The Rouble is collapsing. Bad news for Russia but what about all the customers who now depend on Russia's oil and natural gas? Oil is already trading at around $50 with forecasts of further falls -- Russia needs on average $70 to break even. Russia has already spent nearly $150 billion of her dollar reserves in supporting the Rouble.
While this is a tragedy for the Russians, the consequences for Europe, which has become dependant on Russian oil and gas, are very serious. While the Europeans are paying in hard currency, vital for Russia, the political and social consequences of the collapse are incalculable if they cause disruption to energy exports.
Russia was one of those 'emerging markets' that was supposed, according to most economists, to be able to manage without the west. China, Japan, and Russia are now in dire trouble, along with the Middle East, Europe, the United States and much of South America....Australasia,....
Friday, 28 November 2008
Black Friday
The stock market rally has paused. It's impossible to say whether this is a point of inflexion and we continue up for a while, or whether the downtrend will resume. We should consider this as only a bear market rally, in any case.
Key pointers today are continued dire forecasts and comments from companies. Forecast losses. Gold edging up a little and oil down. Soft commodities firming, and metals softening on forecasts of deeper recession in Japan and China.
We are also seeing a weaker Dollar, firmer Euro and a British Pound waiting to rise. The Swiss Franc is looking good. The flight to US Treasuries is ending. The US and British Treasuries will start to have real trouble with new issues particularly longs. I wonder if we will see some new undated issues on the same formula as War Loan and Consuls?
The general position continues to be a worsening financial crisis, worsening company results and flight to gold. This is a time not to be in equities or derivatives.
Key pointers today are continued dire forecasts and comments from companies. Forecast losses. Gold edging up a little and oil down. Soft commodities firming, and metals softening on forecasts of deeper recession in Japan and China.
We are also seeing a weaker Dollar, firmer Euro and a British Pound waiting to rise. The Swiss Franc is looking good. The flight to US Treasuries is ending. The US and British Treasuries will start to have real trouble with new issues particularly longs. I wonder if we will see some new undated issues on the same formula as War Loan and Consuls?
The general position continues to be a worsening financial crisis, worsening company results and flight to gold. This is a time not to be in equities or derivatives.
Thursday, 27 November 2008
High Street Crash
Nov. 27 (Bloomberg) -- Woolworths Group Plc appointed administrators for its chain of stores and MFI Retail Ltd. collapsed, putting almost 30,000 U.K. jobs at risk, as the economy’s slide caused consumer spending to slump.
Woolworths, which opened its first shop in 1909, had Deloitte appointed as administrators today after an attempt to sell the stores ended. MFI appointed administrators yesterday.
Woolworths, which opened its first shop in 1909, had Deloitte appointed as administrators today after an attempt to sell the stores ended. MFI appointed administrators yesterday.
I fear that this is barely even the tip of the iceberg. Many retailers make almost all of their profit at Christmas and this year they are being hit by at least a 10% fall in volume and up to 50% fall in selling prices, taking them well into the red. Due to the shortage of credit for business, few firms will be able to extend their debts to tide them over.
Bad though this is for the retail sector, and the employees and their families, it will also hit the suppliers of products and services to the retail sector. I have argued for many years that retail is the engine behind the western economies. Almost everything else produced or service rendered is, at the end of the day, strongly linked to retail in one way or another. When the retail trade collapses, so does everything else.
It will be interesting to watch the supermarkets. We all have to eat. Will they retain their market share or will food start to be distributed through local markets, traders, 'white van man', etc. at lower cost and margins? For the time being, the huge purchasing power of the supermarkets and their ability to hedge and buy forward might give them the advantage but there is a huge market opportunity for small traders to undercut them by a useful margin. Anyone can drive a white van. There are plenty of good, highly motivated people with retail experience out there who now have no job and in most market towns in the UK there is a right to erect a stall.
I stand by my earlier comments that the more enlightened supermarkets will open smaller convenience stores (as J. Sainsbury has recently announced) but each day that goes by makes the outlook look bleaker. As politicians dig us deeper into debt for very short-term gain, we will sink lower. We might be looking at the closure of shopping malls and hypermarkets on a grand scale - a collapse. This would start at the luxury end of the market and work down. The small traders will be there to take the business for essentials and this movement will be driven from two directions....
From the top down --- Luxury goods and high-overhead malls start to lose money and close
From the bottom up --- Small traders - white van man - starts to take volume from established fixed retailers.
Wednesday, 26 November 2008
Stock Market Rally - What's going on?
The present stock market rally is the steepest since 1933 and has gone over four days. Have we bottomed? NO. All of the earnings and turnover data is dire. This is an engineered rally, by the PPT, possibly to help support the banks (when stocks fall banks solvency is reduced). It is neither a good thing nor a bad thing (unless you were short before the rally and haven't closed your position). If you have been sitting on shares waiting for some recovery, this might be your last good opportunity before the next sharp leg down. We are looking at the S&P going to the low 700s before we have any hope of finding a bottom. At the time of writing this, the S&P is at 888.
To support this view, look at LIBOR, which remains high, yet more market stimulation, this time in the EU, and notice that oil is still down in the low $50s where it has become range-bound for a while. Meanwhile, gold remains firm.
It will not be long before commodities rise again as inflation kicks in and the value of the USD falls against commodities and other currencies, particularly the EUR and GBP. I am not as pessimistic about cable (GBP) as most other commentators seem to be. True, the UK is in a terrible pickle and the economy is being badly mismanaged by Mr Brown and his Chancellor, Darling, but then again, that is true of the USA and all other EU countries. No country seems prepared to bite the bullet.
I am watching constantly and will update again when I have something useful to add. We are in the fiercest financial storm ever seen on the planet and it is impossible to predict the outcome with any certainty. The best we can do is determine the approximate direction and speed but timing is particularly hard to judge. To a great extent, the timing will depend on how long the politicians can keep the public confidence of the banking system. If that goes, the entire structure would fall down with fearsome consequences.
To support this view, look at LIBOR, which remains high, yet more market stimulation, this time in the EU, and notice that oil is still down in the low $50s where it has become range-bound for a while. Meanwhile, gold remains firm.
It will not be long before commodities rise again as inflation kicks in and the value of the USD falls against commodities and other currencies, particularly the EUR and GBP. I am not as pessimistic about cable (GBP) as most other commentators seem to be. True, the UK is in a terrible pickle and the economy is being badly mismanaged by Mr Brown and his Chancellor, Darling, but then again, that is true of the USA and all other EU countries. No country seems prepared to bite the bullet.
I am watching constantly and will update again when I have something useful to add. We are in the fiercest financial storm ever seen on the planet and it is impossible to predict the outcome with any certainty. The best we can do is determine the approximate direction and speed but timing is particularly hard to judge. To a great extent, the timing will depend on how long the politicians can keep the public confidence of the banking system. If that goes, the entire structure would fall down with fearsome consequences.
Tuesday, 25 November 2008
LIBOR going up -- HEADS UP
Indications are that LIBOR is going up again. i.e. banks won't lend to banks. In this present environment it doesn't reflect a shortage of money but, rather, a lack of confidence by bankers, of other bankers.
This is the banking crisis I have been talking about for some weeks.
