The reality goggles are smeared

This project of mine is echoed by Eric Janszen of iTulip. His graph and red line suggests what I've been saying recently, that the Dow's trend (if it has one) could be to 6,000 points, with an overshoot to 4,000.

My independently-researched version:

iTulip's:

It's really hard to see the past in our own terms. I'm trying to do it using the Consumer Price Index, which opens another can of worms about the composition and weighting of that index, especially since (I understand) it affects government statistics and benefits. However, you have to start somewhere.

The first thing to note is how freakish recent years have been. If you connect previous start-of-month highs (August 1929, January 1966) and extended the line, you'd expect the recent Dow highs of 1999 and 2007 to be no more than 10,000 points.

And as for the lows: the drop from 1929 to 1932 was 86% "in real terms"; from 1966 to 1982, 73%; and so far since 1999, 46% - but this last from an amazing historical high. And the 350%-plus American debt-to-GDP ratio is quite unprecedented.

So the history of the last 80 years offers no clear guide as to what could happen next. If proportionately as severe as 1932, the Dow could dive to about 2,100 points; if like 1982, just below 4,000. BUT the second of these great waves crashed rather less than the first, so maybe the third will be even more merciful, perhaps a top-to-bottom fall of only 60%, i.e. end up at c. 5,900.

I note that the Dow has closed tonight at 7,552.29. What a fast fall we've seen - will it spring back sharply and then recommence its decline, as in previous cycles, or is it popping like a balloon?

Methodology

I've noted the Dow as it stood on the first trading day each month, starting October 1928 and ending November 2008 (plus where it stood yesterday - 7.997.28 - since we've seen a further steep fall). Then I've noted the historical CPI as at the end of the previous month in each case. Then, looking at the latest Dow figure, I've adjusted historical Dow figures accordingly (i.e. Dow then/CPI then, times CPI now).

Sources: Dow: Yahoo! Finance; CPI: InflationData.com

UPDATE

iTulip today also reproduces its graph on holdings at the Federal Reserve bank, underscoring the point that the current crisis has features that we can scarcely compare to anything in the last 80 years. Except that it's unlikely to be good news.

America to default on its debts?

Michael Panzner introduces the topic with an entry from the Economist blog - and look at the comments.

The Gadarene Swine

In a visit to old haunts, ex-Wall Street trader Michael Lewis (author of "Liar's Poker") describes how greed was turbocharged by ignorance among both the experts and the public, firing them all well beyond the edge of the precipice.

Latest figures on foreign holdings of U.S. Treasuries

The U.S. Treasury statistics issued today list 29 foreign holders of their securities. Between them, the three above account for $110.3 billion of the $110.6 billion increase. What is is to have friends, I suppose.

Not the same as the last Great Depression

How it won't be

A very interesting and credible New Great Depression scenario from Drake Bennett at the Boston Globe, explaining how the grainy images of the 1930s will not be remade and colorized for the 2000s. The same, and not the same.

htp: Michael Panzner - another nugget brought in by the news miner!

What goes up

The US dollar is in a kind of bear market rally, according to Jim Rogers. Then it's down.

htp: Anticitizen One

Presumed Consent, Part Two

The government "has not ruled out" a scheme to treat those who die intestate as donors to Party funds, a spokesman said today. A White Paper shortly to be issued by HMSO for limited distribution assumes the writing of a will to be an opt-out by the deceased from offering their estates to the Labour Party, and deems those who fail to make such an elementary arrangement to have assented thereby to the seizure of their goods after death. At Prime Minister's Questions, the Premier declined to discuss the proposal, saying that it was a matter for the Treasury Committee, to which he has just made several new appointments to supplement the existing membership. Further details of the Paper and the composition of the Committee are withheld, as subject to a Confidentiality Order under European legislation. However, we are permitted to reveal that a Will Contestation Board will shortly be set up and given terms of reference, under the aegis of the Privy Council.

Presumed consent

The government has embarked on a campaign to convince the nation that an opt-out or presumed consent system for General Elections will improve government majorities and save on administrative costs. Under the proposed system, the voter will be presumed to have voted for New Labour unless he/she has registered their dissent. Only if an outright majority of those eligible to vote have registered such a protest, will the public be put to the inconvenience of an election. Dissenters will be interviewed at Neighbourhood Offices to determine that they understand the issues properly and that their reasons for objecting are valid.

