financial virtues (though not, of course, here in the Western world). Ty Andros points out what I have long suspected: we've been failing for a long time, and only inflation has hidden the truth from the masses. He goes back further than I would, and suggests the real-wealth stagnation in G7 countries began in 1990-1991.
Ben Bernanke half-joked about dropping money from helicopters if necessary; now the first $500 tax rebate parcels are on their way. Andros says we're into a Ludwig von Mises"crack-up boom" which means that nominally, assets won't fall in price, but in reality they will be eaten hollow by inflation:
“Volatility is opportunity” and it is about to SOAR! (As you will see in the next installment of the 2008 Outlook) They will “Print the money” as the unfolding “Crack up Boom” powers generational moves in grains, commodities, currencies, and stocks are on the table.
Ben Bernanke half-joked about dropping money from helicopters if necessary; now the first $500 tax rebate parcels are on their way. Andros says we're into a Ludwig von Mises"crack-up boom" which means that nominally, assets won't fall in price, but in reality they will be eaten hollow by inflation:
“Volatility is opportunity” and it is about to SOAR! (As you will see in the next installment of the 2008 Outlook) They will “Print the money” as the unfolding “Crack up Boom” powers generational moves in grains, commodities, currencies, and stocks are on the table.
Danger of systemic breakdown
Doug Noland looks at the world of financial speculation, which has used loads of borrowed money to boost returns, and worries that as liquidity dries up, the market will become inefficient. This is, I think, one of the things about which Richard Bookstaber has warned. Perhaps the gunslinger day traders should assure themselves of the robustness of their counterparties when playing with futures and options.
We've just had a crash
... and Robert McHugh figures that the US stock market (as measured by the Wilshire 5000 Index) has already lost $2.6 trillion in the last three months.
He's begging for inflation now, rather than a useless stimulant later when the mule has died.
He's begging for inflation now, rather than a useless stimulant later when the mule has died.
The $1 trillion loss figure reappears
Thomas Tan thinks the addition of plausible losses in the credit default swap market to write-offs in other areas of banking, could bring the total hit on the US financial system to the $1 trillion mark.
Sunday, January 20, 2008
Economics in the dark
In 1971, the economist Stafford Beer brought the cybernetic revolution to Chile. His key perception was that economic decisions needed not only accurate, but timely information. So he set up a computer network and data analysis systems to empower the government's ministries without overloading them with irrelevant data.
In advanced economies, it's important for companies, banks and individuals to receive such information, too.
But nearly 40 years later, the USA needs to re-learn the lesson. The Federal Reserve ceased reporting M3 money supply data in 2006; accurate assessment of inflation is complicated by "hedonic adjustment" and periodic (and tendentious?) alteration of the types of item included in price surveys; the Bureau of Labor Statistics seasonally adjusts unemployment figures so that an increase can sometimes appear to be a decrease; nobody (not even the lenders) yet knows the full figures on bad loans and "Tier 3 assets"; it is not even clear how we should assess a nation's wealth (GDP per capita seems a misleading measure).
How can you navigate without up-to-date information? Even in the nineteenth century, Mississippi river pilots had to keep track of the river's changes, or risk getting stranded on new sandbars. And as John Mauldin reports, party political manoeuvering is stymying two appointments to the Federal Reserve's Board, at a time when the Fed most needs to concentrate on resolving the unfolding complex financial crisis.
Even given the right data, decision-making has become tougher. Increasing global interconnection and wealth transfer between nations means that normal cycles may be broken by epochal linear developments, so the past is now a very unsafe guide to the future.
We need clarity, direction and vision.
In advanced economies, it's important for companies, banks and individuals to receive such information, too.
But nearly 40 years later, the USA needs to re-learn the lesson. The Federal Reserve ceased reporting M3 money supply data in 2006; accurate assessment of inflation is complicated by "hedonic adjustment" and periodic (and tendentious?) alteration of the types of item included in price surveys; the Bureau of Labor Statistics seasonally adjusts unemployment figures so that an increase can sometimes appear to be a decrease; nobody (not even the lenders) yet knows the full figures on bad loans and "Tier 3 assets"; it is not even clear how we should assess a nation's wealth (GDP per capita seems a misleading measure).
