I break the silence again, because yet again the high-ups are trying to get more drugs legalised; in this case it's the Chairman of the Bar Council. I've taken on the redoubtable (and courteous) Charon QC and expect to be hit over the head repeatedly by third-party Bolly-swiggers, but fear not the struggle naught availeth. I give below my objections, perhaps Devil's Kitchen will reappear and deny yet again that he's hooked.
M’learned friend has opened a can of worms. Those who would welcome liberalisation should first read, in a fair-minded way, the experiences and views of the former Birmingham prison doctor Anthony Daniels, aka the Spectator’s “Theodore Dalrymple.” (See his 1997 City Journal article here: http://www.city-journal.org/html/7_2_a1.html)
Readers may also wish to consider the different reasons for taking drugs. Some in the more successful and privileged levels of society may take them as a pleasure trip to stave off boredom, or to alleviate stress and mental overstimulation as they continue to pursue wealth and fame. A proportion will be caught in the toils of addiction, but their network of friends and their financial resources often (though not always) help cut them free.
Lower down, drugs licit and otherwise are a form of medication against unrelenting misery, even if that misery is carpeted and centrally heated. And they are a trap, just as much as the benefits system. They destroy initiative and ambition. This gestalt of hopeless idleness and fuddled fecklessness is then passed on to another generation, with the addition of negligent and abusive parenting. My teaching assistant also works in the evenings at a chemist, and told me yesterday how she was struck that practically everyone in Quinton (west Birmingham) was on a drug she didn’t recognise, so she Googled it up and discovered it was an antidepressant.
When I was at school, the futurologist’s choice was Huxley’s Brave New World or Orwell’s 1984. We now have a miserable coalition of both. Speaking of coalitions, there is a most unfortunate agreement between a government wanting to save money and so eyeing the allegedly unwinnable war on drugs, and a social elite (including members of the government) who grew up with drugs-for-fun and don’t see why anybody should be allowed to prevent one doing as one wishes. This glosses over the obligation to set an example to the less fortunate and to succour them. Much of the libertarian philosophy I read today seems to be a clever gloss on callous selfishness.
[Charon then directs me to a podcast interview with an American judge who also thinks the war is lost.]
OK, have now skimmed the transcript (for which, thanks). Now let’s have a look at some of these worms wriggling out of the can:
Racism: yes, a lot of non-whites in jail. Connect that to justice being like the Ritz. Also (maybe) more usage at the desperate end, and less ability to stay out of sight of the cops – no haciendas to fall apart on. And please consider what I have heard black colleagues in the looked after child system say more than once: the whites permit the plague of drugs, because it keeps the blacks down.
Judge Kane compares the “unwinnable” war on drugs to Prohibition. I understand that by and large, Prohibition worked. It was repealed after the Great Crash because the government needed a way to raise more revenue.
Legalisation means pure drugs, clean needles – point taken, so to speak. But I expect customers also got clean straw during the Gin Epidemic. “If it is available like an aspirin, then there is no market for it.” May I ‘umbly draw His Honor’s attention to the aforesaid epidemic.
Prisons are overcrowded: build more. This freeing of offenders for reasons of accommodation is part of the feedback system that tells the offender that the law has no teeth and will only gum you gently after the 150th offence. A firm – and class-blind – approach would send the message very quickly. I read not so long ago about a magistrate in a Scottish court (in the 60s?) who warned publicly that carrying a knife would be punished as severely as possible; the next offender got 10 years; knife crime ceased abruptly, immediately and for the remainder of the magistrate’s time on the Bench.
Prisons are expensive: not so much as crime. Cost of a year at Her Majesty’s pleasure £30k, savings in costs of crime £300k I have read recently. Perhaps a proportion of insurance premiums should be hypothecated to the prison system so the connexion might be made more explicit.
Legalisation means “no need to rob”. So how come liquor store robberies?
The war on drugs is unwinnable in the same sense that the war on murder, robbery etc are unwinnable. What you don’t see in advance is what will happen when the restraints are off; but we have historical precedent to teach us. The judge speaks of a steady 1.7% addiction rate to heroin and opium, but forgets (a) that there are now many other drugs available and (b) that in a far wealthier and more leisured society legalisation and ready supply could spread use and multiply addicts much, much faster.
Doubtless I’ll be told how pernicious tobacco and alcohol are; I agree, and I am also in favour of increasing restriction on both. The former shortened both my parent’s lives by some 20 years, I believe; and I recall when the latter was available from pub, offies and vintners, but not from supermarkets, garages, post offices etc and often at all hours. I recall one of my looked after children went home to celebrate his father’s release from prison; the poor sap of an adult drank everything in the house and then went out and got caught stealing a bottle of vodka from his local shop. Back in the jug agane.
I think the real driver in all this handwringing declamation of failure is the reluctance of the authorities to prosecute famous people as they will in cases of tax evasion.
Now, Charon will you read Daniels for me?
The case continues.
Saturday, July 17, 2010
Thursday, July 15, 2010
S&P dividend yield suggests 50% fall appropriate
A good metric to determine the valuation of stocks is the dividend yield. The current dividend yield on the S&P is a paltry 2.1%. The historical average dividend yield is a much greater 4.36%. The lowest dividend yield was 1.11%, which was reached in August of 2000. The highest dividend yield was 13. 84%, this was achieved in June 1932. Therefore, on a dividend yield basis, the market is currently significantly overpriced.
Michael Pento
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.
Michael Pento
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.
Tuesday, July 13, 2010
The real villains of the Global Financial Crisis: teachers
Headline radio news today: a London primary headteacher earned £276k. Imagine! Actually, read the news item linked above to find out that it wasn't just for being a headteacher; then decide whether you think he's earned his corn.
Of course, it's still only about two-thirds of what Fred Goodwin, slayer of the Royal Bank of Scotland, gets as a pension (early, to boot); and Fred would have had twice that if he'd got his way.
And it's not a patch on the bonuses at Goldman Sachs and other doers of "God's work".
Who sets the news agenda?
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.
Of course, it's still only about two-thirds of what Fred Goodwin, slayer of the Royal Bank of Scotland, gets as a pension (early, to boot); and Fred would have had twice that if he'd got his way.
And it's not a patch on the bonuses at Goldman Sachs and other doers of "God's work".
Who sets the news agenda?
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.
Will the workers of the world end up on the same wages?
Yes, unless the US (and the PC-obsessed UK) take real, hard-fact-and-logic education and R&D seriously again:
Question. Why do workers in developing nations earn a fraction of the wages American workers earn? While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.
The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.
John Hussman (who says in the same piece that the US stockmarket is 40% overvalued - get ready for a correction).
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.
