Friday, October 24, 2008

Interlude

On holiday for a week. Best wishes to you all.

Aussie humour



At first I was prepared to believe that an Australian politican could be this aggressive, but despite Web-spread assurances that it's genuine, it come from this series.

Doing the rounds: explaining the world with cows

I think the main thing learned here is that, as Oscar Wilde said, when good Americans die they go to Paris.

The World Explained with Cows

DEMOCRAT You have two cows.Your neighbor has none.You feel guilty for being successful. Barbara Streisand sings for you.

REPUBLICAN You have two cows.Your neighbor has none.So?

SOCIALIST You have two cows.The government takes one and gives it to your neighbor.You form a cooperative to tell him how to manage his cow.

COMMUNIST You have two cows.The government seizes both and provides you with milk.You wait in line for hours to get it.It is expensive and sour.

CAPITALISM, AMERICAN STYLE You have two cows.You sell one, buy a bull, and build a herd of cows.

DEMOCRACY, AMERICAN STYLE You have two cows.The government taxes you to the point you have to sell both to support a man in a foreign country who has only one cow, which was a gift from your government.

BUREAUCRACY, AMERICAN STYLE You have two cows.The government takes them both, shoots one, milks the other, pays you for the milk, and then pours the milk down the drain.

AMERICAN CORPORATION You have two cows.You sell one, lease it back to yourself and do an IPO on the 2nd one.You force the two cows to produce the milk of four cows.You are surprised when one cow drops dead. You spin an announcement to the analysts stating you have down sized and are reducing expenses.Your stock's price goes up.

FRENCH CORPORATION You have two cows.You go on strike because you want three cows.You go to lunch and drink wine.Life is good.

JAPANESE CORPORATION You have two cows.You redesign them so they are one tenth the size of an ordinary cow and produce twenty times the milk. They learn to travel on unbelievably crowded trains. Most are at the top of their class at cow school.

GERMAN CORPORATION You have two cows.You engineer them so they are all blond, give excellent quality milk, and run a hundred miles an hour. Unfortunately they also demand 13 weeks of vacation per year.

ITALIAN CORPORATION You have two cows but you don't know where they are. While ambling around, you see a beautiful woman.You break for lunch.Life is good.

RUSSIAN CORPORATION You have two cows.You have some vodka.You count them and learn you have five cows.You have some more vodka.You count them again and learn you have 42 cows. The Mafia shows up and takes over however many cows you really have.

TALIBAN CORPORATION You have all the cows in Afghanistan, which are two.You don't milk them because you cannot touch any creature's private parts.Then you kill them and claim a U.S. bomb blew them up while they were in the hospital.

IRAQI CORPORATION You have two cows.They go into hiding.They send radio tapes of their mooing.

POLISH CORPORATION You have two bulls.Employees are regularly maimed and killed attempting to milk them.

FLORIDA CORPORATION You have a black cow and a brown cow.Everyone votes for the best looking one.Some of the people who like the brown one best, vote for the black one.Some people vote for both. Some people vote for neither.Some people can't figure out how to vote at all.Finally, a bunch of guys from out-of-state tell you which is the best looking cow.

CALIFORNIAN You have a cow and a bull.The bull is depressed.It has spent its life living a lie.It goes away for two weeks and comes back after a taxpayer-paid sex-change operation. You now have two cows.One makes milk; the other doesn't.You try to sell the transgender cow, but its lawyer sues you for discrimination.You lose in court.You sell the milk-generating cow to pay the damages. You now have one rich, transgender, non-milk-producing cow.You change your business to beef. PETA pickets your farm.Jesse Jackson makes a speech in your driveway.Cruz Bustamante calls for higher farm taxes to help "working cows". Hillary Clinton calls for the nationalization of 1/7 of your farm "for the children."The legislature passes a law giving your farm to Mexico.The L.A. Times quotes five anonymous cows claiming you groped their teats. You declare bankruptcy and shut down all operations and the cow starves to death.The L.A. Times' analysis shows your business failure is Bush's fault.

htp: my wife's American cousin. GOK where it started, though.

