Lies, Damned Lies And Economic Statistics

Posted by admin on Feb 9, 2022 in borrowing, credit crunch, depression, public borrowing, recession
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This morning I spotted a story on the BBC website about jobless statistics in the United States. You might recall that unemployment in the US hit 10% a few months ago.

Well the story explains a little of the real numbers. As we must all have - at a minimum - suspected by now, governments have a habit of reporting nmumbers in the best possible light. With inflation we have RPI, RPIX, ‘Core’ rates and more. Over time, the subtle changes in methods of calculations make these numbers meaningless to most of us. This post by Greg Hunter suggests that US inflation - if calculated using the same method as in 1980, it wouldn’t be 2.7% but 9.7%.

Well it is the same with US jobless numbers. As you will see from the story, and from Greg Hunter’s post, the real number is likely to be much higher. The BBC thinks more like 17%, while Hunter (via shadowstats.com) thinks 21.9%.

(It is worth pointing out that while some statistics may change in the level of their importance, when they were first invented, it was with a reason. That reason was to measure something. It seems reasonable to presume that they were invented to measure that thing as accurately as possible. Therefore, most changes probably reduce the ability of the numbers to measure accurately. So when something is compared to the (for example) 1980 method, that method is probably a much purer reflection of the underlying number. End of rant.)

It is numbers like this that will ensure that public sector debt is stubbornly difficult to reduce and that this will be a very long recession.

There are two factors that make such statistics really meaningful. Firstly, we all know just how important the US economy is to the global economy. The longer and deeper this recession lasts for America, the longer and deeper it will be for all of us. This will not be easy to shift.

Secondly, there are many developed nations that ‘massage’ their economic statistics like this. If I happened to speak several languages and read several different nations major newspapers each day, I could probably quote similar situations in many European nations. But I don’t so I can’t. But there have certainly been changes to the way numbers are calculated in the UK.

How we - and I include government - are meant to deal with the debts of the world and this economic crisis if we don’t really understand how bad the problem is, I have no idea. Confronting the problem is the first step in dealing with it. But still, around 2 years in, we are unable to see the real numbers. It seems that we are still hiding behind lies and statistics.

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Obama Starts Budget Cuts With The Obvious

Posted by admin on Feb 2, 2022 in borrowing, public borrowing, recession
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I have been writing about public sector debt recently in this blog and the opinions of those in the know about it’s likely impact.

The first major shot in what will probably become a global political war to reduce deficits has been fired. President Obama has announced a new budget which contains cuts to many areas. While the obviousness of reducing debt levels is hard to deny, personal and corporate interest will create mass cries of ‘not this’ to many of the proposed reductions.

The fact that President Bush’s proposals to get NASA really moving again are for the chop is being criticised, for example. It is hard to deny that no further space flight can be seen as a disappointment. But really, when you are forecast to owe US$1.56 trillion, do you really need to send Man back to the Moon? Aren’t there more important things to do with the money?

To make this seem a little more real, an example would be a family on the verge of bankruptcy, with a massive mortgage and other unsustainable debts. The husband has just been asked to take a pay cut by his employer and to celebrate, he bought a Porsche!

If your neighbour were in such a situation, you would - rightly - blame them for their financial demise. When they ought to be switching off the cable channels and looking for additional part-time work, they are spending big money on an unaffordable luxury.

Is it really so much different on a national level?

But this is the easy end of the scale. With such high national debts, there will be many more important projects that will need to be cut. In time, a couple of years perhaps, there will be medical projects, childcare, road safety and much more that will be dumped to stave off national bankruptcy. This will be happening in many Western democracies.

And in those same democracies, there will be political argument after political argument.

Of course, this will all be very tough for private investment. When state plans change, so will personal circumstances - possibly removing vital capital from stock markets - leading to knock on effects in areas I dare not try to forsee.

This is - to my mind - the real start of the hang-over after the party. So far, we have simply been getting home to bed. But the spiral down of reduced spending from governments, causing reduced spending from corporations and the public, leading to further reduced spending from all three will take a long time to balance. Just as the party was pushed upwards by ever increasing public sector spending - based in large part on borrowing - the recession will be exacerbated by it.

Hold on to your hats…

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Thoughts ‘Borrowed’ From Davos

Posted by admin on Jan 29, 2022 in borrowing, public borrowing, recession
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No, sorry. I didn’t make it to Davos 2010 - I wish. After Copenhagen, this would have been an event too far…

In a blog post from Davos, the Beeb’s Robert Peston discusses the thoughts of some of the world’s top bankers about the state of things now.

It seems that these guys agree with the opinions recently alluded to in this blog in this post about Public Sector Debt and this one about my estimates for the length of this recession.

