A response to "Capitalists@Work"

"City Unslicker" has posted a feelgood piece and entitled it "Bearwatch". If this is intended as a tease, looking sideways at my first blog which started three years ago and forewarned of the credit crunch*, banking collapse etc, then it's worked. Not that I claim any wisdom, but a strong gut feeling got me looking around for sources of information other than the useless Press.

Perhaps I should feel flattered that anyone from stockbroking or banking pays me any attention; or maybe it's just a naming coincidence. Nevertheless, here is my reply: you experts can be both right and wrong at the same time.

I'd like to have made a graph for the FTSE over the period I think we should be looking at, but that index only started in 1984. Besides, ours is a mixed economy, doing the hokey-cokey between privatisation and nationalisation, so it's very difficult to discern the reality underlying all the fudge.

So instead, here's the history of the US stockmarket "boom" of 1974. The blue line is the nominal index, and then I reinterpret the figures in the light of the Consumer Price Index. We start at the beginning of 1974 and continue for 10 years.


*"a systemic risk that could have really serious consequences is the possibility of a major failure in the mortgage and credit markets, which could then roll on to the banking sector." - 31 July 2007

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.

Underneath the headlines, debt continues to increase

There's much argument on the wires about the issue of inflation vs deflation. As James Quinn points out, the mainstream media aren't helping much because if they comment at all, they may still misunderstand what they're reporting. The official figures appear to show that debt in the US is reducing, but this needs to be reinterpreted in the light of write-offs:

If consumer debt was $13.8 trillion at the end of 2008 and the banks have since written off 5.66% of that debt, total write-offs were $800 billion. If total consumer debt now sits at $13.5 trillion, then consumers have actually taken on $500 billion of additional debt since the end of 2008. The consumer hasn’t cut back at all. They are still spending and borrowing. It is beyond my comprehension that no one on CNBC or in the other mainstream media can do simple math to figure out that the deleveraging story is just a Big Lie.

Reading around, it seems that a lot of credit card debt has been written-off, but better-risk customers may be increasing their usage, especially business owners (perhaps finding a way around the dearth in other forms of bank lending):

Credit cards are now the most common source of financing for America’s small-business owners. (Source: National Small Business Association survey, 2008)

44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008)

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.

Gold up, shares down?

Hot on the heels of China, which has recently increased its gold hoard to over 1,000 tonnes and intends to accumulate far more, comes Russia, which has acquired an extra 10% in the last seven months.

This is at a time when the wealthy are turning pessimistic about the economy again. As I said two years ago, generally I now see newspapers as useless, except for tidbits like that: "Other than weather forecasts, the last usable information I can remember is from the summer of 1987, when I learned that Sir James Goldsmith had sold all his shares on the Paris Bourse, which confirmed my feelings about the way the market was going - but that item came from Private Eye magazine." The current pessimism is reflected not only in last night's close on the Dow (now below 10,000 again), but also in a surge in demand for safe government bonds, as "Jesse" reports.

I said a few days ago that the price of gold was well above its inflation-adjusted trend, but the interest of foreign countries, bearish millionaires and speculative funds boosted by cheaply borrowed money may keep the market buoyant for some time yet.
And I'm sure we'll all be watching the stockmarket with some interest this autumn.

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.

Don't look at the FTSE, all is NOT well here

Gary Dorsch points out that the UK bond market is a better indicator of local economic conditions than the UK stockmarket:

FTSE-100 companies equal about 85% of the market capitalization of the London Stock Exchange, and nearly half the companies are headquartered outside the UK. Roughly one-third of the FTSE is concentrated in the natural resource sector. Thus, the Footsie is viewed as a global bellwether rather than a reflection of the state of the British economy.

Right now the sharp downward trajectory of UK gilt yields is flashing warning signals of a sharp downturn in the British economy, which could trigger deflation in wages and UK home prices.

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.

Time to invest in helium?

