David's Compass

Shall we continue with David's Compass?

2010-08-17T19:19:00.002+02:00

I have lots of things to share, shall I continue?

What Next?

2009-08-08T22:44:00.002+02:00

Sorry for the pause in blogging, friends. I have been very busy getting the yacht ready to sail for Spain and have had poor Internet connection since around May.

One would think, from the media, that the problems are behind us but I urge you to look at the fundamentals. Jobs are being lost. Tax revenue is falling. The Government is printing money. Government debt is increasing. The economy is shrinking. And on Friday the Bank of England stated categorically that the problems are not behind us and continued with another £50 billion print run on QE.

My advice is keep your belt tightened until you can see a real recovery.

What about Gold?

2009-04-24T09:54:00.000+02:00

The question facing the long-term investor in gold is "when are the supplier nations (the manufacturing and commodity nations) going to demand payment in gold, or gold-backed currency"? The answer lies in the nature of the relationship that exists between supplier and user, which is symbiotic and mutually beneficial. Neither can prosper without the other; what is good for one is good for the other....up to a point. This holds true only while both parties are benefiting but as soon as either party ceases to benefit, the relationship must end.

At this time, the US dollar is holding up strongly; given dollars, you can buy anything you want. As a store of value, it is -- today -- perfectly good. So the supplier nations are still happy to be paid in dollars (or any other currency that can be exchanged for dollars on the open market). However, there is considerable concern that the dollar will lose its value by combination of deliberate actions by the Fed and factors largely outside the control of the USG (principally high levels of debt and insufficient assets).

The Euro has been exposed as a currency in at least as bad a situation if not much worse than the dollar. The Swissie is too small and needs to be linked to the EUR for trading reasons. This only leaves gold for the time being - in due course another currency might emerge and take over the baton from the dollar but that is some way off.

At this time there is no real alternative to gold as an alternative means of payment.

Presently, the value of the dollar is being supported entirely by fashion and confidence. If people lose confidence in the dollar, it will become unfashionable to hold it and its value will fall -- maybe very quickly indeed. Timescales? That's the $64,000 question but when it happens - if it happens - it will most likely happen very quickly over a period of days or weeks rather than weeks or months.

Has G20 altered the medium to long term outlook?

2009-04-03T22:59:00.002+02:00

The main things that were agreed at the G20 summit were:-

1. The world's financial system is in a pickle
2. There will be a new 'world order' passing more influence from the US and developed countries to eastern countries
3. More central bank support is required
4. The IMF will have more money to lend probably by selling part of its gold
5. China is not happy about US QE as that is likely to devalue the dollar, and China has massive dollar holdings in treasuries

Meanwhile, the unemployment rate in the US rises to 8.5% with forecasts of 10% or more, to follow. Obama says that bankruptcy is the best way out for GM. US Treasuries fall. British Airways traffic fell 7.4% last month. UK house prices fell 1.9% in March.

I don't really think that this week has done anything for the current crisis. The publicity and support from central banks probably helped to push the stock markets a little bit higher but they show signs of wanting to fall back again. I'm afraid that the whole thing was a rather pointless waste of everyone's time -- principally because everyone had their own agenda and had already decided on the outcome.

Public Sector workers will always be paid well

2009-03-26T11:32:00.002+01:00

It is being said that the Brown government is maintaining public sector pay rises because it is frightened of the unions. That isn't really the point. In times of unrest and dissatisfaction any government, particularly one that has poor support and popularity, has to shore-up its power base by looking after Government workers. That's why public sector workers are getting their indefensible and deeply unpopular pay rises while the private sector continues to cut pay and shed workers.

This will continue to cause real resentment in society, particularly as more and more private sector workers and pensioners suffer further cuts. This Government policy, while perfectly traditional, is likely to cause the most resentment in the usually laid-back middle classes.

G20 -- Obama and Brown marginalised

2009-03-26T07:25:00.003+01:00

Obama and Brown are being increasingly marginalised by the rest of the world in pushing for further fiscal easing. The Chinese premier, the EU and King, Brown's own head of the UK central bank are all against further stimulus. Last night Brown seemed to be pulling back. This is from this morning's FT...

He [Brown] appeared to respond to pressure from Alistair Darling, his chancellor, and Mervyn King, Bank of England governor, in conceding on Wednesday there was little room for Britain to announce a second wave of tax cuts or spending increases.

Speaking in New York, he sought to shift the political focus from a fiscal stimulus to other mechanisms intended to kickstart the economy, amid forecasts that the UK deficit could rise to 11 per cent or 12 per cent of gross domestic product next year.

Asked at a Wall Street event about Mr King’s warning against a big new fiscal stimulus, Mr Brown said: “If you put that question to Mervyn King, he will say ... that we've got to be ready to take the action that is necessary to restore [economic] growth.”

Beware, this isn't quite the U turn you thought. This does NOT rule out further Quantitative Easing, in fact it almost rules it in. What happened is that yesterday's gilt auction (these are new 40 year Government bonds being auctioned off) failed to find enough buyers. This is very unusual and is a signal from the world's financial community that British debt isn't as safe as it could be. Since the only way that Brown can finance his proposed tax cuts and public spending rises is by borrowing, that's why he appeared to be pulling back last night but be clear, this does not rule out QE. QE is the most dangerous of the stimulus methods being used and has the risk of causing inflation. There have been many press reports in recent days that strongly suggest we are in an inflationary phase already with consumer prices rising, auto manufacturers putting up their prices significantly, and distributors announcing that once present stocks have been sold, prices will rise due to a fall in the value of the Pound.

What worries the world right now is that the US (and the UK) will inflate (devalue) away their debt. But maybe that's the only option open to them? That's why there will be considerable interest in some new reserve currency. It has to happen, and happen fairly soon. I think that it will probably be based on some kind of gold standard because there is no other way that isn't too contentious -- at least, not until the Dollar crisis plays out and the world's next obvious choice as a reserve currency emerges (the Yuan?).