The banking crisis IS THE CRISIS. The banking crisis is why governments are in a flat spin, a panic.
Be vigilant. A banking crash would have implications far outside banking.
I'll come back to this when I think I have something useful to add.
This is the banking crisis I have been talking about for some weeks.
The banking crisis IS THE CRISIS. The banking crisis is why governments are in a flat spin, a panic.
Be vigilant. A banking crash would have implications far outside banking.
I'll come back to this when I think I have something useful to add.
This Stock Market Rally
Why are the stock markets rallying? Have they bottomed? Is now the time to get back in? Is the end of the recession in sight? Have commodity prices bottomed?
Stock markets are not just left to fend for themselves....
Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.
"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:
Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee.
Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."
This little group is generally known as the "Plunge Protection Team". It operates by playing the futures markets in commodities, currencies, gold and stocks. Since it is backed by the US Treasury, it's power is awesome, if not unlimited. I think that this present rally has been manipulated (at least in part) by the PPT. Once a rally starts, it tends to find its own momentum so the PPT can unwind its positions and actually make a profit on the exercise. It is the ultimate Insider Trading given that the PPT is comprised of the policymakers! The world's capital markets are NOT a level playing field....beware. Edit:- A reader has kindly given me a link to a Washington Post article that describes how the PPT work... http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm
So, is this the bottom? No. Nowhere near. We have to go down to the low 700s (S&P) at least before we bottom and we will not see a genuine recovery until some fundamentally good news appears on the horizon. At this time, the situation is becoming more dire by the day. Any rallies at this time are bear market rallies most likely engineered by the PPT.
Is now the time to get back into the stock markets? No. Even if you are prepared to see your investment fall by averaging-down (a well-known investment strategy advocated by stockbrokers, financial advisors and practiced by idiots and philanthropists) many of the firms you might invest in will have gone bust or bailed-out before things get better. If you can cherry-pick and you really know your stuff you will find some firms that will actually profit from this recession, but I can't help you with that.
Is the end of the recession in sight? No. The recession hasn't really started yet. Most firms are still trading and most people still have their jobs. In the US and UK we will see up to 30% job losses before this recession bottoms. In these countries we have built economies that feed on themselves, financed by external borrowing. The borrowing is going to have to stop. The present government initiatives -- spend and borrow to 'halt' the recession -- are insane and due to blind panic. It won't work, it will make things worse and it will cost a fortune. Of course it could give a Christmas bonus to those who would otherwise have lost their jobs but it'll be worse for them in February than if they had done what they SHOULD have done -- cut public spending and cut borrowing.
Have commodity prices bottomed? Maybe. As the debts are unwound and safely wrapped-up in toxic waste dumps the monetary debt-deflation that has been soaking up all the spare dollars will start to fall. With the monumental sums of USD being deluged onto the world, we will soon be awash with dollars. That is called monetary inflation and it results in higher prices because a large number of dollars are competing for a finite resource. If you have $1000 in your pocket you don't argue about the price of an ice cream -- $1 or $3, doesn't seem to matter much. If you only have $10 in your pocket, it makes a huge difference and either you do without the ice cream, or you haggle, or shop around for a better deal. It's the same thing in the world's markets from commodities to finished goods.
Economists are split between those who think we are headed for deflation and those who think we are headed for hyper-inflation. If you see commodity prices start to rise again it could signal the start of a rapid rise in prices, probably completely out of control with inflation running at rates unheard of in the US or UK.
Stock markets are not just left to fend for themselves....
Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.
"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:
Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee.
Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."
This little group is generally known as the "Plunge Protection Team". It operates by playing the futures markets in commodities, currencies, gold and stocks. Since it is backed by the US Treasury, it's power is awesome, if not unlimited. I think that this present rally has been manipulated (at least in part) by the PPT. Once a rally starts, it tends to find its own momentum so the PPT can unwind its positions and actually make a profit on the exercise. It is the ultimate Insider Trading given that the PPT is comprised of the policymakers! The world's capital markets are NOT a level playing field....beware. Edit:- A reader has kindly given me a link to a Washington Post article that describes how the PPT work... http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm
So, is this the bottom? No. Nowhere near. We have to go down to the low 700s (S&P) at least before we bottom and we will not see a genuine recovery until some fundamentally good news appears on the horizon. At this time, the situation is becoming more dire by the day. Any rallies at this time are bear market rallies most likely engineered by the PPT.
Is now the time to get back into the stock markets? No. Even if you are prepared to see your investment fall by averaging-down (a well-known investment strategy advocated by stockbrokers, financial advisors and practiced by idiots and philanthropists) many of the firms you might invest in will have gone bust or bailed-out before things get better. If you can cherry-pick and you really know your stuff you will find some firms that will actually profit from this recession, but I can't help you with that.
Is the end of the recession in sight? No. The recession hasn't really started yet. Most firms are still trading and most people still have their jobs. In the US and UK we will see up to 30% job losses before this recession bottoms. In these countries we have built economies that feed on themselves, financed by external borrowing. The borrowing is going to have to stop. The present government initiatives -- spend and borrow to 'halt' the recession -- are insane and due to blind panic. It won't work, it will make things worse and it will cost a fortune. Of course it could give a Christmas bonus to those who would otherwise have lost their jobs but it'll be worse for them in February than if they had done what they SHOULD have done -- cut public spending and cut borrowing.
Have commodity prices bottomed? Maybe. As the debts are unwound and safely wrapped-up in toxic waste dumps the monetary debt-deflation that has been soaking up all the spare dollars will start to fall. With the monumental sums of USD being deluged onto the world, we will soon be awash with dollars. That is called monetary inflation and it results in higher prices because a large number of dollars are competing for a finite resource. If you have $1000 in your pocket you don't argue about the price of an ice cream -- $1 or $3, doesn't seem to matter much. If you only have $10 in your pocket, it makes a huge difference and either you do without the ice cream, or you haggle, or shop around for a better deal. It's the same thing in the world's markets from commodities to finished goods.
Economists are split between those who think we are headed for deflation and those who think we are headed for hyper-inflation. If you see commodity prices start to rise again it could signal the start of a rapid rise in prices, probably completely out of control with inflation running at rates unheard of in the US or UK.
Sunday, 23 November 2008
Update Sunday 23rd November 2008
Fear has been increasing in the markets last week, leading to a continued fall in equities and rise in gold as a safe haven. The real issue at the moment is stability of the banking sector. Citi is the headline but there are many others out there in as much or more trouble. That's why LIBOR stubbornly refuses to fall and why banks won't lend despite government pressure.
It's a double-edged sword for the banks. Their financial base is being eroded by falling stock values (their own stock and the stock held as collateral on outstanding loans), and their customers' performance is going to plummet over the next few years due to the recession, hitting banks' income. Because most banks are so over-leveraged many will not survive. Some will be bailed out by government, some will amalgamate with others and others will go to the wall. The problem will come if (or when) ordinary customers lose their money or can't get hold of it. That is the risk -- a run on the banks. That is what governments are terrified of and that is why they are all in a blind panic.
