Soros thinks markets still overpriced

June 11: Multi-billionaire George Soros gives his views on the present systemic crisis. He argues that since complete catastrophe was averted by government action in 2008, free-market discipline (failure and bankruptcy) no longer applies and must be replaced by official regulation and management - or the "superbubble" will eventually burst. I give below some extracts, but the piece is worth reading in its entirety.

... life support consisted of substituting sovereign credit for the credit of financial institutions... But the collapse of the financial system as we know it is real, and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt... budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip...

When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.

The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation.

He will speak more on the latter subject in Berlin this Wednesday. In the meantime, please note his comment on market prices, which I have highlighted. Some people seem to think that the corrections in stocks and residential property have brought us back to normality - I don't think so.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Banks - growing worry

There is growing concern about banks again, reflected in what is known as the "Ted Spread" - the difference between the yield (effective interest rate, compared to trading price) of government debt (3-month US Treasury bills) and interbank lending (the LIBOR rate). According to Paul Nolte, the difference has widened over the last three months from 10 basis points (0.1%) to over 50 b.p. (0.5%). In other words, investors are willing to accept a lower income from government debt, in exchange for greater confidence that they will be able to get their money back.

The Ted spread can be a significant indicator - I passed on concerns about it in December 2007, months before the great credit crisis slammed into us. But to put it into perspective, at that time the spread was 2%, or four times higher than now. Nevertheless, a straw in the wind.

And evidence that there are those in the market who know (or have good reason to suspect) what's going on, long before it's disclosed to the rest of us by our alert and expert news media. Still, the latter can hardly be blamed - Peston the messenger was shot at by many, even when his message came rather late.

Perhaps I should take an insanely insouciant, upbeat angle on it all, like the Book in The Hitchhiker's Guide to the Galaxy: "Many men of course became extremely rich but this was perfectly natural and nothing to be ashamed of because no one was really poor, at least no one worth speaking of." On the same note, James Quinn's latest post includes the following graphs:





DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Credit crunch, bailouts and unemployment - according to Steve Keen

Steve Keen, Australian post-Keynesian economist and one of only about 16 (previously estimated at 12) out of 20,000 econ pros to have predicted the "credit crunch" (aka GFC - Global Financial Crisis), looks at economic models and produces his own. The one I find most striking is the last, Fig. 22:

There are several implications I see here:

1. It is better to bail out borrowers than banks
2. The disruption takes c. 15 years to settle
3. Whatever is done or not done, we are left with permanently elevated levels of unemployment

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Currents in the sea of debt

Michael Panzner, author of "Financial Armageddon" (a book I reviewed 3 years ago when I began to relay advance warnings of the credit crisis), is a great miner of news and comment. Here he has unearthed an article that analyses the apparent improvement in USA household debt figures.

It seems that there has been over $400 billion in defaults; and many of those who haven't defaulted (yet) have continued to increase their debt. If the economy continues to struggle, perhaps a portion of the latter will also renege on their financial obligations.

One coming blow to the US economy is a fresh wave of mortgage problems. Traditionally (and unlike in the UK), domestic mortgages were fixed for the entire term of the loan, but in the late greedy rush to make fortunes in fees, banks and brokers offered housebuyers "option ARMs" (adjustable rate mortgages with an initial very low interest rate fixed for a few years). These loans are due to start coming off their "teaser rates" over the next couple of years.

That's when many homeowners may either be forced to default, or choose to do so because they calculate that falling house prices will catch them in a negative equity trap. In many (not all) cases, they may be able to default and leave their credit problems behind, because the loan may be of a kind that is attached to the property only - the lender can't pursue the borrower for any debt left over after selling the house. So all the beleaguered borrower has to do is send back the keys - the slang for this is "jingle mail".

Lots of American houses are built of wood. Standing empty and uncared for, they are likely to deteriorate quickly, even if they haven't been trashed by resentful ex-owners as a parting slap to the repossession teams. And there is still plenty of land to build new houses, so an existing property in poor condition may never find a new buyer - especially if it's in an area blighted by unemployment and rising crime, like former "Car City" Detroit.

The bankers have been sustained by huge financial backing from the government, but it may not be possible to light that match twice. Put "financial crisis" and "second wave" into your Web browser and you'll find lots of material to support the view that we are merely in the eye of the storm (another phrase now frequently used, e.g. by Tim Wood here).