I leave you with this thought. Large heavily-populated towns and cities in the USA would become literally uninhabitable without air conditioning and cars to carry people around. Imagine the consequences. They need oil in very large quantities. If Obama is going to inflate away US debt by devaluing the Dollar then clearly imported oil is going to be very much more expensive - by a factor of five times or more, taking it to truly unaffordable levels, for air conditioning. It is unthinkable that the administration hasn't already figured this out, so what are their plans?

China and US Treasuries - Update

2009-03-23T10:30:00.002+01:00

The present position is that the US and the UK have started a policy of printing money (QE). Both governments claim that this is to counter deflationary pressures in their economies. I do not believe that there is any monetary deflation -- while prices are falling for a few things, overall, there is underlying inflation in the economies. It seems likely that the US and the UK are intent on inflating away their debt. If that is the plan, then the likely target is an 80% devaluation of the US Dollar and British Pound. The GBP/USD pair could remain fairly constant, of course. It does not seem likely that the EU can retain a strong Euro in this scenario and that will have to be devalued, also.

We are already seeing the USD decline on fears that this is the case (and gold has been rising on the same fears). Today, the Chinese have stated that China will continue to buy Treasuries despite the warnings given by the Premier Wen Jiaboa a fortnight ago. I presume that this is an attempt to stabilise the value of the USD. One assumes that there must be a tremendous dialogue taking place between Chinese and US officials constantly and the comments made public are simply the tip of a huge iceberg of discontent.

I don't see how this is going to change US or UK fiscal policy; the policy of QE, i.e. printing money to inflate away the debt, has not been halted. We would have been told, for certain, as nobody is very happy with that policy in any case.

For now, it is all happening behind the scenes but the really important issue facing us now is inflation. The recession is happening and it will get much deeper. House prices will continue to plummet. Firms will continue to go bankrupt, workers laid off (the motor manufacturers are in terrible trouble as are most banks), and tax revenues will continue to fall. This will make it impossible for either the US or UK governments to manage without 'printing' money.

I am only posting when I have something that either confirms or changes the overall outlook. I don't want this blog to become a micro-economic commentary -- there are plenty of those and many of them are excellent (and a few cranks, it must be said).

China and US Treasuries

2009-03-13T09:53:00.002+01:00

China has warned the USA to maintain the value of the USD 'or else'.

It's a warning shot across the bows. China is worried that too much QE will devalue the currency, as a result of monetary inflation. The USA is in a horrible pickle right now; China is in a position to bring the USA to her knees, if she wanted to. Would the Chinese want to?

Do the Chinese prefer to work in factories, often no better than sweat-shops, or rake-over piles of European refuse for recycling, to keep the US and EU citizens in the comfort to which they have become accustomed? One hopes that they realise their station in life and being merely Chinese they should be glad of the opportunity to serve their betters. Some people say that the Chinese are getting fed up with it and would like to spend some of their own hard-earned that is presently being used to prop-up western economies. If they tried to do that there would be a run on treasuries that would make the Dutch Tulip Bubble and Dot Com Bubble look like diurnal trading swings.

Greenspan likes to define bubbles as 'irrational exuberance'. If lending someone hundreds of times more than they could repay in several generations isn't 'irrational', I don't know what is! The flood of funds into Treasuries from other asset classes can fairly be described as 'irrational exuberance' so yes, we have a Treasuries bubble. The odd thing about bubbles is that most of us don't perceive them to be bubbles until they have burst....there is always some rationale such as "there's a shortage of land...", "people have to have somewhere to live so house prices will always rise in the long term and at most will only fall back a few percent.....". The thing about houses is that at least you own them (unless they are mortgaged). People just refuse to sell until they have to, and that makes the decline slower. Treasuries, on the other hand, are simply an IOU. If 'I' looks as though he might default on paying 'U' then U want out, and out fast. Or if 'I' decides to repay 'U' in a currency that has devalued by x%, again U want out.

I don't believe that the Chinese want this. What the Chinese (and almost everyone else) want and are working towards, is a return to 2006/7. They want to turn the clock back. Quantitative Easing is about resuming lending, trying to turn the clock back. In my opinion that is unlikely to happen.

I think that we do have a Treasuries bubble and that it is about to burst. Cash or gold are good places for the proceeds right now unless you have the risk-appetite for very dodgy debt?

19th February 2009

2009-02-19T18:33:00.002+01:00

Updates to this blog have been sparse recently because while there has been a lot of activity, there has been very little real news.

I will only post when I have a message that suggest some change in direction or some material confirmation that things are moving as forecast.

The world's economy has been going in much the same direction. Governments are now printing money in wholesale quantities.

Here in the UK we are entering a bizarre period of 'spin'. I'm not sure that it is 'spin' in the accepted sense. It is blatant lying. So blatant one wonders how anyone will fall for it. We have the Bank of England telling us that it is acting to prevent deflation, while reporting increasing inflation! Press surveys suggest that retail price inflation is higher than it has been for decades and anecdotal evidence confirms that everyone sees rising prices and falling income as the biggest problem today.

While crude oil has fallen from $140 per barrel last summer to $34 today, domestic fuel and road fuel prices are still at very high levels, and are starting to edge back UP again, while the oil spot market is trending down. Who is creaming off this profit? It is hardly likely that Government would sit back and allow this to happen unless it was in Goverment's interests. Government is grossly underfunded as a result of falling income tax, capital gains tax, property taxes, fall in VAT due to falling consumer spending and massive increases in expenditure on bailing out lame duck banks, and other industries, as well as massive increases in social security and Jobseekers' allowances.

I suggest that the only plausible explanation is that Government has colluded with the oil industry to share the 'bonanza' between them. No other explanation fits the facts.