Infiltration

Is it me, or has this formerly-funny radio programme become a tendentious political broadcast aiming to reinforce the prejudices of a snickering, sycophantic coterie of not-as-smart-as-they-think-they-are socialists? Alan Coren, thou shouldst be living at this hour.

Carte Blanche

"... Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone."

- an estimated $290 billion so far.

We are star dust

Spot the difference:

Looking back, looking forward

UPDATE: "This secular bear market will last a lot longer and be much deeper than anyone thinks. Sadly, very few are prepared for it." - Mish.

This gels with what Marc Faber was saying quite some times back, that the market had further to drop than many people thought. Equities may seem to be fair value in terms of multiples of their earnings, but when the earnings fall, valuations have to be reassessed.

US public debt increases by over $1 trillion in 3 months

Food shortages next?

London Banker explores the implications of the drying-up of letters of credit. Stock that larder extra well until you've heard the problem has been fixed.

Was I right?

I said in comments to one of my Monday pieces, "Up to a certain limit, one can purchase index-linked certificates to preserve one's savings, but I'm trying to guess what rich people will do to get out of cash if currencies everywhere inflate - buy Van Goghs?"

And now Reuters reports that Sotheby's is still selling contemporary art at high prices.

The rich are getting their servants to load the packing-crates into the train while still telling us that we'll win the war. Perhaps they'll flee to Argentina.

You can hear the recession

In recent years, the Bonfire Night (November 5th) celebrations began weeks early - rockets and bangers aplenty every night - in fact, evenings and mornings as well. And after the big event on the day, more for days and weeks after. It didn't seem to matter (even in our "artisan" area) that a single banger could cost £5 or more; every year was like Operation Shock and Awe.

Not this year. A pop or two in the days immediately before and after, something mild on the night. No more 70s Beirut.

Anybody else spot straws in the wind?

Is the right way possible?

The state is always and everywhere a danger, even when it has no monopoly on money and no printing press that can create money tickets at will. But a state with the ability to make its own money is a grave and relentless threat to prosperity and freedom. It leaves the future entirely to the discretion of the money managers. Every day we live under the threat that the United States could be the next Weimar Republic or even another Zimbabwe. All that stands between us and that day is the wisdom and prudence of the Fed.

Llewellyn H. Rockwell, Jnr - talk given on 1 November 2008

Now, how do we mice bell the cats?

And if a foreign nation that trades with you uses currency inflation to support its domestic employment and its exports to you, are you prepared to see a slump in your own economy in order to maintain the integrity of your currency? Can virtue be rewarded, or is it (as seems to happen in this world) severely punished?

Gordon Brown and the New World Order

"...we can together seize this moment of change in our world to create a truly global society..."

Does he know what he is saying? How would one vote out, or flee, a world government?

As Huckleberry Finn says,"I reckon I got to light out for the Territory ahead of the rest, because Aunt Sally she's going to adopt me and sivilize me, and I can't stand it."

Any suggestions as to good places left to flee to?

"I've got a little list"

It was apparent five or six years ago that credit card debt, mortgage borrowing and house prices were rising too fast.

Howard Flight, in today's Daily Mail.

As they break cover to make themselves appear wise now, you may care to amuse yourself by compiling a list of those who knew at the time, and didn't say.

All in the same boat

Mish notes that because it's a global crash, everyone is printing money and the relative value of the dollar has not plummeted as many expected:

... Looking ahead, it is quite possible that if all pegs were removed and the Renmimbi allowed to freely float, that the Renmimbi, not the US dollar would crash. Certainly the pound could crash (I think that is likely), and the EU might even break up.

FDIC underfunded

Two more US banks have just failed, bringing the total this year to 19:

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

The current target (the "Designated Reserve Ratio") is 1.25% of deposits and is discussed here. According to Mish on July 23, insured deposits in the US banking system totalled $4.24 trillion, which if unchanged now would mean the FDIC current funds represent 1.066% of the sum insured, s0 the FDIC needs to raise another c. $8 billion in premiums from banks.

The question remains, whether merely 1.25% is sufficient for present and foreseeable circumstances. Dr Marc Faber is now talking about eventual US inflation and State bankruptcy - after a near-term rally.

Like I said

I've said more than once, including in my latest letter to the Spectator, the notion that the East is going to suffer from the slump as badly as the West needs some qualification. It's what happens after the slump that will be decisive, and the East has the gear and skilled people to lead the way out, as the Telegraph reports:

Arcelor, being three times larger than its nearest rival, Japan's Nippon Steel, and sharing 10 pc of the industry's global sales, wields huge power to determine what happens to prices and production. In the medium to longer term, Mr Mittal expects the industry to bounce back sharply as the pace of industrialisation in China and India picks up again.