You should have already made provision for these things -- make sure you have cash 'in the sock drawer', at least two month's worth for all expenses. If you haven't, do it now. The interest you will lose will be trivial at today's rates and you can always put it back in later. You will feel much more comfortable with a couple of month's cash to hand.
If you have funds available, and you have not already done so, put some money into gold coins. For UK taxpayers, UK legal tender coins (sovereigns and britannias) are free from CGT. All gold bullion and coins in the EU are free from VAT. I don't suggest you buy gold coins from Ebay unless you really know what you are doing. The best way is to phone a gold coin dealer, agree a price and then go and pick them up in person. Keep them in the same sock drawer you use for your folding cash and don't tell anyone. If you are going to invest a large amount in gold, consider asking your own bank for a safe deposit box. I would not entrust my gold to any gold coin dealer to store for me.
It'll be an interesting week ahead!
It's a double-edged sword for the banks. Their financial base is being eroded by falling stock values (their own stock and the stock held as collateral on outstanding loans), and their customers' performance is going to plummet over the next few years due to the recession, hitting banks' income. Because most banks are so over-leveraged many will not survive. Some will be bailed out by government, some will amalgamate with others and others will go to the wall. The problem will come if (or when) ordinary customers lose their money or can't get hold of it. That is the risk -- a run on the banks. That is what governments are terrified of and that is why they are all in a blind panic.
You should have already made provision for these things -- make sure you have cash 'in the sock drawer', at least two month's worth for all expenses. If you haven't, do it now. The interest you will lose will be trivial at today's rates and you can always put it back in later. You will feel much more comfortable with a couple of month's cash to hand.
If you have funds available, and you have not already done so, put some money into gold coins. For UK taxpayers, UK legal tender coins (sovereigns and britannias) are free from CGT. All gold bullion and coins in the EU are free from VAT. I don't suggest you buy gold coins from Ebay unless you really know what you are doing. The best way is to phone a gold coin dealer, agree a price and then go and pick them up in person. Keep them in the same sock drawer you use for your folding cash and don't tell anyone. If you are going to invest a large amount in gold, consider asking your own bank for a safe deposit box. I would not entrust my gold to any gold coin dealer to store for me.
It'll be an interesting week ahead!
Wednesday, 19 November 2008
Update 19th November 2008
I am privileged to have friends and acquaintances who work at a most senior level, in industry and banking, in Europe. I have just returned from a social visit and I am sharing the essence of what was said.
Many banks are expected to disappear. There will not necessarily be failures resulting in loss of depositors' funds (although that was considered very possible) but nobody thought that most banks would survive this crisis.
Currencies are in 'red for volatile' conditions. Most are bullish GBP and neutral EUR (both vs the USD). Gold is seen as rising or trading sideways around the mid-700s. 650 is considered to be a absolute floor for gold.
Everyone regarded last week's G-20 'summit' as a complete waste of time (at best) or a fraud. Talking to people who have some insight, it seems that USA might have some alternative agenda that they are not prepared to announce just yet...but that's speculation.
The bourses are tipped to continue to plunge. This is threatening banks. The situation remains dire and getting worse.
Sorry to be the bearer of bad news.
Many banks are expected to disappear. There will not necessarily be failures resulting in loss of depositors' funds (although that was considered very possible) but nobody thought that most banks would survive this crisis.
Currencies are in 'red for volatile' conditions. Most are bullish GBP and neutral EUR (both vs the USD). Gold is seen as rising or trading sideways around the mid-700s. 650 is considered to be a absolute floor for gold.
Everyone regarded last week's G-20 'summit' as a complete waste of time (at best) or a fraud. Talking to people who have some insight, it seems that USA might have some alternative agenda that they are not prepared to announce just yet...but that's speculation.
The bourses are tipped to continue to plunge. This is threatening banks. The situation remains dire and getting worse.
Sorry to be the bearer of bad news.
Sunday, 16 November 2008
After G-20 Oh dear, oh dear, oh dear
The 'outcome' of the G-20 summit is about as dismal as was possible. For the details, see http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html
All they have done is to agree dates for subsequent meetings and a glib 'agreement to think about it'. Not even an 'Agreement to agree'. I had hoped for 'Heads of Agreement' stating those things that had been agreed in principle, subject to the fine print by lawyers and ratification by local administrations, but instead, they assure us that they will think about it. Good-oh.
What does this mean? As I wrote on Friday, more borrowing and more fiscal stimulation. Tax cuts and bailouts financed by borrowing. Mr Brown is widely tipped to give a massive handout to the 'poor'. Not, you understand, because the 'poor' are 'needy' but because the poor tend to spend what they get the instant they get it (could be WHY they are poor??). The Government wants instant results and political capital so it hands out billions of pounds of taxpayers' money to people who are mostly already net recipients of benefits. How fair is that? Not just unfair, but as policies goes, it is insane for fiscal reasons.
We are in the biggest financial tempest the world has EVER seen. It has never before happened on such a scale and there is no end in sight.
What is not helping is economists tinkering around at a micro level with the odd % here or there, with interminable debates about how "more stimulus is needed" and where, and how it should be stimulated. What would really help us is for these utter idiots who, only a few short months ago were telling us how this was all going to be contained, to shut up and let some 'handbag' economics take over.
1. Let GBP find its own level in the market - do not support it.
2. Provide no state funds for failing businesses but instead provide benefits, training and job-search assistance to those who are in severe financial difficulties.
3. Cut out -- ALTOGETHER -- all government spending that is non-essential. No more gender/race/age/ commissions. Slash administrators in every field of government spending to the core. Cut the upper-tier state-employees salaries by a large margin. Slash government-funded expenses and allowances to subsistence and pure reimbursement levels.
4. Put all government pensions on a fixed basis. No more index linked.
5. Remove the concept of 'performance-related pay' from the public sector.
6. Accept that there is no such thing as a business that is 'too big to fail'. It is all part of a life-cycle. All large businesses are born, grow and die, just like people. Think British Leyland, and how that came about.
7. Refuse to take on any further public sector debt for any reason whatsoever other than imminent defence of the nation.
8. Make a public statement that the servicing of government debt will be the number one fiscal priority.
All they have done is to agree dates for subsequent meetings and a glib 'agreement to think about it'. Not even an 'Agreement to agree'. I had hoped for 'Heads of Agreement' stating those things that had been agreed in principle, subject to the fine print by lawyers and ratification by local administrations, but instead, they assure us that they will think about it. Good-oh.
What does this mean? As I wrote on Friday, more borrowing and more fiscal stimulation. Tax cuts and bailouts financed by borrowing. Mr Brown is widely tipped to give a massive handout to the 'poor'. Not, you understand, because the 'poor' are 'needy' but because the poor tend to spend what they get the instant they get it (could be WHY they are poor??). The Government wants instant results and political capital so it hands out billions of pounds of taxpayers' money to people who are mostly already net recipients of benefits. How fair is that? Not just unfair, but as policies goes, it is insane for fiscal reasons.
We are in the biggest financial tempest the world has EVER seen. It has never before happened on such a scale and there is no end in sight.
What is not helping is economists tinkering around at a micro level with the odd % here or there, with interminable debates about how "more stimulus is needed" and where, and how it should be stimulated. What would really help us is for these utter idiots who, only a few short months ago were telling us how this was all going to be contained, to shut up and let some 'handbag' economics take over.
