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“There are weeks when decades


Title of Goldman Sachs Commodities Update, 16th
April 2013.


Human beings are essentially
pattern-recognition engines. We are hard-wired to recognise patterns,
shapes and trends. Evolutionarily, this presumably yielded our ancestors
benefits in the form of helping them to anticipate shifts in weather and the
seasons, or to identify potential predators or sources of food. Human beings
also have a longstanding appreciation of stories. So when we encounter moments
of high drama, both of these evolutionary characteristics come to the fore: we
associate the drama with the potential for crisis or threat; and we immediately
start on a search for meaning. Who did it, and why ? Turning the drama into an
engaging narrative may even be more satisfying to the human brain than striving
for objective truth. Who cares if the story is nonsensical, illogical, or just
plain wrong, as long as it’s sufficiently enjoyable ? So when the gold price,
in US dollars, fell by over 13% in the space of just two trading sessions a
week ago, it was a natural reaction to start looking for significance (and to
try and identify the protagonists). It was also a cue for legions of the
misinformed, underinformed or chronically uninformed to start filling column
inches with mindless drivel about what, if anything, it portended.


It helps the narrative when the
instrument in question is so widely misunderstood. There are at least two
wholly distinct participants in the market for gold. There are
momentum-followers, who like to buy into rallies and sell into dips. These are
speculators in paper gold, for want of a better turn of phrase. And there are
those like us, tasked with the preservation of clients’ capital in real terms,
who favour gold as a form of sound money in the midst of a fraudulent global
monetary landscape, in which inflationism is not just the norm but now explicit
state policy. There are, indeed, other types of participant beyond these. There
are also entities (states, and their economic agents) who have a vested
interest in suppressing the gold price on the grounds that an elevated price
for gold denotes a growing suspicion at the inherent soundness of fiat
currency. Suffice to say that for us, the fact that the supply of gold cannot
be suddenly or arbitrarily expanded simply by political whim is its defining
characteristic, and one that trumps its perceived value as expressed in units
of baseless fiat money.


So, to accelerate to the point.
We had no target price (in US dollars, say) for gold before last week’s antics
in the futures market. We have no target price today. We will continue to hold
gold, and for that matter silver, for as long as there is risk of acute
monetary disorder in the global financial system. And we don’t hold gold in
isolation: we also invest into high quality credit instruments, high quality
equity investments, and uncorrelated funds. The beauty of this diversified
approach is that because each asset class is distinct and discrete, it is
comparatively rare for all four to move lock-step with each other. If all
tended to move in the same direction at the same time, there would be no
benefit from diversification. It is, indeed, plausible to presume that while we
were incurring some mark-to-market pain in our bullion and bullion mining
holdings, our trend-following managers were simultaneously making hay. It’s an
ill wind..


So some mysterious heavy selling
in gold futures is unlikely to shift our prevailing philosophy or process much,
if at all. If the politicians of the western world were suddenly to get
religion and start pursuing balanced budgets, or if the central bankers of the
western world were suddenly to abandon money printing, that might change


Beyond that, we would simply like
to republish commentary we issued in November 2011, which we still think is
absolutely relevant to the environment today.


Spoiler warning


“I am certain that my fellow
Americans expect that on my induction into the Presidency I will address them
with a candour and a decision which the present situation of our people impel.
This is pre-eminently the time to speak the truth, the whole truth, frankly and
boldly. Nor need we shrink from honestly facing conditions in our country
today.. So, first of all, let me assert my firm belief that the only thing we
have to fear is fear itself – nameless, unreasoning, unjustified terror which
paralyzes needed efforts to convert retreat into advance.. In such a spirit on
my part and on yours we face our common difficulties. They concern, thank God,
only material things. Values have shrunken to fantastic levels; taxes have
risen; our ability to pay has fallen; government of all kinds is faced by
serious curtailment of income; the means of exchange are frozen in the currents
of trade; the withered leaves of industrial enterprise lie on every side;
farmers find no markets for their produce; the savings of many years in
thousands of families are gone..”


From President Franklin D. Roosevelt’s Inaugural
Address, March 4, 1933.

Just two years after ‘The China Syndrome’
lifted the lid on Spanish practices in the US nuclear industry, Jane Fonda and
her production company, IPC Films, did a similar hatchet job on US banks with
1981’s ‘Rollover’. The Alan Pakula-directed film is certainly of its time (that
is to say, paranoid and narrowly racist); environmental concerns have now
segued into economic and financial malaise, with Arabs and their petrodollars
as the enemy (if it could be remade today, and it probably couldn’t, the
Chinese and the Renminbi would doubtless be replacing them). Investors with
strong stomachs – and these days, that needs to be all of us – can watch the
devastating final minutes here,
as the US / global financial system is brought to its knees.

are often accused of being permabears, and it simply isn’t true. We will,
however, accept any charges of being brutal realists or pragmatists. What is
true is that the financial world has been in a state of crisis for at least the
past four years, and despite all the Sturm und Drang and the endless
pontificating from the markets commentariat, the nature of the crisis is
neither widely recognised nor widely understood. Greece, for example, is a
sideshow. But it is symptomatic of the cause, which we identify as
fundamentally a problem of debt.