In China, billionaire Shagang steel magnate Shen Wenrong has also planned for the coming downturn. In fact he's not even cutting his prices, since (I surmise) his game plan is that his over-leveraged competitors are going to go bust and customers will have to come to him anyway.

This is smart, counter-intuitive strategy for dealing with a recession. Those who try to survive by cutting margins will get skinny and become more vulnerable to delayed delivery by cash-strapped suppliers, bad-debt customers, and shark bigger-business customers that deliberately pay late to force your business under and then buy your goods from the official receiver at a 90% discount.

In a really post-industrial economy, we in the UK and USA will discover the disadvantages of being run by money-grows-on-trees lawyers, box-it-all-up-and-get-it-on-the-train-before-the-war-ends bankers and hang-onto-office-by-your-bitten-fingernails politicians.

My plan? Pay off debts, hoard some emergency cash (and maybe gold), and if I have to invest, put it in something that's secure and inflation-proofed.

A brilliant idea - Kiva microfinance

Let's think about people to whom $25 would make - is making - a difference. Rory Sutherland's column in The Spectator this week is about Kiva, a project that lends small sums to individuals and groups around the world, mostly to set up or develop little businesses.

They repay from their increased production, you get to re-lend to more people. Really, it's a way that the poor but proud can help each other, using your finance to grease the wheels.

Having read Sutherland, I've just joined, and I really feel good about it. Why don't you?

Coming your way

Marc Faber: There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy.

Swissinfo: Do you share that view?

M.F.: One hundred per cent.

(Source)

A glimpse from the rich man's coach

Here is a letter to the NYT from the insouciant Don Boudreaux. Unfortunately the comments to this piece on Cafe Hayek are closed - I wonder why? So I'll have to note here that it stirred a memory...

‘Now, you know,’ said Mr. Bounderby, taking some sherry, ‘we have never had any difficulty with you, and you have never been one of the unreasonable ones. You don’t expect to be set up in a coach and six, and to be fed on turtle soup and venison, with a gold spoon, as a good many of ’em do!’

Hard Times, by Charles Dickens

And another, from Shaw's Pygmalion:

I ask you, what am I? I'm one of the undeserving poor: that's what I am. Think of what that means to a man. It means that he's up agen middle class morality all the time. If there's anything going, and I put in for a bit of it, it's always the same story: 'You're undeserving; so you can't have it.' But my needs is as great as the most deserving widow's that ever got money out of six different charities in one week for the death of the same husband. I don't need less than a deserving man: I need more. I don't eat less hearty than him; and I drink a lot more. I want a bit of amusement, cause I'm a thinking man. I want cheerfulness and a song and a band when I feel low. Well, they charge me just the same for everything as they charge the deserving. What is middle class morality? Just an excuse for never giving me anything.

The American Declaration of Independence states "all men are created equal", and of course it was obvious even then that they are not so, whether by birth, upbringing, education or natural talent. Not, in those senses; but the bold defiance of Nature and Society represented by the libertarian revolution of America, and of revolutionary France, is that they have, they should be given, equal dignity, as of right.

And unless a tenured economics professor who boasts of not voting, in a colony that rebelled on the principle of "no taxation without representation", wishes to see the poor squashed while the rich loot the country without fear of retribution, he will need to develop his thesis somewhat.

I do not see how a country can be composed exclusively of the well-off, nor can I imagine how, given all their disadvantages, the poor may rise up as one and join the middle class. There will always be inequality, so our debate should be about setting a minimum standard for the poorest, while motivating them to better themselves if they possibly can. That's certainly a circle that will take some squaring, and a benefit-trap-riddled Britain can scarcely present itself as a model answer.

But I don't see how air conditioning and two cars (what? all poor families?) quite make up for the miseries of ill-health, disability and a shorter lifespan. And it's not entirely down to consciously-made bad choices, in quite the way Mr Boudreaux implies. The ideal-world notion of rational choice has to take into acount real-world limited intelligence, inadequate information, poorer education and in many cases disharmonious emotional constitutions produced by poor parenting, lousy neighbours, failing schools and fear of crime and destitution.

Dives should not look down upon Lazarus.