Question. Why do workers in developing nations earn a fraction of the wages American workers earn? While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.
The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.
John Hussman (who says in the same piece that the US stockmarket is 40% overvalued - get ready for a correction).
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.
Sinking together
BRYAN DAWE: Why are people selling the European currency and buying the US dollar?
JOHN CLARKE: Because the US economy is so much stronger than the European economy.
BRYAN DAWE: Correct. Why is that Roger?
JOHN CLARKE: Because it's owned by China.
Read the rest of this Australian truth-spoof here (htp: Brian Gongol)
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.
JOHN CLARKE: Because the US economy is so much stronger than the European economy.
BRYAN DAWE: Correct. Why is that Roger?
JOHN CLARKE: Because it's owned by China.
Read the rest of this Australian truth-spoof here (htp: Brian Gongol)
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.
Monday, July 12, 2010
British victory as octopus scores 100%
Weymouth-born psychic octopus Paul got all his predictions perfectly right in the World Cup. What more important questions should we ask him?
Here come higher interest rates - and inflation?
An article in yesterday's New York Times - hat tip to Michael Panzner - points out that some $5 trillion in short-term borrowing by banks has to be renewed within the next couple of years. American banks have to refinance $1.3 trillion, but Europe's $2.6 trillion - twice as much in cash terms, and still nearly double the USA's burden in terms of the relative size of their economies (GDP).
Competition among borrowers will strengthen the hand of lenders, so expect interest rates to rise.
In turn, this will hit the trading value of existing bonds (because their income is fixed and so will become less attractive). It will put further downward pressure on house prices as mortgages become more costly and harder to get. And investment banks will be less keen to borrow cash to speculate on the market, so quite possibly shares will fall as debt-fuelled gambling reduces; besides, businesses will find it harder to make a profit if they pay more for their borrowing at the same time as their customers have less money to spend, and the rate of profit obviously impacts on share prices.
From what I read, much of Britain's public debt is in the form of bonds with longer maturity dates, so that part of the government's debt servicing won't be hit so soon as in the USA, where more comes due earlier. But the UK is projected to increase public borrowing for some years yet, so any increase will be funded at a higher cost. And, as I've said before, private debt in Britain is greater than public debt, so the economy is likely to slow as credit cards, variable rate mortgages etc become more expensive and Joe Public trims his personal spending - there is already clear evidence of this in the USA. Expect businesses that rely on discretionary expenditure to be hit particularly hard (except, perhaps, those that service the richer end of the population - inequality has grown in Britain and the USA).
Lower profits mean less tax revenue and more unemployment. Some fear that our governments will be in such a squeeze that they will crack and begin creating money to buy their own debts - bailing themselves out as they did the banks. Inflation is a threat to savers, who for the last 10 years would generally have been better off in cash than in the stockmarket. We could be approaching a turning point. (Contrariwise, Steve Keen thinks inflating our way out can't be done, nor will debt be defaulted or written off - he is predicting another Great Depression - see his last paragraph.)
There's more than one type of inflation. We tend to think of it as higher prices, and certainly there's been some of that, as evidenced by the cost of petrol, food, energy; but the effects aren't universal - my first car cost £6,000 in 1989 and its equivalent today costs the same. We could see price inflation hitting the poor worse than the rich.
Monetarists see inflation differently: they define it as an increase in the amount of money and credit in the economy. If the money supply grows faster than the economy, then in general (in theory) we'd expect an increase in wages and prices. However, since global trade sets the workers of the world against one another, median wages in the UK and the USA have not progressed much for decades. The improvement in standards of living has come from cheap imports, increasingly financed by personal debt.
If the monetary base in one country increases, then normally you'd expect the currency to devalue against that of stronger, foreign economies. But the situation has now become very complicated: many economies are in a similar crisis, so their currencies are falling together against commodities (like gold) whose supply cannot easily be expanded. Other economies (e.g. China) have become dependent on trade with the spendthrift countries, and therefore have a strong incentive to keep down the relative value of their currency, so as not to price themselves out of the market.
Can the show continue forever?
Traditional economists assume that the economy is self-righting, and that debt doesn't matter much because it ripples throughout the system and raises both wages and prices; and currency exchanges will adjust international trade so that it comes back into balance, eventually. Their harmonious conception is now challenged, just as the mediaeval concept of an orderly universe was challenged and replaced with a vision of colliding worlds.
Leading this modern Copernican-style revolution is maverick Australian economist Steve Keen, who models finance in a way that shows the system tends to increasing instability and breakdown.
Yet the economy is not a fixed machine - not even a self-destructive one. Its workings can be changed, for example by the action of governments. As the philosopher Henri Bergson said:
It is of the essence of reasoning to shut us up in the circle of the given. But action breaks the circle.
The economist can suggest what will happen if, if, if. The politician trying to avert disaster and get re-elected will then try something to avoid the consequences of his and our actions. The economy is dynamic, changing and with many intelligent and competing players. It's more like poker than Meccano; perhaps more like war than poker.
UPDATE (13 July): John Mauldin agrees with Keen that deflation seems unavoidable, and predicts that government bonds will increase in value because they are safe. But as I've suggested here, that's the first part of the game; the question is, whether governments will indeed find a way to reflate out of the hole - effectively part-paying-off debt by stealing value from savers. As John Hussman says (my emphasis):
From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.
For commodity speculators, the second highlighted point is a challenge: wait for the bottom and then ride to the top, or get in now because you may not be able to make the purchases during a really rapid rise (especially if you don't trust "paper gold" and only want the real, tangible stuff)?
So much of what I read among the experts is about timing the market in the short term, which is OK if that's your day job; I don't put myself up against these "gunslingers", as George Goodman (aka "Adam Smith") terms them.
Counter-argument: Charles Hugh Smith says that the rich and powerful simply won't let inflation destroy wealth, since they have most of it.
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.
Competition among borrowers will strengthen the hand of lenders, so expect interest rates to rise.
In turn, this will hit the trading value of existing bonds (because their income is fixed and so will become less attractive). It will put further downward pressure on house prices as mortgages become more costly and harder to get. And investment banks will be less keen to borrow cash to speculate on the market, so quite possibly shares will fall as debt-fuelled gambling reduces; besides, businesses will find it harder to make a profit if they pay more for their borrowing at the same time as their customers have less money to spend, and the rate of profit obviously impacts on share prices.
From what I read, much of Britain's public debt is in the form of bonds with longer maturity dates, so that part of the government's debt servicing won't be hit so soon as in the USA, where more comes due earlier. But the UK is projected to increase public borrowing for some years yet, so any increase will be funded at a higher cost. And, as I've said before, private debt in Britain is greater than public debt, so the economy is likely to slow as credit cards, variable rate mortgages etc become more expensive and Joe Public trims his personal spending - there is already clear evidence of this in the USA. Expect businesses that rely on discretionary expenditure to be hit particularly hard (except, perhaps, those that service the richer end of the population - inequality has grown in Britain and the USA).