Thursday, October 23, 2008

A credible, horrible warning

In a fearsome, plain-speaking guide to the long-standing debt problem, Karl Denninger explains why he believes we are now in dire crisis. If the insolvent continue to be bailed out with money that the government itself must borrow from elsewhere, the American government's own credit will be destroyed. And non-Americans are in an even worse plight, in fact may trigger the explosion:

We may be days away from an international credit incident originating outside of the United States. Foreign nations, banks, and businesses have "levered up", or taken more risk, than we have. They too have chosen to lie.

This will hammer the stockmarket:

You have already seen nearly half of your money disappear.
You could see another half disappear - within days.

This is an implication of the graph I did on Sunday (see below), looking at the Dow adjusted for CPI inflation since 1928. A return to 4,500 points would seem to be reversion to the long-term norm - but to have it happen all at once, from its peak last October, is a scary prospect.


UPDATE

Tyler concurs, with respect to the UK economy, because of our dependence on income from financial services and associated services:

"Brown's boom was built on a group of industries that are now facing an Almighty bust..."

Wednesday, October 22, 2008

Throw the grenade, or put it in your pocket?

I was educated in the wrong things. Karl Denninger explains - in a way I struggle to understand fully - how the US government's schemes to support the banks must ultimately be financed by Treasury bonds on such a scale as to seriously damage their credit rating and pump up interest rates to a ruinous level.

This is a consequence of avoiding taking the right action, i.e. finding out who's insolvent and letting them go bust. I still remember Henry Paulson's panicky look when Congress threw out the bailout bill the first time.

Once you've pulled the pin out of a grenade, you can throw it, or you can hang on to it. Madly, it looks as though the government is following the latter course, and hopes to be able to handle the consequences.

UPDATE

Relevant to the above is Wat's resume of public debt history in the UK since World War II, showing how important it is NOT to get into debt, to fight inflation and control the finances.

A reason not to invest in pensions?

Argentina appears to be planning to seize private pension funds. Who is to say that, in extremis, it couldn't happen here? They're already taking tax on the dividends that were tax-free until 1997.

The Great Theft begins

I comment on The Great Depression of 2006:

Once inflation gets going it'll be Alice in Wonderland, I think. Real wages have to come down in relation to earnings in competitor countries, and house prices have to come down with respect to wages.

So whatever the nominal value, I think we in the West shall see a real depreciation in both houses and the stockmarket, plus a real decline in earnings relative to both consumer prices and foreign labour.

Am I wrong?

Sunday, October 19, 2008

Do-it-yourself Dow prediction

I've battled Windows Vista to produce the above graph, which takes the Dow at the beginning of October each year from 1928 on and adjusts it for CPI.

The red dot is where we were on Friday; some are saying it could hit 6,000 or 4,000, also indicated (adjusted for CPI as at the end of September 2008).

The question is, how much of the fantastic gain of the past 20 years or so will be undone, and over what period? Where would you say we "ought" to be? (Not that Mr Market cares, obviously.)


Connect up the lows of the early 30s and the 70s and extend the line, and you get what? An implied 2,500 or so. Connect up the highs of 1929 and the 50s and extend the line, and you end up about where we were at the start of this month, nudging 11,000.


"Faites vos jeux, Mesdames et Messieurs." Too rich for me, I think.

UPDATE

Karl Denninger is now talking about the S&P 500 falling to 500 points, a level it first broke above in March 1995; this would mean a further c. 50% drop from its close on Friday.

And he gives his reasons (plausible to me) why the American economy is in worse shape to overcome the setback, than it was in the 1930s.

A note on abortion

We tried to watch a bit of "Sex and the City" last night, just to see why it's talked about. This episode was "Coulda, Woulda, Shoulda". The friends were, by turns, lying and boasting about their abortions. Apparently a baby wasn't in someone's "plan"; it's not as though these nitwits had any plans worth considering - for example, evidently they didn't plan to have a condom in their handbag. I've never seen a programme so louche and vapid. What can its makers think of us all?