The paste below has come from the Bank of England website....

http://www.bankofengland.co.uk/publications/inflationreport/ir09feb.pdf

INFLATION REPORT PRESS CONFERENCE
Wednesday 11 February 2009
Opening Remarks by the Governor
The UK economy is in a deep recession. Monetary, fiscal and financial policy have all
responded vigorously to that prospect. But the length and depth of the recession will
depend to a significant extent on developments in the rest of the world, where a severe
economic downturn has taken hold. Growth in the advanced and emerging market
economies fell sharply towards the end of last year. And world trade is contracting rapidly.
As in the UK, the scale and synchronised nature of the downturn around the world has
been driven by two factors – a further tightening of credit conditions following failures in
the international banking system, which means that lending, especially to companies, is
still slowing, and a collapse of confidence, or “animal spirits” in Keynes’ description, that
is leading to falls in spending and production. Restoring both lending and confidence
will not be easy and will take time.
In many countries, governments have now taken significant measures to improve
conditions in financial markets and support lending. Three weeks ago, the UK
Government announced a five-point plan to restore the flow of lending. One of the five
points is the creation of an asset purchase facility operated by the Bank of England and
aimed at increasing the availability of corporate credit. The Bank of England will open
its facility to make purchases later this week. In due course, the plan should help to
alleviate credit conditions for corporate and personal borrowers. But even when all of the
measures are in place, it will take time for banking and credit market conditions to
improve and longer still before they begin to have a noticeable impact on activity.
To cushion the downturn in spending, policymakers around the world have cut interest
rates and loosened fiscal policy. At home, the MPC has cut Bank Rate from 5% to just
1% in the space of five months. To some degree, the effect of those reductions has been
blunted by the problems in the banking sector. But monetary policy is by no means
2
ineffective and, when combined with the sharp fall in sterling of more than a quarter
since the summer of 2007, the fall back in commodity prices, and the easing of fiscal
policy, will provide a significant boost to demand.
The Committee’s latest projection for GDP growth is shown in Chart 1 (GREEN
CHART) on page 7 of today’s Report. The projection is based on the assumption that
Bank Rate moves in line with market expectations, which when the Report was finalised
were for Bank Rate to fall to around ¾% in the middle of this year, before rising back to
around 3% by the end of the forecast period. The central projection is for output to
decline in the first half of this year, so that four-quarter growth falls further in the near
term. It is markedly lower than the projection in November, as a deteriorating labour
market and increased uncertainty weigh on consumption, companies run down their
stocks and scale back investment spending, and the weakness in world demand restrains
export growth. Further ahead, output growth increasingly responds to the substantial
policy stimulus, an improvement in the availability of credit, and a reduction in the trade
deficit as expenditure switches towards home-produced output.
At present, CPI inflation remains well above the 2% target. The Committee’s latest
projection for future inflation is shown in Chart 2 (RED CHART) on page 8 of the
Report, again on the assumption that Bank Rate follows the path implied by market
yields. The near-term path of inflation is uneven, reflecting changes in energy prices and
the temporary cut in VAT. But in the medium term, inflation falls well below the 2%
target, as a substantial margin of spare capacity more than outweighs the waning impact
on import and consumer prices from the lower level of sterling.
The prospects for economic growth and inflation remain unusually uncertain, not least
because of the extraordinary events of the past few months. The Committee judges that
the balance of risks to the path for GDP is very much to the downside, reflecting in large
part uncertainty about when lending and confidence will recover. But the risks to
inflation are more broadly balanced, reflecting the possibility that the sharp depreciation
of sterling may push up on inflation by more than the Committee expects.
3
At its February meeting the Committee judged that an immediate reduction in Bank Rate
of 0.5 percentage points to 1% was warranted. Given its remit to keep inflation on track
to meet the 2% target in the medium term, the projections published by the Committee
today imply that further easing in monetary policy may well be required. That is likely to
include actions aimed at increasing the supply of money in order to stimulate nominal
spending. So let me assure you that, with the full range of instruments at its disposal, the
Monetary Policy Committee can and will take action to return inflation to the target and
so ensure that economic growth will again match its potential.

So, we will "take action to return inflation to the target and so ensure that economic growth will again match its potential?"

Welcome to part of reality. They try to persuade you that price rises = economic growth. Actually, price rises = theft. Theft from those who hold cash of any kind. Inflation robs the saver and rewards the debtor. The UK is a nation of debtors and hyper-inflation is the tool that they are using to write off those debts.

So, maybe you are not 'wealthy' in the accepted sense? Why should you care?

If you have a pension fund of any kind, an endowment policy on your mortgage or any 'insurance' policy that you expect to mature then you should assume that it will be valueless when you expect to collect.

This will happen the way policy is going today. Those who have invested and saved are going to lose everything. The only hope is for people to make their views clear to Government and stand up for themselves. Today, this hard-working, honest, backbone of society, is standing in a field waiting to be shorn.

Update

2009-02-05T11:10:00.002+01:00

There are some key issues surfacing this week:-

Inflationary (i.e. price rise) indications are increasing
The Rouble is in terrible trouble -- security of energy and 'detente'
Bank 'earnings' are rising -- this is public money being used to bolster the banks' balance sheets
Japan has declared a major problem with industrial sales
Obama's holiday has ended. Rather earlier than the usual 100 days.

The world's central banks are now using Quantitative Easing (=printing money) and reducing interest rates to try to reverse the trend. Meanwhile the trend line continues to take a sharper fall.

I will try to post again this week with some analysis and opinion but meanwhile keep an eye on these issues.

Update

2009-01-28T22:22:00.002+01:00

While governments continue to say that we are in an unprecedented situation, their solution is "stimulus".

Stimulus means borrowing sums or money that nobody on the planet can even begin to grasp. Nobody has ever spend such sums before. It's like the suburban family suddenly deciding to stimulate their lives by going out on a $5,000,000 spending spree. What are they going to spend the money on? And why? Leave aside who is going to pay it back.

You can be sure that this money will not pass seamlessly through the hands of the fat cats.

Just as you can be sure that foreign aid does not usually reach the poor.