Lower profits mean less tax revenue and more unemployment. Some fear that our governments will be in such a squeeze that they will crack and begin creating money to buy their own debts - bailing themselves out as they did the banks. Inflation is a threat to savers, who for the last 10 years would generally have been better off in cash than in the stockmarket. We could be approaching a turning point. (Contrariwise, Steve Keen thinks inflating our way out can't be done, nor will debt be defaulted or written off - he is predicting another Great Depression - see his last paragraph.)
There's more than one type of inflation. We tend to think of it as higher prices, and certainly there's been some of that, as evidenced by the cost of petrol, food, energy; but the effects aren't universal - my first car cost £6,000 in 1989 and its equivalent today costs the same. We could see price inflation hitting the poor worse than the rich.
Monetarists see inflation differently: they define it as an increase in the amount of money and credit in the economy. If the money supply grows faster than the economy, then in general (in theory) we'd expect an increase in wages and prices. However, since global trade sets the workers of the world against one another, median wages in the UK and the USA have not progressed much for decades. The improvement in standards of living has come from cheap imports, increasingly financed by personal debt.
If the monetary base in one country increases, then normally you'd expect the currency to devalue against that of stronger, foreign economies. But the situation has now become very complicated: many economies are in a similar crisis, so their currencies are falling together against commodities (like gold) whose supply cannot easily be expanded. Other economies (e.g. China) have become dependent on trade with the spendthrift countries, and therefore have a strong incentive to keep down the relative value of their currency, so as not to price themselves out of the market.
Can the show continue forever?
Traditional economists assume that the economy is self-righting, and that debt doesn't matter much because it ripples throughout the system and raises both wages and prices; and currency exchanges will adjust international trade so that it comes back into balance, eventually. Their harmonious conception is now challenged, just as the mediaeval concept of an orderly universe was challenged and replaced with a vision of colliding worlds.
Leading this modern Copernican-style revolution is maverick Australian economist Steve Keen, who models finance in a way that shows the system tends to increasing instability and breakdown.
Yet the economy is not a fixed machine - not even a self-destructive one. Its workings can be changed, for example by the action of governments. As the philosopher Henri Bergson said:
It is of the essence of reasoning to shut us up in the circle of the given. But action breaks the circle.
The economist can suggest what will happen if, if, if. The politician trying to avert disaster and get re-elected will then try something to avoid the consequences of his and our actions. The economy is dynamic, changing and with many intelligent and competing players. It's more like poker than Meccano; perhaps more like war than poker.
UPDATE (13 July): John Mauldin agrees with Keen that deflation seems unavoidable, and predicts that government bonds will increase in value because they are safe. But as I've suggested here, that's the first part of the game; the question is, whether governments will indeed find a way to reflate out of the hole - effectively part-paying-off debt by stealing value from savers. As John Hussman says (my emphasis):
From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.
For commodity speculators, the second highlighted point is a challenge: wait for the bottom and then ride to the top, or get in now because you may not be able to make the purchases during a really rapid rise (especially if you don't trust "paper gold" and only want the real, tangible stuff)?
So much of what I read among the experts is about timing the market in the short term, which is OK if that's your day job; I don't put myself up against these "gunslingers", as George Goodman (aka "Adam Smith") terms them.
Counter-argument: Charles Hugh Smith says that the rich and powerful simply won't let inflation destroy wealth, since they have most of it.
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.
Sunday, July 11, 2010
The Economist: UK houses 33% overpriced
The Economist magazine has produced a table comparing rents with house prices to give an idea of fair value in different countries. According to this, the average UK house is 33% overvalued, or in other words should drop 25% to return to its long-term price/rent ratio.
A word of warning: Mike Shedlock (where I found this) points out that the US is too diverse to make these statistics precise and universally applicable. I would say the same for the UK, small as we are. Nevertheless, it corroborates my feeling that houses are generally still too expensive here.
Addendum (19:37): Charles Hugh Smith gives some reasons why owning a home may not be the Holy Grail, anyway. I was suggesting selling up and buying a caravan to my dearest some years ago, but women love plumbing.
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.
A word of warning: Mike Shedlock (where I found this) points out that the US is too diverse to make these statistics precise and universally applicable. I would say the same for the UK, small as we are. Nevertheless, it corroborates my feeling that houses are generally still too expensive here.
Addendum (19:37): Charles Hugh Smith gives some reasons why owning a home may not be the Holy Grail, anyway. I was suggesting selling up and buying a caravan to my dearest some years ago, but women love plumbing.
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.
Sunday, July 04, 2010
Signs of the times - Acocks Green, Birmingham on Sunday 4 July 2010
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.
David Cameron may face his Major/Lamont moment
There was tension in our insurance office on Wednesday, 16th September 1992. The British government was fighting to remain in the Exchange Rate Mechanism, which pegged the pound to 2.95 Deutschmarks. George Soros, we later discovered, had started a run on the pound with a massive "short" that would soon net him one of his several billions.
The government was using the interest rate as its defensive weapon. The rate had leapt from 10% to 12% at lunchtime. Still unconvinced, the currency traders continued dumping the pound, which the government frantically bought by the billion to support its value.
Then came the moment of truth - or rather, an utterly implausible bluff, instantly called: the Chancellor shoved the rate up to 15%. While we in the office were dazedly contemplating the effect on our mortgage clients, the market knew it had won. 15% just couldn't be done. Britain was ejected from the ERM like a pip from a crushed lemon.
As every teacher, as every parent knows, you musn't threaten what you cannot perform. When you overreach, your credibility is busted. And I fear that David Cameron may be skirting very close to that point.
Cameron has let the papers know about wargame economic scenarios to cut public spending by as much as 40%, a figure that would have barely-conceivable consequences. Clearly this is to scare policymakers and departments into crystallising proposals for much lesser reductions.
Yet there is a whiff of desperation in this big-stick-waving and weekend-news-leaking, and if the markets scent fear and self-doubt at the heart of government, the hunt may begin.
The initial figure of £6 billion in savings, yet to be turned into concrete plans, was merely a stopgap to reassure the bond markets that the new government intends to get control of the budget. Compared to the accumulated and increasing public debt, this first cut is a drop in the ocean. It's held off the short-sellers for now and we retain our official AAA credit rating, which allows us to keep down the interest rate.
Unofficially, our rating has already fallen to "AA", according to the credit insurance market. If interest rates go up, debt servicing becomes much more difficult, not only for the government but even more so for the worker-consumer - private debt in the British economy is far greater and Joe Public pays above the bank lending rate, so he can support all those people in glass-and-marble offices who send him his mortgage and credit card statements.