I’d like to bring your attention to points 1 and 2. “prospects are particularly poor for the heavily indebted economies of the west” and “a meaningful risk of sovereign debt crises in economies with large and rising deficits“.

Why do I do this?

Because I am mean and like to write depressing things? Because I like poking fun at politicians and their lies? Because I like to delude myself that I understand economics?

Well, yes, all of those. Of course!

But this blog is aimed and written for investors. To be an investor - especially a successful one - requires a mindset that is realistic and sees the world as it most likely is.

Making poor judgements about economic conditions or business and market reality will most likely lead to buying the wrong asset or company and - sooner or later - losing money.

Therefore, we need to see the reality. And the reality is that more and more of the people that really ought to know, are starting to say that this will be a very long recession.

It is almost a year ago that I was involved in interviewing Paul Krugman where he called it ‘The Mother of all Recessions’. Despite being a Nobel Prize winning economist, the tide was against him - as he has published a book about depressions (a clear bias). But now the world is agreeing more and more with him.

In between then and now, just about every politician in the world has seen ‘green shoots of recovery’, ‘an end in sight’ and all sorts of other hopeful things. They can’t really say much else, of course. But as an investor, it is our job to see through the smoke and past the mirrors to get to the underlying reality.

What is that underlying reality?

It seems clear - at least to this amateur economist - that real GDP growth in major economies will be hard to find and that this recession will last and last. It also seems clear that we as investors need to think very deeply about how to best manage our finances. In a world where either inflation or deflation takes hold, the correct decisions will make or break family finances.

The low interest rate ’stimulus’ environment ought to have a finite lifespan and has probably built something of a bubble in stock markets. When cash on deposit earns less than 1% pa gross, why keep money in the bank? When governments are borrowing like a drunken Admiral, why buy or hold bonds? That, in combination with quantitative easing (I suspect) has pushed money into global markets when the majority ought to be selling.

We all need to be thinking deeply and clearly about our financial positions right now.

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Public Sector Debt And The Everlasting Recession

Posted by admin on Jan 17, 2022 in borrowing, public borrowing, recession
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Back at the end of July 2009, your author wrote a post titled: ” 2016: The End Of This Recession? “. At the time I felt a little bonkers, it was the out-loud musings of an amateur economist and nothing more. But the tide of economic thought seems to be moving in this direction…

In The Economist this week (16th January 2010 - Economics Focus | Digging out of debt) is analysis and opinion of the analysis and opinions of another. The other in this case is a report about debt and global deleveraging by the McKinsey Global Institute. No lightweights here then.

Both report and article are worth the read if you have any interest in the medium-term economic future of the world.

As The Economist notes, there are only three ways to reduce the debt levels of us all (government, corporations and individuals) to a sensible level. They are default, inflation and a prolonged period of belt-tightening.

As you might imagine, both report and article focus on prolonged belt-tightening as the preferred route out of debt. It is fair to say that the prospect of countries such as Spain, Britain, the US, South Korea and Canada choosing default - and the consequences for us all thereafter - is not an appealing one. However, the elected officials of the day may well choose inflation as their preferred escape hatch. While this is obviously unappealing to economists and the general public, it may prove to be popular with government officials. Regrettably.

When looking at past examples of deleveraging, The Economist tells us that, “Typically deleveraging began about two years after the beginning of the financial crisis and lasted for six to seven years. In almost every case output shrank for the first two or three years of the process.”

It continues, “big increases in public debt, while cushioning demand in the short term, increase the overall debt reduction that will eventually be needed. Once private deleveraging is done, the public sector will need to cut back.” And closing with, “Investors may worry about the sustainability of public debt long before private-debt reduction is over, forcing a lot of belts to be tightened at once. The most painful bits of deleveraging could well lie ahead.”

Thus, it seems that more respected voices than mine fear that this recession could run and run.

The part of this that never ceases to amaze me, is the capacity of politicians to avoid the reality. The pronouncements about the recession being over have slowed a little to my mind in recent weeks, but that might simply be a change in focus to Christmas and climate change. Of course, the sales numbers on the high streets of the world have had their temporary December fix and so consumer spending has - at least in the very short-term - come to the rescue.

But the article seems to suggest - though not actually say - that this process of debt repayment will have the effect of dragging the recession out for more years than we are currently hoping for. Of course, the economists are saying something slightly different, “If history is a guide, many years of debt reduction are expected in specific sectors of some of the world’s largest economies, and this process will exert a significant drag on GDP growth.” which I think is the same thing…

Thus, my thoughts remain the same, if slightly enhanced. I know that recommending yourself is no recommendation at all, but I shall end this post as I ended the previous post, “What this all means is that we all ought to be managing our finances as if we may never see the good times again and that things are going to get much worse before they get any better.”