History will show that this exercise will enrich the least worthy while doing nothing for the ordinary people, or the nations taking part in it. Use whatever influence you have to find out to whom this money is going and demand accountability.

Sadly, I fear that it is a lost cause. Forget the rhetoric today from the Fed about deflation being a threat. They have to say that to justify continued 'stimulus' - money being borrowed by the public to give to those who are already very rich.

If you haven't already done so, get out of bonds, Treasuries, stocks and shares and into cash. Then immediately invest in physical gold.

Gaza, Russia, and Bank Bailouts

2009-01-18T09:23:00.002+01:00

Israel's unilateral ceasefire last night was an excellent development marred by reports that the Palestinians are still firing missiles into Israel. From an outsider's point of view, tragic though this conflict is, it is turning out to be of no great international importance. Clearly the Arab world has no stomach for a fight on this issue at this time. That is truly excellent news; a great relief.

Meanwhile with oil at the mid $30s the oil producers are in deep poo. While Saudi, Iran and other Middle Eastern fields can produce profitably at well below this price, the high oil prices of last year was a bonanza that most of them have already spent. Few offshore fields can pump profitably at these levels and the Russians are very badly hit. There will be a battle and those with the cheapest production costs will win. That competition will hopefully keep oil prices down for the time being and this will help world economies.

The problem with under-capitalised banks is surfacing again. in the UK they are talking about a £200 billion bailout. Be aware that the bailout is not just to provide money, it is to provide solvency. Banks' collateral bases are decreasing in value as debts go bad and shares fall. Income will be falling as the economy continues to plunge. It is a self-tightening screw since the inability of the banks to lend is harming the very economy that the banks need to be growing.

Governments have got to realise that you cannot push on string. It is one thing to make funds available for potential borrowers and another thing to make them borrow it. No prudent company, large, small or even self-employed, is going to borrow if by doing so they dig themselves deeper into the hole. Companies have realised that this isn't a 'blip' or a short-term pullback, this is the start of a world depression the like of which has not been seen since the 1930s. The scale of this depression is likely to be far larger than the '30s, affecting more people and more industries. The danger of loss of social cohesion and civil unrest is high and the consequences frightening particularly for the rather genteel, street-dumb folk who inhabit most of Europe and the USA.

Monday 12th January 2008

2009-01-12T12:54:00.002+01:00

While Gaza remains the principal issue internationally, a significant fall in the price of oil today suggests that the market is not expecting Gaza to result in a wider conflict. The oil market is very close to ME affairs and while market prices are not generally a good barometer of international tension (they tend to be panicky, over-reactive and based on a short-term perspective) the oil market is different.

So cautious optimism on Gaza -- at least from the viewpoint of the west. I don't have a clue how the poor folk involved on the various sides are going to resolve their differences.

So we are back to much of the same news. Progressively gloomy reports from companies. Consumers spending less. Banks lending less. House prices and sales volumes falling. Industrial output falling. Stock markets falling. Unemployment rising. In such a scenario, with the UK and, later perhaps, the EU, starting their own versions of Quantitative Easing (printing money), we can predict with near certainty government revenue shortfalls on an unprecedented scale.

In you private and business lives, expect taxes to rise and -- most importantly -- existing taxes to be assessed and collected with an enthusiasm and rigour that you have never seen before. This might be the time to consider a tax accountant even if you haven't had one before.

Meanwhile, stock markets are likely to continue their decline, as will interest rates and currencies will continue their 'race to the bottom'.

Never before has gold looked like such an excellent investment. At the time of writing, spot is at $845. I expect it to continue its rise in the very near future.

Gaza

2009-01-04T19:06:00.002+01:00

The situation in Gaza continues to dominate. The position is that while almost everyone is sympathetic to the Israeli need to stop Hamas from lobbing missiles into her country, nobody wants Israel to rock the boat by doing anything about it.

We are starting to see serious polarisation around the world and countries will align with whom they wish to align. East vs West.

Everything else, for the time being, is noise. A Middle East war would be the most calamitous event possible. Oil supplies severed, and spread of hostilities from the ME to Asia and Eastern Europe.

Oil and gold should gain. It should be GBP and CHF positive and possibly quite good for military stocks in the USA.

Gaza, Rouble and Russian Gas

2009-01-02T23:03:00.002+01:00

The key issues to watch are Gaza, the Rouble and Russian gas supplies. For the next few days everthing else is just noise. Make no key financial decisions until these issues become clearer.

Gaza

2008-12-31T20:51:00.002+01:00

The fact that everyone is pleading with both sides to stop the hostilities suggests that this is more serious than usual. Keep watching very closely. Oil could go either way. So could gold, especially paper gold. Physical gold is a pretty safe investment at today's prices ($880) -- oil isn't.

A very Happy New Year to all my friends here. Thank you for visiting my Compass.

Make your New Year Resolution be to levitate yourself above events and try to look at them from above -- as if you were a ruler, a god or even God Himself. If people seem to be talking nonsense, they ARE talking nonsense. In this world, if someone does something for you they expect quid pro quo.

Reading recommendations:-- Alan Greenspan's book

29th December Update

2008-12-30T00:50:00.002+01:00

A very brief update between Christmas and New Year (I have been off with pneumonia and a bit out of it all, unfortunately).

Watch the Treasury bubble unwind, and the USD fall. Will be gold positive in USD. Watch oil rise on technicals + ME situation. Watch EUR reverse soon.

EUR is grossly overvalued. Ridiculous. Impossible for PIGS (or frogs or krauts come to that). Fundamentals and technicals will see EUR fall sharply - sell.

Gold probably set for its assault past $900 but still very political and volatile. Not good for leveraged trading.

At home -- UK and US -- the big issues are the High Street and consequential job losses, plus the car makers. Retail prices still set to decline for many weeks to come showing apparent 'faux' deflation. This is not deflation but price cutting on stock liquidation. Very different.

