I'm back from my wanderings with longer arms and a nasty cold. I am a little bit out of touch but I am pleased to see that the immediacy of the crisis has reduced just a little. I'm not sure that there is anything very useful being put forward right now, other than 'Son of Bretton Woods', which is inevitable. Another news item is worthy of comment ---
- WASHINGTON (AP) -- With defaults on credit card debt spiraling amid a global financial downturn, banks already reeling from the mortgage crisis are losing billions more from unpaid credit card bills.
Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.
This is a quite outrageous suggestion in that it forces those who are not in debt to repay the debts of those who are in debt! Quite apart from being outrageous, it is the opening gambit to start the whole spending merry-go-round off again. I don't see how it can happen as governments are only the source of fiat currency, not wealth. If they issue more fiat currency to repay these debts and in the process generate new debt, then the currency will be devalued - it is inflationary. There continues to be debate among economists whether we are headed to a long period of deflation, as in Japan, or hyper-stagflation along the lines of Wiemar. The latter would destroy the paper wealth of most private individuals. My own view continues to be that as soon as the present flood of USD is freed up and flows into the financial system, we will see inflation race away out of control.
Gold seems to have found a floor and it looks as though these levels are a good buying opportunity. I would urge gold buyers to buy and take delivery of their own physical. Don't use ETFs, buying clubs and pools or even so-called allocated gold. At this time, you need to be able to have it in your own hands.
In writing a blog and other comments I wonder to what extent I could be open to defamation action. Suppose I say "Bloggs Bank seems to be representing itself as something that it is not and some of its investment schemes look dodgy". I am likely to get a stern threat of legal action. Suppose I say "Bloggs Bank does not overly impress me and I suggest that you meet the Directors before investing your money in them" seems safe, I suppose, but does it convey what was intended? It's all very difficult but there are quite rightly means of redress available when a party has had its reputation harmed due to unfounded allegations. As another example, suppose you observe that a car has no road licence disc, there is no certainty that the tax is unpaid; the disc could have been stolen, for example, and a duplicate awaited. Would it be fair to suggest that there might be safety issues given that IF the car has no disc, it MIGHT not have passed its annual test (which is a requirement before a new disc is issued). But this would only be an inference even if you could actually see safety issues on the vehicle, such as poor lights, tyres, wiper blades unless you are deemed by the law to be sufficiently expert. All very complicated; best not to judge anyone, I suppose?
Friday, 31 October 2008
Monday, 27 October 2008
Pause
I am possibly not going to be able to post over the next two days as I am taking steps to protect my own assets. Will post as and when possible. Protect and Survive. Do not underestimate the gravity of the present situation - it is so easy to look out of your window, see the cars, taxis and buses, the aircraft, and everyone doing what everyone has always done. When it stops it will stop rather suddenly. Good luck.
Implosion leading to Meltdown
As I have been warning, the world's stock markets are continuing to plunge with the futures sharply lower this morning. The Euro continues to plunge while the Yen is worryingly strong. Commodities are continuing to fall. Money market rates are beginning to rise again in Asia.
What we are witnessing is the implosion of the world's financial and capital markets which will result in meltdown.
No currencies (with the possible exception of the Swiss Franc but don't bet on it) are going to survive this collapse without massive devaluation. Exchange rate volatility is making international trade almost impossible. We are watching the system implode - it is collapsing in on itself - and the effect is to further fuel the collapse. There is no power on earth capable of reversing this; all that is uncertain is timescales. This week could see capitulation on the stock exchanges with further bank failures around the world to follow.
There has never been an economically more dangerous time in the history of money and finance. This is completely uncharted territory and nobody can predict what will happen.
The biggest issue facing the world will be the rule of national and international law, and the protection of the property rights of individuals. With such an upheaval, it might be impossible for governments to protect their citizens. Martial Law is a real possibility even in G7 countries. This is the time to protect yourselves and your families. You DO need to keep a good sum of cash (i.e. banknotes) in your home. If you can, get a mix of currencies. Gold is well worth considering if you can find any at a reasonable price but remember, gold is under political control so there are risks.
Watch very carefully the military situation in the Middle East right now. This is a very dangerous time.
I will be watching this happen in real time and will post as often as I have something worth saying. Some of you will remember a slogan from an old civil defence campaign.... "Protect and Survive". Exactly.
For those who are interested, I have produced a short Gold buyer's guide which is on sale at http://www.3r.co.uk/gold
What we are witnessing is the implosion of the world's financial and capital markets which will result in meltdown.
No currencies (with the possible exception of the Swiss Franc but don't bet on it) are going to survive this collapse without massive devaluation. Exchange rate volatility is making international trade almost impossible. We are watching the system implode - it is collapsing in on itself - and the effect is to further fuel the collapse. There is no power on earth capable of reversing this; all that is uncertain is timescales. This week could see capitulation on the stock exchanges with further bank failures around the world to follow.
There has never been an economically more dangerous time in the history of money and finance. This is completely uncharted territory and nobody can predict what will happen.
The biggest issue facing the world will be the rule of national and international law, and the protection of the property rights of individuals. With such an upheaval, it might be impossible for governments to protect their citizens. Martial Law is a real possibility even in G7 countries. This is the time to protect yourselves and your families. You DO need to keep a good sum of cash (i.e. banknotes) in your home. If you can, get a mix of currencies. Gold is well worth considering if you can find any at a reasonable price but remember, gold is under political control so there are risks.
Watch very carefully the military situation in the Middle East right now. This is a very dangerous time.
I will be watching this happen in real time and will post as often as I have something worth saying. Some of you will remember a slogan from an old civil defence campaign.... "Protect and Survive". Exactly.
For those who are interested, I have produced a short Gold buyer's guide which is on sale at http://www.3r.co.uk/gold
Saturday, 25 October 2008
Saturday
Huge losses and negative sentiment again yesterday. There are plans to produce a 'Son of Bretton Woods' agreement which will re-define how the world's monetary system will work. Meanwhile, the US Dollar continues to be undeservedly stong with the Euro (and British Pound) plunging to new recent lows. None of this helps anyone - business needs stability, not volatility.
There is a lot of talk about the crisis moving into the 'real economy'. The chart below is of the Baltic Dry Index; this shows the volume of goods being shipped around the world at any time. I think that the chart speaks for itself. If all those goods are no longer being transported, chances are they are no longer being made! That means that the firms that made them will close (or contract), the workers laid off and - very significantly - all the raw materials needed to make them will be left with the producers. Commodities have fallen not because investors have stopped investing in them but because there is a reduced demand for them.
There is a lot of talk about the crisis moving into the 'real economy'. The chart below is of the Baltic Dry Index; this shows the volume of goods being shipped around the world at any time. I think that the chart speaks for itself. If all those goods are no longer being transported, chances are they are no longer being made! That means that the firms that made them will close (or contract), the workers laid off and - very significantly - all the raw materials needed to make them will be left with the producers. Commodities have fallen not because investors have stopped investing in them but because there is a reduced demand for them.
Friday, 24 October 2008
Friday Lunchtime Update
``The panic levels are now quite unseen,'' said Christian Gattiker, Zurich-based head of equity research at Bank Julius Baer & Co. which manages about $307.6 billion globally. ``It's difficult to have any words for this situation right now.''
Friday Morning
Stock markets slumped across Asia overnight, money markets showed signs of rising on concerns that other countries are about to go the way of Iceland and Argentina. The Euro and Pound Sterling continue their plunge. Oil continues its fall despite the noises coming from OPEC and evidence that production cuts have already taken place. Gold continues to lose. US Treasuries are the clear winners, with the entire world wanting to buy US Government debt. There is fresh speculation that the world's financial markets are in dire trouble. The volatility index 'VIX' is still at an all-time high indicating that fear is still at record levels.
While typing this blog, I was listening to a live interview on Bloomberg with a European banker who said that nobody had ever seen anything like this present situation and was recommending investing in gold "as a hedge despite the recent falls".