A fuss about banks

British banks are being criticised for not passing the 1.5% rate cut on to their customers, but retaining some or all of the difference. Presumably they are trying to rebuild their reserves, for running down which they have been much more justifiably criticised. Or do we wish them to remain insolvent, which, as Rick Santelli has admitted, they are?

As my wife said, what do we expect the banks to do: take in washing? Look after your pets in holiday time? Run daycare for the elderly in their conveniently-located, brightly-lit premises?

Inflation-adjusted Dow

( htp: The Mogambo Guru)

As I said in my recent letter to the Spectator, "a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible."

Just asking

A propos the (I would say) criminal systematic financial looting of past years:

1. Is there any limit in scope or number to the pardon/s of a retiring US President?

2. Can an incoming President challenge or reverse any such pardon?

P.S. If Thomas J. DiLorenzo is right, perhaps the pardons should be made retrospective right back to 1781, just to be on the safe side.

Pro-am economics

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?

Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?

It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

James K. Galbraith, 31 October 2008 (htp: Jesse)

And I thought I ought to start reading academic textbooks on economics. It seems that the difference between an amateur and a professional is that the latter gets paid.

Dow 4,900 - sometime?

I'm still working on looking at the Dow in real (CPI-adjusted) terms. Meanwhile, note that in two previous cycles, the Dow dropped to a third of its former peak: from 15 to 5, from 30 to 10 (see red dots).

If history repeats itself, then in real terms the Dow would again lose two-thirds of its value, from 66 to 22, which considering last autumn's peak would imply an ultimate low (if it happened all at once, tomorrow) of about 4,900 points.

But in the previous cases, the process took years to complete, and I would expect it to be a long affair this time, too. The Dow may not hit this 4,900 low in nominal terms.

Continuing this theme, may I draw your attention to the letter I emailed to The Spectator today?

Public service, public broadcasting, public nuisance

12 months' earnings in pounds sterling (official for the PM, reported for the others):

Yet another letter to the Spectator

Sir:

Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.

A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.

But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.

Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.

In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.

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.

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..."

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?

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?

Recycled from my post of April 1st, 2008.

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.

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)

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.

A future case for impeachment?

The threats:

htp: Karl Denninger

The result:

At least $125bn is to go to nine of America's largest banks, including Citigroup, JPMorgan Chase and Bank of America, in exchange for capital under the rescue plan.

The power:

(9) TROUBLED ASSETS-

The term `troubled assets' means--

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

...not "prior approval", you'll note. For those that think they understand law, here is the full text of the genetically-modified bill as enacted on 3rd October 2008.

And here's an intriguing clause in Section 119:

(2) LIMITATIONS ON EQUITABLE RELIEF.—

(A) INJUNCTION.—No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101, 102, 106, and 109, other than to remedy a violation of the Constitution.

Excuse my ignorance, but is this a watered-down version of the infamous "non-reviewable" Paulosn proposal ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.")?

A lesson from 1721

The South Sea Bubble ended in the imprisonment of the Chancellor of the Exchequer, John Aislabie:

The South Sea Company had been built on high expectations which it could never fulfil, and it collapsed in August 1720. An investigation by Parliament found that Aislabie had been given £20,000 of company stock in exchange for his promotion of the scheme. He resigned the Exchequer in January 1721, and in March was found guilty by the Commons of the "most notorious, dangerous and infamous corruption". He was expelled from the House, removed from the Privy Council, and imprisoned in the Tower of London.

Aislabie was replaced by Robert Walpole, who became in effect Britain's first modern-style Prime Minister - who earlier had spent six months in the Tower in 1712, as a result of unjust impeachment by his political enemies.

Now, who will be properly prosecuted and properly punished for a man-made disaster that has undermined the world's banking system?

More dire warnings

Karl Denninger is predicting a bond and currency crash in the US if banks aren't forced to disclose exactly what they do and don't have, so we can let the insolvent go down and release the liquidity into the right channels.

I hope the right path is taken, because my brother lives there.

By the way, in body language terms I read Hank Paulson as a hell of a bully. He looks like a totalitarian danger to me.

Rally? The smart money's been moving out for a long time

Read Michael Panzner here. Reminds me of when Jimmy Goldsmith sold all his holdings on the Paris Bourse in the Summer of 1987, and recently how Warren Buffett was reported to be holding massive amounts of cash.

Now Buffett has bought $5 billion of Goldman - but as preferred stock with a 10% dividend (and with warrants representing an instant capital gain from day one); and Philip Green is buying £2 billion of Baugur's debt. Note that these wise men are NOT buying stock market ordinary shares: they are betting on a sure thing, pretty much.