Will comment again soon, sorry for the brief brief. Happy New Year!

2008-12-21T19:35:00.002+01:00

Obama also said he wants to enact measures designed to protect workers and families from future recessions.

By this Obama apparently is talking about measures to bail out companies so the workers (and their families) are 'protected'. The measures he is outlining involve subsidising inefficient and insolvent industries from the public purse. That is the communist method -- a command economy, not a free market economy (don't bring capitalism vs communism into this discussion at this stage, we are only talking about investment by government into private industry).

I suggest that the best way to protect workers (and their families, etc.) is to:-

a) Provide a stable financial and economic climate for business.
b) Ensure that workers make adequate provision from their regular income to protect themselves from the consequences of leaner times. i.e. Saving.
c) Provide a regulatory environment in which fraudsters will be detected early. Today's problem is that a sizeable part of the world's financial system was trading fraudulently. I knew that. Why didn't the experts?
d) Put into place satisfactory safety-nets to protect those who cannot afford the basics of food, water, shelter, clothing, education for their children and basic health care.
e) Declare that the USA will not borrow money other than to defend herself and provide the basic care outlined in a) through d) above.

Government borrowing to support wonky industries so they can continue to make products that nobody wants to buy, is crass.

Iraq

2008-12-20T18:49:00.002+01:00

I have never wished or intended for this blog to be 'political' in the doctrinaire sense so it is with some caution that I blog on the subject of Iraq.

Let us be absolutely clear about this:-

1. The invasion of Iraq had nothing whatsoever to do with human rights in Iraq or the dreadful Saddam.
2. The invasion of Iraq had nothing whatsoever to do with any security threat to the west or 'WMD'.

Iraq was simply the best available place to get US and British troops on the ground to protect our oil interests in the Middle East. Those troops will stay there in appropriate bases with appropriate logistical support and supplies until 'we' no longer need them.

Why have troops on the ground in the Middle East? Because, as the first Gulf War showed, without troops you cannot move forward to secure territory. If you don't have your own bases you are under the political control of host nations (Saudi was the biggest host in the first Gulf war and supporting the USA caused immense harm in Saudi's relations with the rest of the Arab world). Iraq has ceased to be a sovereign nation in any meaningful sense -- it is an an occupied territory under the control of the USA.

If you wanted to go round the world rooting out evil tyrants you would not have started with Saddam and you certainly wouldn't end your crusade there.....how about the mad, murderous Mr Mugabe?

The oil price crash is causing social and political upheaval in an already unsettled region. Never has the west needed troops on the ground more than now. Without access to affordable Middle East oil you can forget 'recovery'. Period.

The USA is now headless and directionless

2008-12-19T22:31:00.003+01:00

Remember the $700 billion 'Poulsen plan'? It's now known as the TARP - Troubled Asset Relief Program(me). The idea was for the Treasury to buy up dodgy debt and store it in a quarantined environment. Having taken off the dodgy debt from banks' balance sheets the banks will be OK. Not so, as we know. But things are happening to the TARP fund. Bush has failed to get Senate approval for a bailout of the carmakers so he has agreed to bail them out from the TARP fund. Yikes, is this even legal? In any case, we have the spectacle of major US carmakers being paid by the Government to make cars that nobody wants.

The twist today is that the original $700 billion was actually voted in two tranches - of $350 billion and it so happens that after giving the carmakers their $14 billion or so, there is nothing left of the first tranche. So Congress needs to approve the second tranche. But now Congress is insisting that if they are going to vote for this, money will also have to be made available from TARP for 'homeowner relief'! Where is this all going to end? The TARP fund has become just a big pot of cash for corporate and individual welfare.

One problem is that this money is being borrowed and printed. The other problem is that it is not going to do anything to resolve the underlying problem -- it is a panic measure to try to maintain the status quo for a few more months. The carmakers are going to go down. The vulnerable homeowners are going to lose their homes. This must be obvious to everyone.

The real issue is that the United States, the world's largest financial and military power, is headless and directionless. That is terrifying.

Sterling Crisis

2008-12-18T22:52:00.002+01:00

Following up previous blog entries in which I had forecast Sterling recovering; the present price action and economic news -- and, importantly, SENTIMENT in the UK -- I am concerned that GBP/EUR will plunge through parity. I am not convinced that Europe is any stronger when you take into account the mix of the whole of Euroland but Sterling seems on a one way ride right now.

Aside from the implications for British trade and industry, this could destabilise an already unstable banking sector. At this stage in this crisis we need to focus on unstable sectors rather than individual assets and the banking sector is both the most vulnerable and the most vital.

I hope that all readers of davidscompass still have at least one month, preferably more, of cash in the sock drawer; enough to pay all bills? The income you are getting from your deposit and savings account is now near-zero so there is no incentive to leave it where it is vulnerable.

Take those nuts and satsumas out of those Christmas stockings and fill them with good old-fashioned folding money -- or gold coins, or both.

Oil price collapse signals instability

2008-12-18T21:39:00.002+01:00

While we will all take some personal comfort in oil falling - at the time of writing - to $36, this is indicative of a huge instability in the world's economy. There are very major undercurrents taking place at this time and it is not clear what is happening, or about to happen. This is a massive machine, constructed and designed by no-one, essential for the maintenance of twenty-first century life, that is breaking down -- crumbling -- in front of our eyes. We are on a cliff-edge.

Oil falls after a 9% OPEC cut - go figure!

2008-12-17T23:41:00.002+01:00

You don't have to 'go' very far to 'figure' why oil is down despite an OPEC cut of 9%.

A) The recession is looking more like the most severe depression the world has ever seen
B) Central governments are in a flat spin, trying to fight the 'crisis' -- the measures being taken are disproportionate to the official line. People realise that something very nasty is about to happen. This will be oil-negative.
C) The oil producers need to increase their incomes -- they have their own domestic issues. Regardless of any OPEC agreements, the producers will pump whatever they need to pump.