One for the commodity punters: the Daily Mail reports on the potential price boom in helium:

The world's biggest store of helium - the most commonly used inert gas - lies in a disused airfield in Amarillo, Texas, and is being sold off far too cheaply.

But in 1996, the US government passed a law which states that the facility - the US National Helium Reserve - must be completely sold off by 2015 to recoup the price of installing it.

This means that the helium, a non-renewable gas, is being quickly sold off at increasingly cheap prices, making it uneconomical to recycle [...] The US stores around 80 per cent of the world's helium and so its decision to let it go at an extremely low price has a massive knock-on effect on its market. [...] The only way to obtain more helium would be to capture it from the decay of tritium - a radioactive hydrogen isotope, which the U.S. stopped making in 1988.

The article says that because of the too-low price, it's being used very much faster than it can be replaced and reserves will be used up in 25 years. Professor Robert Richardson of Cornell University is arguing for a return to the free market in this commodity.

According to this site, major companies supplying helium in the US are Air Products (NYSE: APD) and Praxair (NYSE:PX).

Too exciting for me as an investor, and besides I don't know when in the next 25 years the market surge might start, if at all. But it's another story in the saga of finite world resources.

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.

When will the bear market end? How bad will it get?

Tim W. Wood at Financial Sense reckons the last bull market ran from 1974 to 2007 (extended by government interference or support, depending on your point of view). His research tells him that bear markets last one-third as long as the preceding bull market, so he sees the present stockmarket rally as a "dead cat bounce".

That's my gut feeling, too, though I'm aware of the dangers of confirmation bias.

Below, I give two charts showing the course of the Dow from August 1929 (close to its pre-Crash peak) to August 2010, 82 years later. The first shows the raw index, which as you see only breached the 2,000 mark in the late 80s, making the last 20 years look freakish.



The second adjusts the Dow for inflation as measured by the CPI, so we can see where we are "in real terms" in comparison to the great speculative bull market of the late 1920s. Note that the recent low point (March 2009) is above the high point of the bull run that ended in January 1966, whereas the low of June 1982 was less than 40% of the 1929 peak.


If the eventual market bottom this time has the same relationship to the 1966 peak, as 1982 had to 1929, the Dow should go below 5,200 points (adjusted for inflation between now and the future low point).

So much has changed over the last 3 generations that the attempt to turn historical data into predictable cycles may be fruitless. On the one hand, debt is now an even greater burden than in 1929; on the other, big companies are multinational and the fortunes of Wall Street are less bound up with those of Main Street.

Yet global trade means that the fortunes of sovereign nations are increasingly interconnected, and while China is set to overtake Japan in size of economy, it is also (apparently) heading for a Western-style banking bust; should China choose to raid its overseas investments to tackle such a crisis, then the American markets (where China holds over $1 trillion of assets) are in trouble.

I still feel that a major breakdown is on the way, I just don't know exactly when. It's like waiting for the Big One in California: every day it's "not today", yet it's never "never".

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.

Beating inflation safely

UK investors who are concerned about the threat of inflation have recently (19 July) lost access to an ideal solution, the NS&I Index-Linked Savings Certificate. Now a building society is offering something to fill that gap in the market.

National Counties are marketing an index-linked cash ISA. This is not quite the same as NS&I's product, because the investment is for a fixed amount (the maximum cash ISA allowance, i.e. £5,100) and no withdrawals are permitted within the 5-year term of the plan. As with NS&I, the return is linked to the Retail Price Index (RPI), plus 1% p.a. For further comment by Citywire, see here.

A lot depends on what you think may happen in terms of inflation, which brings us to the great inflation-deflation debate. Some commentators are saying that Western economies are so indebted that we have reached a turning point and people will spend less and save more (or pay down debt, which amounts to the same thing). Governments are going to have to follow suit, and the UK government is currently busy trying to demonstrate its commitment to do so, fearing that bond markets may lose confidence in our financial management and will then charge higher interest, which would really put us in a pickle.