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No Deal Yet In Copenhagen

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After almost two weeks in the Bella Center for the Copenhagen Climate Conference, money is still one of the main issues. The lack of financial aid for poorer countries is being addressed, but slowly and in parts.

From the perspective of an investor, there has been some interesting ideas floating around though.

A couple of days ago, your author sat in on a side event arranged by the Club de Madrid. As ever, the CdM had a number of high-profile and interesting speakers and guests, including the former President of Chile, Ricardo Lagos.

This session contained the usual smattering of former Presidents and Prime Ministers, but also included an address from Tracy Wolstencroft from Goldman Sachs.

If you want to hear interesting things about markets, listen to the guy from Goldman Sachs!

The overall message from the session was that the Copenhagen process is focusing on public money, but the sums required are so huge that hundreds of billions of dollars of private money will be required as well. It isn’t all required tomorrow, but much of it will be required in the coming three to five years or so.

Mr Wolstencroft suggests that the sums required to avert a global climate disaster are so large that they will essentially become the world’s largest ever emerging market. You hadn’t thought of it like that, had you?

Having seen a report a few months ago from the European Climate Foundation called Project Catalyst, it is reasonable to suggest that the coming ‘green’ energy gap is enormous and will take monster amounts of private investment to fill.

But this energy gap is only for energy production. The total numbers include emissions reductions and technology (known as clean tech),  upgrading the insulation (for energy efficiency) of public and private buildings and the entire housing stock of the world and much more.

However, the point being made was that this investment will need to be global, simply doing this in the developed world will not be sufficient. But, for developed world investors, much of the developing world is an investment no-go area. Without vastly improved legal protection of property rights, transparency and clear governmental policy making, this is unlikely to change. This suggests that new democratic policies are required in many nations to enable the capital to flow.

As was pointed out - and every investor knows - “capital wants to find a way to invest”.

So here is the point: can you, as a private investor, find a way to invest in this emerging market, make a profit and be doing good for society and humanity?

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Copenhagen for me…

Posted by admin on Dec 9, 2021 in copenhagen climate conference
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My travel plans seem to be firming up and my sleeping space on the floor of an appartment hardening. It seems that every hotel room within about 100kms of Copenhagen is now fully booked. But my invite from the Committee of the Regions is in hand and it seems day by day to be more likely that I’ll be posting live(ish) from the centre of the world next week!

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The Copenhagen Climate Negotiations Are Open!

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Without putting too much emphasis on this, the UN Climate Conference in Copenhagen which opened this morning has the potential to be one of the defining moments in human history.

What?

Sounds like hyperbole to me…

Your author has a quite fortunate position in the media which allows access to all sorts of experts, politicians and events. Having spoken to some very knowledgable people about climate change, humanity is essentially doomed unless we do something quick-smart to change our ways.

You may have seen in the news stories that discuss aims to keep temperature rises to a maximum of 2 degress celcius within the next 100 years or so (the dates tend to vary). You might have also have read other experts state that we are almost certainly going to miss that target.

Not good.

2 degrees does not sound like much. It probably isn’t in the grand scheme of things. Well, 4 degrees is a bit of a nightmare that has the potential to unleash all sorts of problems as sea-levels rise, methane levels rise, more species are wiped out yada yada yada. We have heard it all before…

Well the thing you don’t hear so often - and has been said to me independently by three different and very knowledgable people - is that 6 degrees of temperature increase will equal, err, umm, phew, well, probably the extinction of mankind.

In short, if we don’t try and sort this out, within about 150 - 200 years, there might not be humanity. A pretty sobering thought I think you will agree.

150 years sounds like a long way away, but it isn’t really. Why? Because the effects will be being felt a long time before then. Somewhere in the region of 1 billion people live within 1 metre of sea-level. This could wipe out the population of places like Bangladesh with storm surges every time there is poor weather. And this could be happening with 50 - 100 years - it could be argued that it is happening already.

So we all need to make changes to our lifestyles if we - or our children or grandchildren - are to have a fighting chance at life. This means less trips in the car, eating less red meat, less flights, switching to energy efficient appliances and lighting, switching things off that are not in use, recycling and much more besides. Are you up to the challenge?

As a part of my work, it now seems highly likely that I will be in Copenhagen for the last few days of the summit. These will be the Ministers Days and Leaders Days. I will be there to try and obtain as many interviews as I can for my employer with my camcorder and microphone in hand, to be added to our blog platform. I’ll do my best to blog here about it as well.