Chris Martenson has observed (and
we note, in passing, how it takes non-financial professionals to see clearly
through the fog of the present), perpetual expansion is a requirement of modern
banking. The supply of credit at least doubled during the 70s, then again
during the 80s, then again during the 90s, then again during the noughties.
Martenson suggests, and we fully believe, that there is now simply more debt in
the world than can ever be paid back. You can see it in pictorial form here. Note that
that debt is concentrated in the western economies. So on the one hand, we have
a requirement for perpetual economic expansion, if only in the cause of debt
service. On the other hand, the western economies have run into the sand. A
recent McKinsey report on debt plainly identifies the problem. After a forty
year party of debt-fuelled growth, we have the hangover of deleveraging.
Historic episodes of deleveraging fit into one of four archetypes:

austerity (or “belt-tightening”), in which credit growth lags behind GDP growth
for many years;

massive defaults;

high inflation; or

growing out of debt through very rapid real GDP growth caused by a war effort,
a “peace dividend” following war, or an oil boom.

words, not ours. So choose your poison – assuming you have  a choice.

therein lies the problem. The dead weight of debt was amassed in large part by
politicians promising more than they could ever deliver, with taxpayers now and
to be born involuntarily taking up the slack. And it was facilitated by banks,
the scale of whose malinvestment excesses has effectively caused their finances
to be fused with those of national governments. Whether the crisis is resolved
via options 1, 2, 3 or 4 (or combinations thereof) will be a function of
cultural stability and political will – it is certainly not precisely
predictable. The UK, so far, under a fractious coalition government has opted
for 1. The grisly farce that is Greece will probably plump for 2. Option 4
looks unrealistic but US militarism cannot be entirely discounted. Option 3
continues to look like the most politically expedient “solution” for most of
the indebted world. The business of investing involves a probabilistic quest
for certainty where none exists. Hence asset diversification. But we have
established to our own satisfaction a few ground rules. G7 government debt
looks like a ‘safe haven’ bubble that could end disastrously. But if G7
government bond yields really are sustainable at their current, pitifully low
levels, that implies a Japanified prolonged deflation that is logically
consistent with a disaster for most other traditional assets. So sensible and
uncorrelated investments scream out as one solution – we vote for systematic
trend-following funds, and are now examining insurance-linked and
infrastructure investments. And one thing “seems” certain: ongoing currency
debauchery in the west, which would make the case for the monetary metals even
without the simultaneous, grave and tangible threat to our banking and
financial infrastructure.

the conclusion of ‘Rollover’, a tearful young Asian banker summarizes the intra-day damage to her dealing room
head: stock market down 10%; the same for the dollar; rival firms essentially
bankrupt; gold just breaking above $2,000. His response: “By tonight, that’ll
be cheap.” The economic logic is sound. We have been conditioned for the last
forty years to price gold (for example) in an inconstant currency, the dollar.
(Using the euro, the mongrel currency of a mongrel political union, would make
the problem no more easily resolvable.) We make no apology for requoting
Andreas Acavalos on the topic:

problem of economic calculation under a fiat monetary regime is fundamentally
insoluble. It cannot be solved for exactly the same reason that you cannot
solve the problem of “measuring” a length of cloth with an elastic tape
measure. The only “solution” is to throw away the elastic and use a yardstick
that cannot be stretched at will.”

yardstick, of course, is gold. Mr Acavalos, again:

it is unfortunately not within our power, as ordinary citizens, to do away with
fiat money, we have to live with it and manage our affairs accordingly; we
must, in other words, take rational economic decisions in the context of an
irrational monetary regime that distorts relative prices and renders them
increasingly meaningless as guides of where to invest. Here, I think, is where
the role of gold comes in: acquiring gold is not an investment. It is a
conscious decision to REFRAIN from investing until an honest monetary regime makes
rational calculation of relative asset prices possible.”

to Wikipedia, the phrase “spoiler warning” started appearing during the early
days of the internet so that unwitting readers didn’t have vital plot points
inadvertently revealed to them ahead of time. We apologise for giving away the
plot to ‘Rollover’ – but as you’ll find if you make the attempt, it’s a
difficult film to track down. I cannot recall its ever having been broadcast on
terrestrial television here in the UK. Watch those final minutes and you can
appreciate why. Films about meteorites, volcanoes, even earthquakes, the
authorities can handle. Films about monetary and economic breakdown..
Confidence and trust are inherently part of the modern financial system. Once
broken and driven away, they will not easily return. With luck, the sort of
panic that we see in the last minutes of ‘Rollover,’ as an institutionalized
and local bank run becomes public and international, will not recur in our
lifetimes. But the current pace of “progress” in the euro zone and for that
matter global debt crisis might suggest otherwise. “By tonight that’ll be
cheap.” Six words that should inspire fear in every politician and monetary
policymaker, in Europe, the US and elsewhere.