How can you navigate without up-to-date information? Even in the nineteenth century, Mississippi river pilots had to keep track of the river's changes, or risk getting stranded on new sandbars. And as John Mauldin reports, party political manoeuvering is stymying two appointments to the Federal Reserve's Board, at a time when the Fed most needs to concentrate on resolving the unfolding complex financial crisis.
Even given the right data, decision-making has become tougher. Increasing global interconnection and wealth transfer between nations means that normal cycles may be broken by epochal linear developments, so the past is now a very unsafe guide to the future.
We need clarity, direction and vision.
Panzner votes DE (flation)
Michael Panzner is in the DE camp, because the bubble was caused by credit creation: "The way up is the way down" (a maxim of both Taoism and Heraclitus, apparently; but then the Greeks have always been great travellers and interested in ideas).
In his excellent book (reviewed here last May), he suggests that inflation will come afterwards (actually, not just IN- but HYPER-).
In his excellent book (reviewed here last May), he suggests that inflation will come afterwards (actually, not just IN- but HYPER-).
Saturday, January 19, 2008
A small town in Germany
The TV was on, and I forget what programme we were watching. Sometimes they were Dutch - we were near the border - but more often German. I was eleven, and would watch anything. Even the adverts were fun, linked by shorts featuring little cartoon characters, the Mainzelmännchen. HB cigarettes, Allianz insurance, Bear condensed milk ("Nichts geht über Bärenmarke……Bärenmarke zum Kaffee!")
Then a newsflash cut in: the President of the USA had been shot on a visit to Dallas and had been rushed to hospital. My father went upstairs. The programme resumed.
My father came down. I still remember him buckling his belt over his uniform, as ever uncomfortable and determined to do his best, a stocky man with a straight back, now full of tension. He watched with us as another newsflash came: the President was dead.
I think the camp sent a driver with a Jeep; in any case, Dad was gone. We watched some more TV, interrupted by occasional updates and speculation. Then it was time for bed. Flannel pyjamas, cotton sheets, the heavy blankets that trapped your feet. I went to sleep.
Lights woke me, illuminating the curtains. Heavy engines, headlights passing, heading in the direction of Düsseldorf. One after another after another. Now, I know they were tank transporters, racing to position the heavy armour in readiness for the Red invasion.
And now there are no more Communists, or so it seems. We buy fuel from the Russians, hardware and toys from the Chinese. The people my father, a gentle and sensitive man, was prepared to die fighting, are our friends and trading partners. As reported by The Independent, Chinese interests even supported our Conservative leader and former Prime Minister, Edward Heath (Sir Edward protested the following week, saying the claims were "misleading and inaccurate" - but did not go so far as to say that they were untrue). Surely, we're all friends now. After all, Dad had helped the Germans start to rebuild their country; he'd worked with German civilians, learned to speak the language fluently, married a German refugee. Wars happen, and so does peace. The people of the world are vexed by their leaders, yet love for one another endures and triumphs.
But Communism is not a nation, and does not love people. Everything, even its own most ardent supporters, can be burned on the altar of abstract principle. Informed that a general nuclear war would kill a third of humankind, Mao said good, then there would be no more classes.
As gypsies and beggars used to sing:
So proud and lofty is some sort of sin
Which many take delight and pleasure in
Whose conversation God doth much dislike
And yet He shakes His sword before He strike
(The Watersons performed it on "Frost and Fire", which our English teacher played to us in the late Sixties. I associate it with cold, freshness, the musty fragrance of the Monmouthshire woods, animism, hope.)
By degrees, this brings me to the current state of affairs. Our leaders wish us to believe that the history of our fathers is at an end, and now only efficient administration remains to be achieved. The revels of democracy are ended; they were fun, but their time is past.
No: as Christopher Fry said, "affairs are soul size", still. Although I do believe that sudden and total conversion is possible, as in James Shirley's now implausible-seeming play "Hyde Park" (who would have believed the Earl of Rochester's conversion? - and there are those who still doubt it, not knowing how the sinner hates sin), I doubt that all who worked with the old Soviet and Chinese Communist regimes have abandoned their principles and plans. Like the remark about the significance of the French Revolution (variously attributed to Chou En-Lai and Mao Tse-Tung), it's "too early to say".
