Dagong's Sovereign Credit Ratings for June 2010

The new Chinese credit rating agency has issued its assessment of 50 nations - please click on the picture below to enlarge, then alter your computer view until it's readable (I haven't yet worked out how to get Blogger to show a long list like this full-size).

By way of comparison, you may wish to look at CMA DataVision's rankings of sovereign credit default risk from the first quarter of this year, which I rendered here.

Norway still looks good!

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.

After the Apocalypse - or instead of it

In the comments section of my previous piece, "Arthurian" picks up on a remark I made regarding the mindset of some it's-all-going-to-end-ers. I respond:

What I'm thinking re the bit you quoted is that there is a self-aggrandizing tendency to think that the end of the world is nigh, which kind of ties in with one's own mortality and somehow makes the latter more meaningful, e.g. when I was a teenager we'd write poems about the threat of nuclear war.

Take James Kunstler: very sparkly prose style, but through it you sense a relish in contemplating the end of the corrupt old order, which will be replaced by an energy-efficient, sunny, bike-riding, low-food-miles happyocratic New World. In its way it's the sort of fantasy promoted by Communists to justify the awful things we must regrettably do before we get there, only here it's simply inevitable and we don't have to do anything to make it happen, so no guilt.

Fact is, when the money system broke down in Germany in 1923 and Hungary in 1946, the history books don't conclude their accounts with the sentence "As a result, everybody starved to death". The worst things that happened in Germany were what people decided to do about the collapse, in particular to look for a strong leader - ah yes, what we all need.

So ignoring the Doomsdayists and the Bright New Worlders, we should look at the social and political ramifications of what is undoubtedly major financial change. Growing inequality, increasing unemployment, and a State more determined to keep tabs on the populace. Money meltdown has been prevented, but civil liberties and the democratic system are definitely threatened. We've all (or most of us) been a lot poorer materially before now, but our birthright (even in the UK) is the expectation of liberty and the rights and intrinsic, inalienable worth of the individual.

The US has an advantage in that this eighteenth-century vision of man and society was preserved, crystallised, installed in the Constitution, and there'll be a hell of a ripping sound if someone tries to tear it out. The UK's constitution is much more liable to change and so while the biggest noise comes from America, the biggest loss may be ours - if we don't fight for the Rights of Man.

As a financial adviser (while there is much of a financial system left), I try to defend the little wealth of my clients - property rights are part of the R of M - but as I say, at the end it's not really about money. Once a basic minimum has been achieved, the material aspects of life are less important than the social.

What good would all the money in the world be, if you were the last human being on earth? That's a question I'd like to ask the 1% who own 40% of everything. I suspect many of them are gripped by a kind of madness.

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.

Apocalypse whenever, whatever

The present crisis is as much psychological as fiscal. That's not to say that it's not real - psychological stress can result in behaviour that is very real and destructive. But talk of financial limits ignores the fact that the limits are elastic.

I'm reading Simon Schama's Book "Citizens", which is about the French Revolution. He points out (p.65):

"Not only do we now know that the British per capita tax burden was three times heavier than in France, but by 1782, the percentage of public revenue consumed to service Britain's debt - on the order of 70 percent - was also considerably greater than the French equivalent."

The UK's GDP is now an estimated £1,410 billion, of which about half runs through the government's fingers. On average the interest rate on government debt is 4.3% (until we have to renew loans) and last year the forecast was that the debt would rise to some 100% of GDP. So long as we can carry on rolling over the debt, the main thing is to be able to afford the interest, which on this showing would look like being about 10% of government revenues.

Returning to Schama, he says (p.79) that in 1788 the French government debt servicing was close to 50% of its revenues - still well below what Pitt had to deal with in 1782. But in France, there was mounting resistance from the tax-farmers and foreign creditors, and the high rates the government was going to have to pay to attract additional capital triggered the crisis - which had implications for rich tax rebels that they hadn't expected. Oo-er.

We've had much worse public debt before now, even in the 20th century - see the graph below. It's not "can't pay" that will determine the course of events here, but "won't pay".

One thing that's different, and isn't shown here, is the additional component of private debt. Unlike government borrowing, private loans are usually expected to be paid-off, so the cost of debt servicing for the private individual is much higher. And if a lot of this debt is tied up in property that is gradually reducing in value, so that the debt may eventually outweigh the asset, the consumer-voter will be building up a head of resentful steam. Then there is the debt accumulated by companies and the financial sector. It all adds up: the graph below (from this site) compares the US and UK economies in terms of the total burden of debt-to-GDP:

Another difference is that the crisis is now global. The US and the UK are in serious difficulty, but so are many European countries and the European banking system that has tried to hold them up; and the increasingly productive East has become dependent on the profligate West.

Historically, says Schama, the pre-Revolutionary French government would partially default on its borrowing (e.g. the 1720s, and in 1770), as well as raise more taxes and find more lenders. Now, we seem to be trying hard to avoid default (perhaps because once it started in one place, there'd be so many following suit); taxation of various kinds is already taking well over 40% of our income, in return for a creaking system of benefits and services; and where are the lenders who will take on so much global debt? And if they do, at what price?

Yet international finance is so murky, anything could happen. Towards the end of Andrew Rawnsley's book on New Labour, "The End of the Party", he says (pp. 626-7) that at last year's G20 summit "it was reliably estimated that more than $10 trillion of private wealth was concealed in paradis fiscaux [tax havens]". I don't think it's all invested in BP shares. Maybe it's waiting for governments to come to heel; to co-operate with each other in some glum global deflation that will further enrich the "oofy", as P.G. Wodehouse would term them.