With the huge losses on the world's bourses and today's futures for the EU and US looking like the abyss, I wonder whether they might need to suspend stock markets for a while. This flight to the 'safety' of US Government debt is highly dubious; as I have discussed recently, the huge injection of US Dollars into the system is set to devalue the US Dollar. We are living through a financial tsunami and it is not possible to make much sense of the daily movements; we need to try to look at the big picture, hence the name of this blog "davidscompass". To survive this financial crises we need to take a view on the conditions that will exist when we come out of this mess. I can see no alternative to hyper-inflation, potentially of Wiemar proportions.
------- STOP PRESS -------
Denmark raises interest rates to boost Krone. This was unexpected.
While typing this blog, I was listening to a live interview on Bloomberg with a European banker who said that nobody had ever seen anything like this present situation and was recommending investing in gold "as a hedge despite the recent falls".
With the huge losses on the world's bourses and today's futures for the EU and US looking like the abyss, I wonder whether they might need to suspend stock markets for a while. This flight to the 'safety' of US Government debt is highly dubious; as I have discussed recently, the huge injection of US Dollars into the system is set to devalue the US Dollar. We are living through a financial tsunami and it is not possible to make much sense of the daily movements; we need to try to look at the big picture, hence the name of this blog "davidscompass". To survive this financial crises we need to take a view on the conditions that will exist when we come out of this mess. I can see no alternative to hyper-inflation, potentially of Wiemar proportions.
------- STOP PRESS -------
Denmark raises interest rates to boost Krone. This was unexpected.
Thursday, 23 October 2008
Thursday Morning
More heavy losses on the Asian stock markets overnight point to possible further heavy losses in Europe and the US.
There is an almost total loss of confidence in any asset that you cannot hold in your hand. Gold's continued fall is, therefore, very surprising until you realise that the price is being manipulated down by intervention. Officially, gold is at £454 per ounce but if you want to buy any gold in London you will have to pay between £500 to £550 per ounce - you might have difficulty in finding any stock at £500. The official price of gold has now become meaningless. It will be interesting to see how the large bullion dealers who are members of the LBMA will cope with this...if they don't pay a fair price for bullion that they are storing for clients then their clients will withdraw it and sell it on the open market, themselves. Even more interesting to watch will be those who have unallocated gold holdings in firms such as BullionVault, Kitco, Perth Mint, etc. It looks as though they would be stuck with the official price or 'paper gold' as it has become known. Interesting times ahead! Possibly this situation will disappear once the heavy intervention stops but free markets become very unpredictable when manipulated.
The biggest news item continues to be the continued strength of the US Dollar. It might be showing signs of bottoming but it has a lot of unwinding to do and, as the world's reserve currency, when it does fall it is going to cause yet more stress in already fragile markets.
Commodities continue to lose, on the worldwide economic downturn, though staple foods might have stabilised. Further job losses and factory closures in the industrialised world suggest that wages will either fall, or, at best, not rise.
All of the indicators are screaming "DEFLATION AHEAD!". However, we have, locked up in the banks, the largest cash injection ever seen on the planet, by two orders of magnitude! When that finally unwinds there are going to be enough surplus US Dollars to buy a nice new car for every man, woman and child in the western world. This is clearly crazy and will not happen; what will happen is that all of that money will chase the same goods and services, so prices will rise. The classic cause of inflation; too much new money. Unless central banks can somehow mop-up all of those excess Dollars, I can't see how this can be avoided.
So how might central banks mop-up the inflationary surplus Dollars, when the time comes? The most obvious way is by massive new taxation and seizure but this effectively steals money from citizens and goes completely against the principle which states that free markets can only work when the property rights of individuals are respected and protected. The levels of new tax and seizures by governments required to remove this excess liquidity would need to be vastly higher than any taxes seen before and would cause distortion in the distribution of wealth. Those who had worked and saved diligently would have to be the target as they would be the ones with the money, and others, who had done nothing but borrow and spend would benefit by becoming net recipients in a vast new interventionist state. The way it is going now, I see little alternative other than hyper-stagflation. Stagflation is when you have inflation and an economy in recession; it is a rare thing and causes immense social injustice at the bottom of the ladder particularly the elderly and those on fixed incomes. Think Boomers and the Perfect Storm, which I discussed a few days ago.
Of course this is all fairly easy to predict if you take the time to read the news and put it into the framework of fairly elementary economics (think Adam Smith and free lunches). This is not 'far-out' theory, it is what all of the economic pointers are predicting.
That's what is behind the new gold rush. The biggest driving force behind the massive public buying of physical gold is the fear that governments have now lost control and that the ordinary man in the street is now in a lose-lose situation. I hesitate to recommend to anyone that they should buy gold because the could lose, however, physical gold bars or coins either in hand stored in a safe for you seems worthy of careful consideration. Email me for further information or have a look at www.3r.co.uk/gold
There is an almost total loss of confidence in any asset that you cannot hold in your hand. Gold's continued fall is, therefore, very surprising until you realise that the price is being manipulated down by intervention. Officially, gold is at £454 per ounce but if you want to buy any gold in London you will have to pay between £500 to £550 per ounce - you might have difficulty in finding any stock at £500. The official price of gold has now become meaningless. It will be interesting to see how the large bullion dealers who are members of the LBMA will cope with this...if they don't pay a fair price for bullion that they are storing for clients then their clients will withdraw it and sell it on the open market, themselves. Even more interesting to watch will be those who have unallocated gold holdings in firms such as BullionVault, Kitco, Perth Mint, etc. It looks as though they would be stuck with the official price or 'paper gold' as it has become known. Interesting times ahead! Possibly this situation will disappear once the heavy intervention stops but free markets become very unpredictable when manipulated.
The biggest news item continues to be the continued strength of the US Dollar. It might be showing signs of bottoming but it has a lot of unwinding to do and, as the world's reserve currency, when it does fall it is going to cause yet more stress in already fragile markets.
Commodities continue to lose, on the worldwide economic downturn, though staple foods might have stabilised. Further job losses and factory closures in the industrialised world suggest that wages will either fall, or, at best, not rise.
All of the indicators are screaming "DEFLATION AHEAD!". However, we have, locked up in the banks, the largest cash injection ever seen on the planet, by two orders of magnitude! When that finally unwinds there are going to be enough surplus US Dollars to buy a nice new car for every man, woman and child in the western world. This is clearly crazy and will not happen; what will happen is that all of that money will chase the same goods and services, so prices will rise. The classic cause of inflation; too much new money. Unless central banks can somehow mop-up all of those excess Dollars, I can't see how this can be avoided.
So how might central banks mop-up the inflationary surplus Dollars, when the time comes? The most obvious way is by massive new taxation and seizure but this effectively steals money from citizens and goes completely against the principle which states that free markets can only work when the property rights of individuals are respected and protected. The levels of new tax and seizures by governments required to remove this excess liquidity would need to be vastly higher than any taxes seen before and would cause distortion in the distribution of wealth. Those who had worked and saved diligently would have to be the target as they would be the ones with the money, and others, who had done nothing but borrow and spend would benefit by becoming net recipients in a vast new interventionist state. The way it is going now, I see little alternative other than hyper-stagflation. Stagflation is when you have inflation and an economy in recession; it is a rare thing and causes immense social injustice at the bottom of the ladder particularly the elderly and those on fixed incomes. Think Boomers and the Perfect Storm, which I discussed a few days ago.
Of course this is all fairly easy to predict if you take the time to read the news and put it into the framework of fairly elementary economics (think Adam Smith and free lunches). This is not 'far-out' theory, it is what all of the economic pointers are predicting.
That's what is behind the new gold rush. The biggest driving force behind the massive public buying of physical gold is the fear that governments have now lost control and that the ordinary man in the street is now in a lose-lose situation. I hesitate to recommend to anyone that they should buy gold because the could lose, however, physical gold bars or coins either in hand stored in a safe for you seems worthy of careful consideration. Email me for further information or have a look at www.3r.co.uk/gold
Wednesday, 22 October 2008
Wednesday Morning
The Argentinian crisis has helped trigger significant overnight falls on the Asian stock markets which could signal a fall across Europe and the US later today. More importantly, the US Dollar continues to strengthen which, as I discussed yesterday, is going to need to unwind. The unprecedented extra liquidity added to the world's financial system and an unwinding dollar, poses the greatest threat to the stability of the world's financial markets at this time. It is quite incredible that the Dollar continues to strengthen but we are living through uncharted, unprecedented times - we are like explorers in a new land and we have no idea what we are going to find over the next hill.