Even if our leaders should be gullible or merely suborned, Jeffrey Nyquist reminds us again that there are still people who think differently from us, and we must be prepared. It is not all right to be weak, whether militarily or in our economies. Good fences (and good borders) make good neighbours.
Then a newsflash cut in: the President of the USA had been shot on a visit to Dallas and had been rushed to hospital. My father went upstairs. The programme resumed.
My father came down. I still remember him buckling his belt over his uniform, as ever uncomfortable and determined to do his best, a stocky man with a straight back, now full of tension. He watched with us as another newsflash came: the President was dead.
I think the camp sent a driver with a Jeep; in any case, Dad was gone. We watched some more TV, interrupted by occasional updates and speculation. Then it was time for bed. Flannel pyjamas, cotton sheets, the heavy blankets that trapped your feet. I went to sleep.
Lights woke me, illuminating the curtains. Heavy engines, headlights passing, heading in the direction of Düsseldorf. One after another after another. Now, I know they were tank transporters, racing to position the heavy armour in readiness for the Red invasion.
And now there are no more Communists, or so it seems. We buy fuel from the Russians, hardware and toys from the Chinese. The people my father, a gentle and sensitive man, was prepared to die fighting, are our friends and trading partners. As reported by The Independent, Chinese interests even supported our Conservative leader and former Prime Minister, Edward Heath (Sir Edward protested the following week, saying the claims were "misleading and inaccurate" - but did not go so far as to say that they were untrue). Surely, we're all friends now. After all, Dad had helped the Germans start to rebuild their country; he'd worked with German civilians, learned to speak the language fluently, married a German refugee. Wars happen, and so does peace. The people of the world are vexed by their leaders, yet love for one another endures and triumphs.
But Communism is not a nation, and does not love people. Everything, even its own most ardent supporters, can be burned on the altar of abstract principle. Informed that a general nuclear war would kill a third of humankind, Mao said good, then there would be no more classes.
And dictators, dressed in a little brief authority, ignore warnings. On the eve of World War II, when the conflict could yet be averted, Hitler was with guests in Berchtesgaden when the clouds over the mountains assumed an ominous red and yellow appearance. A woman told him "Das bedeutet blut, und mehr blut" ("This means blood, and more blood"); Hitler trembled, but then said if it must be so, it must be so.
As gypsies and beggars used to sing:
So proud and lofty is some sort of sin
Which many take delight and pleasure in
Whose conversation God doth much dislike
And yet He shakes His sword before He strike
(The Watersons performed it on "Frost and Fire", which our English teacher played to us in the late Sixties. I associate it with cold, freshness, the musty fragrance of the Monmouthshire woods, animism, hope.)
By degrees, this brings me to the current state of affairs. Our leaders wish us to believe that the history of our fathers is at an end, and now only efficient administration remains to be achieved. The revels of democracy are ended; they were fun, but their time is past.
No: as Christopher Fry said, "affairs are soul size", still. Although I do believe that sudden and total conversion is possible, as in James Shirley's now implausible-seeming play "Hyde Park" (who would have believed the Earl of Rochester's conversion? - and there are those who still doubt it, not knowing how the sinner hates sin), I doubt that all who worked with the old Soviet and Chinese Communist regimes have abandoned their principles and plans. Like the remark about the significance of the French Revolution (variously attributed to Chou En-Lai and Mao Tse-Tung), it's "too early to say".
Even if our leaders should be gullible or merely suborned, Jeffrey Nyquist reminds us again that there are still people who think differently from us, and we must be prepared. It is not all right to be weak, whether militarily or in our economies. Good fences (and good borders) make good neighbours.
Punish the perp
Karl Denninger says we should make the people who caused the subprime problems pay for the consequences. Either they should burn up with their own debt (Marc Faber has said some players should be taken out of the game) or pass on the grief to their shareholders, issuing new shares to raise capital and so diluting the existing stockholders' portion.