The Fed cut created a short lived rally, as I forecast. Daily, the news on our televisions becomes more dire. Something very serious is about to happen -- I have felt this for some weeks and now the pressure is building to a panic level. I shall be very surprised if we don't have some major news within weeks and almost certainly before the end of January.

Very gold positive. Gold has gone through the resistance and the dramatic pullback earlier this year has become a memory. Gold and the Swiss Franc are set to gain.

Fed Rate Cut -- what does it mean?

2008-12-16T21:42:00.002+01:00

As most commentators have said, the effect of the latest cut to near zero will not have any significant effect on the economy. It does mean, of course, that there can be no further significant cuts.

What really matter is WHY have they chosen to cut rates to this level? This will no doubt become clearer as the story plays out.

US Car Makers may be forced into bankruptcy

2008-12-16T05:54:00.002+01:00

Overnight news suggests that the Bush administration might force GM and Chrysler into bankruptcy. This is hard on the heels of the earlier official statement from the White House that they are considering using some of the TARP $700 billion after the Senate turned down the proposed bailout.

While this is of vital interest to those involved in car making throughout the world, for most of us the significance of this play is whether the US is going to support lame duck manufacturing companies or let them go to the wall.

Unless these companies are allowed to fail we will end up with monstrous manufacturers in the US producing products (subsidised with state aid) that nobody wants to buy. This would equal any of the stupidest policy decisions made by the former Soviet Union in the last 60 years.

If they subsidise the car makers you will see the dollar fall faster than it is going to anyway but it will help support the stock market which will, in turn, support the banks at a time when they most need it. The end result will be the same; it is a question of timing.

Dollars and Pounds and Euros -- and Gold

2008-12-15T08:28:00.004+01:00

At the time of writing we still have a frenzy of investment into US Treasuries but it seems probable that this is the final stage of the fear bubble, before it pops. At present, yields from US Treasuries are near zero or even negative so, why not just buy US Dollar notes and store them, instead? Why buy debt instruments with all the complications and risks, when you can put your money in cash -- of the folding-money sort? The problem with keeping dollar bills is the cost of storage, insurance and the fees banks charge for handling cash but we have come to the point where that would be a better investment than Treasuries if -- and let me stress, IF -- the US Dollar is where you want your money.

The US Dollar does now seem to have peaked and at some stage it will fall very sharply indeed at the same time that Treasuries fall. Timing is very hard to predict but I think we are talking days to weeks at the outside.

The GBP (British Pound) will recover against the Dollar and the Euro however the market is talking it down to parity with the Euro. It could be that it needs to touch parity before a recovery takes place. The dynamics in the short term are likely to be a small recover in GBP/USD, a sharp recovery in EUR/USD and still some decline in GBP/EUR.

Much of the money that has been going into US Treasuries will need to find an alternative safe haven. Some will go to the CHF (Swiss Franc) and some will undoubtedly go into gold. While gold will remain potentially highly volatile (making leveraged positions dangerous) we seem to re-established a bull phase which should take gold back through $1000 and beyond.

The Global Village was

2008-12-12T19:12:00.003+01:00

The Global Village was a nice idea, but it is over. No country -- not even the once-mighty USA -- can afford to allow competitive products from overseas free access to its markets where that will result in its own workers losing their jobs or earning less.

Protectionism will return suddenly, and with a vengeance.

Those countries that have allowed certain industries to decline or fail will be poorly-positioned; the United Kingdom, under the arch Global-Villageist, Tony Blair, will be very badly hit in this respect as will the United States.

Bush decides to tap TARP

2008-12-12T17:30:00.003+01:00

As I said in this morning's blog, I expected Bush to use TARP to bail out the car makers and that has now been confirmed by the White House. Expect a bit of a recovery in the bourses and then continued falls as investors realise just how hopelessly out of control is the USA.

US Car Makers - Senate reject $14 billion bail-out

2008-12-12T06:38:00.002+01:00

Last night the Senate rejected the $14 billion bail-out scheme passed by Congress. Overnight, stocks in Asia tumbled between 4% and 7% and oil fell by 5%. The Bush administration still has the option of tapping into the £700 billion pot approved earlier this year, for the financial industry.

The US motor industry has been in a terrible state for some years; in recent years they have been almost giving vehicles away -- almost anyone who wanted a new SUV had one, and on very, very easy terms. The market is saturated with new cars. Most US cars have much higher fuel consumption than their European counterparts and will oil prices surging to £140 this summer, people realised for the first time that the need for fuel economy is here and now. It will take the US manufacturers time to adapt, meanwhile they are poised to lose market share.

If they are going to spend $14 billion (which is surely just a first installment) then it might be better spent on welfare for those who will lose their livelihoods and force the companies to restructure, adapt and emerge in a new form. Let us not forget that it was only few weeks ago that the CEOs of these car firms arrived in Washington in several business jets, while begging for a handout of $14 billion! The shere nerve of these people is astonishing; they have no idea. Even after receiving a presidential rebuke for such conspicuous over-consumption by their executives they only agreed to cease using their biz-jets after January. If they were plane-makers you might understand but these are car makers.

My best guess is that Bush will tap into that $700 billion and use it as an excuse to go back to congress to re-fill that pot. Meanwhile, the uncertainty will cause a major rout on the world's stock exchanges, and a fall in the dollar. Bizarrely, Treasury notes are still rising with yields nudging from zero to negative. This is a panic reaction -- where else can people put their money? The public can put it under their mattresses but corporate, institutional and third-party investors (such as trustees) don't have that option.

Fortunately today is Friday and there will be time for a pause over the weekend but a rapidly falling stock market is going to re-open the liquidity issues in the banking sector. Banks could fail. If only for that reason, some kind of support for the car makers might be justified.