Tim Price

Director of Investment

PFP Wealth Management

22nd April 2013.                                                                     Follow
me on twitter: timfprice

Important Note:


has made this document available for your general information. You are
encouraged to seek advice before acting on the information, either from your
usual adviser or ourselves. We have taken all reasonable steps to ensure the
content is correct at the time of publication, but may have condensed the
source material. Any views expressed or interpretations given are those of the
author. Please note that PFP is not responsible for the contents or reliability
of any websites or blogs and linking to them should not be considered as an
endorsement of any kind. We have no control over the availability of linked
pages. © PFP Group – no part of this document may be reproduced without the
express permission of PFP. PFP Wealth Management is authorised and regulated by
the Financial Services Authority, registered number 473710. Ref 1019/13/JB

Hunting witches

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“To the socialists of all parties
(to whom F.A. Hayek dedicated ‘The Road to Serfdom’), ‘The Constitution of
Liberty’ is anathema. Hayek, they believe, stands for an atomised society full
of selfish individuals all looking after their own interests. But nobody who
has read the original texts could possibly represent him this way.


“One person who understood this
was Margaret Thatcher. Once during a party policy meeting a speaker started to
argue that the Conservative Party should adopt a pragmatic middle way.
According to John Ranelagh in ‘Thatcher’s People’, “Before he had finished
speaking.. the new Party Leader reached into her briefcase and took out a book.
It was Friedrich von Hayek’s ‘The Constitution of Liberty’. Interrupting, she
held the book up for all of us to see. ‘This,’ she said sternly, ‘is what we
believe,’ and banged Hayek down on the table.”




Difficult, somehow, to imagine David Cameron (or Ed Miliband, for
that matter) banging any sort of book down at a policy meeting as a statement
of belief – unless it happens to be on the topic of public relations. That is
the measure of Margaret Thatcher’s premiership. Regardless of whether you liked
or loathed her policies, today’s crop of aspirant statesmen in the British
parliament look like pygmies by comparison. Where are our conviction
politicians ? This matters, because as ‘The Economist’ pointed out last week,
in a world desperately in need of growth,


“the pendulum is swinging
dangerously away from the principles Mrs. Thatcher espoused. In most of the
rich world, the state’s share of the economy has grown sharply in recent years.
Regulations – excessive, as well as necessary – are tying up the private
sector. Demonstrators protest against the very existence of the banking
industry. And with the rise of China, state control, not economic liberalism,
is being hailed as a model for emerging countries.”

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Weird Scenes Inside The Gold Mine

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“The modern Keynesian state is
broke, paralysed and mired in empty ritual incantations about stimulating
‘demand’, even as it fosters a mutant crony capitalism that periodically lavishes
the top 1 per cent with speculative windfalls.”


From ‘The Great Deformation – how crony
capitalism corrupts free markets and democracy’ by David A. Stockman.


First they ignore you, said Mahatma Gandhi. Then they laugh at you.
Then they fight you. Then you win. On the basis of the vitriol that David
Stockman’s new book has stirred up, he is close to winning – the debate, if
nothing else. Someone called Jared Bernstein described Mr. Stockman’s book as
“a horrific screed, an ahistorical, dystopic, Hunger Games vision of America based on debt obsession and wilful
ignorance of macro-economics and the impact of market failure”. Sounds like
America to us. Someone else called David Frum labelled it “primitive” as
economics, “silly” as advice and suggested that Mr. Stockman might be suffering
from elderly depression. “As an insight into the gloomy mindset that overtakes
us in middle age, it’s a valuable warning to those still middle-aged that once
we lose our faith in the future, it’s time to stop talking about politics in
public.” Perhaps. Or perhaps Mr. Stockman’s new book is an accurate portrayal
of a dysfunctional kleptocracy beset by venal politicians and inept and greedy
financiers in which “politics” is reduced to an endless clown parade of the
economically illiterate attempting to perpetuate an illusory boom fuelled only
by ever more desperate spasms of unsustainable credit. Thanks to Amazon, we
will soon know one way or the other.

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A Greek Tragedy

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“In money management what sells
is illusion of certainty. The truth (i.e. we don’t know much) is a more
difficult sale, but a better investment.”


Tweet from Piet Viljoen of RE: CM asset

“A woman was trying to read

 If deposits were
still guaranteed

 If her bank would consign

 To Frankfurt am Main

 Or Cyprus would have
to secede.”


