The price of everything

Something has to give

“More than half of all workers have experienced a spell of unemployment, taken a cut in pay or hours or been forced to go part-time. The typical unemployed worker has been jobless for nearly six months. Collapsing share and house prices have destroyed a fifth of the wealth of the average household. Nearly six in ten Americans have cancelled or cut back on holidays. About a fifth say their mortgages are underwater. One in four of those between 18 and 29 have moved back in with their parents. Fewer than half of all adults expect their children to have a higher standard of living than theirs, and more than a quarter say it will be lower.. for many Americans the great recession has been the sharpest trauma since the second world war, wiping out jobs, wealth and hope itself.”

 

-       From a Pew survey on the effects of the American recession, cited in the current issue of ‘The Economist’.

 

 

“Three years ago, it seemed inconceivable that a country such as Greece would be allowed to default, or exit the euro zone. But back then it seemed equally hard to imagine that Lehman Brothers might fail. Now that Lehman has gone, who knows what the worst-case scenario might be ? Could the euro zone break up ? Could Greece default ? What might happen to other debt-laden nations, such as the US, if the worst case scenario occurred ? The one thing that is clear is that the answers to those questions now depend as much on culture and politics as on macro-economics.. In this new world of sovereign risk, what really matters is a set of issues that cannot be plugged into a spreadsheet. The old compass no longer works.”

 

-       Gillian Tett in ‘The Financial Times’, April 2010.

 

 

“Two prisoners have escaped from a prison in Argentina after guards placed a dummy with a football for a head in the watch tower because of a shortage of manpower.. The source said that the video cameras monitoring the perimeter wall had stopped working some months ago. He said that he hoped the incident would alert the authorities to the problems with lack of resources and that politicians would act to improve the conditions.”

 

-       ‘Prisoners escape after guards put dummy in watch tower’, ‘The Daily Telegraph’, 21 July 2010.

 

Why did US stocks crash on May 6^th this year ? That date saw the biggest one-day points decline – 998.5 – in the history of the Dow Jones Industrial Average. For a brief period, $1 trillion in market value evaporated. Eight large company stocks, including Accenture, fell to a price of one cent, while others, including Apple and Hewlett-Packard, rose to over $100,000 per share. Having fallen by nearly 10%, the market then largely recovered. The precise cause of this extraordinary intra-day volatility remains a mystery. What seems reasonably plausible, though, is that some form of algorithmic trading, whether executed by hedge funds or investment banks (like there’s a difference), played a role. The ‘essential’ function of the stock market is to raise capital for businesses. A secondary but meaningful function is to assist in price discovery, the more or less democratic process of evaluating those businesses, with capital assessed as votes. What is not a core function of the stock market is to act as a playground for high speed leveraged speculators. As Keynes said,

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”


To read more,


Download Something has to give

QE2 - economy overboard

 

“Over the medium term, participants saw both upside and downside risks to inflation.”

 

-       Minutes of the US Federal Open Market Committee, once again boldly telling it how it is.

 

Optimism may well play a key role in human evolution and survival, but in matters of the narrower discipline of investment it can be a grave threat to the retention of wealth. Which is not to say that pessimism is preferable, only that the quest for realism – or objectivity – is likely to be the most rewarding route towards capital preservation and growth. This is a hard orientation for most investors, given that the financial services industry, and notably the ethical swamp that is the brokerage business, has an enduring bias in favour of good cheer. Bad news rarely sells.

But blind optimism now would be, in our view, exquisitely dangerous. The latest reason for a considered pause comes with publication of the most recent minutes from the US Federal Reserve. Fedspeak is a bureaucratic sedative at the best of times, but sometimes the dry-as-dust language is unable to conceal some real firecrackers. The minutes from the Open Market Committee of 22-23 June contain the following observation; it’s interminable but bear with it:


To read more,


Download QE2 - economy overboard

Money-printing: a warning from history

"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

-       John Maynard Keynes, ‘The Economic Consequences of the Peace’, 1919.

 

Last week, on a sultry summer’s evening in London, I had the pleasure of attending the re-launch party of Adam Fergusson’s ‘When Money Dies: the nightmare of the Weimar hyper-inflation’. This über-cautionary tale was originally published in 1975 by William Kimber & Co. Having fallen out of print, second-hand editions were changing hands, amongst those who could locate copies, for several hundred pounds each. It has now, happily, been republished by Old Street Publishing Ltd., for the very affordable price of £12.99. Suffice to say that every reader of this commentary is gently encouraged to purchase a copy.

That said, reading, and digesting, ‘When Money Dies’ is not particularly easy. In financial terms it is the equivalent of a snuff movie. For the sensitive of spirit, the experience is truly heart-rending. For this is not a fictional phantasmagoria; the extraordinary sequence of events within it genuinely happened, to real people.


To read more,


Download Money printing - a warning from history

Enduring the ‘Phoney War’

“We believe that overall, the [bank stress] tests will be positive.”

 

-       Unnamed banker in London, as reported in the FT.

 

“The stress test idea is a shambles. The whole thing is a complete joke.”

 

-       Unnamed analyst in London, as reported in the FT.

 

This last week we have been presenting investment seminars across the country. In this note I would like to highlight the presentation given by one of our guest speakers, strategist James Ferguson of Arbuthnot Securities, and a fellow Money Week contributor.

One of the difficulties with investment strategy when the authorities are trying to resolve banking crises is knowing who to trust. Many banks in the industrialised world are insolvent, but the authorities are unlikely to admit the fact since that has the unfortunate tendency of triggering runs on them. So instead we all participate in something akin to a phoney war. The more enlightened – or distrustful – keep at a wary distance from anything approximating to a bank investment, while the more daring – or credulous – flirt uncertainly with a sector still in intensive care.


To read more,


Download Enduring the 'Phoney War'