It is interesting to see oil continue to fall; the oil exporters do not need to wait until their emergency meeting to cut production or send signals to the market. Part of this fall is undoubtedly due to the strength of the Dollar but the main influence today seems to be the growing realisation that the Far East - particularly China - is not going to escape from this deep recession. Indeed, this might de-rail China's economic miracle.
It seems probable that gold will rise as the Dollar unwinds although, as I discussed yesterday, there will be a huge intervention by central banks to try to keep gold low. Nevertheless, gold is now oversold and the conditions for a strong rise to challenge $1000 are in place.
The Argentinian seizure of private pensions will send shivers around the world. Free market economies cannot exist unless private property rights are vigorously protected; free markets depend, to a great extent, on trust between people and between the people and their governments. When this breaks down so does the free market. In today's environment, such things might be highly contagious.
I am seeing serious fault lines developing in the capitalist free market system worldwide. The part-nationalisation of the banks is going to delight naturally interventionist, left wing governments such as France, Italy, Canada, Australia and, more recently, the United Kingdom. Those governments are not going to hand back their ill-gotten gains to the people without a struggle, if ever. Those of us who still believe that despite the present problems the free market system is the best system available need to keep focused on the political implications of each and every government action. You'd better believe that every right, freedom and privacy you give up will be lost for ever. People do not win back rights and freedoms other than by revolt. Revolt is becoming less possible in an age where central governments can (and do) scan every phone call and email you make and, with a network of mobile phone locators, CCTV cameras with facial recognition and car licence plate recognition, the ability to track individuals wherever they go. Political dissent is going to be very difficult in any society whose government chooses to suppress it. This is a situation that the UK has been sleepwalking into over the last five to ten years. Other EU nations are a long way behind but the technology is easy to replicate and install, given the will to do so. For those who haven't noticed the extent to which this has been happening have now been warned.
It is interesting to see oil continue to fall; the oil exporters do not need to wait until their emergency meeting to cut production or send signals to the market. Part of this fall is undoubtedly due to the strength of the Dollar but the main influence today seems to be the growing realisation that the Far East - particularly China - is not going to escape from this deep recession. Indeed, this might de-rail China's economic miracle.
It seems probable that gold will rise as the Dollar unwinds although, as I discussed yesterday, there will be a huge intervention by central banks to try to keep gold low. Nevertheless, gold is now oversold and the conditions for a strong rise to challenge $1000 are in place.
The Argentinian seizure of private pensions will send shivers around the world. Free market economies cannot exist unless private property rights are vigorously protected; free markets depend, to a great extent, on trust between people and between the people and their governments. When this breaks down so does the free market. In today's environment, such things might be highly contagious.
I am seeing serious fault lines developing in the capitalist free market system worldwide. The part-nationalisation of the banks is going to delight naturally interventionist, left wing governments such as France, Italy, Canada, Australia and, more recently, the United Kingdom. Those governments are not going to hand back their ill-gotten gains to the people without a struggle, if ever. Those of us who still believe that despite the present problems the free market system is the best system available need to keep focused on the political implications of each and every government action. You'd better believe that every right, freedom and privacy you give up will be lost for ever. People do not win back rights and freedoms other than by revolt. Revolt is becoming less possible in an age where central governments can (and do) scan every phone call and email you make and, with a network of mobile phone locators, CCTV cameras with facial recognition and car licence plate recognition, the ability to track individuals wherever they go. Political dissent is going to be very difficult in any society whose government chooses to suppress it. This is a situation that the UK has been sleepwalking into over the last five to ten years. Other EU nations are a long way behind but the technology is easy to replicate and install, given the will to do so. For those who haven't noticed the extent to which this has been happening have now been warned.
Tuesday, 21 October 2008
This is what is happening...
What started out as a "credit crisis" due to huge volumes of bad debt has become a different animal. We now have:
a) Huge quantities of bad debt around the world that will have to be written off.
b) A deepening recession affecting all major economies with signs of increasing severity. Pointers are that this will be deeper than the 1930s.
c) A banking crisis caused by banks having lost a large part of their capital due to bad debts. This is why many banks are being taken into whole or part state ownership.
d) A dire liquidity crisis - a shortage of the world's Reserve Currency, the US Dollar which led to the "Paulson Plan", the $700 billion bailout.
Governments, banks, businesses and individuals around the world are hoarding US Dollars. That is why the Interbank lending rate has been high and that is why governments are pumping tens of billions of dollars a day of surplus liquidity into the system.
Due to the recession, businesses are de-stocking and instead of making more products to replace stocks (which would be normal in a flat economy) or continuing to increase stocks (which would be normal in a growing economy such as we have enjoyed for the last decade) companies are selling off their stock and using the income to pay off debt or hold on account.
We are now awaiting yet another stimulus package to be presented to Congress while the UK has announced its own massive state spending programme including new nuclear weapons, and massive infrastructure investment. All of these packages are being presented to the public as 'essential' with no analysis of the long term issues - how the debt is to be repaid.
At some stage this process will reverse but there is no mechanism to remove this vast surplus and the world will be flooded with US Dollars. To describe this as 'inflationary' would be like describing lung cancer as 'a bit chesty'. When the process has bottomed and starts its reverse we will see commodities and factory prices start to rise. There will still be a deep recession which will hinder workers from getting matching pay rises. Pensioners will be on reducing incomes as the value of underlying stocks and the income therefrom has fallen to about one third to one quarter of their previous highs. The 'Boomer' generation will be heading for retirement and age-related health issues at the same time, making conditions for a 'Perfect Storm'.
I'm sorry to be so terribly gloomy this morning but it is better to understand what is happening than to be left in ignorance. Please don't shoot the messenger (me!). Timeframes are very, very hard to estimate. Over the last decade or two even the most lauded economists have found that the economy moves slower than they expected (see Alan Greenspan's book 'The Age of Turbulence' and ask yourself why he chose that title, back in 2007).
I shall be watching the development on this blog and you can look for certain pointers yourself. Watch commodity prices and factory prices. Look for signs of increasing inflation. The de-hoarding could happen very quickly when the process starts and if it does, we could see almost a step-function with the US Dollar taking a plunge more akin to a devaluation than inflation per se.
What about gold? Gold is the perfect hedge against this. At the moment it is very hard to obtain gold bullion; the major bullion dealers in London are now reporting zero availability of coins and bars with delays of months for silver, platinum and other precious metals. So why has the price of gold fallen back from its highs? This is almost certainly due to government intervention; as reported by a previous Governor of the Bank of England, at times of crisis it had been essential to keep the price of gold down to prevent a rush from currencies into gold. This is what he said in his memoirs....
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England, September 1999
Today, we are staring into a far deeper abyss. Private holdings of gold have soared and we have the incredible situation where you cannot buy physical gold because the price is too low - holders of gold are not prepared to sell. This is what happens when governments intervene in free markets. As courtiers to King Canute found, even the king couldn't hold back the tide.
a) Huge quantities of bad debt around the world that will have to be written off.
b) A deepening recession affecting all major economies with signs of increasing severity. Pointers are that this will be deeper than the 1930s.
c) A banking crisis caused by banks having lost a large part of their capital due to bad debts. This is why many banks are being taken into whole or part state ownership.
d) A dire liquidity crisis - a shortage of the world's Reserve Currency, the US Dollar which led to the "Paulson Plan", the $700 billion bailout.
Governments, banks, businesses and individuals around the world are hoarding US Dollars. That is why the Interbank lending rate has been high and that is why governments are pumping tens of billions of dollars a day of surplus liquidity into the system.