So demand is reducing. We see this in the recent bankruptcies of UK holiday companies and the pages of cut-price cruise adverts in the middle-class press. If this is the pattern generally, then holders of cash will benefit as prices reduce - the pound in your pocket will grow more valuable, quite safely. Even better, this type of deflationary gain is not taxed, at least not until the government nerves itself up to simply confiscate your savings.

But that's not the whole picture. While demand for luxuries is lessening, there are other things that we still have to buy, especially food and energy. Here, prices are rising. And if interest rates do rise, that will also increase RPI, which unlike the Consumer Price Index (CPI) includes housing costs. So it is quite possible that inflation as measured by RPI could be high, even as the economy slows down. It's worth noting that the government has recently changed rules on private sector occupational pensions so that their benefits will increase in line with CPI instead of RPI, which suggests that our rulers believe that one way or another, RPI will rise faster than CPI in years to come.

The BBC appears to have bought the official line that we should ignore food and energy costs, referring to CPI as "core" inflation and noting that it's now a mere 3.1%, as opposed to RPI which is running at 4.8%. However, unlike the mandarins at Broadcasting House, the rest of us need to eat and keep warm; or, to be a little fairer, food and energy is a more significant part of most people's budgets than it is for the upper echelon of the mediaocrities.

An RPI-linked cash product is a good each-way bet: if prices do reduce, then your money becomes more valuable; if prices increase, the value of your savings is preserved; and either way, you benefit from that extra 1% p.a. sweetener.

Reasons not to? You may find you need access to cash within the 5 year term; and if you're a gambler, you may be looking at investments that could outpace inflation (think of the current fever for commodities such as gold, silver, oil and agricultural products). But you shouldn't put all your eggs in one basket, and most ordinary people aren't gamblers when it comes to their nest-eggs, so this product is worth a look.

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.

Growing ownership by foreigners

One indication of our plight is the balance of ownership between ouselves and foreigners - who owns more (including official debt) of whom? The Econbrowser blog reproduces the following graph from a study of the US position:
And I give below a graph I've constructed from official figures, showing what's happened here in the UK:

For those inclined to blame solely New Labour for the economic disaster, this should be an eye-opener - look where we were in 1997.

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.

Inflation or deflation? Crisis, either way.

Mike "Mish" Shedlock, financial analyst at Sitka Pacific, and Dr Marc Faber (Thailand-domiciled investment guru and economic commentator) are thought to represent opposite points of view - deflation versus inflation, respectively.

In this interview, it's clear that to some extent they agree: the US Government will see huge budget deficits for years to come, and it's not going to be a re-run of the 1970s: there is no ability of the people to take on more debt because (as Mish says) we've now gone from 1- to 2-wage households (where work is available).

Faber accepts that the government may eventually choose to default with respect to foreign creditors, but otherwise he sees monetary inflation to cover the public funding gap and stimulate economic demand. Mish sees price rises as compatible with his judgment that the economy will deflate.



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.

Too much wealth tied up in houses

A release from the Office for National Statistics, widely reported in the papers today, says that the UK's net worth is £6,669 billion. Of this, 61% (£4,048 billion) is tied up in housing.

According to Credit Action in April 2010, 11.1 million households have mortgages, at an average of £111, 612 per mortgage. The total of personal debt in the UK (including mortgages) is £1,464 billion; UK GDP in 2009 was an estimated £1,396 billion.

Much of the value of housing depends on the inflationary effect of lending. According to a release by the Council of Mortgage Lenders, in May 2010 the average loan to value for first-time buyers was 75%, and for house movers it was not much less (67%).

Housing has become a far more important element in our economy, over the last 50 years. Here is Table 1 of a press release by the Halifax in May 2010:

Since 1959, total net household wealth has increased 5 times in real terms. But houses have gone up in value 11 times, and mortages are 23 times bigger. Consumer credit is also 13 times greater.

I don't think we can really run a successful economy on the basis of inflating the value of our huts by getting into hock with moneylenders. Sooner or later, we have to get out there and hunt something.

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.