I pass over the religious objections to abortion, and the arguments (to my mind, wholly specious and self-serving) about the humanity of the unborn. Do please spare me the hate mail.

But why is the political class so keen on it? And on the experimentation that continually encroaches on the right of human beings to live? (Don't tell me it will cure cancer and all the other things that make us mortal.)

Is it a financially-motivated plan to murder the poor, the deformed and the sick in their mother's wombs, so that they will not live to become benefit dependant and/or petty criminals? Is it about money? Has money become more real, more valid, than the people who earn and spend it?

Don't think it'll work anyway. A while back, I saw an interview with some serial shagger who didn't give a fig for any of his girlfriends, but there's one instinct he still retained. Remarking on his last, he said, "At least I got a kid out of her."

Abortion is a bloody and chaotic approach to sexuality and relationships. This study aims to correct some of the misunderstandings on the subject by both "conservative" and "liberals", and tends to support the greater use of contraception.

Will that work?

Are we headed for the Red Pond?


How do we get out of this?

I'm trying to understand the situation, and it's worrying that many experts freely admit they don't understand, either. Here is the simplified picture I'm building up:

Democratically-elected governments wanted their voters to get back the feelgood factor after the tech bubble burst and the stockmarket pretty much halved. So they undid the belts round the banks' waists and said, go eat.

The banks went at it like labradors at a full plate of Gravy Train, and got very fat on lending far too much money, with very few questions asked. Houses doubled in value and became the new stockmarket.

Then the bust, because whatever you treat like an investment will behave like one. Except houses are unlike shares: if you lose all your money on them you have nowhere to live, and this will make the losers very angry and vengeful. Also, housing is illiquid, which is bad news for banks, who can't put bricks and fridges in their vaults. And if the banks go bust their richer depositors (some of them Party contributors?) will get very upset, also the businesses that hold their balances in cash. This last is very important: a small fraction of bank accounts holds the majority of uninsured cash.

So now the "rescue". Billions - hundreds of billions - poured into the system. Who will pay the bill?
  • Not the shareholders, since (in most cases) we didn't let the banks collapse.

  • Not the majority of retail depositors - they have votes, and enough education to make trouble.

  • Not the poor - they have nothing, and are more likely to vote for whoever keeps paying their benefits. That's if they vote at all, but non-voters will become very interested in democracy if their money runs out.

  • Not the seriously rich - they have most of their personal wealth safely outside this thieving country and if annoyed, will not only move out but close businesses that employ many voters, which will dump smelly stuff on the heads of the Government and leave a big tax hole to boot.
I can see only two classes of juicy victims: taxpayers, and people who have saved up money.

Very few people understand that the combination of income tax plus National Insurance and employer's NI, is effectively a marginal tax rate on income of over 40% on all but the worst-paid. Raising direct taxation much more will only increase the incentive to give up work altogether, or to lay off employees. And there's only so much benefit to be gained by shipping-in zillions of low-paid foreign immigrants to replace them - that dodge is getting to be a public embarrassment, politically as well as economically.

Indirect taxation tends to be regressive, hitting the poorer worse (as a proportion of their income) - which implies a need to increase their benefits. Not impossible - there's a plan afoot for an extra levy on power bills, to finance heating costs for the poor. Doing it in this roundabout way preserves the illusion that we are a lower-tax economy, and appeals to the sneaky, surreptitious personality of the man currently running the country. There will be other subtle and economically suspect ways to raise tax, and Gordon Brown thought up many during his incumbency as Chancellor of the Exchequer - which, I think, has not yet ended.

And then there's the attack on savers. Means-testing is a good one, yielding a very high effective tax rate. Last time I looked, the combination of minimum income guarantee and savings credit for pensioners worked out to a 40% tax on poor pensioners who'd increased their pension income by voluntary savings.

