Thursday, December 04, 2008

What Is To Be Done ?

It's rapidly becoming apparent - to me, anyway - that GB and NuLab in general are fearful of depression - forseeing civil unrest and all the other consequences of ticking the Weimar boxes.

And it looks as if their least worst option is to inflate their way out of it. They're simultaneously spending lots of money they haven't got, and slashing interest rates to way below inflation. Cue for collapse of sterling.

At this point, long after the smart money's made its exit, Laban wonders if it mightn't be a bad idea to convert his savings into Euros. Gordon seems intent on driving the pound down to 1-1 parity (and then Euro entry), so why not preserve a little value ?

Trouble is, it looks as if the European Central Bank's got the same idea.

Mr Sarkozy said the goal of restoring France's dilapidated public finances to good order could wait for better times. "Not doing anything now would have cost us much more. We're not going to sacrifice the present for the future. This crisis is an ordeal, a painful ordeal and a terrible ordeal, but we have to keep faith," he said.

Italy needs a stimulus package even more badly but is having to tread with care as markets fret over some €200bn of Italian state debt that must be rolled over next year. The yield spread on 10-year bonds has risen to 123 basis points over German Bunds. Giulio Tremonti, Italy's finance minister, insisted yesterday that state bonds were at no risk. "Buy them. They are absolutely solid".

Mr Trichet signalled for the first time that the bank is considering some form of "quantitative easing" (QE), the term used to describe the emergency measures pioneered by Japan during its Lost Decade and now being adopted by the US Federal Reserve.

"We are supplying liquidity on an unlimited basis. We will continue to look very carefully at the situation of the market and if needed we will take new decisions," he said, when asked about QE measures.

I really hoped the historical memory of Germany, the strongest Euro economy, would prevent the ECB attempting to inflate its way out of trouble. Seems not.

Two questions

a) where should a man with some cash put it ? The garage is already full of tins of beans.
b) in the hyperinflation of Weimar, who profited ? What investments preserved value ?

UPDATE - thanks for the helpful advice. Commenter Dawn suggested that in Weimar it was the professional clever-clogs with government contacts ("government power brokers") who could make big profits.

And what's this ? Jonathan Weil :

If you had considered betting against Fannie Mae and Freddie Mac this summer -- that is, when the Securities and Exchange Commission wasn't banning short sales of their stocks -- the biggest risk wasn't that they would surprise investors by turning in a good quarter. It was that Treasury Secretary Hank Paulson or Federal Reserve Chairman Ben Bernanke would show up before Congress to talk up their stocks and squeeze the shorts.

Your worry is the same if you're thinking of shorting Morgan Stanley, Goldman Sachs Group Inc. or Citigroup Inc. All Paulson might have to do to separate you from your money is call a press conference. And if you bought toxic mortgage bonds, just before Paulson canceled Treasury's purchases of troubled mortgage-related assets, you've felt his sting already.

When the government let Lehman Brothers Holdings Inc. die, there at least was the sense, for a day or so, that somebody very large wasn't too big to fail. Today we understand better: The government is picking winners and losers ...

So, for the time being, the clearest path to making money in the public markets is to know in advance what the government plans to do next with which companies, and when - and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now.


Dawn said...

try bullionvault or They will let you easily move your cash between Sterling, US dollar, Euros and gold bullion stored out of harms way in Zurich. Right now gold bullion stored well away from Gordon's sticky fingers seems like the most likely last currency standing, but I am hedging my bets with dollar and Euro as well. A Swiss internet account is fairly easy to open but will cost a small amount to set up. You should get your lifeboat strategy set up now even if you don't use it. It will be to late if/when the flight from sterling happens in ernest and exchange controls and bank holidays are on the agenda.

If you need anymore motivation to act have a read of this:

Slagella said...

Germany and Poland have come out firmly against reflating the burst bubble. German bonds as a safe haven. PHYSICAL gold, not virtual. Tin Foils Hats are very much in favour this season, too.

Thud said...

The cries of the end of the world as we know it crowd are becoming increasingly shrill...things are bad...will get worse...will get better....As Cpt Mainwaring would say...well you know the rest.

John said...

1) Liquidate all savings.
2) Borrow as much as you can.
3) Borrow more.
4) Invest in assets of proven inherent value.
5) Better yet invest in productive assets of proven value. Farmland might be a reasonable bet.
6) Sit back and let hyperinflation write down your debts, while real assets hold value.
7) Don't come crying to me when this leaves you totally broke because hyperinflation doesn't happen.
(Which it ain't: at this point present and prospective monetary boosts from govts. are barely balancing the monetary contraction of collapsed value shares, corporate bonds, CDO's etc etc)

Dawn said...