Unfortunately, we in the UK have chickened out - for party political reasons to do with its power base in the north of England, the Labour government is currently holding the baby in the case of insolvent lender Northern Rock, even though the tax payer is on the hook for nearly $120 billion as a result. (Hey, that's nearly as much as the proposed new tax break to reflate America - and our population is one-fifth the size of yours!)
Hope you have better luck - or better leaders - over there. Buy a Lottery ticket and hope?
Unfortunately, we in the UK have chickened out - for party political reasons to do with its power base in the north of England, the Labour government is currently holding the baby in the case of insolvent lender Northern Rock, even though the tax payer is on the hook for nearly $120 billion as a result. (Hey, that's nearly as much as the proposed new tax break to reflate America - and our population is one-fifth the size of yours!)
Hope you have better luck - or better leaders - over there. Buy a Lottery ticket and hope?
Friday, January 18, 2008
Dow 9,000 update
Dow 12,082.31, gold $880.50/oz, so the Dow is now worth 13.72 ounces of gold as against Robert McHugh's prediction of 13.51.
Nearly there, and the new announcement of a $145 billion reflation may push gold that extra yard.
Nearly there, and the new announcement of a $145 billion reflation may push gold that extra yard.
Stocks may follow bond yields down
Bob Bronson gives us a striking graph of the apparent correlation (since 2000) between the stockmarket and the yield on 10-year Treasury bonds. There is now a very wide gap between the two and seemingly the implication is that stocks are overdue for a large correction.
Wednesday, January 16, 2008
Here we go
Two from Karl Denninger in the last two days:
Monday, he reasserted his belief in DE-flation; but as I've been saying for some time, maybe the real issue is the divide between haves and have-nots, and he deals with that, too. No point being rich if you daren't go out.
Yesterday, he sounded the bells for a possible crash today. Maybe this is when Robert McHugh's prediction is fulfilled.
Monday, he reasserted his belief in DE-flation; but as I've been saying for some time, maybe the real issue is the divide between haves and have-nots, and he deals with that, too. No point being rich if you daren't go out.
Yesterday, he sounded the bells for a possible crash today. Maybe this is when Robert McHugh's prediction is fulfilled.
Tuesday, January 15, 2008
Time to buy into Northern Rock?
Two hedge funds have punted heavily on the British lender that the government has supported with £55 billion.
The share price has slumped from over £12 last February to 69 pence, assisted by the gleefully gloomy 20/20 hindsight of the news media. We had voxpops today from small "windfall share" demutualisation shareholders ruefully reckoning their notional losses and admitting they can't find the (now-near worthless - ha!) certificates.
One of Sir John Templeton's maxims is "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."
Let me offer two of mine: "Never buy what the fund managers try to sell you at financial adviser seminars", and "Remember the journalists who had their pensions in Equitable Life with-profits, because EL didn't (ugh!) pay commissions".
If I had the spare, I might speculate on NR. Hedge funds may be able to afford losing money, but they certainly don't go out of their way to do it. I wonder what will happen?
The share price has slumped from over £12 last February to 69 pence, assisted by the gleefully gloomy 20/20 hindsight of the news media. We had voxpops today from small "windfall share" demutualisation shareholders ruefully reckoning their notional losses and admitting they can't find the (now-near worthless - ha!) certificates.
One of Sir John Templeton's maxims is "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."
Let me offer two of mine: "Never buy what the fund managers try to sell you at financial adviser seminars", and "Remember the journalists who had their pensions in Equitable Life with-profits, because EL didn't (ugh!) pay commissions".
If I had the spare, I might speculate on NR. Hedge funds may be able to afford losing money, but they certainly don't go out of their way to do it. I wonder what will happen?
Monday, January 14, 2008
Oil to crack the dollar?
Nathan Lewis reminds us how, when President Nixon cut the dollar's link to gold in 1971, OPEC protected the real value of its oil with price rises (thus earning a reputation for having caused our inflation).
Now that the gold dinar has been introduced in Malaysia, Lewis wonders whether the dirham should link to gold, too, so oil exporters can avoid being robbed by a falling dollar.
Brownouts and lines at the gas station again, perhaps.
Now that the gold dinar has been introduced in Malaysia, Lewis wonders whether the dirham should link to gold, too, so oil exporters can avoid being robbed by a falling dollar.