I think bear market rallies are when the pros sell to the amateurs. When the amateurs realise the pros have gone, and there are no more bigger fools, the panic proper starts. And then the pros are there, waiting for the bottom prices. I think this is what is behind legs 4 and 5 of the Elliott Wave.

A note on gold

Some commentators on the gold market predicted that the price would come down, or at least be restrained, because leveraged speculators would have to sell assets to raise money to clear some of their borrowing.

As the credit market continues to remain tight and the prospects of quick killings made on the back of increasingly-expensive borrowed money become less plausible, watch for the gold price to bottom-out (I read one claim yesterday that this has already happened). Then when continued liquidity injections from governments start to work their way into prices, my guess is that gold will make a steeper and steadier rise, as it becomes not a find-a-bigger-fool speculation but a flight to security, away from devaluing currency.

I may soon get back in myself, with some of my small savings.

And yes, I did indeed start drawing my "cash stash" yesterday, and plan to take more out today. Can anyone believe the blanket guarantees for deposits at banks, especially under the present economic and monetary conditions? You think disasters can't happen, but as a young woman my mother suddenly found herself fleeing the country alone, with two horses. Hope for the best, plan for the worst.

Cassandra couldn't run Troy

Thanks to Michael Panzner at Financial Armageddon, we can read for free an interview with 70-year-old money manager Jeremy Grantham. Grantham points out that business is run by managers, not by Old Testament prophets, and so he philosophises that crises will recur.

He also believes that this one isn't over yet:

The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap... it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.

My 26 June guess at the trend for the Dow was c. 7,000 - 10,000:

If that means a midpoint of 8,500 and the overcorrection is 20%, then the momentary low point could be around 6,800, which at least suggests that the gap between my two red lines is approximately correct.

Friday's lowest point during the day was 7,773.71, still 10% away from the theorised minimum; and the Dow closed at 8,451.19. Yesterday it remained above the latter figure throughout, and rose to 9,387.61.

In short, Grantham must be reading this as a bear market rally, and it's not very silly to think that the Dow could come back to 7,000 at some point.

Good luck to the day traders, I haven't the nerve and speed to try to make a fortune on the bucking-bronco stage of the market.

All clear

Dow up 936, FTSE up 324: so it's all okay again. Isn't it?

Except here in the UK, the Prime Minister wants banks to carry on lending like they did last year. Is there a touch of madness in this?

Surreal. That's the feeling.

I see Mish has the same feeling.

Dow falls are only at interim stage

Jesse relays a couple of charts from Steve Williams at CyclePro, and adds one of his own. As I read it, the implication of the CyclePro charting is that the end-point for the Dow at the bottom of the bear market could be around half its present value, in a process that might take 8-10 years.

Jesse's chart relates the Dow to the price of gold, and the implication of his is a drop of some 60% - but that could be achieved by a rise in gold, as well as a fall in the Dow.

Perhaps it is time for us to be making quiet, regular withdrawals from the cashpoint and building up a stash of truly instant-access cash. I shall start today.

And when inflation hits?

Derivatives blowup may hit insurance and car makers

This blog looks at the implications of failed investment bank Lehman's call on their "insurance" in the form of derivatives contracts. If everyone can handle the the cash call when it comes, good; if not, maybe a domino effect - one failure unbalancing another in a chain reaction. In particular, will hedge funds , who tend to play with borrowed money, be able to honour their contracts, or will they be the weak link in the chain?

Next up, says "George Washington", are the insurance and auto companies. It seems Standard & Poor's fear these could be the last days for GM and Ford.

I'm given to understand that players in derivatives usually balance their position with bets both ways; but they tend to be big bets. It's like a seesaw with an elephant at each end: if one elephant steps off, or turns out to be a baby compared to the other... What's the chances of $55 trillion of derivatives being well-balanced at all points?

So there are good reasons to think that next week is going to be more exciting than most of us would wish. Friday's Dow volatility may be repeated.

Banking crisis part of a deep strategy?

On Financial Sense, F. William Engdahl speculates that asset-backed securities ("toxic waste" mortgage packages) were sold to European banks in order to poison their wells and leave the world banking system dependent on the USA - and an elite group of American bankers.

One startling fact cited in this conspiracy theory, is that the office responsible for overseeing Credit Default Swaps had its staffing reduced from 100 to... ONE person. Giving evidence to Congress, the Chief Accountant of the Securities & Exchange Commission said "... there has been a systematic gutting, or whatever you want to call it, of the agency and its capability through cutting back of staff."