Due to the recession, businesses are de-stocking and instead of making more products to replace stocks (which would be normal in a flat economy) or continuing to increase stocks (which would be normal in a growing economy such as we have enjoyed for the last decade) companies are selling off their stock and using the income to pay off debt or hold on account.
We are now awaiting yet another stimulus package to be presented to Congress while the UK has announced its own massive state spending programme including new nuclear weapons, and massive infrastructure investment. All of these packages are being presented to the public as 'essential' with no analysis of the long term issues - how the debt is to be repaid.
At some stage this process will reverse but there is no mechanism to remove this vast surplus and the world will be flooded with US Dollars. To describe this as 'inflationary' would be like describing lung cancer as 'a bit chesty'. When the process has bottomed and starts its reverse we will see commodities and factory prices start to rise. There will still be a deep recession which will hinder workers from getting matching pay rises. Pensioners will be on reducing incomes as the value of underlying stocks and the income therefrom has fallen to about one third to one quarter of their previous highs. The 'Boomer' generation will be heading for retirement and age-related health issues at the same time, making conditions for a 'Perfect Storm'.
I'm sorry to be so terribly gloomy this morning but it is better to understand what is happening than to be left in ignorance. Please don't shoot the messenger (me!). Timeframes are very, very hard to estimate. Over the last decade or two even the most lauded economists have found that the economy moves slower than they expected (see Alan Greenspan's book 'The Age of Turbulence' and ask yourself why he chose that title, back in 2007).
I shall be watching the development on this blog and you can look for certain pointers yourself. Watch commodity prices and factory prices. Look for signs of increasing inflation. The de-hoarding could happen very quickly when the process starts and if it does, we could see almost a step-function with the US Dollar taking a plunge more akin to a devaluation than inflation per se.
What about gold? Gold is the perfect hedge against this. At the moment it is very hard to obtain gold bullion; the major bullion dealers in London are now reporting zero availability of coins and bars with delays of months for silver, platinum and other precious metals. So why has the price of gold fallen back from its highs? This is almost certainly due to government intervention; as reported by a previous Governor of the Bank of England, at times of crisis it had been essential to keep the price of gold down to prevent a rush from currencies into gold. This is what he said in his memoirs....
"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England, September 1999
Today, we are staring into a far deeper abyss. Private holdings of gold have soared and we have the incredible situation where you cannot buy physical gold because the price is too low - holders of gold are not prepared to sell. This is what happens when governments intervene in free markets. As courtiers to King Canute found, even the king couldn't hold back the tide.
Overnight news
We saw some gains on the Asian markets and notable gains in oil and gold. Commodities seem to have bottomed although copper and zinc have taken a plunge on reduced growth in China.
The US is about to table a second fiscal stimulus package to encourage people to spend, spend, spend.
BUT...see the next post "This is what is happening"....
The US is about to table a second fiscal stimulus package to encourage people to spend, spend, spend.
BUT...see the next post "This is what is happening"....
Monday, 20 October 2008
Monday Evening
Stocks have again risen - in Europe and the US.
Gold and oil are also up.
According to governments, sentiment is improving. The position is that the world is heading deeper into recession, there is a systemic fault in the world's financial system which is being buoyed-up by daily injections of billions of dollars into the money markets and banks. In addition, we are promised huge public spending programmes.
If I sound too negative about all this, then people will accuse me of being 'negative' and of 'talking us deeper into recession'. So I won't do that and instead I will ask you to consider what would happen to your household budget if, on getting a final demand from the bank, you decided to borrow more and go on a spending spree. As our American cousins say...go figure.
What we want to hear is the money market rates are reducing and that billions of dollars per day are no longer required to keep banks working. That seems a long way off, right now.
Gold and oil are also up.
According to governments, sentiment is improving. The position is that the world is heading deeper into recession, there is a systemic fault in the world's financial system which is being buoyed-up by daily injections of billions of dollars into the money markets and banks. In addition, we are promised huge public spending programmes.
If I sound too negative about all this, then people will accuse me of being 'negative' and of 'talking us deeper into recession'. So I won't do that and instead I will ask you to consider what would happen to your household budget if, on getting a final demand from the bank, you decided to borrow more and go on a spending spree. As our American cousins say...go figure.
What we want to hear is the money market rates are reducing and that billions of dollars per day are no longer required to keep banks working. That seems a long way off, right now.
Monday Morning
Overnight, the Asian markets made good gains, and both oil and gold made significant gains. The Euro has firmed, and technically we should see a Euro bounce. This morning, the European markets started firm but are showing signs of pulling back just over an hour into trading. The stock markets are not for the faint-hearted, right now. Today, we are waiting for more news, however the background news from Trichet and the latest UK housing report from Rightmove is, frankly, abysmal.
I will try to make more sense of this this evening.
I will try to make more sense of this this evening.
Sunday, 19 October 2008
Sunday Evening
I am postponing my post on the proposed 'Bretton Woods' discussions; George Bush has promised to host a summit in the very near future and a lot of information is likely to surface soon. I will post this as soon as we have enough information in the public domain.
What should we expect overnight? Well, the central banks continue to pump billions into the world's money markets on a daily basis. Governments are talking about underwriting all debtors, public and private, massive new spending on public works as well as pumping billions into the banks.
I see no fundamental basis for investing in equities at the moment. Stocks are likely to continue to be highly volatile - a daytrader's dream but an investor's nightmare. I believe that we still have much deeper falls to come - another 30% off of present stock prices seems likely.
I continue to believe that the Euro has bottomed in this present cycle and expect the dollar to start to retreat. It could be that the US Treasury will maintain the dollar until after the election on November 4th. That is certainly within their power.
What should we expect overnight? Well, the central banks continue to pump billions into the world's money markets on a daily basis. Governments are talking about underwriting all debtors, public and private, massive new spending on public works as well as pumping billions into the banks.
I see no fundamental basis for investing in equities at the moment. Stocks are likely to continue to be highly volatile - a daytrader's dream but an investor's nightmare. I believe that we still have much deeper falls to come - another 30% off of present stock prices seems likely.
I continue to believe that the Euro has bottomed in this present cycle and expect the dollar to start to retreat. It could be that the US Treasury will maintain the dollar until after the election on November 4th. That is certainly within their power.
Saturday, 18 October 2008
Saturday Morning
The European bourses ended up a useful 3% to 5% though the Dow ended down a little. There was nowhere near the volatility that options traders had feared - maybe the Plunge Protection Team were intervening, I doubt that we will learn the answer for at least ten to fifteen years.
We are seeing a commodities bounce (with the exception of gold, silver and oil). The bounce is right across the spectrum, both hard and soft commodities. There is no doubt in my mind that commodities are oversold and for those of you who are looking for somewhere to invest, now might be a good time to look at commodities - maybe a commodities fund. Of course this does mean that inflation might move up again, led by commodities.
Gold and silver are almost certainly being manipulated down by central banks. Most industry experts expect gold to rise to $1000 fairly soon (the futures are, today, at $788). I note that there seems to be more availability of gold coins in London - there has been a huge shortage, with investors queuing up at bullion dealers to buy anything they can. If you are prepared to carry the risk, then now might be a good time to buy your gold coins. The risk is political - governments are trying to discourage the holding of gold so they manipulate the price down to scare people off. It works.
Oct. 17 (Bloomberg) -- Confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low, posing an increasing threat to consumer spending that accounts for more than two-thirds of the economy.
Over the weekend I shall be posting about the wider situation and the suggestion that a new Bretton Woods is introduced. In essence, this would surely mean the end of the US Dollar as the world's reserve currency. This is a truly huge issue and the ramifications would be felt around the world.
We are seeing a commodities bounce (with the exception of gold, silver and oil). The bounce is right across the spectrum, both hard and soft commodities. There is no doubt in my mind that commodities are oversold and for those of you who are looking for somewhere to invest, now might be a good time to look at commodities - maybe a commodities fund. Of course this does mean that inflation might move up again, led by commodities.