Brownouts and lines at the gas station again, perhaps.
USA / UK Sovereign Wealth Funds?
Shares are supposed to be the best long-term investment, better than bonds or cash. The usual concern is the time horizon of the investor. Who lives longer than a state like America or Britain?
Foreign governments with trade surpluses (based on artificially low currency exchange rates and stupid overspending by the West) are building up trillions in reserves and eyeing our companies and real estate. If our own leaders aren't willing to rebalance the world economy, the least they can do is get a piece of the action.
Why not?
Foreign governments with trade surpluses (based on artificially low currency exchange rates and stupid overspending by the West) are building up trillions in reserves and eyeing our companies and real estate. If our own leaders aren't willing to rebalance the world economy, the least they can do is get a piece of the action.
Why not?
Sunday, January 13, 2008
Dow 9,000 update
Last year, Robert McHugh predicted that the Dow would drop to 9,000, if not in nominal terms then in relation to gold. The Dow was then 13,238.73 and gold $666.30/oz, which means that it took 19.87 ounces of gold to buy the Dow. McHugh's prediction implies the Dow dropping to 13.51 gold ounces (a fall of 6.36 ounces).
The Dow is now 12,606.30 and gold $894.90, so the Dow is now worth 14.09 gold ounces. It has fallen by 5.78 ounces out of the predicted 6.36, so the prediction is 90.9% fulfilled so far.
McHugh will be fully correct if, for example, the Dow remains unchanged and gold rises to $933/oz; or if gold stalls, the Dow will need to fall to 12,090.
The Dow is now 12,606.30 and gold $894.90, so the Dow is now worth 14.09 gold ounces. It has fallen by 5.78 ounces out of the predicted 6.36, so the prediction is 90.9% fulfilled so far.
McHugh will be fully correct if, for example, the Dow remains unchanged and gold rises to $933/oz; or if gold stalls, the Dow will need to fall to 12,090.
To Gordon Brown: please remit £4bn ASAP
From Bob Hoye in Safe Haven yesterday:
"U.K. Sold 395 tonnes of gold at an average price of $274.9 per ounce. The first sale at $254 caught (or caused?) the low point in a 20-year slide in the price of gold.
The losers are us, Brown's gold sales raised around $3.49 billion.."
-- Telegraph.co.uk , January 2, 2006
That was written when the price was $627 and at today’s gold price of $895 the position would be worth $11.4 billion. And - remember the reason for selling was to improve central bank returns - what did they buy with the funds?
I make that a loss of $8 billion to date, or £4bn sterling.
We hear a lot about accountability. If only politicians could be made personally financially accountable.
Or if they could be paid to go away. In recent times, it would have saved the country a fortune if each senior politician had been given £10 million to do nothing at all.
"U.K. Sold 395 tonnes of gold at an average price of $274.9 per ounce. The first sale at $254 caught (or caused?) the low point in a 20-year slide in the price of gold.
The losers are us, Brown's gold sales raised around $3.49 billion.."
-- Telegraph.co.uk , January 2, 2006
That was written when the price was $627 and at today’s gold price of $895 the position would be worth $11.4 billion. And - remember the reason for selling was to improve central bank returns - what did they buy with the funds?
I make that a loss of $8 billion to date, or £4bn sterling.
We hear a lot about accountability. If only politicians could be made personally financially accountable.
Or if they could be paid to go away. In recent times, it would have saved the country a fortune if each senior politician had been given £10 million to do nothing at all.
Saturday, January 12, 2008
Debt and slavery
Doug Noland sees the debt crisis spreading to the corporate sector; David Jensen writes a letter to the Governor of the Bank of Canada, including very telling graphs of mounting debt and the bubble in the financial markets; Michael Panzner discusses a piece from the Financial Times on the threat of a downgrade of America's historic AAA credit rating, and refers to the weakening of the USA's military pre-eminence; Sol Palha worries about the acquisition of Western assets by sovereign wealth funds ("Slowly but surely America and Europe are going to be owned by foreigners. The irony is that Congress is trying to keep immigrants out of this country but right in front of their eyes foreigners are slowly gobbling up huge chunks of this country.").