US Treasuries Bubble

2008-12-11T16:25:00.002+01:00

Dec. 11 (Bloomberg) -- The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst.
Investors seeking safety from losses in equity and credit markets charged the Treasury zero percent interest when the government sold $30 billion of four-week bills on Dec. 9. A day later three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929. Yields on two-, 10- and 30-year securities touched record lows this month.
“Treasuries have some bubble characteristics, certainly the Treasury bill does,” said Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk?” he said in a Bloomberg Television interview yesterday.

When this bubble bursts or deflates, the USD will fall, gold will rise and inflation will rise. The threat of deflation will pass. Interest rates might then be set to rise again. Depending on how fast this unwinds, we could be talking about a matter of a few weeks.

They are wrong about deflation

2008-12-08T23:48:00.002+01:00

I am now 95% certain that 'they' are wrong about the threat of deflation. I no longer even believe that this is what 'they' believe. What they are doing is to try to salvage businesses (which, for the most part are bankrolling the politicians) for the sake of the business owners. The flood of newly-printed public money going into the financial markets will result in hyper inflation on a scale never experienced before in the UK or USA.

Jobs will not be saved. These businesses are producing goods and services for which there is a dwindling market.

Monday 8th December

2008-12-08T09:41:00.002+01:00

We are seeing a small but sharp rally on the bourses. Some analysts are suggesting that this is due to the Obama proposal for major infrastructure works. However, given that the effect of that will not be seen until 2010 at the earliest, that is not the whole story. To some extent the rally is due to shorts being closed before the Christmas break and possibly an effect of quantitative easing by the Treasury which is buying any assets at its discretion; support of the stock markets will be a priority action for the Fed/Treasury to avert the looming banking crisis. Banks are still not lending. The fundamentals for most equities still look terrible with deteriorating conditions being reported on a daily basis. We could see this rally continue into Christmas but volatility is very high -- if you want to get involved, this is a market to trade, not a market to buy.

Oil is in the spotlight at the moment with OPEC due to hold another meeting on 17th December. It is being tipped that they will cut production by 2 million per day. Certainly OPEC will not tolerate oil under $50 for long since even those producers that can produce at lower prices already have huge budget deficits. My forecast is for oil to rise back to $50 to$60 fairly soon; while it is impossible to rule anything out in this crazy market, I think that the probability of oil falling further to $30 or $20 are very small indeed.

Commodities in general have continued to fall -- the October rally reversed and prices have continued to fall along with the dollar's rise. I think that the effect is, to a great extent, due to the strengthening of the dollar with continued pessimism on industrial activity, particularly in Asia.

Gold is much firmer with continued reports from bullion dealers of record demand by investors, for bullion. It is interesting that while the official price of gold has been very volatile the demand has been increasing steadily and bullion is selling at 20% or more above the official price. The reason for this is that most gold trading is through gold futures -- these are paper transactions and traders seldom take delivery. With the extra powers now given to the US Treasury under 'quantitative easing', the Treasury is now in a better position to influence the price of gold than hitherto; there is no evidence that is actually has been doing so as the Treasury is not obliged to report which assets it has bought or sold, so that is conjecture. It is also quite likely. The central banks do not want to see a strong gold market; they want to dissuade people from investing in gold. Many gold investors have bailed out after recent sharp pullbacks although those with a longer-term strategy have been doing very nicely. It seems most likely that gold will continue to rise as this financial crisis gets worse. Investors should take the longer-term view and invest in physical gold. Ideally, buy coins and take delivery of them.

Thursday 4th December 2008

2008-12-04T09:51:00.002+01:00

Every day yet more bad news comes out...massive job losses (Credit Suisse cutting 11% of their entire workforce), panic interest rate cuts by central banks, new safety-nets needed for those who are in financial difficulties, company profits turned to unimaginably high losses, bail-outs of private companies by governments, and falling oil prices (bad news because it is politically destabilising).

Let's look at the compass and see where we are headed.....

Governments are trying to halt the decline in business by reducing taxes (mainly for the bottom tier as they spend it fastest) and by making money available to the banking system so that it can lend to consumers and revive the housing market (so people can continue to borrow against their houses for income) . The idea is that if the consumer has more money then he will spend more. The problem is that they are trying to fight a natural cycle. It's like trying to turn the tide. Canute wasn't able to and neither will governments.

I think that we can safely dismiss the idea that present policies are going to do anything for the downturn -- they might help to prevent a collapse of the banking system and it could be that's the main objective, in which case fine; a collapse of the banking system would leave us so deeply in poo we might not recover for decades. Yes, decades.

Accepting that business is going to contract for at least the next twelve months (and that is very optimistic) can we see any more clearly now what is going to happen?

There will be massive new demands on the public purse as unemployment rises and private pensions fail to provide for their pensioners. Tax revenues will fall with reduced earnings and spending, and reduced corporate profits. Added to the billions of pounds spent supporting the banks and other companies, the deficit will become unmanageable. The US and UK will issue more money (dollars and pounds). The Euro will probably follow but more reluctantly. Inflation at this time appears to have fallen to nearly zero and there are fears that we will slip into a long period of deflation, like Japan.

That is possible but I believe that they are looking at the wrong signals. The 'deflation' (i.e. falling prices) that we are seeing today are due mostly to stock clearance and price wars. This will not continue. Normally, most of the stock is cleared out by the end of January -- what doesn't sell before Christmas is sold in the sales. This year, it looks as though it will take longer to sell. Maybe March or April during which time shops will close down and goods will be sold at fire-sale prices, adding to the apparent 'deflation'. If the central banks continue to respond by printing more money in an attempt to fight non-existent deflation then when the glut of product dries up, and new product has to be ordered from the factories, the prices will be much, much higher. This could happen very quickly. In this situation we would have an economy drowning in money with low stocks of products to spend it on. The classic recipe for inflation. Only this time, the numbers will be so massive that the inflation will be a monster.

When you are making investment decisions I strongly caution you not to assume that we will be entering a period of deflation. It could happen, but it's far more likely that we will see hyper-inflation early in the New Year.