Gold and silver are almost certainly being manipulated down by central banks. Most industry experts expect gold to rise to $1000 fairly soon (the futures are, today, at $788). I note that there seems to be more availability of gold coins in London - there has been a huge shortage, with investors queuing up at bullion dealers to buy anything they can. If you are prepared to carry the risk, then now might be a good time to buy your gold coins. The risk is political - governments are trying to discourage the holding of gold so they manipulate the price down to scare people off. It works.
Oct. 17 (Bloomberg) -- Confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low, posing an increasing threat to consumer spending that accounts for more than two-thirds of the economy.
Over the weekend I shall be posting about the wider situation and the suggestion that a new Bretton Woods is introduced. In essence, this would surely mean the end of the US Dollar as the world's reserve currency. This is a truly huge issue and the ramifications would be felt around the world.
Friday, 17 October 2008
Friday Morning
Overnight, the Asian stock markets were essentially flat. It was pleasing to see the Nikkei end a little up, and with little volatility. A small improvement in money market liquidity is being cited as the reason.
For me, the most important stories today are the Options expiry and the OPEC meeting planned for next Friday.
Oct. 17 (Bloomberg) -- The U.S. stock market's wildest swings since 1929 may get even bigger as almost 80 million options expire today.
Owners of the contracts on stocks, indexes and exchange- traded funds have until today's close to take advantage of the rights granted by the calls and puts they own. Investors are preparing for the possibility that market makers will boost volatility by buying and selling stock to hedge the risk of the option trades they have facilitated, according to Scott Nations, president of Fortress Trading Inc.
``I'd expect some fireworks,'' said Herb Kurlan, president of Vtrader Pro LLC, a San Francisco-based options and futures brokerage. ``The unwinding of positions is going to be more pronounced because of the high volatility.''
About a quarter of the approximately 337 million existing options expire today, according to Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts and is the world's largest derivatives clearinghouse. ......end of Bloomberg article.
OPEC has announced a meeting next Friday at which production cuts will be discussed. Oil is trading in the low $70s this morning. Let's put this in perspective; oil rose along with most other commodities, forming a bubble, which burst late summer. Oil rose on the back of the commodities bubble (which was, itself, caused by investors, private and institutional, substituting commodities for equities in their portfolios). The oil price rise was never about producers wanting more for their oil, it was merely a consequence of falling stock markets. To raise oil prices at this time - given that the producers were able to operate perfectly happily on a lower oil price a year ago - would be the height of folly. Reports suggest that production will be cut though it not clear by how much, or their target oil price.
I will post again tonight after the markets have closed and over the weekend I'll be having a look at the possible effects of the massive injections of new money into the world's markets. Are we in danger of seeing Wiemar-like inflation or are the debt write-offs (which effectively destroy money) sufficient to balance the new money? Into whose hands is all this new money going? Is this a vast redistribution of wealth? What about all the debtors whose debts have been segregated into 'toxic debt bins'? If they still owe all this money and are still making repayments, then surely the money hasn't actually been destroyed?
For me, the most important stories today are the Options expiry and the OPEC meeting planned for next Friday.
Oct. 17 (Bloomberg) -- The U.S. stock market's wildest swings since 1929 may get even bigger as almost 80 million options expire today.
Owners of the contracts on stocks, indexes and exchange- traded funds have until today's close to take advantage of the rights granted by the calls and puts they own. Investors are preparing for the possibility that market makers will boost volatility by buying and selling stock to hedge the risk of the option trades they have facilitated, according to Scott Nations, president of Fortress Trading Inc.
``I'd expect some fireworks,'' said Herb Kurlan, president of Vtrader Pro LLC, a San Francisco-based options and futures brokerage. ``The unwinding of positions is going to be more pronounced because of the high volatility.''
About a quarter of the approximately 337 million existing options expire today, according to Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts and is the world's largest derivatives clearinghouse. ......end of Bloomberg article.
OPEC has announced a meeting next Friday at which production cuts will be discussed. Oil is trading in the low $70s this morning. Let's put this in perspective; oil rose along with most other commodities, forming a bubble, which burst late summer. Oil rose on the back of the commodities bubble (which was, itself, caused by investors, private and institutional, substituting commodities for equities in their portfolios). The oil price rise was never about producers wanting more for their oil, it was merely a consequence of falling stock markets. To raise oil prices at this time - given that the producers were able to operate perfectly happily on a lower oil price a year ago - would be the height of folly. Reports suggest that production will be cut though it not clear by how much, or their target oil price.
I will post again tonight after the markets have closed and over the weekend I'll be having a look at the possible effects of the massive injections of new money into the world's markets. Are we in danger of seeing Wiemar-like inflation or are the debt write-offs (which effectively destroy money) sufficient to balance the new money? Into whose hands is all this new money going? Is this a vast redistribution of wealth? What about all the debtors whose debts have been segregated into 'toxic debt bins'? If they still owe all this money and are still making repayments, then surely the money hasn't actually been destroyed?
Thursday, 16 October 2008
Thursday Evening
The volatility of the markets is terrifying. Here's just one comment....
"We have a manic-depressive market,'' said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "The speed at which markets are reacting to news right now is close to mind-numbing"
This is a bad thing. Markets need stability, not 1000 point per day swings so while one is tempted to think of the DJIA up by 400 points as 'good', we would have been much more satisfied with a 200 point recovery ending the day in negative territory.
The news this afternoon is the the Ukraine and Hungary are going the same way as Iceland, and have asked the IMF (us) for help. I think it's unlikely that the Asian markets will follow the Dow up tonight, but at the moment anything is possible. The markets are in turmoil.
I think that the Euro is stabilising now, as I predicted earlier this week. We should be near the bottom and I expect it to rise against the dollar before long.
Gold bullion continues to be very hard to source despite the 'price' of gold having plunged to just over $800 today. There are a number of theories but the most likely is that most of the 'gold' market is in gold derivatives - or 'paper gold'. Those who have taken delivery of gold bullion will know that their holdings continue to show a profit and the price continues to rise.
"We have a manic-depressive market,'' said Frederic Dickson, who helps oversee about $20 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. "The speed at which markets are reacting to news right now is close to mind-numbing"
This is a bad thing. Markets need stability, not 1000 point per day swings so while one is tempted to think of the DJIA up by 400 points as 'good', we would have been much more satisfied with a 200 point recovery ending the day in negative territory.
The news this afternoon is the the Ukraine and Hungary are going the same way as Iceland, and have asked the IMF (us) for help. I think it's unlikely that the Asian markets will follow the Dow up tonight, but at the moment anything is possible. The markets are in turmoil.
I think that the Euro is stabilising now, as I predicted earlier this week. We should be near the bottom and I expect it to rise against the dollar before long.
Gold bullion continues to be very hard to source despite the 'price' of gold having plunged to just over $800 today. There are a number of theories but the most likely is that most of the 'gold' market is in gold derivatives - or 'paper gold'. Those who have taken delivery of gold bullion will know that their holdings continue to show a profit and the price continues to rise.
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Thursday Morning
Overnight saw a plunge in shares across the Far East and a continued fall in oil, which is now, at $72, exactly HALF the peak price in the summer, only three months ago. There has been no public statement by OPEC and it is not clear to me to what extent the US-friendly oil producers are happy to see this fall in price. The oil price factors in what traders THINK is going to happen as well as actual consumption. Traders are not best positioned to guess what comes next particularly at this time, so we might see some volatility in due course. Anecdotal evidence suggests that the crisis has yet to have a significant effect on oil consumption in Europe and the US but we are getting reports of factories closing in China, following cancelled orders from the west. A reducing oil price is excellent news for all of us; it might not have much effect on the crisis but it will make the winter much more bearable for those who are being hit with rising prices in the supermarkets, and reducing incomes.
We can expect the US 'Plunge Protection Team' to have been up all night trying to put in place a plan for today's trading. I fear that they have lost control now; all government effort is going into keeping enough capital in the banks to prevent bank seizures or a run on banks. At the time of writing, European bourses are opening around 7% down. The US futures are not quite as dire but neither are they very good indicators. What we are seeing is a flight from equities. Equities are seen as risky with poor income projections during this recession, which is widely forecast to become a depression. (The difference between a recession and a depression is the duration. Recessions last for around two years, depressions can last for decades).
