The price of everything

Frankness goes to Hollywood

 

“People who avoid and evade paying their taxes will no longer get away with either.”

 

-       Deputy Prime Minister Nick Clegg at the Liberal Democrat Party Conference in Liverpool.

 

“Tax avoidance: the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means within the law.”

 

-       Wikipedia.

 

“Prat: a person of no account; a dolt, fool, ‘jerk’. Slang.”

 

-       Oxford English Dictionary.

 

Something rather interesting happens during the end credits of the latest Will Ferrell comedy, ‘The Other Guys’; to the somewhat arch soundtrack ‘Pimps Don’t Cry’, animated sequences show:

·         How a Ponzi scheme works;

·         How the $700 billion T.A.R.P. bailout equated to a $2,258 payment from every man, woman and child in the United States (the children won’t of course have the money, but they’ll be paying for it as part of the government deficit for the foreseeable future);

·         That 73 employees of failed insurer AIG received $1.2 billion in taxpayer-funded post-bailout bonuses;

·         That the ratio of CEO pay to that of the average US employee rose from 7:1 in 1917 to 107:1 in 1990, and to 319:1 in 2010;

·         How the recent stock price history of Goldman Sachs compares to that of the average US listed business;

·         That the average CEO retirement benefit package amounts to $83,600,000 while the average American 401K account has recorded a 47% loss over the last five years.

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The golden ratio

 

“Greece rules out possibility of default”

 

-       FT headline, 16.9.2010.

 

There’s probably merit in seeing the markets through fresh eyes. But after a couple of weeks away, not much seems to have really changed. Stocks have been more resilient than we might have thought – but only a little. Even after the recent rally, the S&P 500 is showing year-to-date gains of less than 1%; the FTSE 100, of just over 2%; the MSCI World Index, of just over 1%; and the year is almost three quarters over. This is not exciting stuff, given the theoretical boost to stocks from interest rates effectively at zero. These markets look simply tired. But the stock market is, in any event, a fickle and rumour-driven sideshow by comparison to the main event, which is a global credit market drowning in government debt. Much of that debt is no longer worth buying, if it ever was. That this market hasn’t collapsed under its own weight like some form of paper neutron star is remarkable. What its failure to collapse means is open to debate. Sceptics point to a bubble in bonds. Deflationists, a number in which we are content to be counted, point instead to the widespread investor terror of investing into anything else at a time when most of the world is engaged in deleveraging and balance sheet reconstruction. At some point, the inherent insanity of buying government debt issued by the most heavily indebted entities in the world will become apparent, and the price evolution of those putatively risk-free assets will become an interesting learning experience for anyone unlucky enough to be holding them. But between now and then, whenever then turns out to be, government bond yields can continue to fall. Japan has shown the way. Suffice to say, we maintain that the only government bond markets worth investing into are those where the governments in question have the resources to pay you back. That effectively excludes most of the developed world, and certainly most of the G8.


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