Oh dear, I thought conspiracy theories were for nutcases. Maybe I'm wrong.

Every picture tells a story

This is a measure of monetary inflation. Increases here will eventually work their way into prices and wages. An explanation is offered here. Note that there has been nothing close to the highlighted "spike" in the last 25 years.

"An inflationary holocaust" - Jim Rogers

TBRRob posts a very useful YouTube interview with big investor Jim Rogers (the best analyses come from people who back their own judgments with their own money).

Despite the recent strengthening of the dollar, he is buying Japanese yen and Swiss francs; and commodities (especially agriculture), because they lead the way out of recession and their fundamentals are (he says) sound.

In the interview, he is challenged on his inflationary hypothesis: surely we are seeing "deleveraging" (reduction in borrowing) and don't we need more money in the system to deal with the liquidity crisis? Rogers cites past history and sticks to his guns

I think it was Marc Faber's comments that first helped me understand why all this public-money-throwing isn't going to help. It's NOT a liquidity crisis: liquidity is what has caused the problems (and anticipating the movement of the money tides is what has helped Faber grow his funds!).

It's a SOLVENCY crisis. If all your possessions are worth less than your total debts, borrowing more money will not help. So when the government creates massive extra funds for you to use, you will not wish to use them. And if your fellows are in the same position, you certainly won't wish to lend them any money you still have.

When you are insolvent, there are two ways out. One is to declare bankruptcy, in which case the money invested in you is lost and so excess liquidity goes down the drain. Good, though it's also painful (personal fortunes lost, people laid off).

The other way is to be unbelievably lucky, and have someone else pay-off your debts. When the government chooses to do the latter for the banks, it has to get the funds from somewhere, and ultimately that is the citizen/loyal subject. In this case, the liquidity is still in the system, and there is no drain to take it away. Sooner or later, it leaks out into the general economy and prices rise, because there is more cash to bid for the usual limited amount of goods and services.

(Or the government increases taxes, and uses the extra to pay-off debt. Nice idea, but increasing taxes slows the economy and creates more benefit dependants, which requires more taxes even as less revenue is coming in because business is suffering because people now have less spending money because taxes are higher, and...)

So there are two problems created: inflation, and moral hazard - the people who have been bought out in this undeserved way have no incentive to change their habits.

You may think that it's only a temporary problem and the government will recoup its investment when things get back to normal. The trouble is, "normal" means house prices dropping to about half what they were worth last year, because they doubled for no good reason in the five-year period before that. In the long term, I understand, houses are priced at 3 times income, not 6 times as during the recent period of monetary inflation.

So either the value of the excess credit is destroyed by bankuptcy, or by inflating away the money saved by more prudent people. Either the guilty (or foolish) suffer, or the innocent.

And here's another either/or: either we go this process again and again, or banks are prevented in future from increasing the money supply in the way they just did.

And the guilty must be punished.

A message to Peter Hitchens

Peter Hitchens seems to me one of the few independently-minded journalists in the mainstream media. One of the pieces in the MoS (and his blog) today reflects on the damage caused by BBC blabbermouth financial commentator Robert Peston and whether the credit crunch could have been anticipated. Hitchens says, in passing, that although he himself had bad feelings about our Roaring-Twenties-type economy, no-one really knew what would happen.

Rarely for me, I completely disagree with him, and think that if he turned his mind to this subject he might be influential enough to help some greatly-needed changes happen. So I comment:

Re your Peston piece and "The truth is, nobody really knew":

Sadly, this state of affairs was in fact VERY well-anticipated. As an independent financial adviser, I repeatedly relayed warnings via my newsletters to clients about the increasing debt in the USA, starting a decade ago. On 20 October 1999 I attended a breakfast meeting given by an investment company to drum up business, and a rep stated that the Dow was 50% overvalued. This confirmed me in the intuitive feeling I had long had, that a collapse was imminent. I feared the consequences so much that I put my business on the back burner and returned to teaching, which is something not lightly to be done, you will understand.

The stockmarket collapse began on the first trading day in 2000. Jerkily, the FTSE went down to less that half its 1999 peak by March 2003, at which point I thought lessons might have been learned and we could start to invest with confidence; but then (and you can see the BoE statistics online) the rate of increase of the money supply was allowed to soar by an extra 5% per annum. The investment bubble had turned into a banking bubble, which led to the horrendous property price instability that now threatens the financial system itself. The government is deeply implicated, since its regulators allowed banking reserves to be pared back (this is part of how you increase the money supply) so that when a crisis occurred, the lifeboats weren't there.