I think that this stock plunge will continue during today in both Europe and the US. It has further to go and will probably now go all the way to final capitulation. I will try to put some numbers on this this evening. For orientation, expect falls of around 7% on each of the bourses today; we might see falls of 10%. We are in uncharted territory - taking the picture as a whole, nothing has happened like this since 1929.
I'll post again this evening. Ciao
We can expect the US 'Plunge Protection Team' to have been up all night trying to put in place a plan for today's trading. I fear that they have lost control now; all government effort is going into keeping enough capital in the banks to prevent bank seizures or a run on banks. At the time of writing, European bourses are opening around 7% down. The US futures are not quite as dire but neither are they very good indicators. What we are seeing is a flight from equities. Equities are seen as risky with poor income projections during this recession, which is widely forecast to become a depression. (The difference between a recession and a depression is the duration. Recessions last for around two years, depressions can last for decades).
I think that this stock plunge will continue during today in both Europe and the US. It has further to go and will probably now go all the way to final capitulation. I will try to put some numbers on this this evening. For orientation, expect falls of around 7% on each of the bourses today; we might see falls of 10%. We are in uncharted territory - taking the picture as a whole, nothing has happened like this since 1929.
I'll post again this evening. Ciao
Wednesday, 15 October 2008
Wednesday Evening
As I predicted, the shares plunge continues. I think that this will continue with high volatility (potentially huge swings positive and negative) during this week, ending the week well down.
The US banks (now Government funded and part-owned) are talking the Euro down while flooding the world market with dollars. Without any doubt this is to try to support the dollar in the face of mass dilution. The market knows what is happening. Expect a major fall in the dollar starting at any time, but within the next fortnight. I am expecting a 10% fall in the dollar against the Euro and Yen.
Buy your Euros now, if you are going to need them over the next few months.
This is not a time to be in equities or bonds. Go for cash, or gold.
The US banks (now Government funded and part-owned) are talking the Euro down while flooding the world market with dollars. Without any doubt this is to try to support the dollar in the face of mass dilution. The market knows what is happening. Expect a major fall in the dollar starting at any time, but within the next fortnight. I am expecting a 10% fall in the dollar against the Euro and Yen.
Buy your Euros now, if you are going to need them over the next few months.
This is not a time to be in equities or bonds. Go for cash, or gold.
Tuesday, 14 October 2008
Tuesday Evening
Europe's stock markets ease back, losing gains on session and Dow end 77 points down. I think that the helter skelter ride continues. Stay on the mat and don't touch the sides.
Tuesday Morning - Asian stocks soar
At the time of writing the NIKKEI is up 1136 points. It seems that the world is being flooded with dollars. It's true that a shortage of dollars was part of the problem - i.e. the liquidity crisis - but flooding the system, seemingly indiscriminately, with dollars is going to cause huge distortions. Free markets have their own regulation at a macro and micro level. These sorts of distortion are liable to turn some markets upside down. Imagine dropping a Hercules-full of USD from 20,000 feet over London....you'll end up with some criminals and schoolkids picking up millions and many business people getting nothing. There are similarities with what happened in Zimbabwe.
These are desperate measures. Will they work? Having tried to start the engine with an explosive charge, will it fire up and start to run, or will the crankshaft break? If you can get the engine to turn over for a while, with the inertia from the flywheel, is the fuel supply intact? Is the timing sufficiently accurate?
Probably too many analogies for one post but I want to make the point in a way that people who aren't into economics can understand.
Let's all hope that these measures do work because the consequences of failure are almost unimaginable - Iceland is heading towards having empty supermarkets and the same could happen here, in the EU and the USA. The wisest will have put an extra couple of tins in the cupboard 'just in case' and have a 'little bit of cash' in hand.
These are desperate measures. Will they work? Having tried to start the engine with an explosive charge, will it fire up and start to run, or will the crankshaft break? If you can get the engine to turn over for a while, with the inertia from the flywheel, is the fuel supply intact? Is the timing sufficiently accurate?
Probably too many analogies for one post but I want to make the point in a way that people who aren't into economics can understand.
Let's all hope that these measures do work because the consequences of failure are almost unimaginable - Iceland is heading towards having empty supermarkets and the same could happen here, in the EU and the USA. The wisest will have put an extra couple of tins in the cupboard 'just in case' and have a 'little bit of cash' in hand.
Monday, 13 October 2008
Monday Night
No updates today as I have been in Rome. The two key factors have been an unprecedented flood of dollars from the US Treasury and the European central banks (CH, GB, ECB) and the biggest rally on Wall Street in 70 years.
We saw the DJIA up 936 points. This is not good news. We don't need more volatility, we need stability. With this sort of volatility it is impossible to predict what will happen next - more volatility seems likely.
Had the central banks been in control we would have seen a more measured rise. Clearly, they are not.
We saw the DJIA up 936 points. This is not good news. We don't need more volatility, we need stability. With this sort of volatility it is impossible to predict what will happen next - more volatility seems likely.
Had the central banks been in control we would have seen a more measured rise. Clearly, they are not.
Sunday, 12 October 2008
Sunday Evening - What Has Been Agreed?
It's Sunday night in Europe and the talking seems to have stopped. As far as I can see, nothing concrete has been agreed other than an agreement that it would be good to agree.
I don't think that the markets will be impressed one little bit. There is a strong possibility that Asian shares will continue their plummet, continuing into Europe and the US tomorrow.
I don't think that the markets will be impressed one little bit. There is a strong possibility that Asian shares will continue their plummet, continuing into Europe and the US tomorrow.
How Money Is Made (A Video on YouTube)
I thoroughly recommend this short video which is highly entertaining and does not require any knowledge of economics. http://uk.youtube.com/watch?v=cy-fD78zyvI
Sunday 12th October - an historic day?
Bloomberg 12th October
French Finance Minister Christine Lagarde said leaders will aim to put ``meat and muscles'' on a commitment to safeguard key banks. German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank-rescue fund, said yesterday the euro region will implement ``the same toolbox of instruments.''
Am I alone in thinking that this sounds like a recipe for disaster? How can you possibly expect the diverse economies of the EU to sign up to a single plan with "meat and muscles"? This is command economy thinking and meddling with a free market which is in its most vulnerable stage. Command economies don't work. The EU works as well as it does because the free market operates in each region. Once you start taking centralised control it will fall apart - which it has been in danger of doing for some time.
I'll post more later when we have seen the outcome of today's meetings.
French Finance Minister Christine Lagarde said leaders will aim to put ``meat and muscles'' on a commitment to safeguard key banks. German Chancellor Angela Merkel, whose government earlier this month rejected French suggestions to form a joint bank-rescue fund, said yesterday the euro region will implement ``the same toolbox of instruments.''
Am I alone in thinking that this sounds like a recipe for disaster? How can you possibly expect the diverse economies of the EU to sign up to a single plan with "meat and muscles"? This is command economy thinking and meddling with a free market which is in its most vulnerable stage. Command economies don't work. The EU works as well as it does because the free market operates in each region. Once you start taking centralised control it will fall apart - which it has been in danger of doing for some time.
I'll post more later when we have seen the outcome of today's meetings.
Saturday, 11 October 2008
UK Banks to be "Under Complete Control of Government"
UK Banks to be under the complete control of the Government.
This is total state control. The Government will now have control of every aspect of our lives.
Unbelievable and unacceptable.
Those able to leave, be kind enough to say goodbye to those who can't.
This is total state control. The Government will now have control of every aspect of our lives.
Unbelievable and unacceptable.
Those able to leave, be kind enough to say goodbye to those who can't.