Monday 1st December

2008-12-01T12:46:00.002+01:00

The stock markets in Asia fell overnight and at the time of writing are falling again today. Wall Street looks certain to open lower. These are large falls, and it looks as though last week's bear market rally is over; we will probably see quite a sharp pullback to new lows during this week.

Meanwhile, hedge funds are falling apart and unwinding their positions. Many have halted withdrawals. There is chaos in the financial markets and most asset classes are being hit as people dispose of hard assets in order to cover paper (derivatives) positions.

This has resulted in even gold pulling back quite sharply today possibly as part of the unwinding of commodities portfolios by the hedge funds.

Oil was in the news over the weekend. It looks as though OPEC is going to let the price drift down, if that's where the market wants to take it. This lower price is going to hit Russia very hard just at the time when she is going through a crises on the stock market, the Rouble and industry. The main issues for Europe are continuity of supply of oil and gas, and the worry about a destabilised Russia at her back door. Both are critical issues.

I think that this week is going to see some major casualties in the financial sector (banks, insurance companies), industrials and retailers. We can expect to see more major retailers fail before Christmas - some have been hanging onto the hope of a last minute surge by Christmas shoppers and if that does not materialise, they will have to go public about their financial situation. As I said last week, then was a good time to offload stocks during the short rally. For now, it is down.

Many people now have put a significant proportion of their portfolios into gold. I think that the underlying trend is again bullish despite today's pullback. However, gold is controlled politically and does not respond in the way you'd expect it to in a free market. The only safe way to hold gold is physical gold -- ideally take delivery. If you are holding physical gold, hold onto it and even add to it. Over the next six months gold is almost certain to gain in value in real terms while most other asset classes are likely to fall in value, in real terms.

Rouble Trouble

2008-11-28T18:29:00.002+01:00

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,....

Black Friday

2008-11-28T12:08:00.003+01:00

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.

High Street Crash

2008-11-27T11:24:00.002+01:00

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.

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.

Stock Market Rally - What's going on?

2008-11-26T23:31:00.002+01:00

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.

LIBOR going up -- HEADS UP

2008-11-25T18:19:00.004+01:00

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 Stock Market Rally

2008-11-25T08:19:00.003+01:00

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.

Update Sunday 23rd November 2008

2008-11-23T23:54:00.002+01:00

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!

Update 19th November 2008

2008-11-19T22:53:00.002+01:00

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.

After G-20 Oh dear, oh dear, oh dear

2008-11-16T10:51:00.004+01:00

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.

G-20 Meeting this weekend

2008-11-14T19:11:00.002+01:00

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.

Managing Contraction

2008-11-13T15:24:00.002+01:00

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.

Thursday 13th November 2008

2008-11-13T11:23:00.003+01:00

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.

Wednesday 12th November 2008

2008-11-12T12:24:00.002+01:00

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.

11th November 2008 Update

2008-11-11T11:26:00.002+01:00

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 Chinese Stimulus

2008-11-10T10:07:00.003+01:00

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.

Saturday 8th November

2008-11-08T12:21:00.002+01:00

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.

Cash injections into the markets - What's it all about?

2008-11-03T08:26:00.000+01:00

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!

Peasant's Revolt in Kuwait

2008-11-02T18:03:00.001+01:00

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.

Saturday 1st November

2008-11-01T08:53:00.000+01:00

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.

I return!

2008-10-31T14:02:00.000+01:00

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?

Pause

2008-10-27T21:02:00.000+01:00

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

2008-10-27T08:40:00.000+01:00

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

Saturday

2008-10-25T11:23:00.001+02:00

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.

Friday Lunchtime Update

2008-10-24T12:46:00.000+02:00

``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

2008-10-24T08:04:00.000+02:00

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.

Thursday Morning

2008-10-23T08:02:00.000+02:00

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

Wednesday Morning

2008-10-22T07:30:00.000+02:00

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.

This is what is happening...

2008-10-21T08:12:00.000+02:00

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.

Overnight news

2008-10-21T08:08:00.000+02:00

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"....

Monday Evening

2008-10-20T22:30:00.001+02:00

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.

Monday Morning

2008-10-20T10:23:00.000+02:00

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.

Sunday Evening

2008-10-19T23:04:00.000+02:00

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.

Saturday Morning

2008-10-18T09:47:00.000+02:00

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.

Friday Morning

2008-10-17T07:36:00.000+02:00

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?

Thursday Evening

2008-10-16T22:54:00.000+02:00

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.

Following this blog

2008-10-16T08:53:00.000+02:00

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Thursday Morning

2008-10-16T08:24:00.001+02:00

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

Wednesday Evening

2008-10-15T21:19:00.000+02:00

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.

Tuesday Evening

2008-10-14T22:41:00.000+02:00

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

2008-10-14T06:57:00.000+02:00

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.

Monday Night

2008-10-13T23:16:00.000+02:00

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.

Sunday Evening - What Has Been Agreed?

2008-10-12T21:57:00.000+02:00

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.

How Money Is Made (A Video on YouTube)

2008-10-12T14:20:00.000+02:00

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?

2008-10-12T11:37:00.000+02:00

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.

UK Banks to be "Under Complete Control of Government"

2008-10-11T23:26:00.001+02:00

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.

Wall Street - Uninvestable

2008-10-10T21:32:00.000+02:00

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.

Why is Gold Plunging Today?

2008-10-10T18:54:00.001+02:00

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.

A Wide Range of Tools?!

2008-10-10T18:31:00.000+02:00

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.

Morgan Stanley and Goldman Sachs

2008-10-10T15:24:00.000+02:00

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

2008-10-10T12:10:00.000+02:00

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.

Urgent! Money Market rates rising in Asia

2008-10-10T08:19:00.000+02:00

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.

Banks and Safety

2008-10-10T07:53:00.000+02:00

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

Stock Market Crash - Shares

2008-10-10T07:32:00.000+02:00

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