Inflation is a fruity possibility. The government is going to have to borrow staggering amounts in coming years, to pay for the current bailout and future mass unemployment, so if the returns on its bonds can be lower than inflation it'll help the public finances a bit.

But who's got the money to sub our kleptomaniac Government? Maybe they won't bother to ask the people to trust them any more; maybe they'll just ask the Developing World to buy-in with their sovereign wealth funds. In other words, sell the country, piecemeal.

Isn't that what's happening? The younger generation will be taxed and worked half to death, the older ones will find they're not as wealthy as the illusory boom led them to believe, and meanwhile the New Pan-European Bureau-Aristocracy is selling us all to foreign powers and foreign businessmen, who do not have to answer to the electorate?

I must study the Highland Clearances, and the Flight of the Earls.

Stating the obvious

Recession is here, warns Item Club

UPDATE: Britain surrounded by water. More on the main news bulletin, next.

Saturday, October 18, 2008

Goldman Suchs

Read, and hang your head.

Are trade deficits a good thing?

This is from a professional academic economist in America. Is he correct? Should we cheer up?

Here's a letter that I sent recently to the Washington Times:

In "Other economic numbers need attention" (Oct. 16), William Hawkins assumes that every dollar increase in America's trade deficit is a dollar increase in Americans’ debt. Not so. If Mr. Hawkins pays for a new car with $20,000 cash and then observes the car dealer stuffing that cash into a mattress, Mr. Hawkins's trade deficit with that dealer rises by $20,000 while his debt to that dealer rises by exactly $0.

More fundamentally, the trade deficit means that foreigners invest in the U.S. rather than spend all of their dollars on U.S. exports. If Mr. Hawkins mistakenly thinks such investments to be undesirable, I have good news for him: as Uncle Sam meddles much more aggressively in capital markets, foreign investors will be scared away. America will then be much more likely to run trade surpluses - just as it did for nine out of ten years of the greatly depressed 1930s.

Sincerely,

Donald J. Boudreaux

Dow 4,000?

We think we will see 10-12% unemployment, a 4-5% decline in GDP, and the equity markets could drop at least 70% from peak to trough.

J. Kyle Bass of Hayman Advisors, 14 October 2008. (htp: "Dearieme")

This source reckons LIBOR is out of sight, not because of counterparty worries, but because banks simply haven't got the money to lend.

Less pessimistically - just - George Slezak (quoted on Jesse) thinks the Dow could possibly go as low as 6,000.

Financial self-education

Watch Paul Grignon's "Money as Debt" video:

... and see here for Chris Martenson's online "Crash Course" (a condensed version of his "end of Money" seminar).

(htp: Yoyomo)

If these teach you anything, please pass them on!

The importance of correctly predicting liquidity movements


A hedge fund manager (Andrew Lahde) says farewell to the industry (extracts):

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? ... Throw the Blackberry away and enjoy life.

...I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life – where I had to compete for spaces in universities and graduate schools, jobs and assets under management – with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunctinstitutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken...

(htp: Michael Panzner)

All the Earth's water and air (by Adam Nieman)




Wednesday, October 15, 2008

We're back to last Thursday

The Dow has closed at 8,577.91, 733.08 off its start today. My amateur trend-drawing suggests that it's now back into its midstream; but then there's often an overshoot.

However, for those who do have money and also a long view, maybe it's not a bad price.

Deflation hasn't happened yet; interest rates to rise, eventually

Jesse argues that we're not yet in a deflation, technically speaking; it's "the transfer of wealth from one asset class to another". So the money is merely changing pockets.

But after that, he expects (as I suggested yesterday) gold to rise sharply: "the move in gold will obtain explosive momentum from which a major rally leg will occur as the banks lose control." The euro, too, he thinks; and oil will stay high. So he concludes that when the pent-up liquidity starts to flow in the system, the US will have to raise interest rates to prevent a relative decline in the dollar.