1. Let GBP find its own level in the market - do not support it.
2. Provide no state funds for failing businesses but instead provide benefits, training and job-search assistance to those who are in severe financial difficulties.
3. Cut out -- ALTOGETHER -- all government spending that is non-essential. No more gender/race/age/ commissions. Slash administrators in every field of government spending to the core. Cut the upper-tier state-employees salaries by a large margin. Slash government-funded expenses and allowances to subsistence and pure reimbursement levels.
4. Put all government pensions on a fixed basis. No more index linked.
5. Remove the concept of 'performance-related pay' from the public sector.
6. Accept that there is no such thing as a business that is 'too big to fail'. It is all part of a life-cycle. All large businesses are born, grow and die, just like people. Think British Leyland, and how that came about.
7. Refuse to take on any further public sector debt for any reason whatsoever other than imminent defence of the nation.
8. Make a public statement that the servicing of government debt will be the number one fiscal priority.
Friday, 14 November 2008
G-20 Meeting this weekend
Starting tomorrow, there is to be a meeting of the G-20 nations, in Washington, to discuss the present financial crisis. I have been researching the mainstream thinking of economists and am saddened to find that the consensus is for more fiscal stimulation, greater borrowing and no mention of a reserve currency as an alternative to the US dollar. For those of you who are interested in reading some papers from some of the world's leading economists, you can download:-
http://www.voxeu.org/reports/G20_Summit.pdf
The language is not too technical and most of it is quite readable -- if lamentably stupid. It is the same sort of thinking that got us into this mess.
I'll be reporting back to this blog over the weekend, as news filters through.
http://www.voxeu.org/reports/G20_Summit.pdf
The language is not too technical and most of it is quite readable -- if lamentably stupid. It is the same sort of thinking that got us into this mess.
I'll be reporting back to this blog over the weekend, as news filters through.
Thursday, 13 November 2008
Managing Contraction
You will find very little work or training on the subject of managing a business to contract. Virtually all management training and experience assumes an environment that is growing; more people = more consumers = growing market in volume and value. Furthermore, virtually all management training assumes that the corporate objective is to grow the business within the market -- i.e. take greater market share. It is this ethos of trying to grow market share within a growing market that is the fixation of every management team.
What this means is that the infrastructure companies use to carry on their business must grow. Leaving aside technological changes and outsourcing, generally this means moving to larger premises, bigger plant, more HR, accountancy and other support staff, etc. As companies grow, they borrow (or raise from their investors) more capital to run the business. The justification to the investors (and lenders) is a bigger income, and a bigger profit.
Now, consider a market which is falling. At first sight you would think that you could contract a business in the reverse order -- like letting air out of a balloon -- but it isn't as easy as that. You can't reduce the size of the plant or premises by 10%. That's because companies tend to distribute functions between different sites or departments. If you sell off the plant that makes the ball bearings you need you will have NO ball bearings but all you wanted was a reduction of 10%. So you'd have to outsource the balls and you might not save the 10% which was your original requirement.
Those lenders and investors who had put money in your business because of your growth targets are going to want their money out.
You might have seen Sainsbury's little-publicised news this week that they are going ahead immediately with up to 100 new "convenience" stores? So they are planning to grow their business in this present market? A supermarket that has positioned itself over years to be at the premium end of the market? No. I think you are seeing a rare example of a management team trying to manage contraction. Once the convenience stores are online they can close down or mothball a hypermarket. The plan is no doubt to find funding to keep one step ahead of the game and keep investors in place while the turnover and profits fall. That's going to be the hardest part because the investors won't understand the game plan or the inevitability of the business contracting. Other, less enlightened management teams, are simply piling-in to the downmarket sections where, in some cases they have little experience. Like Northern Foods. You can't have all the players fighting for market share at the bottom of the market. It will be survival of the strongest balance sheet and most determined investors. That'll favour companies with old family money invested in them, not companies owned almost entirely by institutional investors.
Certain businesses seem to be at more risk than others. Large manufacturing plants such as automotive, aerospace and high volume manufacturing are at the gravest risk but consider also the financial services companies (and I include all insurers in that). Banks, health-care insurance, general and motor insurance and IFAs. Pension providers (and funds) are a unique nightmare; a disaster waiting to happen. How do banks contract and yet still provide a competitive service at a local level? If Bank A closes its branch in Little Rissington then the Little Rissington residents will probably go to Bank B, where there is still a branch. So cutting, say, 10% off the branch overhead could result in a much larger decline in business than 10%. Everything is easier when the overall market -- the number of consumers and what they are spending -- is growing.
The point that I am making here is don't expect an investment of £100 in a FTSE 100 tracker fund to track the market. If the market falls by, say, 10% (which is wildly optimistic, the contraction will be much larger, probably around 30% to 50% before this mess bottoms). Entire companies will go bust. The shares will be valueless. Any kind of chart analysis that suggests the DJIA will bottom at the 2002 lows, for example, is rubbish. There is no rational basis for such a prediction. It's like trying to predict the landing speed of a 747 that has lost its wings, based on previous landings. It's absurd. There will not be a soft landing.
That is not to say that we need to despair and run around like the proverbial headless chickens (although that is clearly what the US and UK administrations are doing this week) but you need to back teams that are showing they can manage contraction, survive and thrive in a contracting market. I don't think that all the management teams are going to share their thinking so you will need to be watching out for sensible moves, such as Sainsbury's.
What this means is that the infrastructure companies use to carry on their business must grow. Leaving aside technological changes and outsourcing, generally this means moving to larger premises, bigger plant, more HR, accountancy and other support staff, etc. As companies grow, they borrow (or raise from their investors) more capital to run the business. The justification to the investors (and lenders) is a bigger income, and a bigger profit.
Now, consider a market which is falling. At first sight you would think that you could contract a business in the reverse order -- like letting air out of a balloon -- but it isn't as easy as that. You can't reduce the size of the plant or premises by 10%. That's because companies tend to distribute functions between different sites or departments. If you sell off the plant that makes the ball bearings you need you will have NO ball bearings but all you wanted was a reduction of 10%. So you'd have to outsource the balls and you might not save the 10% which was your original requirement.
Those lenders and investors who had put money in your business because of your growth targets are going to want their money out.
You might have seen Sainsbury's little-publicised news this week that they are going ahead immediately with up to 100 new "convenience" stores? So they are planning to grow their business in this present market? A supermarket that has positioned itself over years to be at the premium end of the market? No. I think you are seeing a rare example of a management team trying to manage contraction. Once the convenience stores are online they can close down or mothball a hypermarket. The plan is no doubt to find funding to keep one step ahead of the game and keep investors in place while the turnover and profits fall. That's going to be the hardest part because the investors won't understand the game plan or the inevitability of the business contracting. Other, less enlightened management teams, are simply piling-in to the downmarket sections where, in some cases they have little experience. Like Northern Foods. You can't have all the players fighting for market share at the bottom of the market. It will be survival of the strongest balance sheet and most determined investors. That'll favour companies with old family money invested in them, not companies owned almost entirely by institutional investors.
