Tuesday, March 30, 2010

US Bank Closings Continue Record Pace

So far in 2010, the FDIC reports that 41 US banks have closed, vs 21 banks in the same period last year. Wow, twice the rate of failure...remind me please of the meaning of "green shoots."

The Federal Deposit Insurance Corporation has already burned through the funds that it collects through a levy on bank deposits, so the US taxpayer is on the hook to give the depositors back their money.

The Federal Accounting Standards Board is responsible to ensure that the rules of accounting properly value the assets and liabilities of businesses, including banks. Their institutionalized version of wishful thinking has led to a gross overstatement of the value of bank loans, delaying the inevitable and adding to the final reckoning. How gross? 59% was the average across the four most recent failures, according to this source.

In the US, when your unemployment benefits run out, you are no longer officially unemployed. The real level of unemployment is 22% not 10%, according to Shadowstats. The stock market may be at cheerful levels, buoyed by government money and CNBC spin, but the real economy is not.

Why is the stock market at cheerful levels? Well, the Zimbabwe market managed some pretty impressive numbers too. Here is the chart from 2007, when it was the best performing stock market in the world. No one got rich in real terms, but the numbers look impressive...

If it can't go on forever, it won't go on forever.

Monday, March 29, 2010

What if it was all just a big bubble?

Not the bear market rally of the past 12 months.

Not the post tech-stock recovery of 2000-2008.

I'm talking about the whole of your investing life, the last 30-40 years of asset price inflation that started with Great Society spending in the 1960s, augmented by the baby boomer effect on consumption, the effect of technologies like cars and mass production and telecommunications, all strapped to a booster rocket of Nixon abandoning the gold standard in 1971.

When, in your life, has your government sustained a surplus? When has your currency increased in purchasing power?
These provocative questions were prompted by this provocative article is from a provocative blog by Tim Iacono called The Mess that Greenspan Made. Check it out.

What is considered an average return in the stock market took a jump up after money was decoupled from gold. Few people factor in the effect of inflation on stock indices. Look at the chart above, and eyeball an average for the period from 1880 to 1970. Then do the same from 1970 to now.

Real returns probably should be calculated in terms of something timeless, for example the Dow/Gold ratio. The Dow Jones Industrial Average has its weaknesses, but it is easily recognizable. Right now it takes about 10 ounces of gold to buy one unit of the DJIA.
The chart shows the craziness of the gold mania in the late 1970s, and the equal but opposite craziness of the tech bubble in 2000. Those who disparage gold point to its poor performance from its 1979 peak through the subsequent two decades. Those who admire gold simply pick a different time period.

The message of Tim Iacono's article is that the housing bubble and accompanying credit bubble that goosed the financial system from 2000 to 2008 was just the most recent example. Who knows...maybe gold is the next bubble, just as it was in the late 1970s. You will know a bubble is happening when TV shows feature ordinary people buying gold or taking Grandma's old jewelry and flipping it for a huge profit, like the home reno shows that were everywhere three years ago.

Until then, it is probably safe to buy some gold or silver and put it away. When the TV shows start, take a bit of a profit by selling it to the latecomers.

Wednesday, March 10, 2010

Monday, March 08, 2010

Welcome repeat visitors

Hello Omaha! Greetings Melbourne! Thanks for stopping by. If there is something that you would like more of, or less of, just leave a comment.


Saturday, March 06, 2010

Farewell to the Era of Panic

Australian newspaper columnist Andrew Bolt is, I think, the Antipodean equivalent of Rex Murphy.

In a recent column "Farewell to the Era of Panic" he uses the tsunami warnings that arose from the earthquake in Chile to remind us that "Once again the experts and the politicians had ramped up the booga-booga" but this time people rebelled against the panic-mongering, reclaimed their senses, and actually came to the beach to watch what turned out to be a non-event rather than obediently fleeing for the hills.

His column continues:

We're on to them now, you see, these backside-coverers who'd rather be blamed for predicting an all-shrieking Armageddon than for being no-worries relaxed among a crowd of look-at-me urgers.

We're on to the kind of people who last July "leaked" a warning from Victoria's Department of Sustainability and Environment, claiming that the fire season now just ended would probably be worse than last year's Black Saturday one, and had the "greatest potential loss to life and property"?

Yeah, right. Not one big fire came. Not one person died. Plenty freaked, though.

And last week, very quietly, came yet another muffled admission of a terror that had been similarly oversold.

The good news, federal Health Minister Nicola Roxon brightly announced, was that this nice Government was donating 10 per cent of our swine flu vaccines to Laos and other poor neighbours.

The even better news, which Roxon somehow failed to add, was that we could give away so many vaccines because very few people actually caught the swine flu that one of her own advisers, Prof Raina MacIntyre, last year swore could kill between 10,000 and 20,000 of us.

I'm sure you remember that mega-fear campaign - one of the Big Three that made 2009 so infamous in the already sordid history of the Age of Panic.

Swine flu was hyped as a virus so deadly that cruise ships had to be quarantined, schools closed and families with the sniffles locked in their homes.

"All of humanity is under threat," screamed the World Health Organisation, another United Nations bureaucracy (like the Intergovernmental Panel on Climate Change) that feeds on fear.

Britain's National Institute of Medical Research helpfully put the likely death toll at up to 120 million.

The reality? Swine flu turned out to be one of the mildest forms of flu yet seen. We didn't have 20,000 Australians die, but just 191, most of them people already desperately ill with other serious ailments.

To put that in context, about 3000 Australians die each year with normal flu.

Worldwide, it was the same shamefaced story - not 120 million deaths, but 16,226, according to WHO's own figures.

That's less than half the people who die in a normal flu season in the United States alone.

And what of that global financial crisis that last year was going to wipe out the few of us lucky enough to survive swine flu?

What Prime Minister Kevin Rudd gleefully warned was "the worst financial crisis in our lifetime" turned out to be one of our mildest. In fact, "probably our smallest", as Reserve Bank Governor Glenn Stevens conceded last week.

Which means that what will hurt us most is not the financial crisis, but the insane spending Rudd unleashed to stop it, leaving us not just with electrified ceilings, mountains of useless insulation, overpriced school halls and blown-already cash handouts, but now a deep sink of debt as well.

But let's not forget the third leg of last year's great trifecta of panics: the global warming that was going to dry out the dams of Sydney, Melbourne and Adelaide, turn the Great Barrier Reef white and drown half of Bangladesh.

Instead, as rain returns, the globe refuses to keep warming, the Arctic ice rebuilds, great snows bury North America and Tuvalu refuses to sink into the sea, the only thing rising now is the public's scepticism.

Yes, we're finally coming to our senses. We're finally seeing through the spivs who grow rich and mighty by playing on our fears. We're calling time on this Age of Panic.

Well said, Mr. Bolt. In these times of Single-Issue Fanatics, Sound Bites and Political Correctness, it has been difficult to be a dissenting voice against the hurricane of fear-mongering. But sooner or later the average man in the street will tire of hearing cries of "Wolf! Wolf!" and do exactly the opposite of what his betters are suggesting for him. In Australia, perhaps it is already happening.