So if the market senses a panicky bluff, up go the rates and down goes the pound, real estate, the stockmarket and the trading value of bonds.
Mr Cameron will have to talk tough, just enough.
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 government was using the interest rate as its defensive weapon. The rate had leapt from 10% to 12% at lunchtime. Still unconvinced, the currency traders continued dumping the pound, which the government frantically bought by the billion to support its value.
Then came the moment of truth - or rather, an utterly implausible bluff, instantly called: the Chancellor shoved the rate up to 15%. While we in the office were dazedly contemplating the effect on our mortgage clients, the market knew it had won. 15% just couldn't be done. Britain was ejected from the ERM like a pip from a crushed lemon.
As every teacher, as every parent knows, you musn't threaten what you cannot perform. When you overreach, your credibility is busted. And I fear that David Cameron may be skirting very close to that point.
Cameron has let the papers know about wargame economic scenarios to cut public spending by as much as 40%, a figure that would have barely-conceivable consequences. Clearly this is to scare policymakers and departments into crystallising proposals for much lesser reductions.
Yet there is a whiff of desperation in this big-stick-waving and weekend-news-leaking, and if the markets scent fear and self-doubt at the heart of government, the hunt may begin.
The initial figure of £6 billion in savings, yet to be turned into concrete plans, was merely a stopgap to reassure the bond markets that the new government intends to get control of the budget. Compared to the accumulated and increasing public debt, this first cut is a drop in the ocean. It's held off the short-sellers for now and we retain our official AAA credit rating, which allows us to keep down the interest rate.
Unofficially, our rating has already fallen to "AA", according to the credit insurance market. If interest rates go up, debt servicing becomes much more difficult, not only for the government but even more so for the worker-consumer - private debt in the British economy is far greater and Joe Public pays above the bank lending rate, so he can support all those people in glass-and-marble offices who send him his mortgage and credit card statements.
So if the market senses a panicky bluff, up go the rates and down goes the pound, real estate, the stockmarket and the trading value of bonds.
Mr Cameron will have to talk tough, just enough.
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.
Saturday, July 03, 2010
China and gold mining in Alaska
China has reached her first gold target, expanding holding from 600 tonnes to 1,000 as of last month. But she has stated her intention to boost stocks by 10,000 tonnes over the next decade. This source reports on a new long-term contract to purchase gold ore from the Kensington Mine in Alaska.
The mine is about 400 miles from the Klondike, so unfortunately not quite justifying the inclusion of photos of grizzled - they always are, aren't they? - prospectors from the late nineteenth century.
Another difference - perhaps typical of the modern (what is post-modern?) age - is that this is a high-level government deal. It's not about the individual struggle for enrichment and independence. Central banks have also reversed their long-term policy of releasing gold onto the market to depress its value and are now beginning to buy, as Mark O'Byrne suspected 18 months ago.
These developments are likely to support the price of gold, even though it has quadrupled (in dollar terms) in the last 10 years. But the expansionary plan could also be seen as a straw in the wind, for those who see gold as a store of wealth in increasingly uncertain times.
Just for fun (and a little right-brain stimulus), here's a picture of Chinese gold prospectors in California:
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 mine is about 400 miles from the Klondike, so unfortunately not quite justifying the inclusion of photos of grizzled - they always are, aren't they? - prospectors from the late nineteenth century.
Another difference - perhaps typical of the modern (what is post-modern?) age - is that this is a high-level government deal. It's not about the individual struggle for enrichment and independence. Central banks have also reversed their long-term policy of releasing gold onto the market to depress its value and are now beginning to buy, as Mark O'Byrne suspected 18 months ago.
These developments are likely to support the price of gold, even though it has quadrupled (in dollar terms) in the last 10 years. But the expansionary plan could also be seen as a straw in the wind, for those who see gold as a store of wealth in increasingly uncertain times.
Just for fun (and a little right-brain stimulus), here's a picture of Chinese gold prospectors in California:
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.
Monday, June 28, 2010
Keen: debt and deflation
Steve Keen, a non-mainstream economist who is one of a mere handful to have predicted the Great Financial Crisis, has put his latest academic paper on his website. It has a lot of mathematical equations and technical terms, as you'd expect, but I think it's possible to get the general drift if you don't get disheartened by all that. As a non-pro myself, I'll try to pick out some of the main points that appear relevant to investment (I am sorry that I cannot yet reproduce his graphs but in any case that might infringe his copyright).
Keen attempts to model the economy including the role of debt, which appears to be a major factor insufficiently considered by classical economic theory. Using past data, he observes that from 1920 -1940 "rising debt was strongly correlated with falling unemployment" (p.4).
But in the last 20 years private debt has risen far faster than production (fig. 5, page 5) and rising debt now appears to be associated with rising unemployment (fig. 12, page 11). Keen blames what he forthrightly calls "Ponzi finance", i.e. speculative money poured into assets, causing them to become overpriced. In the aftermath of the 1929 Great Crash, the biggest debt load was among businesses and government; now, most of the debt is concentrated in the financial sector and households (fig. 13, page 12). Running his model, Keen finds (fig. 14) that there is an inbuilt tendency for speculative debt (as opposed to debt-financed investment in production) to take off and ultimately account for almost all the debt in the economy.
Another of Keen's themes is that economics has confused the amount of money with the flow of money. This has misled the USA into supporting banks on the assumption that the latter would lend out the usual multiple of their deposits (they didn't), whereas in Australia the emphasis was on financial support to households. Consequently, unemployment in the USA has doubled to 10%, but in Oz it seems to have stabilised at around 5% (fig. 23).
It seems that as total debt reaches a critical size, there is an alteration in the way in which money and the economy interact (I think chemists call this sort of thing a "phase change"). Prior to this point, the system appears to be settling down, rather as milk does in the saucepan before suddenly frothing over and burning on the hob. Kenn quotes (p.12) Hyman Minsky: "Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing".
In Keen's model, the first effects of the crackup are felt by workers: wages spiral around from 100% of GDP, centring towards c. 70%, but then suddenly collapse down to below 50% (fig. 33, page 43). For about 10 years in this final decline, business profits appear fairly unaffected; then they slump catastrophically into deep losses (page 44). At the same time, the banker's share of national income soars. Economic growth turns into economic contraction, and we move from an apparent settling-down of the inflation rate into a savage deflation exceeding 35%.
As with any mathematical model, there is always the question about how far it fits observed reality, and in economics it seems hard to get exact figures and generally-agreed definitions, especially where debt is concerned (see my previous post). But Keen's seems to be a model operating on strict internal logic based on clear theoretical data and correlations, with outcomes that chime with phenomena we've see so far. His model has very worrying implications for the next part of the cycle.