Certain businesses seem to be at more risk than others. Large manufacturing plants such as automotive, aerospace and high volume manufacturing are at the gravest risk but consider also the financial services companies (and I include all insurers in that). Banks, health-care insurance, general and motor insurance and IFAs. Pension providers (and funds) are a unique nightmare; a disaster waiting to happen. How do banks contract and yet still provide a competitive service at a local level? If Bank A closes its branch in Little Rissington then the Little Rissington residents will probably go to Bank B, where there is still a branch. So cutting, say, 10% off the branch overhead could result in a much larger decline in business than 10%. Everything is easier when the overall market -- the number of consumers and what they are spending -- is growing.
The point that I am making here is don't expect an investment of £100 in a FTSE 100 tracker fund to track the market. If the market falls by, say, 10% (which is wildly optimistic, the contraction will be much larger, probably around 30% to 50% before this mess bottoms). Entire companies will go bust. The shares will be valueless. Any kind of chart analysis that suggests the DJIA will bottom at the 2002 lows, for example, is rubbish. There is no rational basis for such a prediction. It's like trying to predict the landing speed of a 747 that has lost its wings, based on previous landings. It's absurd. There will not be a soft landing.
That is not to say that we need to despair and run around like the proverbial headless chickens (although that is clearly what the US and UK administrations are doing this week) but you need to back teams that are showing they can manage contraction, survive and thrive in a contracting market. I don't think that all the management teams are going to share their thinking so you will need to be watching out for sensible moves, such as Sainsbury's.
Thursday 13th November 2008
The bourses continue to plunge, increasing the risk of bank failures and deficiencies in pension funds.
Company earnings and forecasts continue to plunge with gloomy CEO outlooks in most cases. It is plunging earnings and insolvent balance sheets that are the real problem today. People have stopped buying things and now businesses will have to stop making things (or at least, not as many things). That's a 'heads-up' to GM and Ford.
MasterCard say that gasoline consumption in the USA is now down 4% (presumably adjusted seasonally, but my report does not say). Official figures are due out later today. 4% is a huge fall. Nearly one journey in twenty has not taken place.
The US dollar is far too strong for the USA to stand. At present levels the US cannot be competitive in many export markets and we can be sure that there is huge political pressure within the US to weaken the USD. Of course, a weakening USD would also reduce the value of debt, in real terms, so has two benefits. What is not clear right now is how much control the US has over its exchange rate.
The outcome of tomorrow's Washington summit will be very interesting. I won't go as far as to suggest that you short the dollar but it might be wise to close any long positions before Friday.
Company earnings and forecasts continue to plunge with gloomy CEO outlooks in most cases. It is plunging earnings and insolvent balance sheets that are the real problem today. People have stopped buying things and now businesses will have to stop making things (or at least, not as many things). That's a 'heads-up' to GM and Ford.
MasterCard say that gasoline consumption in the USA is now down 4% (presumably adjusted seasonally, but my report does not say). Official figures are due out later today. 4% is a huge fall. Nearly one journey in twenty has not taken place.
The US dollar is far too strong for the USA to stand. At present levels the US cannot be competitive in many export markets and we can be sure that there is huge political pressure within the US to weaken the USD. Of course, a weakening USD would also reduce the value of debt, in real terms, so has two benefits. What is not clear right now is how much control the US has over its exchange rate.
The outcome of tomorrow's Washington summit will be very interesting. I won't go as far as to suggest that you short the dollar but it might be wise to close any long positions before Friday.
Wednesday, 12 November 2008
Wednesday 12th November 2008
Just two days to go before the summit in Washington. There has been so much kite-flying and cage-rattling by world leaders it is looking nearly certain that any policy agreement will be interventionist. More liquidity, support of banks, and support of major industries.
The US automobile issue is becoming more serious. This is a huge industry (see below) and the implications of paying all these people, the service industries, retirees and hangers-on (and biz-jets) solvent to make cars that nobody wants, needs or can afford is folly on an unimaginable scale that will hurt the entire world economy, breaking international free trade agreements. It would be better to pay these people to sit at home and make sandwiches. But they want to make cars, not sandwiches. They have enough clout to make that happen, it seems.
Here's a little bit of a report from Bloomberg today.....
Nov. 12 (Bloomberg) -- House Speaker Nancy Pelosi has thrown her support behind the premise that General Motors Corp., the largest U.S. automaker, is too big to be allowed to fail.
In urging Congress to enact emergency aid for the ailing auto industry, Pelosi rejected calls to let GM collapse and sided with the company and its allies in trying to prevent a ``devastating'' domino effect that would cost millions of jobs.
``Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get,'' said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. ``The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.''
Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.
``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''
Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from a 14-year high of 6.5 percent in October, and produce a recession comparable in length to that of 1980-82.
Oil is another key issue that is about to surface. Many oil producers have now geared themselves to need an oil price of around $100 per barrel. No industry experts forecast oil ever coming down to below $60 ever again. While the USD has firmed against most other currencies, that fact is not especially important for most oil producers, who tend to buy their imports in USD.
I think what we are seeing is crazy volatile swings in currencies, commodities and stock markets. The system has become unstable. As in any engineering system, it is usually impossible to predict what an unstable system will do unless you have a working mathematical model of the system -- clearly we don't have that or we would not have 'sleepwalked' right into this situation!
There is no asset class other than gold that seems safe at this time. I see instability increasing, panic at government level and such negative thinking in the population that there is no way this is going to settle. The run-up to Christmas will be hugely significant since 2/3 of profits of many companies are earned as a direct result of Christmas.
Keep focusing on the summit on Friday. Maybe they will surprise us yet, but I have my doubts.
The US automobile issue is becoming more serious. This is a huge industry (see below) and the implications of paying all these people, the service industries, retirees and hangers-on (and biz-jets) solvent to make cars that nobody wants, needs or can afford is folly on an unimaginable scale that will hurt the entire world economy, breaking international free trade agreements. It would be better to pay these people to sit at home and make sandwiches. But they want to make cars, not sandwiches. They have enough clout to make that happen, it seems.
Here's a little bit of a report from Bloomberg today.....
Nov. 12 (Bloomberg) -- House Speaker Nancy Pelosi has thrown her support behind the premise that General Motors Corp., the largest U.S. automaker, is too big to be allowed to fail.
In urging Congress to enact emergency aid for the ailing auto industry, Pelosi rejected calls to let GM collapse and sided with the company and its allies in trying to prevent a ``devastating'' domino effect that would cost millions of jobs.
``Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get,'' said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. ``The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.''
Passage of an industry bailout plan may keep GM from running out of operating cash by year's end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year's first half.
``It's truly one of those companies that's too big to fail, and everybody understands that,'' said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. ``If it does collapse, it could make the recession deeper and longer.''
Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from a 14-year high of 6.5 percent in October, and produce a recession comparable in length to that of 1980-82.
Oil is another key issue that is about to surface. Many oil producers have now geared themselves to need an oil price of around $100 per barrel. No industry experts forecast oil ever coming down to below $60 ever again. While the USD has firmed against most other currencies, that fact is not especially important for most oil producers, who tend to buy their imports in USD.