Friday, 10 October 2008
Wall Street - Uninvestable
Stock exchanges are a way to finance businesses. As markets and companies change, so the price of shares rise and fall. Investors buy stocks that are priced at a level determined by the free market - that is the cornerstone of the free market system. A stock exchange that can value a broad range of blue chip shares down 700 points from breakfast to lunchtime then up 300 by teatime, to close down 128points, is not investable. It is a casino. A range of 1000 points! It is broken. These are sample comments from Wall Street traders today -
* Uninvestable
* Crazy volatility, insane
* Dow changed direction 16 times in one hour
* Never seen this kind of volatility
* The market is broken
We need to wait until next week to see what happens next but generally markets hate uncertainties. This insane volatility suggests that that there is a systemic breakdown outside the control of governments - it is possible that this weird, unprecedented behaviour was a direct result of Bush using his "Wide range of tools". In which case, let us pray that someone shows him how to use his tools before the markets open on Monday.
Nobody but the most serious gamblers would leave their capital in this market. It might recover, but then again, it might crash yet another 1000 points on Monday or Tuesday. The odds might be better for you on the tables in Monte Carlo for Wall Street is not a headless, directionless monster.
My sympathies are with you if you have lost money in these markets recently.
* Uninvestable
* Crazy volatility, insane
* Dow changed direction 16 times in one hour
* Never seen this kind of volatility
* The market is broken
We need to wait until next week to see what happens next but generally markets hate uncertainties. This insane volatility suggests that that there is a systemic breakdown outside the control of governments - it is possible that this weird, unprecedented behaviour was a direct result of Bush using his "Wide range of tools". In which case, let us pray that someone shows him how to use his tools before the markets open on Monday.
Nobody but the most serious gamblers would leave their capital in this market. It might recover, but then again, it might crash yet another 1000 points on Monday or Tuesday. The odds might be better for you on the tables in Monte Carlo for Wall Street is not a headless, directionless monster.
My sympathies are with you if you have lost money in these markets recently.
Why is Gold Plunging Today?
At the time of writing gold is $45 per ounce down on the session. Why? Well, firstly, this is one of Bush's "tools" - private gold ownership is seen as a threat to the economy - and secondly the market for gold has, for the time being, settled into two markets. There is the market for physical gold and the market for what is called 'paper gold'. The price of physical gold is what you would have to pay to buy an ounce of gold to put into your pocket - i.e. take it away with you. 'Paper gold' is a piece of paper saying that you own (or are entitled to) an amount of physical gold.
What's the difference? Place a one ounce coin in your toilet bowl and flush it. It will still be there. Place your piece of paper in the toilet and flush....
Take your one ounce coin to a coin dealer and he will give you (surprise, surprise) around $1000 in today's money for it. Take your piece of paper into a dealer and he will (at best) give you the phone number of someone else you might speak to.
There is now a very distinct difference between the 'spot' gold price and what you will need to pay to buy bullion. So, if you are about to buy bullion, don't assume that your dealer is ripping you off if he is asking 20% or far more as a premium over the 'spot' price quoted.
Will the prices stabilise and converge later? Maybe, but there are no guarantees. I suspect that we will see a worldwide private market for small bars and coins at a large premium over spot for some time to come - six months to several years. Best advice is to buy on dips but this market is moving so fast that possibly the best advice is to buy bullion coins for whatever you have to pay - but use a reputable dealer. DO NOT USE EBAY unless you are an experienced gold trader and ebayer.
Don't panic - unless you are on margin and long. This is about taking out traders - and maybe posturing for the G7. Everyone with access to their own capital is filling their boots with bullion. Gold WILL go up but it will be savagely volatile. This is the time to say farewell to paper gold in all its forms. If you couldn't write your name on every piece of gold you own, with a felt-tip, then you don't have physical gold. If you trust your bank or bullion dealer's vaults and you are sure that your property is properly stored there in your own box, then that counts. But don't trust any ownership that does not in principle allow you the felt-tip-pen-test.
"The Felt-Tip-Pen-Test-Is-Best" You heard it here first.
What's the difference? Place a one ounce coin in your toilet bowl and flush it. It will still be there. Place your piece of paper in the toilet and flush....
Take your one ounce coin to a coin dealer and he will give you (surprise, surprise) around $1000 in today's money for it. Take your piece of paper into a dealer and he will (at best) give you the phone number of someone else you might speak to.
There is now a very distinct difference between the 'spot' gold price and what you will need to pay to buy bullion. So, if you are about to buy bullion, don't assume that your dealer is ripping you off if he is asking 20% or far more as a premium over the 'spot' price quoted.
Will the prices stabilise and converge later? Maybe, but there are no guarantees. I suspect that we will see a worldwide private market for small bars and coins at a large premium over spot for some time to come - six months to several years. Best advice is to buy on dips but this market is moving so fast that possibly the best advice is to buy bullion coins for whatever you have to pay - but use a reputable dealer. DO NOT USE EBAY unless you are an experienced gold trader and ebayer.
Don't panic - unless you are on margin and long. This is about taking out traders - and maybe posturing for the G7. Everyone with access to their own capital is filling their boots with bullion. Gold WILL go up but it will be savagely volatile. This is the time to say farewell to paper gold in all its forms. If you couldn't write your name on every piece of gold you own, with a felt-tip, then you don't have physical gold. If you trust your bank or bullion dealer's vaults and you are sure that your property is properly stored there in your own box, then that counts. But don't trust any ownership that does not in principle allow you the felt-tip-pen-test.
"The Felt-Tip-Pen-Test-Is-Best" You heard it here first.
A Wide Range of Tools?!
Oct. 10 (Bloomberg) -- President George Bush said the U.S. government will ``aggressively'' use a ``wide range of tools'' to help stabilize markets and resolve the financial crisis.
This is Bush-speak for underhand market manipulation. In these times, taken at face value, that need not be a bad thing but it is leading us further down the path of a command economy (e.g. do it Soviet style). If all the banks and financial institutions are owned and controlled by the state, you have a command economy, like it or not. More likely we will end up in the USA with an ogliarchy, headed by the US patricians. This is pretty scary stuff and we won't be able to roll it back. I don't suppose that the 'people' will be given the chance to vote on any of this.
What can you do? Nothing, really, other than try to preserve your wealth, preferably in your sock drawer. If you can think of something we can do as individuals, please leave your suggestions as a comment on this blog.
This is Bush-speak for underhand market manipulation. In these times, taken at face value, that need not be a bad thing but it is leading us further down the path of a command economy (e.g. do it Soviet style). If all the banks and financial institutions are owned and controlled by the state, you have a command economy, like it or not. More likely we will end up in the USA with an ogliarchy, headed by the US patricians. This is pretty scary stuff and we won't be able to roll it back. I don't suppose that the 'people' will be given the chance to vote on any of this.
What can you do? Nothing, really, other than try to preserve your wealth, preferably in your sock drawer. If you can think of something we can do as individuals, please leave your suggestions as a comment on this blog.
Morgan Stanley and Goldman Sachs
Mogan Stanley and Goldman Sachs are the world's largest financial services companies. They are both feared to be at risk of collapse. If either or them collapses it will make the Lehman Brothers collapse look small. It is unthinkable that this will be "allowed" to happen - note the "" around "allowed". With these bailouts right across the financial sector with no apparent means to finance them you might well compare keeping these insolvent companies alive with declaring Queen Victoria to be alive and well, and reviving the British Empire.
Haydn's Notes
Here are the notes that I sent to Haydn on the YBW thread yesterday:-
Cash is king right now. Gold should have a very long way to go but there is risk. Gold sovereigns or brittanias are best for tax but most dealers are out of stock with huge backlogs. FTSE headed to an interim low of 3500 by the end of this month. Residential property down. Most commodities down. Gilts/Treasuries - with all those cash injections will they retain their AAA rating? Normally they epitomise safety but that's no longer true. There is a real risk of severe currency devaluation if not inflation. So where do you keep your cash? For many, National Savings might be a good choice but a couple of month's spending in a biscuit tin is going to be a great comfort. Meanwhile, slash all spending ruthlessly and without pity and keep the austerity measures in place until you feel that things have bottomed and are getting better (we have a long way to go, we are nearly at the end of the beginning). Mid-term, we might be in an inflationary or deflationary environment - few professional economists claim to know and certainty is the domain of the ignorant. To understand what deflation means, have a look online at resources that discuss deflation in Japan - Google japan deflation thought remember that we would be starting in a worldwide depression. Caveat - this is uncharted territory, there could be any number of underwater hazards on the other hand, the water might be fairly clear and safe. Nobody knows.