An unknown factor is what government will do. Whatever the economic machinery, politicians are liable to throw a spanner into it, if only to be seen to be doing something. Keen's prediction of a housing price collapse was refuted by the financial measures the Australian government introduced to help householders, and internationally it is widely feared that governments will ultimately attempt to mitigate the effects of deflation by debauching the monetary system and introducing hyperinflation; hence the shrilling of the "gold bugs".
So every economic model will have to be updated to incorporate the new cogs, axles and valves invented by our desperate leaders. The value of Keen's model is, I think, not so much to offer accurate predictions of the future as to show that the system as it stands appears to tend to equilibrium but actually is highly unstable. He is predicting the burning of the Phoenix, not its reincarnation.
UPDATE: Keen's dynamic model, with its self-reinforcing trends, has something in common with George Soros' ideas of market feedback loops. Soros terms this process "reflexivity" and set out his theories in his 2008 book "The New Paradigm for Financial Markets". In his speech at Berlin's Humboldt University last week, Soros argues that Germany would be damaged by an exit from the Euro and should be less purist about financial rectitude at a time when weaker Eurozone countries are struggling to support their banking systems.
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.
Keen attempts to model the economy including the role of debt, which appears to be a major factor insufficiently considered by classical economic theory. Using past data, he observes that from 1920 -1940 "rising debt was strongly correlated with falling unemployment" (p.4).
But in the last 20 years private debt has risen far faster than production (fig. 5, page 5) and rising debt now appears to be associated with rising unemployment (fig. 12, page 11). Keen blames what he forthrightly calls "Ponzi finance", i.e. speculative money poured into assets, causing them to become overpriced. In the aftermath of the 1929 Great Crash, the biggest debt load was among businesses and government; now, most of the debt is concentrated in the financial sector and households (fig. 13, page 12). Running his model, Keen finds (fig. 14) that there is an inbuilt tendency for speculative debt (as opposed to debt-financed investment in production) to take off and ultimately account for almost all the debt in the economy.
Another of Keen's themes is that economics has confused the amount of money with the flow of money. This has misled the USA into supporting banks on the assumption that the latter would lend out the usual multiple of their deposits (they didn't), whereas in Australia the emphasis was on financial support to households. Consequently, unemployment in the USA has doubled to 10%, but in Oz it seems to have stabilised at around 5% (fig. 23).
It seems that as total debt reaches a critical size, there is an alteration in the way in which money and the economy interact (I think chemists call this sort of thing a "phase change"). Prior to this point, the system appears to be settling down, rather as milk does in the saucepan before suddenly frothing over and burning on the hob. Kenn quotes (p.12) Hyman Minsky: "Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing".
In Keen's model, the first effects of the crackup are felt by workers: wages spiral around from 100% of GDP, centring towards c. 70%, but then suddenly collapse down to below 50% (fig. 33, page 43). For about 10 years in this final decline, business profits appear fairly unaffected; then they slump catastrophically into deep losses (page 44). At the same time, the banker's share of national income soars. Economic growth turns into economic contraction, and we move from an apparent settling-down of the inflation rate into a savage deflation exceeding 35%.
As with any mathematical model, there is always the question about how far it fits observed reality, and in economics it seems hard to get exact figures and generally-agreed definitions, especially where debt is concerned (see my previous post). But Keen's seems to be a model operating on strict internal logic based on clear theoretical data and correlations, with outcomes that chime with phenomena we've see so far. His model has very worrying implications for the next part of the cycle.
An unknown factor is what government will do. Whatever the economic machinery, politicians are liable to throw a spanner into it, if only to be seen to be doing something. Keen's prediction of a housing price collapse was refuted by the financial measures the Australian government introduced to help householders, and internationally it is widely feared that governments will ultimately attempt to mitigate the effects of deflation by debauching the monetary system and introducing hyperinflation; hence the shrilling of the "gold bugs".
So every economic model will have to be updated to incorporate the new cogs, axles and valves invented by our desperate leaders. The value of Keen's model is, I think, not so much to offer accurate predictions of the future as to show that the system as it stands appears to tend to equilibrium but actually is highly unstable. He is predicting the burning of the Phoenix, not its reincarnation.
UPDATE: Keen's dynamic model, with its self-reinforcing trends, has something in common with George Soros' ideas of market feedback loops. Soros terms this process "reflexivity" and set out his theories in his 2008 book "The New Paradigm for Financial Markets". In his speech at Berlin's Humboldt University last week, Soros argues that Germany would be damaged by an exit from the Euro and should be less purist about financial rectitude at a time when weaker Eurozone countries are struggling to support their banking systems.
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.
Sunday, June 27, 2010
How bad is the debt problem?
The things we really need to know seem to be the hardest to find out, at least here in the UK. I look again and again for figures on our debt and each time get a different answer.
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
Sometimes, with public debt, it's because of problems of definition - for example, the "National Debt" is different from the "Public Sector Net Debt". Even then, there's the question of what has yet to be included in the accounts, and what has been designed not to appear in the accounts at all (e.g. the Private Finance Initiative, or PFI). Official statistics say "government debt" in 2009 was almost 70% of GDP. According to this source, the Bank of England put it at 60% in January 2010. But reportedly, the Centre for Policy Studies estimated that the true figure at the end of 2008 was 103.5%, including public sector pensions and PFI. Even the lower, official figure for Public Sector Net Debt is forecast to rise steeply in the years to come, to around 80% (a similar story is told here).
Then there is private debt. A couple of years ago, personal debt in the UK broke above 100% of GDP, according to Grant Thornton. In the USA, private indebtedness has soared to something like 300% of GDP (recently reconfirmed by Australian economist Steve Keen here).
But we also have to factor in business debt. This graph from Moneyweek adds business and private debt together to show the UK's figure running at around 250% of GDP. - and the graph is out of date. It's fair to guess that we're as badly off as the Americans.
Finally, we have to consider who are creditors are. How much of the debt is owed "within the family", so to speak, and how much to foreigners? 18 months ago, the Spectator magazine's Fraser Nelson reported an estimate (by Michael Saunders of Citigroup) of total "external" debt among the G7 nations:
The point of this is that not only are we very heavily in hock, but we are particularly vulnerable to pressure from foreign creditors.
In another post, I plan to consider our options, and the extent to which the recent "emergency Budget" has helped solve the problems we face.
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.