I think what we are seeing is crazy volatile swings in currencies, commodities and stock markets. The system has become unstable. As in any engineering system, it is usually impossible to predict what an unstable system will do unless you have a working mathematical model of the system -- clearly we don't have that or we would not have 'sleepwalked' right into this situation!
There is no asset class other than gold that seems safe at this time. I see instability increasing, panic at government level and such negative thinking in the population that there is no way this is going to settle. The run-up to Christmas will be hugely significant since 2/3 of profits of many companies are earned as a direct result of Christmas.
Keep focusing on the summit on Friday. Maybe they will surprise us yet, but I have my doubts.
Tuesday, 11 November 2008
11th November 2008 Update
Shares around the world have been falling again, as I predicted. The Chinese stimulus is not likely to do much for the western world.
The two issues worth looking at today are the forthcoming economic summit in Washington, on Friday and President-Elect Obama's pressure on the Bush administration to 'save' the Auto manufacturers, Ford and GM.
The general feeling among world's economists is that we need to spend our way of of this problem. To my mind, that is rather like trying to pump water through the Panama canal to stop the Atlantic tide from going out. There always have been and always will be economic cycles and to fall back on a misinterpretation of a half-work by a half-baked early 20th economist (J M Keynes, whose theories have been discounted for over fifty years by mainstream economists) seems absurd. But that is where we are. I can predict with gloomy confidence that whatever comes out of Friday 15th will be a spend policy. If you have capital, and income from your capital, you need to consider how they might try to finance that and try to take steps to protect yourself. Inflation - which is mostly a deliberate policy, they have an inflation target! - is the usual form of state capital theft. There are other ways including the sequestration of private assets.
Saving Ford and GM is quite pointless. For several years the car makers have been almost giving away their products on a marginal cost basis to keep their plant open. Most of those cars sold were on particularly advantageous credit terms and especially in the USA anyone who wanted a new car who could conceivably have been granted credit to buy one, has already got a new car. Who are they going to build the cars for? The numbers are so wildly stacked against keeping the main car plants open I cannot see this happening even with determination from the top.
Going back to my recent posts on the banking situation. We need to remember that shares are part of the collateral (one way or another) of every bank. When the stock markets slump, so the balance sheets move into the red. It is the stock market crash that poses the greatest threat to financial stability in the world today. Banks are already on the precipice, further significant declines in the bourses could tip them over. If one of the really big banks should go down, it could take the rest of them down with it. Don't be at the end of the queue at the cashpoint if that should happen.
The two issues worth looking at today are the forthcoming economic summit in Washington, on Friday and President-Elect Obama's pressure on the Bush administration to 'save' the Auto manufacturers, Ford and GM.
The general feeling among world's economists is that we need to spend our way of of this problem. To my mind, that is rather like trying to pump water through the Panama canal to stop the Atlantic tide from going out. There always have been and always will be economic cycles and to fall back on a misinterpretation of a half-work by a half-baked early 20th economist (J M Keynes, whose theories have been discounted for over fifty years by mainstream economists) seems absurd. But that is where we are. I can predict with gloomy confidence that whatever comes out of Friday 15th will be a spend policy. If you have capital, and income from your capital, you need to consider how they might try to finance that and try to take steps to protect yourself. Inflation - which is mostly a deliberate policy, they have an inflation target! - is the usual form of state capital theft. There are other ways including the sequestration of private assets.
Saving Ford and GM is quite pointless. For several years the car makers have been almost giving away their products on a marginal cost basis to keep their plant open. Most of those cars sold were on particularly advantageous credit terms and especially in the USA anyone who wanted a new car who could conceivably have been granted credit to buy one, has already got a new car. Who are they going to build the cars for? The numbers are so wildly stacked against keeping the main car plants open I cannot see this happening even with determination from the top.
Going back to my recent posts on the banking situation. We need to remember that shares are part of the collateral (one way or another) of every bank. When the stock markets slump, so the balance sheets move into the red. It is the stock market crash that poses the greatest threat to financial stability in the world today. Banks are already on the precipice, further significant declines in the bourses could tip them over. If one of the really big banks should go down, it could take the rest of them down with it. Don't be at the end of the queue at the cashpoint if that should happen.
Monday, 10 November 2008
The Chinese Stimulus
The big news over the weekend was the $586 billion economic stimulus package to be spent on infrastructure, tax cuts and farming subsidies. I haven't anywhere seen published how the Chinese plan to pay for this. Will they spend some of their $1.9 trillion ($1900 billion) foreign reserves. There are three important issues here for the outside world:-
1. What effect will this stimulus have on commodity prices?
2. What business opportunities will be available to non-Chinese companies?
3. If this money is coming from China's USD reserves, they are presently invested, mostly in US Treasuries. Selling those is going to be very dollar-negative and the effect of the money in circulation is going to cause dollar inflation. It isn't clear to what extent.
Looking inside China, I think that we will see utter carnage in the export manufacturing sector. Factories will close, workers laid-off and decrease in spending on non-essential goods, tightening the grip. In the past, commentators (though not I), have generally agreed that the Far East, especially China, will continue to expand and that their economies will be the new 'engine' for the world economy. That is not going to happen. This has happened too early in China's emergence for them to go it alone and if anything China will be hit harder than other western economies.
Further to my previous posts, it seems that I was right that the Euro has bottomed and we are now seeing useful gains against the USD. There is little doubt that this was going to happen anyway but the Chinese package will speed it up. We could see quite a sharp bounce in EUR/USD and long EUR is probably a good call. Commodities priced in USD will also rise but the world demand for industrial commodities (metals, minerals, etc.) will fall. The price rise will be due to a devaluation in the USD - inflation. The effect of China spending its dollars would be inflationary.
I don't see that there will be much opportunity for outsiders to benefit from the Chinese stimulus. We wouldn't really expect it, either, as the plan is to stimulate the Chinese economy, not the western world's.
In summary, stocks rising on the back of the Chinese announcement seems illogical. When the penny drops, they will go back down again. Gold is making some serious gains right now. Keep that in mind as a fear indicator. We are still not out of the woods in the banking sector and a major collapse is still a possibility. Indeed the actions being taken by governments last weeks suggest a greater level of panic than at any time up to this stage and you can be sure that governments will know long before the rest of us.
The massive 1.5% cut by the Bank of England last week was very significant.
I don't enjoy posting gloomy news and views but then again please understand that I am not responsible for the present circumstances. Don't shoot the messenger.
1. What effect will this stimulus have on commodity prices?
2. What business opportunities will be available to non-Chinese companies?
3. If this money is coming from China's USD reserves, they are presently invested, mostly in US Treasuries. Selling those is going to be very dollar-negative and the effect of the money in circulation is going to cause dollar inflation. It isn't clear to what extent.
Looking inside China, I think that we will see utter carnage in the export manufacturing sector. Factories will close, workers laid-off and decrease in spending on non-essential goods, tightening the grip. In the past, commentators (though not I), have generally agreed that the Far East, especially China, will continue to expand and that their economies will be the new 'engine' for the world economy. That is not going to happen. This has happened too early in China's emergence for them to go it alone and if anything China will be hit harder than other western economies.