Are you up to the challenge?

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The “Madoff” Effect

Posted by admin on Dec 7, 2021 in stock market
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As if life as a financial planner wasn’t hard enough - and trust me, unless you have a scad of multi-millionaires as clients, life if hard enough - it seems that the efforts of Bernie Madoff have made things even tougher.

This article on CNN explains how clients are now demanding ever more accountability and separation of adviser from money.

Never before has the role of a custodian been so important in selling investments!!

As the article mentions, there is a feeling that regulators didn’t do enough and now clients are taking a bigger interest in the well-being of their money.

To quote a very old investment trueism, “The return of your money is more important than the return on your money.”

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No ‘Green Shoots’ Of Recovery In A Desert

Posted by admin on Nov 30, 2021 in borrowing, credit crunch, depression, recession
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It seems that the ‘Green shoots’ of a financial recovery that the world has been prepared for by multiple hundreds of desparate politicians and economists has been dealt a severe blow.

Why?

Dubai.

All this time, we have been witnessing the economic miracle that is / was Dubai in awe and respect. But hey, it seems that they have built their massive towers not on sand but on debt! Sand might be unsafe, but debts are worse. And we thought they were all bazillionaires in the UAE…

Earlier in the year, we learnt about the end of the Dubai property boom as prices plummeted. Various stories are becoming ‘legend’ about expats leaving their Mercedes at the airport as they fly out to avoid their debts. Now we find that the Dubai government is in serious hock and pulling global stock markets down.

Will the sheiks be leaving their Maseratis at the private runway when they leave? That’ll be the place to go car hunting.

With so many banking stocks already in trouble - even after positive recent results - there seems to be no visible route for a genuine recovery in the financial sector. One thing that seems ever more clear, if major banks have been proved wrong about lending to Dubai - the home of global extravagance it would seem - then it is easy to imagine that there are many more loans in deep trouble.

It certainly proves the ability of the financial services and banking industries to spray money around. From NINJA loans in the USA to sovereign governments in the Middle East, they were certainly equal opportunity lenders.

What never ceases to amaze me, is the level of debts that seemingly wealthy individuals, corporations and nations have. Is there anyone or anything left in this world that isn’t up to his / her / their necks in debt? Would that man, woman or organisation please stand up? (’Cos the rest of us need a loan…)

When you read about countries like Dubai and Latvia struggling or going under ( Puerto Rico went bankrupt earlier in the year ), it doesn’t need a big stretch of the imagination to forsee bigger nations next.

This isn’t a domino effect for nothing you know…

For sure, it will take time before a genuinely large government goes under. Perhaps I should start a ‘debt pool’ in a similar vain to Dirty Harry in The Dead Pool to see who can pick a ‘winner’. Of course, finding a politician willing to fall on his or her sword over their handling of the recession / depression / financial crisis really is the needle in the haystack.

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The Financial Cost Of Flooding

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In my last post about water policy in the EU, I mentioned the potential for prohibitive costs to protect people and property from flooding.

CNN has today published a story about the likelyhood of seal-level flooding costing US$28 trillion by 2050.

This story is based on research for the insurance company Allianz - one place where the costs of floods will be severly felt - and the WWF ahead of the Copenhagen summit in early December.

As an aside, I’d expect lots more stories like this in the coming days. They are being timed to force attention onto the negotiations and - hopefully - to get everyone to agree a deal.

Whether this number is real, who can say? It seems big, very big. But then if you submerged London, New York, Rio, Barcelona and a few other large cities, the cost would be, well, very big. So let us not argue about the costs. It is only splitting hairs when the numbers are this big…

Instead, think about the impact on the property industries, insurance industry - and more importantly - national economies (it is worth bearing in mind that if, for example, London were to truly be flooded, a very large part of the UK economy would simply stop). The impact on the finances of the globe would be catastrophic.

To use an example that is happening right now, Cumbria in the North West of England has been hit by floods and heavy rain - while parts of Ireland are under water as well.

To quote from that BBC story, “The cost of damage is expected to run into tens of millions of pounds.” Those ‘tens of millions of pounds’ relate to 900 properties and businesses that have been hit.

Anyone that has been to Cumbria will know that it isn’t exactly the most densely populated place on earth, partly because of the multitude of hills and wild country. But of all places, they ought to be able to cope, after all, much of Cumbria is known as the ‘Lake District’. If they aren’t used to lots of water - and it rains a lot up there - who is?

So what would be the impact of major flooding hitting a capital city like London or New York? “Total economic shut-down” would be my guess.

And a new definition of the term ‘offshore banking haven’.

My mind has been changed. We need to take this ‘water’ thing much more seriously than we already do…

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