Saturday, June 26, 2010
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
"Jesse" predicts gold will appreciate 500%
We've seen the price of gold in dollars quadruple since the beginning of the new Millennium. Compared to inflation, gold is above its long-term average - but still below its 20th century peak in 1980, when the American economy was under severe strain.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
Some "gold bugs" think that our current and worsening problems will cause a very significant flight to the historic preserver of wealth - in my previous post I link to one who predicts $50,000 per ounce (in real terms, apparently). I find it hard to believe that you will be able to buy a 3-bed semi in Birmingham for a handful of gold weighing little more than a packet of winegums.
But the total private and public debt in the USA is now far higher than before the Crash of 1929, and similar problems affect us here in the UK and across much of Europe. In today's Daily Mail, Peter Oborne (not normally an alarmist commentator) discusses the danger of a return of recession and of the Euro collapsing, and the risks of depositing more than £50,000 with any one bank, especially Santander and its subsidiary Abbey National. Against such a background, we could see a scramble into anything that offers a secure nest for our savings.
On the internet, "Jesse" (to all appearances a technically expert and sober-minded investor) is bullish on gold without going quite as far as the most excited of the gold bugs:
Gold has been gaining, on average about 70% every three years. So what is the end point?
Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but will the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.
Three points I'd make:
1. There is something like 100 ounces of gold "on paper" for every ounce of gold you can hold in your hand. I now often see online comments recommending the possession of physical gold because of concerns over delivery on all those paper promises. This then gives you the challenge of getting it and storing it safely, plus being taxed on gains if it appreciates; and remember that President Roosevelt confiscated gold from private investors in 1933. (UPDATE: Note that Saudi Arabia revealed this week that it is sitting on twice as much gold as we previously thought.)
2. There are other assets that have intrinsic value - farmland, houses etc - and even if they may lose some wealth, they won't lose it all. The billionaire Duke of Westminster is in no hurry to get rid of his properties in London's Mayfair and Belgravia, the foundation of the family fortune established when Sir Thomas Grosvenor married heiress Mary Davies in 1677, so acquiring 500 acres of then-rural land near the capital.
3. If you're looking to preserve what you have, rather than beat someone else in the investment game and take their stake, there is a government-backed product designed to achieve this: the NS&I Index-Linked Savings Certificate. We can argue about what is the correct measure of inflation, and if the Russians invade all British government promises are void*; but otherwise it's a safe bet and all you have to do is give up some spending now to have its true worth again later on.
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.
*It's how my mother's family lost their farm in East Prussia, now a heavily-militarised sliver of Russian Federation land with access to the vital open-in-winter Baltic seaport of Kaliningrad. The Russkies threatened to base missiles there in 2008 in a Cuban Crisis-style response to US plans for missile bases in Poland and the Czech Republic. Perhaps some wealth in portable form wouldn't be a bad idea, after all - it would certainly have helped my family on their flight westwards.
Sunday, June 20, 2010
Fun with gold
As the crisis continues, the gold bugs cheerily anticipate rocketing gold prices. Some fling about wild notions like $50,000 per ounce, others try to be a bit more sober (or less drunk) and guess at $10,000. But there are so many imponderables, as I comment:
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
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.
Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?
Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?
Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.
Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.
But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.
This farmer (http://thebeginningfarmer.blogspot.com/2008/02/how-much-land-do-you-need.html) reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.
Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.
So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.
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.
Email to clients, 20 June 2010
Dear Client
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
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.
If you have been expecting to hear from me recently, please accept my apologies - we have had a family healthcare emergency that has taken up much of our available time and energy for many weeks. And now, for the next few days, I must devote time to answering many detailed questions for the FSA's regular periodic reviews. But I plan to re-contact you soon thereafter if you are ready to re-examine your financial plans.
In the meantime, I hear people around me saying that since house prices have dropped "so much" and the bank and stockmarket problems seem to have been sorted by the government actions of 18 months ago, things have returned to normal. I think it's too early to say that and my general approach is still very cautious. The price of our (or our leaders') follies has yet to be paid, and the economic consequences of national budget reviews here and in Europe may be challenging for some time to come.
Like many expert commentators, George Soros sees as us as between two acts in a longer drama (some describe it as "the eye of the storm") - please see my latest post on the Broad Oak Blog here: http://broadoakblog.blogspot.com/2010/06/soros-thinks-markets-still-overpriced.html
Soros is worth listening to - after all, he is personally worth some $7 billion dollars, which is slightly more than most of us - though even Warren Buffett can make mistakes (the latter recently told a Congressional committee that he hadn't anticipated the scale of the 2008 crisis).
I feel we are in a quandary. Commit new money to investment and you could be caught in another correction from which it could take some time to recover. Hold cash, and your savings could be affected by inflation if the government fails to get public finances under control.
But there are some fairly safe options still available to most of us - in particular, National Savings Index-Linked Savings Certificates. These are backed by the government and offer returns in line with RPI, plus 1% p.a. It does mean locking up money for 3 or 5 years, and yes, if the stockmarket suddenly booms you'll miss out on those wonderful, effortless gains we came to regard as normal in the 1980s.
On the other hand, the official change in RPI over the 12 months to May 2010 was 5.5%, so with an extra 1% on top that would have been a pretty good tax-free and risk-free return.
Anyhow, although this isn't a personal recommendation (we have to consider how such things fit in with your other plans) it's something to think about and possibly discuss with me. Do please call if I can help further.
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.
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.
... 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.
Tuesday, June 15, 2010
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.
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.
Monday, June 14, 2010
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.
Sunday, June 13, 2010
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.
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.
Wednesday, June 09, 2010
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?
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?
Monday, June 07, 2010
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.
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.
Sunday, June 06, 2010
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.
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.
Tuesday, May 18, 2010
Is it time to get out of cash?
For a long time - years - I have counselled caution to clients, and thought cash was not a bad place to be. That has been correct for the last decade or so. If you had hopped in and out of the market at just the right times, you might have done very well, but equally you could have lost very heavily. The FTSE still hasn't got near to its peak of 1999, and when you consider inflation, in real terms we are still far below.
But we may be moving on to a new phase. Governments in the USA, the UK and now the European Union have poured quite staggering amounts of cash into the banking systems to prevent their collapse. Some commentators now think that we are heading for an inflationary period that will devalue savers' money (and interest rates on deposits are not matching the official inflation figures).
There is an argument for investing now, not to make a genuine gain, but because over time stocks and shares may not lose as much in real terms as cash at the bank. This is the view of Dr Marc Faber, for example (see excerpts from a recent interview here), even though he believes that the monetary system will eventually collapse (and presumably be replaced by a new currency).
There are other ways to protect against inflation, notably National Savings Index-Linked Certificates, which are backed by the government and will return growth in line with RPI plus 1% per annum or so. We can argue about how exactly inflation is measured - and that is relevant - but their definition of inflation will have to be fairly reasonable, we hope.