Further to my previous posts, it seems that I was right that the Euro has bottomed and we are now seeing useful gains against the USD. There is little doubt that this was going to happen anyway but the Chinese package will speed it up. We could see quite a sharp bounce in EUR/USD and long EUR is probably a good call. Commodities priced in USD will also rise but the world demand for industrial commodities (metals, minerals, etc.) will fall. The price rise will be due to a devaluation in the USD - inflation. The effect of China spending its dollars would be inflationary.
I don't see that there will be much opportunity for outsiders to benefit from the Chinese stimulus. We wouldn't really expect it, either, as the plan is to stimulate the Chinese economy, not the western world's.
In summary, stocks rising on the back of the Chinese announcement seems illogical. When the penny drops, they will go back down again. Gold is making some serious gains right now. Keep that in mind as a fear indicator. We are still not out of the woods in the banking sector and a major collapse is still a possibility. Indeed the actions being taken by governments last weeks suggest a greater level of panic than at any time up to this stage and you can be sure that governments will know long before the rest of us.
The massive 1.5% cut by the Bank of England last week was very significant.
I don't enjoy posting gloomy news and views but then again please understand that I am not responsible for the present circumstances. Don't shoot the messenger.
Saturday, 8 November 2008
Saturday 8th November
Sorry for the temporary disruption to service; I have a serious computer virus which the anti-virus chaps have yet to find. This has held back my research -- if I am looking through a keyhole at the world, I can hardly synchronise the compass!
The essential issues today are still the bourses weakening the balance sheets of the banks. We are still on the very precipice of a collapse of the banking system which is why LIBOR remains so high despite unprecedented fiscal stimulation and political pressure (stronger pressure than ever, given that many banks are not part-nationalised).
The western economy used to revolve around the automotive industry - from the early post WW2 period to the early 1990s. After that, financial services and domestic real estate started to edge up and become more important. It is the bubble in 'house prices' and the leveraged derivatives in the financial services market that have brought us to this particular position. Now we have serious warnings for GM and Ford, both of whom are burning cash at such a rate that they will be out of business by Christmas.
It is not just the GMs and Fords, of course. More people are indirectly involved in the automotive industry than realise it. Consider three main pillars - Cars, Homes and Financial Services. Two of those pillars have collapsed and the third has been diagnosed as being in imminent danger of collapse.
This is not a time to trust the banks. LIBOR is encouragingly lower but it has been manipulated there. While none of us want to see a run on the banks, on the quiet, those of us with funds in banks might take steps to protect our cash. At this time inflation is falling but it will surely rise rapidly at some time in the future. But for the time being the risk/reward ratio is clearly in favour of cash under the bed.
The essential issues today are still the bourses weakening the balance sheets of the banks. We are still on the very precipice of a collapse of the banking system which is why LIBOR remains so high despite unprecedented fiscal stimulation and political pressure (stronger pressure than ever, given that many banks are not part-nationalised).
The western economy used to revolve around the automotive industry - from the early post WW2 period to the early 1990s. After that, financial services and domestic real estate started to edge up and become more important. It is the bubble in 'house prices' and the leveraged derivatives in the financial services market that have brought us to this particular position. Now we have serious warnings for GM and Ford, both of whom are burning cash at such a rate that they will be out of business by Christmas.
It is not just the GMs and Fords, of course. More people are indirectly involved in the automotive industry than realise it. Consider three main pillars - Cars, Homes and Financial Services. Two of those pillars have collapsed and the third has been diagnosed as being in imminent danger of collapse.
This is not a time to trust the banks. LIBOR is encouragingly lower but it has been manipulated there. While none of us want to see a run on the banks, on the quiet, those of us with funds in banks might take steps to protect our cash. At this time inflation is falling but it will surely rise rapidly at some time in the future. But for the time being the risk/reward ratio is clearly in favour of cash under the bed.
Monday, 3 November 2008
Cash injections into the markets - What's it all about?
The Press seems to be getting confused about all the money that's being pumped into the worlds' financial system. Money is going into two distinct areas --
A) The Banks - to try to prevent a meltdown in the banking system
B) Economies - via tax cuts, public spending projects, etc., in the hope of stimulating economies to reduce the severity of the recession.
The banking crisis is less acute at the time of writing, with the interbank lending rates a bit lower than it had been. We are by no means free of risk, however. Not only is there potentially a lot more bad news to come (nobody knows for sure) but as the recession bites this will put strain on the banks. The recession has barely started biting - only a very small proportion of ordinary people have yet felt any significant effect on their lifestyles.
Pumping cash into the banks to prevent their collapse was essential. The problem is the way in which it was done. Pumping money into economies to lessen the effects of recession is a very old and largely discounted technique originally put forward by Keynes in the 1930s. The problem is that these vast sums of money - hundreds of billions of dollars - are being dumped into schemes that will make people spend it quickly with no lasting benefit to individuals, society or the infrastructure. In the UK there is talk about massive road and military projects but those are just the headlines - the bulk of the money is planned to be given to the poorest who will spend it quickest - on anything! The Government doesn't care, as long as it is spent quickly. History shows that this is seldom very effective and it destroys wealth.
The question facing us is "How will the markets react?" Markets are fickle and especially at this time they are so volatile they don't factor in genuine trends - to this extent free markets are serving us very badly right now. The serious, long-term, investors are not going to impressed at all this window dressing. Short term speculators are going to respond positively to hundreds of billions being dumped into the economy to pump it up.
I see the decline on the world's bourses continuing - the decline has a long way to go - for many months but the unprecedented cash transfusions will exacerbate the usual bounces on the way down. This is a day trader's dream though volatility will be terrifying and margin requirements could be high.
The dollar is going to turn soon - it has gone far too far, too fast. When it does, it could move down at astonishing speed. We are in completely uncharted territory, beware!
A) The Banks - to try to prevent a meltdown in the banking system
B) Economies - via tax cuts, public spending projects, etc., in the hope of stimulating economies to reduce the severity of the recession.
The banking crisis is less acute at the time of writing, with the interbank lending rates a bit lower than it had been. We are by no means free of risk, however. Not only is there potentially a lot more bad news to come (nobody knows for sure) but as the recession bites this will put strain on the banks. The recession has barely started biting - only a very small proportion of ordinary people have yet felt any significant effect on their lifestyles.
Pumping cash into the banks to prevent their collapse was essential. The problem is the way in which it was done. Pumping money into economies to lessen the effects of recession is a very old and largely discounted technique originally put forward by Keynes in the 1930s. The problem is that these vast sums of money - hundreds of billions of dollars - are being dumped into schemes that will make people spend it quickly with no lasting benefit to individuals, society or the infrastructure. In the UK there is talk about massive road and military projects but those are just the headlines - the bulk of the money is planned to be given to the poorest who will spend it quickest - on anything! The Government doesn't care, as long as it is spent quickly. History shows that this is seldom very effective and it destroys wealth.
The question facing us is "How will the markets react?" Markets are fickle and especially at this time they are so volatile they don't factor in genuine trends - to this extent free markets are serving us very badly right now. The serious, long-term, investors are not going to impressed at all this window dressing. Short term speculators are going to respond positively to hundreds of billions being dumped into the economy to pump it up.
