Who's bailing out Uncle Sam?

Just a couple of graphs to show which foreign countries have most increased their holdings of US Treasury securities.

The UK seems the odd man out, bearing in mind its own financial difficulties, but it is widely suspected that much of the UK's holdings are cat's-paw transactions on behalf of China.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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.

Cash - the investment of the century

There's been comment recently about how the ordinary investor has been abandoning the market, in some cases with an undertone of contempt for the poor saps who are missing out on those incredible gains to be made just around the corner.

The banks who from time to time attempt to poach my clients often use past performance an an indicator of future returns, while of course covering themselves by the usual disclaimers. Typically they cherry-pick among terms of 1, 3, 5 and 10 years.

Let's see how the graph for the Dow would look over various time periods, and compare it with cash in your bedsock. To be fair, let's ignore the interest you could have earned on cash, and the dividends on stocks; as a special favour to the Dow, so being especially unfair to cash, let's also ignore the offer-bid spread and the fees and charges loaded onto the investor.

Over the last 12 months:, you could have made a good profit - well, you could if you'd got out a month early:
... over the last 3 years:
... over the last 5 years:
... and since January 2000:

"Mish" today points out that we are in deflation, if you are a monetarist, since credit and asset values have contracted. Inflation scares suit those who are running what some call a "wolf market" - come out, little pigs, it's all clear now.

What inflation? The consumer - and the inflation indices - may notice a rise in food and energy prices, but that's not what your nest-egg is for. Look at house prices - still going down in the UK and the USA - and all the other big-ticket items that in recent years were purchased with borrowed money.

I think Mish is right, for now. The concern I have - and it's reflected in the soaring price of gold - is what governments will do in their desperation once giving money to busted and corrupt banks (and governments) is finally seen as worse than useless. Can the bond market really dictate terms in an economic collapse, or will governments across the world break their currencies with the final splurge of money-printing that third-party control by central banks is designed to prevent?

Until that time, and despite the temptations of commodities, maybe cash-holders should hold the line while the enemy advances. A lot depends on your personal plans, of course; we're hoping to move house and such cash savings as we have may continue to appreciate against the thing we want. So really it's about relative values - comparing asset A with asset B - decided by you, not some index that doesn't reflect your priorities.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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.

Where "should" the stock market be?

There's a flap on about market declines. I think it's because the traders are kids.

Take a look at the graph below, which shows the Dow since the end of WWII. Bearing in mind that in real terms, a thousand points on the Dow was worth more in the past than today, where do you think we ought to be, if the market was "normal", or better yet "sane"?

Adjusting for inflation (CPI-U), and looking at the Dow's progress from August 1945 to August 1980 (around when the Great Inflation really started), then extrapolating, I figure the Dow should be a shade under 3,000 points today.

The rest is, effectively, monetary bubble - which is not to say it can't continue.



INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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.

China downgrades American credit to "A"

Half a world away from the USA, China's Dagong credit rating agency can afford to be blunter than Standard & Poor.

Their view, shared by many in the West, is that the problems have not been solved but damagingly deferred; $4 trillion needs to be cut from the public budget within 5 years; QE3 is inevitable and "will throw the world economy into an overall crisis". Accordingly, on August 3 Dagong downgraded the US rating further, to "A, with a negative outlook".

If the Western rating agencies dare to echo that view (and some see last week's S&P's re-rating to AA+ as an attempt to break the news gently), it could be the trigger for a more serious selloff in the stock and bond markets. Disaster for many, opportunity for some - perhaps.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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.

Crash? What crash?

The hackneyed news media deadlines are trotted out again: "x billion wiped off shares". How quickly we forget.

Below are the charts for the FTSE and the Dow from their recent low points in March 2009:

The FTSE closed Friday 49.4% higher than 29 months ago; the Dow, 74.8% higher.

I think that ultimately, both will (in real terms) plumb depths significantly deeper than they did in 2009, but it will not happen in one go, and it will take a long time.

The stockmarket is not a store of money: A has already paid B for ownership of the shares, and the money went into B's bank account. The money is not parked on Wall Street or Paternoster Square, it merely passes through it.

On the way, it's purchased either the promise of a future income stream (and how reasonable is that hope in an unravelling world economy?) or the chance to sell on to a bigger fool (in the hope that it hasn't already happened).

Remember, you don't have to be in this game. I should like to know where the traders' and bankers' bonuses are invested at the moment: do they eat where they cook?

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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.