I therefore remain cautious about investment, yet fearful that governments will try to escape their obligations through inflation.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

The Impending Geek Shortage

In his recent editorial (“Why a liberal arts degree? The Big Shaggy”), David Brooks of the New York Times writes, “… many people have the ability to produce a technical innovation; … Very few people have the ability to create a great brand;…”

Polite words almost fail me.

Mr. Brooks’ argument is that manipulating emotion by words is a rarer and higher-order skill than ‘simple’ problem-solving. This view was shared by the ancient Greek philosophers, who looked down on the people who made things as ‘mere artisans’. It is also the stated view of Richard Cohen of the Washington Post, Simon Jenkins of the Guardian (UK), and the late writer Norman Mailer.

To be consistent, this alternate reality means ignoring the hard work and dedication of legions of scientists and engineers, and treating our comfortable existence as the Natural state of things.

It is also the apparent view of our nation’s scientifically- and technologically-illiterate middle managers, administrators, money manipulators and politicians. Starting in the 1970’s, they collectively watered down science and mathematics education, reduced funding for research and de-emphasized manufacturing.

This ‘service-based’ economy allowed us the illusion of confusing the movement of wealth with its creation, and brought the nation to bankruptcy. Lawyers, accountants, bankers, hedge fund managers, and the like all have incomes which are vastly larger than those of the typical scientist, and yet they produce absolutely nothing of any substance.

Unfortunately for them, the energy, economic, environmental and societal problems that we face are largely scientific and technological. Simply put, without a lot of such work, most of us would starve.

At most universities, the number of majors in any one of psychology, sociology, communications, pre-law, and other non-technical fields dwarfs the total in the hard sciences and mathematics combined. Exactly where will we get the experts that we badly need?

Faber on inflation, war, and physical and financial security

May I recommend that you watch the following video in full, even if you are not an economics buff?

Dr Marc Faber is a highly respected investment and economics commentator. He has a wry sense of humour that verges on what the Germans call galgenhumor - the sort of joke you make when you are about to be hanged. His thesis is that prices have become very volatile because of manipulation of interest rates and the money supply, and that in the West we are now so far in debt that governments will see no option but to create very significant inflation.

Accordingly (he thinks), the things people would usually regard as safe stores of value - cash and bonds - will turn out to be places to lose your wealth. Equities may not make much in real terms - and may well lose a lot at certain points (he looks for example at the Mexican experience from the late 70s to the 90s) - but are likely to recover again. Nimble investors may even do very well by exiting and re-entering the stockmarket at the right points.

Faber also considers how the Eastern economies are coming to dominate manufacturing production and consumption, so that although they seem poor compared with us they are not spending the majority of their money on services, as we do in the West. Further, they are not generally so indebted (if we ignore Japan). Faber thinks that at some stage we should all have a significant proportion (he gives a ballpark figure of 50%) of our investments in the East - though he stresses that's not a signal to get in right now.

He is also bullish long-term on gold, merely because of what he thinks will happen to our currencies as governments in the West try to inflate their way out of the debt trap. Interestingly and untypically of many of Faber's audiences, many of the people he is talking to here themselves hold significant amounts of physical gold. (I have just come back from a haircut here in Birmingham and a shop has just opened next door, specialising in buying gold - not so much an outlet as an inlet, you may say.)

Other investment themes are covered in the last few minutes of the video, and include agricultural land and infrastructure companies working e.g. in India, where the majority of the population is still rural and cities will have to be built.

Faber considers geopolitical aspects as well, and thinks that there will be growing international tensions. He is quite clear and non-humorous about how big cities are very vulnerable and that those who can afford to do so should have somewhere to live far away from them. It's worth pointing out that he has taken his own advice and lives in Chiang Mai, northern Thailand - and close to borders with several other countries.



DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Another expert predicting sharp market falls

Bob Janjuah of RBS is talking about the S&P 500 halving from its current level - over 1,700 - to somewhere in the 800s. If this is reflected in the Dow then the Dow will do what (in Dec 2008) I suggested it might, i.e. fall to around 4,000 points.

The interviewer describes Janjuah as an uber-bear, but in fact some other commentators have said the same for quite some time, and it's not even the most pessimistic figure I've seen. Though if and when it comes, the index may have to be interpreted in the light of inflation - and what the true inflation rate really is, is another issue.

Given this scenario, Janjuah says he is interested in gold, "value" (income-producing) stocks of large, financially solvent companies, and emerging market equities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.