I repeat, very clear warnings have been sounded for a very long time by respected investment experts, mostly from the USA as the average Brit has very little understanding of money since we are rarely allowed to make or keep much of it. So I began a blog, in May last year, to learn more myself and to sound Cassandra-type warnings to any who would listen.

Bankers, politicians and economists knew very well, or ought to have known, the consequences, and the worst result of the present debacle is that it is likely that none of them will face Enron-style prosecution and punishment. They and/or their successors will therefore do it all over again, to their enormous gain and our near-ruin, as they have done periodically for centuries. Unless the perpetrators are punished in a way that will be remembered for generations, this moral hazard will continue to be a profound threat to our financial security and social stability.

You have written an excellent book on the mutilation of the British police, and I can promise you that the basics of finance are nothing like as complex as the professional fraudsters of the investment and banking community would like you to believe. I do really wish and hope that you will turn your investigative and communication skills to an analysis of what really went wrong with our Western economies.

NEWS: Gold CAN back all the world's money

... says Mike Hewitt in this article. Looking at gold in all its forms and relating it to the world's money that actually circulates (as opposed to all the money on the account books), he arrives at an estimated price of $738 per ounce.

That's not so far off the long-term median price of gold, adjusted for inflation - see below for some attempts to describe that relationship.

Maybe it could work.

Refuge, flight, battle rejoined, victory, retribution

Brad Setser looks at a flood of demand for US Treasuries and suspects that it's central banks shifting into the securest dollar asset they can find; and away from other dollar-denominated assets.

The first comment on the same post says that the next stage is a run on the dollar.

Continuing the Tolkien fantasy theme, one recalls the flight to Helm's Deep, and the eventual breach. Ultimately, though at a cost, the good side wins, of course (Denninger explains today how we can face the mess and clean it up).

Time to revisit Michael Panzner's "Financial Armageddon" - reviewed here in May of last year.

If he's right - and he's been right so far - it's first cash, then out of cash. But there's not enough gold to act as the world's currency (unless a horrific amount of wealth is permanently destroyed), and if we start up a new fiat currency, the moral criminals of the banking class will play the game all over again.

I note that Max Hastings in the Daily Mail calls for bankers to be "named and shamed"; this is milksop stuff. Yet they're still going to get billions in bonuses this year! Why does the Proceeds of Crime Bill not apply? Heavy, heavy fines, so that generations of bankers and traders will remember and hesitate. How about the last 5 years' bonuses, as a benchmark? Punitur quia peccatum est ("punishment is to be inflicted, because a crime has been committed").

But even that's not enough. What about the political class that opened the financial sluices to alleviate the discomfort of 2002-2003? And did it several times before, too? (See Jesse today on Greenspan's bubbles.) How do we mete out condign punishment to those greedy for power, as well as those for money?

I repeat, this is a crisis of democracy.

Guessing the low points

I looked at trends in the Dow earlier this year and guessed that the Dow's low might be 7,000. Now, Mish reports that Nouriel Roubini is saying the same.

The FTSE is currently hovering around 4,000, which is lower than the line I drew in June. But then, the line passed through, not under, the lowest negative spike in 2003. I seem to recall Wolfie predicting 4,000 in one of his comments here recently; well done, old chap.

It's not about money; it's about democracy

It's the interconnectedness that's pulling us all down: the centralisation of money and power has made us vulnerable. As I said in December:

I think the themes of diversity, dispersion and disconnection will grow in importance over the coming years, in politics and economics. As with some mutually dependent Amazonian flowers and insects, efficiency and specialisation will have to be balanced against flexibility and long-term survival.

Life on Earth has survived because it is not like a clock. Mechanistic systems must fail sometime, and the larger they are, the greater the damage they will cause.

After all this is over, we will need to refresh democracy and its controls on those who seek power, in whatever form. Bertrand Russell's book "Power" suggested that it comes in three forms - political, financial and religious, if I recall - and the American Constitution was devised to bell these cats; except, it seems, insufficient attention was given to the potential of money to destroy the community.

Still air in the balloon

The FTSE ended 2007 at 6,456.90. Back in August, I constructed a rough RPI-related graph from 1984 onwards, and to get back to the equivalent of 1984 in real terms, the index would have to drop to around 3,000: at the end of that year the FTSE closed at 1,181.10. We forget how far we've come.