I see the decline on the world's bourses continuing - the decline has a long way to go - for many months but the unprecedented cash transfusions will exacerbate the usual bounces on the way down. This is a day trader's dream though volatility will be terrifying and margin requirements could be high.
The dollar is going to turn soon - it has gone far too far, too fast. When it does, it could move down at astonishing speed. We are in completely uncharted territory, beware!
Sunday, 2 November 2008
Peasant's Revolt in Kuwait
In Kuwait, the peasants are revolting.
Nov. 2 (Bloomberg) -- Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.
``Every day the market is crashing,'' said Saleh, a 42- year-old trader, staring dumbfounded last Tuesday as company names scrolled across the Dubai Stock Exchange's outdoor ticker in red.
It's hard to get terribly worked up about the 'plight' of the oil-rich states when we read of all the problems closer to home - some of which can be directly attributed to the high price of oil over the summer. BUT, look at the other news this weekend. Barclays has decided that it doesn't want anything to do with the British Government bank bailout as it considers the terms too onerous (the limits on the Directors' remuneration, perhaps?, Please tell us Barclays, and leave a comment here). The other news is that Gordon "SleazeMeister" Brown has been in the Gulf this weekend with a begging bowl to scrounge money from the Gulf's Sovereign Wealth Funds, to support British industry.
What we are witnessing this week is the Gulf equivalent of the Peasant's Revolt and the influx of the wealthy G7 nations all with begging bowls at the ready....while oil prices have fallen from $140 to the low $60s! If this doesn't sound like desperation and futility, I don't know what does.
The markets will not be too impressed on Monday, fasten your seat belts.
Nov. 2 (Bloomberg) -- Abdullah Hajeri led a march on the Emir's palace in Kuwait last week, demanding the oil-rich nation's ruler stop stocks from plunging. Adnan Mohammed Saleh, down the Persian Gulf coast in Dubai, said he wants more government protection from the global financial crisis.
``Every day the market is crashing,'' said Saleh, a 42- year-old trader, staring dumbfounded last Tuesday as company names scrolled across the Dubai Stock Exchange's outdoor ticker in red.
It's hard to get terribly worked up about the 'plight' of the oil-rich states when we read of all the problems closer to home - some of which can be directly attributed to the high price of oil over the summer. BUT, look at the other news this weekend. Barclays has decided that it doesn't want anything to do with the British Government bank bailout as it considers the terms too onerous (the limits on the Directors' remuneration, perhaps?, Please tell us Barclays, and leave a comment here). The other news is that Gordon "SleazeMeister" Brown has been in the Gulf this weekend with a begging bowl to scrounge money from the Gulf's Sovereign Wealth Funds, to support British industry.
What we are witnessing this week is the Gulf equivalent of the Peasant's Revolt and the influx of the wealthy G7 nations all with begging bowls at the ready....while oil prices have fallen from $140 to the low $60s! If this doesn't sound like desperation and futility, I don't know what does.
The markets will not be too impressed on Monday, fasten your seat belts.
Saturday, 1 November 2008
Saturday 1st November
An overhaul of the world's financial system is a possible outcome of the Global Economic Summit to be held in Washington between 20 global leaders, on November 14th. Sarkozy is pushing hard for major changes and he has much influence in Euroland. The Euro is, today, a challenger to the US Dollar as a future reserve currency. The point of this conference (as far as we have been told) is to find a new mechanism for exchange rate 'fixing' that allows rates to vary over longer time frames while providing a stable exchange rate over shorter times, to allow businesses to plan. Volatile exchange rates are difficult for businesses who either carry the risks (in which case they need to trade on higher margins), buy forward (expensive and they could lose if business levels don't meet the forecasts) or hedge (same problems as buying forward).
The whole point of the capitalist system is that success is rewarded and bad companies, products and services either improve or go bust. The same is true of currencies; if you postulated an environment in which a country could print as many banknotes as it wanted without affecting the exchange rate, that's exactly what governments would do! Nobody is going to accept crass stupidity like that. At the present time, the US Dollar is the world's reserve currency. Presently, the US Government is over-borrowing and over-issuing US Dollars as cash and new debt. Under normal circumstances, the markets would devalue the dollar but US Treasuries have become a safe haven - a "Flight to Safety" - as the last remaining refuge for cash, in the face of a possible meltdown of the financial markets. I am very doubtful whether the US Dollar is any safer or more immune than, say, the Euro right now. We have seen a huge distortion in capital movement from equities and commodities into government bonds and massive swings in exchange rates. This in itself is adding to the stress on the financial system.
Given that an artificial peg between currencies makes no sense (unless you move from being a capitalist free-market system to a command economy) what might this conference come up with?
I suggest that the most logical choice is a return to a Gold Standard in some form. The holding of gold reserves by governments (and the IMF) is still common, and the mechanisms are all still in place.
I don't think that there is any sound alternative to a return to a Gold Standard in some form. For the private investor considering buying gold the question is whether this would result in a rise in the price of gold, or a reduction. My best guess is that governments will manipulate the price of gold by foul means if not fair to a price at which the gold producers can still produce at a profit. The price of gold dictates which mines can produce at a profit - this is a political decision insofar as each government will require the price to support gold mining in its own territory. Taking this into account and considering the huge extra demand for new gold as the world returns to a Gold Standard, suggests to me that the price of gold would rise to around $1250 in the short term, in constant money, i.e. today's purchasing power of the US Dollar. With today's price of gold around $725, there looks to be a good upside opportunity for gold for the private investor.
The whole point of the capitalist system is that success is rewarded and bad companies, products and services either improve or go bust. The same is true of currencies; if you postulated an environment in which a country could print as many banknotes as it wanted without affecting the exchange rate, that's exactly what governments would do! Nobody is going to accept crass stupidity like that. At the present time, the US Dollar is the world's reserve currency. Presently, the US Government is over-borrowing and over-issuing US Dollars as cash and new debt. Under normal circumstances, the markets would devalue the dollar but US Treasuries have become a safe haven - a "Flight to Safety" - as the last remaining refuge for cash, in the face of a possible meltdown of the financial markets. I am very doubtful whether the US Dollar is any safer or more immune than, say, the Euro right now. We have seen a huge distortion in capital movement from equities and commodities into government bonds and massive swings in exchange rates. This in itself is adding to the stress on the financial system.
Given that an artificial peg between currencies makes no sense (unless you move from being a capitalist free-market system to a command economy) what might this conference come up with?
I suggest that the most logical choice is a return to a Gold Standard in some form. The holding of gold reserves by governments (and the IMF) is still common, and the mechanisms are all still in place.
I don't think that there is any sound alternative to a return to a Gold Standard in some form. For the private investor considering buying gold the question is whether this would result in a rise in the price of gold, or a reduction. My best guess is that governments will manipulate the price of gold by foul means if not fair to a price at which the gold producers can still produce at a profit. The price of gold dictates which mines can produce at a profit - this is a political decision insofar as each government will require the price to support gold mining in its own territory. Taking this into account and considering the huge extra demand for new gold as the world returns to a Gold Standard, suggests to me that the price of gold would rise to around $1250 in the short term, in constant money, i.e. today's purchasing power of the US Dollar. With today's price of gold around $725, there looks to be a good upside opportunity for gold for the private investor.
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