More speculative investors may be eyeing gold (which has already quadrupled in price since 2000), silver, oil, agricultural land etc - but commodities are risky and there are already funds investing in these areas with the advantage of borrowing very cheap money, thanks to the state-supported banks.
If you would like personal advice, do please get in touch.
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.
But we may be moving on to a new phase. Governments in the USA, the UK and now the European Union have poured quite staggering amounts of cash into the banking systems to prevent their collapse. Some commentators now think that we are heading for an inflationary period that will devalue savers' money (and interest rates on deposits are not matching the official inflation figures).
There is an argument for investing now, not to make a genuine gain, but because over time stocks and shares may not lose as much in real terms as cash at the bank. This is the view of Dr Marc Faber, for example (see excerpts from a recent interview here), even though he believes that the monetary system will eventually collapse (and presumably be replaced by a new currency).
There are other ways to protect against inflation, notably National Savings Index-Linked Certificates, which are backed by the government and will return growth in line with RPI plus 1% per annum or so. We can argue about how exactly inflation is measured - and that is relevant - but their definition of inflation will have to be fairly reasonable, we hope.
More speculative investors may be eyeing gold (which has already quadrupled in price since 2000), silver, oil, agricultural land etc - but commodities are risky and there are already funds investing in these areas with the advantage of borrowing very cheap money, thanks to the state-supported banks.
If you would like personal advice, do please get in touch.
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.
Monday, May 17, 2010
Can Osborne do it?
The UK's new Chancellor, George Osborne, is committed to finding £6 billion of cuts by the this weekend. That sounds like a lot, but given the scale of the challenge facing the country I think this target is a tiny sop to the markets that showed such concern on Friday (and which failed to recover today).
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
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.
An economics professor was brought onto BBC News 24 this lunchtime; he pointed out that UK government spending runs at £700 billion per annum and UK GDP is something like £1,500 billion. £6 billion is peanuts, less than 1% of current spending.
A recent OECD study (this link is to John Mauldin's post on "Business Insider") suggests that we need to do far more to stabilise the economy. Even if we set ourselves a leisurely 20 years to bring debt-to-GDP down to 2007 (pre-crisis) levels, Britain would have to make savings of 3.5% of GDP. So using figures already given, I make that £52.5 billion per year.
Government statistics say that median earnings in the public sector in 2009 were £539 per week, or a shade over £28,000 per year. Let's assume that for every pound in pay you need to allow another pound in overheads. So every job cut saves £56,000 per annum. If we want to save 3.5% of GDP, we need to lose over 936,000 jobs.
Actually, it's worse than that, because there's the loss of tax (and NIC) revenue when you make someone unemployed; plus the additional cost of unemployment benefits, probably higher medical costs because of the health impact of joblessness, and so on. So, make that a target of more like 2 million jobs to lose? Especially if, on average, you cut less-well-paid jobs (teaching assistants and so on). That's out of a total of 6 million public sector employees, if you take John Redwood's figure; or 8 million if you take the first comment on that post, by Mark Wadsworth; i.e. a loss of a quarter to a third of the public workforce.
That's if you do it over 20 years. According to the OECD's report, doing it in 10 years would mean savings of 5.8% of GDP; or 10.6% over 5 years. Unimaginable.
Then there's the fact that we're starting from an annual budget deficit, not a balanced budget. Even before the credit crunch, the UK's deficit was running at 2.7% of GDP. According to the post by John Mauldin above, in 2011 the deficit is expected to be 9%!
So, it's just not to come from public sector layoffs alone. And even there, some of the cuts will impact the private sector, e.g. outsourced IT projects in the NHS, the education system and the widely-hated national ID card system.
The Welfare State is going to be hit hard. But how? State Pension Age raised to 70? Family payments for special needs children cut? Unemployment benefit payable for a limited period only, as in the USA (though even there they're having to extend the benefit period on an emergency basis)?
Or will we, despite desperate and hugely unpopular efforts by this new government, eventually end with default on a massive scale, either straightforward or by hyperinflation? Increasingly, this seems a distinct possibility.
I fear that George Osborne's attempts at reassuring the markets will not succeed for long. And if the Opposition makes maximum political capital out of the disaster, quite possibly the voters will reinstate Labour in five years' time, in the hope of mitigating the pain; which, if the next government plays along, may ignite the final financial crisis.
We must hope for the best and support this coalition in what must be far more serious measures than have been telegraphed to us so far.
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.
Debt, inflation and the looming currency crisis
This post has been copied from the Broad Oak Blog (see also sidebar on right). I think I'm getting to the point where it's all been said and like Wolfie, maybe I should stop and take care of my own situation as best I can. I shall continue to post from time to time on the Broad Oak Blog, focussing on financial matters for the benefit of clients. Otherwise, I shall read others' blogs and websites - but try to keep quiet, apart from the odd comment.
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The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
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 terrifying truth about debt - and inflation
The above is a recently-released video from the National Inflation Association in the USA (hat-tip: Tim Iacono). In short, it says that the budget cannot be balanced and the currency will eventually collapse. According to the NIA, perhaps a few wealthy investors will prosper from speculation in gold, silver, agricultural land, but the vast majority of Americans will suffer and the middle class will see their savings wiped out by inflation.
This is not a problem restricted to America. According to page 2 of this study by Citibank, the UK will not bring its government debt under control until 2013/2014, and even that is on assumptions that the author sees as optimistic. The second graph shows that compared to the debt-saddled "PIIGS" group of Western European countries, we will take longer than all of them just to be in a position to begin to reverse direction.
Further, the UK is by far the worst of the G7 countries in terms of the debt owed to foreigners, according to this article by Fraser Nelson of the Spectator magazine (and that was back in December 2008). So our economy is at risk from a reassessment of its creditworthiness by foreign lenders and we are vulnerable to a hike in interest rates - which in turn would make it far harder for us to service our debts. True, foreigners have recently shown themselves willing to continue lending to us, but that is against a background of concern about Greece. The picture could change in the intermediate future.
Finding out the true state of affairs with debt is difficult - it seems to be an embarrassing secret. We are given a confusing array of definitions and much of the discussion we hear on TV and radio is about government debt, rather than the total burden of debt within the economy. Even then, we hear talk of "reducing the deficit", which actually means continuing to get into debt, but not quite so fast - the actual total amount outstanding will increase for years to come.
If you want to get some notion of the overall liability, see the graphic on this post at Naked Capitalism: it shows that all in all, we are not much better off than Greece - and Germany is scarcely better off than the UK. The US is a giant debtor - this graph shows the position at the end of September last year: debt was c. 370% of GDP, or half as much again as Ireland's, relative to national income. To put it another way, the US now has 42% more debt-to-GDP than before the Wall Street Crash in 1929.