In a splendidly furious recent rant, American writer Joe Bageant said:

"If we decide to believe the money economy still exists, and that debt is indeed wealth, then we damned sure know where to go looking for the wealth. Globally, forty percent of it is in the paws of the wealthiest one percent. Nearly all of that one percent are connected to the largest and richest corporations. Just before the economy blew out, these elites held slightly less than $80 trillion. After the blowout/bailout, their combined investment wealth was estimated at a little over $83 trillion. To give some idea, this is four years of the gross output of all the human beings on earth. It is only logical that these elites say the only way to revive the economy, which to them consists entirely of the money economy, is to continue to borrow money from them."

Or as humorist J. B. Morton (aka the Daily Express' "Beachcomber") put it in his “A Dictionary For Today”, long ago:

“WORLD-PEACE: A state of affairs which would make it possible for the international moneylenders to get even more power than they possess at present.”

It's there to be taken from us: for except among the very poorest, there is so much wealth we still have, such a high standard of living. In the early 80s, businessmen strode into our insurance office with mobile phones the size of bricks tucked proudly under their arms; now, the primary-age children of the underclass have iPhones that my fingers are too fat to operate.

Underneath the polemic of many of the doomsters who now write on the Internet is, I think, a hope that in some way disaster or revolution will save us, because they cannot see us deliberately planning and achieving a better state of affairs. I think this is a dangerous line for the imagination to take: we might find we'd burned what we thought was the Phoenix, but were unable to resurrect it.

But change of some kind is certainly on the way, and in the course of it we must remember to hold onto the things that really matter, especially civil liberties and the democratic form of government. Perhaps the biggest mistake is for us to think that money is the main issue.

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.

Protest! Index-Linked Savings Certificates withdrawn!

I have just looked at NS&I's website and found that Index-Linked Savings Certificates (and some other products) are no longer on sale. I've spoken to a rep and she confirms that they've been withdrawn as of today (19 July 2010). NS&I cite the extreme popularity of the products, evidenced in unexpectedly high sales volumes that have led to the Treasury's sales targets being fulfilled.

This product was introduced at the beginning of the high inflation in the 1970s. The point of it is to preserve the value of your hard-earned savings against the surreptitious theft of devaluation.

As I pointed out last month, anyone invested in it for the 12 months ending in May would have an effective 6.5% tax-free gain, 100% securely. Find that on the High Street.

This is a government that was going to sort out the system for the benefit of the citizens. It's started with a big fat failure. If my hunch about future inflation is correct, you are about to be stuffed by the financial system.

Protest! You can call 0500 007 007 and ask to make a complaint. They'll take brief details, give you a complaints reference number and have a member of their complaints team contact you.

Please pass this on. Know anyone in the news industry?

UPDATE (3 p.m.): BBC News has caught up with this story:

"Building societies are likely to welcome the move as it removes a strand of competition from the market... NS&I, which is backed by the government, works under rules that state that it must not dominate the savings and investments market." So when artificially low interest rates rob the saver, the government must follow suit.

"It has withdrawn both products from the market for new customers and has not set a date for when they might be offered again." I can't remember when this last happened - if it ever did.

FURTHER UPDATE (Weds 8 a.m.): Indeed this hasn't happened before, as The Guardian reports. Hit quote: "Rival banks and building societies have lobbied intensively to make sure the rates offered by NS&I and other government-owned banks are not so competitive that they restrict the flow of funds into other banks."

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.

Massive inequality

See this series of slides for some eye-openers about the distribution of income and wealth, e.g.:

1. In the US, the top 10% have 81.5% of all the wealth, and 90.4% of financial wealth such as stocks, bonds and mutual funds.
2. Of OECD countries, the UK has the 3rd most unequal income distribution, after the US and (can we perhaps ignore it?) Luxembourg.

The first point may be significant for market speculators, since the top 10% are so wealthy that they are unlikely to be forced into dumping investments simply to make ends meet. But one wonders what they might be doing on the quiet - moving into land and commodities? That's if they anticipate inflation. On the other hand, Charles Hugh Smith thinks they'll be happy to see a deflationary economy as long as they hold Treasury bonds.

It's getting very "us and Them" these days, rather worrying if you're not able to sit it out like Cicero on his country estate at Arpinum, 70 miles from Rome. But even he could not hide forever, and Antony's thug Herennius found him at Formiae.

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.

Alas, we don't know

The system has become so distorted - some might say crooked, which includes the connotation of cheating - that economists are turning from their financial models to speculate about the future actions of governments.

Even Steve Keen, having come up with a model that shows the economic machine can shake itself to bits, admits that the State can throw a spanner into it first: "There’s a lot more work to do before the model is complete–notably including the impact of a goverment sector that can add its own spending power to a depressed economy."

Now John Mauldin, on his way to the annual Agora conference in Vancouver, notes that even among the pessimists, opinion is divided as to the severity of the economic consequences, and especially as to turning-points.

And as the sovereign debt crisis rolls on, differences between countries get to look more interesting. Mauldin considers the relationship between cyclical debt (owing to periodic upturns and downturns in the economy) and structural debt - the type that demands long-term cutbacks in spending. Hearteningly for any Italian readers, their nation doesn't look too bad, especially when (as he points out) it will be so easy to save money, for example on official Maseratis.

But after looking at the US, just look at the state of the UK. I fear that our new and amicable coalition government is asking us to clap hands to save Tinkerbell.


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.

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.

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.

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.

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.

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.

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.

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.