All this leads me to Jeffrey Nyquist's grim, but compelling latest piece. He despairs of the irrelevance of mainstream political discussion, especially as the polling process rattles on, and paints a far greater picture. I think you should read it all, but here are a few extracts:
What is happening in the news today, what is happening in the markets and in the banking system, has profound strategic implications... There are no invulnerable countries... If a government does not see ahead, make defensive preparations, establish a dialogue with citizens, lead the way to awareness and responsibility, then the nation stumbles into the next world war unarmed and psychologically unprepared.
Even worse, today's politics has become a politics of "divide and conquer" in which one constituency is played off against another: poor against rich, non-white against white, the secular against the religious. Before a positive outcome is possible, we must have unity and we must have reality.
It's more comfortable to ignore the crying of Cassandra, but maybe Nyquist is like Churchill in the pre-WWII political wilderness, trying to prepare us for the next conflict. We in Britain only just made it, and how we have paid for that struggle ever since.
But it was a price worth paying. History would have been very different, and very horrible I am sure, if Churchill had listened to some in his Cabinet in 1940 who advised him to make a deal with the Nazis. He said, “If this long island story of ours is to end at last, let it end only when each one of us lies choking in his own blood upon the ground.” It's a line that even now has tears pricking my eyes. The appeasers were silenced by the sound of deeply-moved men banging their fists on the Cabinet table in agreement and applause.
My worry is that I don't see men of that calibre now. As Lord Acton said in a letter to a bishop, "Power corrupts, and absolute power corrupts absolutely". Commenting on the House of Commons after the Great War, Stanley Baldwin remarked on the presence of "A lot of hard-faced men who look as if they had done very well out of the war". Today, the faces are softer, the hair expensively dressed, the manner relaxed and affable, but behind it all one senses cold-hearted, selfish betrayal. To be charitable, it may be that our leaders and ex-leaders don't fully realize the negative consequences of all their deals, compromises and consultancies.
As our reckless debt is progessively converted into ownership, we may find out how much we took our freedom for granted. It's a lot harder to get back.
The Bible has something to say on this, too (and no, I'm not a preacher, this is to show that the issues endure throughout history): Leviticus, Chapter 25 deals with debt, buying and redeeming slaves, and how the chosen people should be treated differently from the heathens - for the latter, enslavement is perpetual.
Friday, January 11, 2008
Gold, the dollar and the Dow
Gold supporters seem to be waiting for a reprise of the heady days of 1980. I think this is another case where you need to decide whether you are a speculator or a long-term investor.
Here's a relatively recent graph of the price of gold, adjusted for inflation (admittedly, inflation can be defined in many ways):
Here's a relatively recent graph of the price of gold, adjusted for inflation (admittedly, inflation can be defined in many ways):
On this chart, it looks as though gold's median price would be around $600/oz, so currently it's above trend and presumably the elevated value factors-in some economic concern.
Now, here's a chart correlating the Dow and gold:
It seems harder to spot an average here, since each peak is much higher than the one before. But taking the Dow as it is now (12,606.30) and the current price of gold ($894.90), the present ratio of 14.08 ounces would be in the middle range of the variation since the mid-1920s.
So a purchase of gold now looks like a speculation, rather than a bargain.
Waves and tides
A most apposite article by the Contrarian Investor, in which he considers how all this economic information leaves us confused as to the future direction of the economy. It's like getting millimetre-accurate radar images of all the waves in the harbour, without knowing about the effect of the moon on the tides. Not that the information itself is accurate, anyway.
Thursday, January 10, 2008
Stuffed
Michael Panzner hands on a piece from Naked Capitalism: expert, inside opinion is that the banks are so gorged with bad debt that America will mimic the "melancholy, long withdrawing roar" of Japan's ebb tide.
Wednesday, January 09, 2008
Something's gotta give
Interest on official debt in the USA runs at $430 billion for 2007, and rising steeply, according to the Treasury's own figures (htp Michael Panzner, quoting Mish's Global Economic Trend Analysis); total government debt is now c. $9.2 trillion.
It's more serious than that, of course: James Turk quotes the Comptroller General, David M Walker's estimate that total liabilities, including commitments to future social security benefits, are around $53 trillion. The government's annual revenues are only around 5% of this figure, so the credit card looks like it's pretty much fully-loaded.