More falls

Elliot Wave again

Like Robert McHugh, "Mish" also follows the Elliot Wave theory:

In Elliott Wave terms the index is in an impulsive wave 3 down. At some point there will be a corrective wave 4 up, with still more down to follow in wave 5. A lower low can be expected.

Back to Kondratieff

Some people are now revisiting Kondratieff''s theory of economic cycles. Seems to fit winter, at the moment. The above image is modified from this source: smart fellows.

A question

What would have happened if the UK had not followed suit with monetary inflation over the past 5 or 6 years?

Would prudence have been rewarded, or would a Protestant adherence to the right course of action have been punished by falling exports and unemployment? In a global trading system, when one major player makes a mess of their money, must others do the same or be sorry?

Can the world be run on the principles of the efficient-market purists, or is there an advantage to the first to break ranks? Are monetarists doomed to merely understand what is going on, incapable of preventing it?

Hope

Brad Setser sees hope in the correction:

I increasingly suspect that one consequence of United States and Europe’s recent financial crisis will be a smaller deficit in both regions, and a smaller surplus in the emerging world.

Robert McHugh was right!

15 months ago, Robert McHugh predicted this:

[The Dow] can be expected to drop to about the start of the pattern, at a minimum, meaning into the 9,000s over the intermediate-term... It is looking increasing likely to us that world central banks will choose hyperinflation rather than nominal decline in stock indices, which will force precious metals prices to rise sharply.

In gold-price terms, McHugh's Dow prediction came true on January 22 this year. Now it's come true in nominal terms, too (9,153.22 at 13:04 ET today) (UPDATE: 8.731.87 at 15:41).

It seems McHugh is an adherent of the Elliot Wave principle. Wikipedia gives a criticism of the theory:

The premise that markets unfold in recognizable patterns contradicts the efficient market hypothesis, which says that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott wave principle among investors would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

I think one could riposte that events have demonstrated that the efficient market does not exist.

A big figure

Hard on the heels of the $700 billion US bailout bill comes the UK's £400 billion rescue plan.

Oddly, this latter figure, in dollar terms, is very similar to the one approved by Congress - a little over $692 billion at today's retail conversion rates (and even closer in wholesale terms).

But the really interesting thing is the difference is in its relationship to the size of the population of the country, and the GDP:

Marc Faber recently said that the US needed $5 trillion to resolve the crisis, i.e. 7 times more than the amount approved by Congress. Britain's bailout fund is proportionately 7 times greater, and so, crippling cost to the taxpayer aside, maybe it could work.

And it has political implications. The average Brit is so innumerate that he doesn't know how to calculate 75% of 100, so don't expect him to understand that it wasn't simply "the banks" to blame, but the relaxation of Government monetary controls. Don't discount the possibility that, however undeservedly, Gordon Brown may win the next election.

End of the dollar as the world's reserve currency?

See the comment in Brad Setser's blog - Brazil and Argentina are already finding other ways to pay each other, Russia may deal in euros... if no-one wants the dollar after Jesse's predicted devaluation, it may go from devalued to almost worthless.

But what will countries do, that export to the USA? Devalue their own currencies? Or demand payment in euros? Or oil contracts? Even Setser admits to struggling to understand what's going on.

Jesse also comments on a report that the Gulf States may diversify into gold.

Dow: 6th anniversary of its 2002 low

Currency devaluation time?

Jesse reckons there's going to be a massive (30 - 40%) devaluation of the US dollar, in order to swindle foreign creditors.

Are there any currency experts out there who can tell me whether the UK won't race to do the same? Will the Yen and the Renminbi be forced upwards, relatively speaking? Should we be buying dried food etc instead of holding cash?

FTSE prediction: poll results

Thanks to all those who took part in the poll for the forecast value of the FTSE by the end of December. The median line is on 4,500.

This is what I guessed in June and repeated on Monday. Below that at the moment, but I'm still hoping that it'll settle back to the simplified trend I suggested. I prefer to be a sun bear, not a grizzly.

Are we there yet, Dad?

Stop blaming the Americans

The political formula here in the UK is "We'll do anything that's necessary" and "the sub-prime problem started in the USA." Misleading nonsense.

The Americans may have sold packaged mortgages, but our institutions here didn't have to buy stuff they didn't have the competence to analyze.

And we didn't have to have 6x earnings, LTV100%+, self-certification or a rush into buy-to-let.

This disaster is home-grown.