To answer your second question, I am currently reading Nouriel Roubini's book "Bailouts or Bail-ins" on financial crises in emerging markets, in order to adress your underlying question of "how do I play this mess?". It seems no one wins except a) government power brokers, b) those who got their cash out early. Remember you don't just have to deal with the crisis but also the aftermath.

Anonymous said...

Who profited from the Weimar hyper-inflation?

Ultimately, the Nazis.

(Nod to Godwin)

Anonymous said...

John: "1) Liquidate all savings."

Help, how?

"2) Borrow as much as you can."

That sounds attractive, but Given the Icelandic experience, those in debt were slaughtered overnight when the currency went to nearly nil and internal interest rates went up massively. Wouldn't want to be holding a lot of debt in those circumstances.

"4) Invest in assets of proven inherent value."

Yes, but how to identify them - Gold for example is now £520/oz and you can't get delivery for weeks at spot price. Ebay is significantly higher than that already.

"5) Better yet invest in productive assets of proven value. Farmland might be a reasonable bet."

That seems a sound idea. In the dim recesses of my mind, I recall that in the Weimar the farmers did pretty well, it was folk in towns and cities that lost out.

Tim Worstall said...

"What investments preserved value ?"

Property. Not that this helps much right now.

Anonymous said...

Laban: "Trouble is, it looks as if the European Central Bank's got the same idea."

No country can afford to allow its currency to stay 'up' against the others. We are in a stage of competitive devaluation, there are now rumors that the Chinese are planning a devaluation too.

tim t said...

I asked the same thing on John Redwoods blog a couple of weeks back. He kindly replied that i should get some financial advice, and that asian currencies looked strongest in the long run.

John said...

Anon: "Icelandic experience, those in debt were slaughtered...(when)... interest rates went up massively"

But point is Iceland wasn't in hyperinflation.
Hence my point 7

I'd repeat, given the staggeringly huge meltdown in financial asset values and the credit drought, betting on high, let alone hyper, inflation would be a big risk v. unlikely to pay off, govt. monetary and fiscal moves notwithstanding.

Time for that will come a year or two down the line if govts/central banks then fail to raise interest rates and curb borrowing/spending into the upswing.

You know, like el Gordo did last time.

Oh dear.

Anonymous said...

Who profited from the Weimar hyper-inflation?

Ultimately, the Nazis.

And then after them who?

The only game allowed for western (or rather white) politicians is a globalised, anti-nationalist platform. To be anything else is to be a nazi.

Is that some natural political progression or does someone benefit from that?

Laban said...

Anonymous 4.27 - if you're trying to suggest what I think you're trying to suggest, words fail me.

But anyway, when I ask who profited, I'm asking in a short-term financial sense.

In the long term, no one profited from Weimar except the United States and Soviet Union, who saw their main historic military and trade rivals either bankrupt (UK) or flattened (Japan, Germany). But the Soviet Union lost 20 million dead and had their country flattened. The US lost an awful lot of dead too. WW2 was a negative-sum game.

TDK said...

Who profited from the Weimar hyper-inflation?

Ultimately, the Nazis.

Given the Weimar hyperinflation took place in 1923 and the Nazi party didn't get to power until 10 years later after the world depression took hold, that's not a particularly convincing thesis. It has merit in that middle classes voters are said to have lost their savings as a result of inflation but it is only a left wing myth that the Nazis were a party of the middle classes. Extensive research of voting patterns shows that they received votes across the spectrum.

Anonymous said...

Im only saying that each crisis opens the way for one group and that in turn opens the way for another. There doesnt have to be a big plan or anything.

Britain and America were far more white and nationalistic in WW2 than today and yet they defeated the Nazis.

Anyone suggesting - in the mainstream - today that we become more white and more nationalistic is denounced as a Nazi, but who defeated the Nazis?

Edward said...

Can't comment on your post above - but David Cameron seems to be thinking what you're thinking re the Matthews' clan.

Anonymous said...

No doubt a little late, but the idea that it's a left wing myth that the Nazis largely drew their support from the middle classes really must be challenged. There are studies too numerous to mention which show that the bedrock of Nazi support was the lower-middle class of shopkeepers and small farmers. Of course, they did have support across the social spectrum, but it was here that the bulk of it came from. For further evidence, simply consider the social back-grounds of the leading Nazis; consider too which political parties' lost most support to them in the run-up to their take-over, namely the parties of the centre - those of the middle-classes who had previously supported the Weimar Republic.

As for who benefits most from hyperinflation - indebted holders of real, productive assets, such as land, buildings and machinery. So get a mortgage and buy an office-block.