However it happens, it seems something must give way under the strain. Frank Barbera reckons the Dow has plenty further to fall (and possible interim correction or not, he thinks gold looks good). Prieur du Plessis concurs, quoting Nouriel Roubini's comment that "... a lousy stock market in 2007 will look good compared to an awful stock market in 2008."
Bob Bronson thinks the downturn will be long as well as hard. He in turn quotes the chairman of the National Bureau of Economic Research: this one “could be deeper and longer than the recessions of the past.”
Boris Sobolev also looks to gold, but prefers the smaller companies because of all the money that's piled into the majors.
In case we in the UK should be tempted by schadenfreude, Ashraf Laidi predicts that sterling will accompany the US dollar's fall against other currencies. From what I read in connection with the USA, a weakening currency may provide a temporary boost to exports, but also inflate the cost of imports; so I don't suppose that our following the dollar will do us much long-term good, either.
Of course, it's possible to dismiss all this as group-think wall-of-worry stuff, but maybe that would be double-bluffing ourselves. Sometimes, things are exactly what they seem. Banks have consistently turned a profit for centuries, on the inexorability of debt.
It's more serious than that, of course: James Turk quotes the Comptroller General, David M Walker's estimate that total liabilities, including commitments to future social security benefits, are around $53 trillion. The government's annual revenues are only around 5% of this figure, so the credit card looks like it's pretty much fully-loaded.
However it happens, it seems something must give way under the strain. Frank Barbera reckons the Dow has plenty further to fall (and possible interim correction or not, he thinks gold looks good). Prieur du Plessis concurs, quoting Nouriel Roubini's comment that "... a lousy stock market in 2007 will look good compared to an awful stock market in 2008."
Bob Bronson thinks the downturn will be long as well as hard. He in turn quotes the chairman of the National Bureau of Economic Research: this one “could be deeper and longer than the recessions of the past.”
Boris Sobolev also looks to gold, but prefers the smaller companies because of all the money that's piled into the majors.
In case we in the UK should be tempted by schadenfreude, Ashraf Laidi predicts that sterling will accompany the US dollar's fall against other currencies. From what I read in connection with the USA, a weakening currency may provide a temporary boost to exports, but also inflate the cost of imports; so I don't suppose that our following the dollar will do us much long-term good, either.
Of course, it's possible to dismiss all this as group-think wall-of-worry stuff, but maybe that would be double-bluffing ourselves. Sometimes, things are exactly what they seem. Banks have consistently turned a profit for centuries, on the inexorability of debt.
Oil splat
"Oil crunch" doesn't sound right, although it might be appropriate to shale oil: Jeffrey Brown outlines what looks like a compelling thesis on growing domestic energy consumption by major oil exporters. He thinks that the top five producers will be using all their own supplies by around 2030, and concludes that the USA must rapidly reshape its transportation system:
In simplest terms, we are concerned that the very lifeblood of the world industrial economy—net oil export capacity—is draining away in front of our very eyes, and we believe that it is imperative that major oil importing countries like the United States launch an emergency Electrification of Transportation program--electric light rail and streetcars--combined with a crash wind power program.
That is just the tip of the iceberg, surely: residential and office heating/lighting, mechanised farming, supermarket shopping, centralised medical facilities - so much will have to be reviewed and planned.
In simplest terms, we are concerned that the very lifeblood of the world industrial economy—net oil export capacity—is draining away in front of our very eyes, and we believe that it is imperative that major oil importing countries like the United States launch an emergency Electrification of Transportation program--electric light rail and streetcars--combined with a crash wind power program.
That is just the tip of the iceberg, surely: residential and office heating/lighting, mechanised farming, supermarket shopping, centralised medical facilities - so much will have to be reviewed and planned.
Tuesday, January 08, 2008
Twang money, encore
The Contrarian Investor is also struck by the elasticity of fiat money, and how this vitiates attempts to make fair comparisons and store wealth. Gold for the long term, he thinks.
In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".
In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".
Grab your pension now, inflation-proof it?
Tony Allison looks at the threats to your prosperity in retirement. A bird in the hand?
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