Even on this definition of debt, experts disagree about the extent of it. Another source (stockbrokers Charles Schwab) agrees on the US figure, and then says:
"But on this metric, we're in "good" company: The United Kingdom's total debt-to-GDP is a whopping 470%, Japan's is 460%, Spain's and South Korea's are 340%, Switzerland's is 315%, France's and Italy's are about 300%, Germany's is 275% and Canada's is 245%. These are all records.
"The "BRIC" countries (Brazil, Russia, India and China) all have total debt-to-GDP under 160%. However, since this study ended in 2008, we have to add in China's stimulus package, which was three times the size of the US package, not to mention China's banks lending out $1.3 trillion during 2009. Some believe China could now be more leveraged than the United States." (My emphasis.)
Pictorially, Schwab's figures would look like this:
Because of the crisis facing so many nations including the world's wealthiest, there is heavy pressure on their governments to keep interest rates low (or lower than inflation), while they try to shore up their public finances. This means that savers will see the value of their money reduce, even when interest is added to their accounts and not spent. When I worked at an insurance company in the late 80s, we had a sales aid that showed the real (adjusted for inflation) value of cash deposited with the Halifax Building Society for 10 years (from 1974 to 1984, if memory serves). Even with accumulated interest, the sum at the end would only buy half as much as when the cash was first deposited!
Much the same story can be seen with the stockmarket. In December 2008, I made the following graph reinterpreting the Dow Jones Index in the light of inflation:
In "real terms" (and yes, one can argue long about what is an appropriate measure of inflation) the apparent recovery in equities was actually a fall in value from 1974 to 1982 - a loss of about two-thirds in eight years. The picture for the FTSE is something similar (though not as severe as in the USA, which was paying for the Vietnam War on top of other problems): apparent gains, undermined by the fall in the purchasing power of money.
The difference between cash and equities is that the latter did eventually bounce back and turn a "real" profit, thanks (in my view) to very significant inflation in the money supply, not under a Labour government (though they did their fair share both before 1979 and after 1997), but under the Conservatives! I've written to people including Lord Tebbit and the economics editor of the Guardian, pointing out the long-running use of monetary inflation to make the economy seem healthy (while weakening it), but perhaps unsurprisingly, have had no response. However, if recent comment (see link just given) on the dimishing returns of monetary inflation are correct, we now approaching the point where further stimulus will actually reduce gross domestic product (GDP) - pumping more money in will be worse than useless.
The fact is, while some compare our situation to that of the Thirties and others look back at the Seventies, the debt problem is now far greater than in either period. The past is not necessarily going to be a good guide to the future. Respected commentators like Dr Marc Faber are coolly convinced that our currency system will simply break down; in which case the social consequences will be very unpleasant.
The challenge now is for you not to make a profit, but to find some way of hanging on to whatever wealth you have managed to accumulate. I cannot advise you personally here on this blog, but do please contact me if you are a client and would like a review.
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.
Wednesday, May 12, 2010
Tuesday, May 11, 2010
Monday, May 10, 2010
Why not a Lab-Con pact?
Last Thursday, the people spoke, and what they said was this:
"We want a proper government. A strong, honest government that works for us.
"One that doesn't make stupid compromises just to keep in power. One that works for what most people want.
"A job. A better chance for our children than we had. Money to pay bills, to pay for a bit of fun, to save for when we're old. Decent education and healthcare, keep crime down, protect us from enemies domestic and foreign.
"Apart from those things, if you have a wonderful vision of the future, write a novel or make a movie. We don't want revolutionaries, Puritans of any religion or none, national separatists or the European Brotherhood of Man.
"Now, get on with it. And stop lying and fiddling the expenses."
So, why not a coalition of Conservative and Labour? Up to the 70s/80s, when the country was tearing itself into pieces because of economic crisis after Bretton-Woods collapsed, there was quite a lot of consensus between the two sides.
If Clegg can talk face to face with Brown and his back can talk to Cameron, maybe Lab and Con could discover that they have more in common with each other than they have with the LibDems. (For a start, neither of them thinks that a white flag is a robust defence in a nuclear world.)
With 424 seats, a Lab/Con government of national unity would have a majority of 198. Enough to ignore special pleading and political blackmail from Alex Salmond, Ieuan Wyn Jones and the Northern Irish factions; enough to ignore the babel of grand reformist schemes from the LibDems; and enough left over to ignore episodes of up to half a hundred backbenchers at a time temporarily crossing the floor of the House in a hissy fit about their own pet projects.
We face enough challenges to occupy a full-length Parliament, challenges that all serious politicians would wish to solve together.
So, why not? Out of 650 Members of Parliament, is is really impossible to find 326 that would cooperate for the national good?
There might even be some Liberal Democrats willing to help.
"We want a proper government. A strong, honest government that works for us.
"One that doesn't make stupid compromises just to keep in power. One that works for what most people want.
"A job. A better chance for our children than we had. Money to pay bills, to pay for a bit of fun, to save for when we're old. Decent education and healthcare, keep crime down, protect us from enemies domestic and foreign.
"Apart from those things, if you have a wonderful vision of the future, write a novel or make a movie. We don't want revolutionaries, Puritans of any religion or none, national separatists or the European Brotherhood of Man.
"Now, get on with it. And stop lying and fiddling the expenses."
So, why not a coalition of Conservative and Labour? Up to the 70s/80s, when the country was tearing itself into pieces because of economic crisis after Bretton-Woods collapsed, there was quite a lot of consensus between the two sides.
If Clegg can talk face to face with Brown and his back can talk to Cameron, maybe Lab and Con could discover that they have more in common with each other than they have with the LibDems. (For a start, neither of them thinks that a white flag is a robust defence in a nuclear world.)
With 424 seats, a Lab/Con government of national unity would have a majority of 198. Enough to ignore special pleading and political blackmail from Alex Salmond, Ieuan Wyn Jones and the Northern Irish factions; enough to ignore the babel of grand reformist schemes from the LibDems; and enough left over to ignore episodes of up to half a hundred backbenchers at a time temporarily crossing the floor of the House in a hissy fit about their own pet projects.
We face enough challenges to occupy a full-length Parliament, challenges that all serious politicians would wish to solve together.
So, why not? Out of 650 Members of Parliament, is is really impossible to find 326 that would cooperate for the national good?
There might even be some Liberal Democrats willing to help.
Exports and loans
The way Charles Hugh Smith explains it, it seems that Germany is the China of Europe.
Goldman Sachs - "financial terrorists"
Max Keiser claims GS quite deliberately caused last week's 1,000-point drop on the Dow, just to remind the US Government who's master.
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