Cash is king right now. Gold should have a very long way to go but there is risk. Gold sovereigns or brittanias are best for tax but most dealers are out of stock with huge backlogs. FTSE headed to an interim low of 3500 by the end of this month. Residential property down. Most commodities down. Gilts/Treasuries - with all those cash injections will they retain their AAA rating? Normally they epitomise safety but that's no longer true. There is a real risk of severe currency devaluation if not inflation. So where do you keep your cash? For many, National Savings might be a good choice but a couple of month's spending in a biscuit tin is going to be a great comfort. Meanwhile, slash all spending ruthlessly and without pity and keep the austerity measures in place until you feel that things have bottomed and are getting better (we have a long way to go, we are nearly at the end of the beginning). Mid-term, we might be in an inflationary or deflationary environment - few professional economists claim to know and certainty is the domain of the ignorant. To understand what deflation means, have a look online at resources that discuss deflation in Japan - Google japan deflation thought remember that we would be starting in a worldwide depression. Caveat - this is uncharted territory, there could be any number of underwater hazards on the other hand, the water might be fairly clear and safe. Nobody knows.
Urgent! Money Market rates rising in Asia
Overnight money market rates rose in Asia. The 'Paulson Plan' - $700 billion - is about adding liquidity. If it was working money markets would stabilise or fall. The problem this causes is that banks cannot or will not lend. That seizes-up commerce.
Why is this important? Individuals cannot borrow to spend. Businesses ultimately serve individuals. Businesses cannot borrow to run their business, and either have to curtail operations or go bust.
Why is this important? Individuals cannot borrow to spend. Businesses ultimately serve individuals. Businesses cannot borrow to run their business, and either have to curtail operations or go bust.
Banks and Safety
Most banks are now insolvent.
Banks are insolvent because they have lent money to people who cannot repay it. It isn't just money that they lent, either, the debt market is a bit complicated but in essence debts are chopped up, put into parcels, and sold off around the world. Imagine pouring sheeps' droppings into a huge vat of liquid chocolate....you have no idea whether one or more droppings will end up in any bar of chocolate, anywhere in the world. There are a LOT of sheep's droppings.
Banks are also insolvent because their capital is partly in shares - their own, and other companies. Also, they use shares (and other assets) as collateral when lending money. So when shares fall their capital falls. Banks are required by law to have a certain amount of capital to support the business they do. When their capital falls below that, they have to stop trading. That's the law all over the world (think Iceland).
Governments have helped by buying up the bad debt and putting capital into the banks. They have also been guaranteeing depositors' savings to prevent a run on the banks. The problem is that the Government does not have unlimited resources. It can print money without limit, but in doing so it devalues the currency and weakens confidence.
Are the banks safe? They are as safe as the governments' finances. How safe is that? I don't know. Not as safe as we'd like, right now. You mean the Government could crash??? No, not like that. Treasuries would print money and issue new debt (same thing as creating new money) in their own currencies until the world at large lose confidence, then the currency crashes. UK, EU, and USA are heavily dependent on imports (especially for energy and UK for food) which would have to be paid in devalued dollars, pounds, euros, etc.
When could this happen? If it does happen, the currency will start to lose value over weeks to new lows and at a certain stage the 'dam' will burst, and the currency will crash. At a stroke, any holdings you have in that currency will be worth a fraction of what they were. For a few weeks the effect in that country will be limited, while stocks are used up, then the full effect will be seen in the shops, utilities, etc. At the time of writing the pound looks dangerously close to heading in that direction, unthinkable though that might be. The IMF has singled out the UK as one of the countries it expects to be hit the worst in this crisis.
What can I do about it? If you are liquid, spread your cash around different currencies. Swiss Francs, US Dollars, Euros, Canadian Dollars, and Yen. Your bank will probably open foreign currency accounts for you. With First Direct you can do it over the phone in seconds. Then, if the Pound falls badly you will still have most of your cash intact.
Consider buying gold. My buying guide is available at www.3r.co.uk/gold
Banks are insolvent because they have lent money to people who cannot repay it. It isn't just money that they lent, either, the debt market is a bit complicated but in essence debts are chopped up, put into parcels, and sold off around the world. Imagine pouring sheeps' droppings into a huge vat of liquid chocolate....you have no idea whether one or more droppings will end up in any bar of chocolate, anywhere in the world. There are a LOT of sheep's droppings.
Banks are also insolvent because their capital is partly in shares - their own, and other companies. Also, they use shares (and other assets) as collateral when lending money. So when shares fall their capital falls. Banks are required by law to have a certain amount of capital to support the business they do. When their capital falls below that, they have to stop trading. That's the law all over the world (think Iceland).
Governments have helped by buying up the bad debt and putting capital into the banks. They have also been guaranteeing depositors' savings to prevent a run on the banks. The problem is that the Government does not have unlimited resources. It can print money without limit, but in doing so it devalues the currency and weakens confidence.
Are the banks safe? They are as safe as the governments' finances. How safe is that? I don't know. Not as safe as we'd like, right now. You mean the Government could crash??? No, not like that. Treasuries would print money and issue new debt (same thing as creating new money) in their own currencies until the world at large lose confidence, then the currency crashes. UK, EU, and USA are heavily dependent on imports (especially for energy and UK for food) which would have to be paid in devalued dollars, pounds, euros, etc.
When could this happen? If it does happen, the currency will start to lose value over weeks to new lows and at a certain stage the 'dam' will burst, and the currency will crash. At a stroke, any holdings you have in that currency will be worth a fraction of what they were. For a few weeks the effect in that country will be limited, while stocks are used up, then the full effect will be seen in the shops, utilities, etc. At the time of writing the pound looks dangerously close to heading in that direction, unthinkable though that might be. The IMF has singled out the UK as one of the countries it expects to be hit the worst in this crisis.
What can I do about it? If you are liquid, spread your cash around different currencies. Swiss Francs, US Dollars, Euros, Canadian Dollars, and Yen. Your bank will probably open foreign currency accounts for you. With First Direct you can do it over the phone in seconds. Then, if the Pound falls badly you will still have most of your cash intact.
Consider buying gold. My buying guide is available at www.3r.co.uk/gold
Stock Market Crash - Shares
Why are shares crashing? Quite simply because at this time they are a terrible investment. The price of shares have been far too high based on current earnings; we have been living through a major asset bubble funded by debt driven to a great extent by a housing bubble. That's why shares have been on a long term decline since October 2007. They are crashing at this time because people have suddenly woken up to the truth that they will lose money if they stay in shares. This causes fear, and when people are frightened, they take urgent steps. Hence the crash.
How far will they crash? My earlier targets had been FTSE 3500 and DJIA 6500 but they could go lower.
Should you hang on to your shares right now? No, sell for whatever you can get for them but all this is at your own risk, of course. As soon as the funds are with your broker, get them AWAY FROM THE BROKER. Do NOT leave money in a client account. Depending on the sums, spread around banks to maximise guarantees but make sure you have a couple of months cash in a biscuit tin AT ALL TIMES from now on. Consider gold (another post to follow). I have published briefing notes for gold purchases available at www.3r.co.uk/gold
How far will they crash? My earlier targets had been FTSE 3500 and DJIA 6500 but they could go lower.
Should you hang on to your shares right now? No, sell for whatever you can get for them but all this is at your own risk, of course. As soon as the funds are with your broker, get them AWAY FROM THE BROKER. Do NOT leave money in a client account. Depending on the sums, spread around banks to maximise guarantees but make sure you have a couple of months cash in a biscuit tin AT ALL TIMES from now on. Consider gold (another post to follow). I have published briefing notes for gold purchases available at www.3r.co.uk/gold
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