Tweet from Dr. Goose

“..a quite outstanding week’s
work by the Troika [ECB, EC, IMF]. Take a moment to realise the scale of what’s
been done here. No human agency has achieved so much economic destruction in
such a short time without the use of weapons.”


, ‘Cyprus: the operation was a success. Shame the patient died’.


“Alright, people just need to chill. Cyprus is a tiny country. To put things in
perspective, its GDP is roughly the size of.. Lehman.”


Tweet from Jesse Livermore.


Like Lehman Brothers before it, Cyprus may well come to be seen not
so much as the cause of further crisis but as yet another symptom of the ‘long
emergency’ that continues to suffocate the western economies. We would describe
this emergency as, fundamentally, an inevitable crisis triggered by an
unsustainable explosion of credit. No progress or improvement has been or will
be possible in the underlying condition because both the banking sector that
collectively lost its mind and the governments that permitted it to are fatally
dysfunctional and equally bankrupt, literally and morally. Western
banks and western governments are now like Macbeth’s


“..two spent swimmers, that do
cling together

And choke their art.”


The prime minister of Luxembourg,
Jean-Claude Juncker, has provided two clear insights into the world of deceit
that the modern politician inhabits:


“We all know what to do, we just
don’t know how to get re-elected after we have done it.”




“When it becomes serious, you
have to lie.”


This is what we now have by way
of parliamentary democracy: a self-serving elite who cannot be trusted,
operating to a timetable defined by, and limited to, the electoral cycle.

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The Big Freeze

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“From 30 feet away she looked
like a lot of class. From 10 feet away she looked like something made up to be
seen from 30 feet away.”


Raymond Chandler.



To AC, with thanks.


I never met a central banker who didn’t respect a smack in the
chops, and Bernanke was no exception. ‘Helicopter Ben’ went down faster than a
two dollar hooker when the Navy’s in town. While he did his best to compose
himself, I took the opportunity to glance around his office. Much like the top
man at the Fed, it had seen better days. Glasses still half full of whiskey, a
scattering of unconscious dames almost artfully draped around the furniture,
sundry tobacco stains all littered the place. It was empty, other than a few EU
officials rifling through the customer safe while a gloomy Russian looked on. The
stench of a party that had gone on for far too long hung in the air like an
inappropriate comment at a christening. And I was in no mood for compromise. Pretty
soon I set to tidying ‘Helicopter Ben’s face with a crowbar. But in an instant
the door burst open. It was mad Uncle Vince and someone I only half recognised
from his mug shots in the popular press – ‘good time Carney’, a glamorous but rabid
Canuck in full-scale retreat from a domestic housing bust.

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Ask Vince Cable

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“We admit that we doubted the zimbabweconomists
who said “this will work, trust us, we’ve never been wrong theoretically,” but
the wealth effect is working. We feel GREAT. More importantly, we feel rich.
So much so that we are using a new word to describe our riches — wealth.
And all that wealth burning a hole in our pocket? What’s a mini-baller¹
to do? Spend spend spend spend spend. We are spending 5x more than we normally
would thanks to our new permanently elevated levels of riches, our new
so-called wealth. And that spending has begot job creation in the economy. Last
week, feeling flush with nouveau wealth, I personally spent $40k to buy windows
and $10k to hire homeless people to break those windows in a sort of informal
mad-dash shopping-for-dollars-cum-breaking-windows competition. It was
inspirational. This actually works — unemployment has never been lower
according to current theory I think. The economy is growing at record levels
(depending only on how you define these words: “economy,” “growing,” “record,”
and “is”).”


From ‘Long the wealth
by Long or Short Capital.


¹Baller: A thug
that has "made it" to the big time. Originally referred to ball
players that made it out of the streets to make millions as a pro ball player,
but now is used to describe any thug that is living large.


Usually male, a mini-baller is single, aged 22-30, and has a six-figure income.
He tries to be a "baller" but can't quite afford it. He lives a
"mini-baller lifestyle" which involves over-spending his large income
on weekend travel, expensive clothes, and alcohol. His life goal is to become a
regular "baller" but he usually doesn't get there.

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Them was rotten days

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“Sir, Robert Skidelsky and Marcus
Miller (Letters, February 27) consider that the Nobel Prize winner Friedrich
Hayek offered a “counsel of despair” in the Great Depression. Next, we have the
minatory clichés “writing on the wall” and a call for George Osborne to “change
gear” or “let someone else take the wheel”.


“By chance, having literally been
chauffeur in 1975 to Hayek at a Mount Pèlerin conference and thus spending some
hours with him, may I declare an interest. Hayek was a delightful passenger.
His view of the self-adjusting powers of markets is in fact a counsel of
well-founded optimism. Indeed, as we discussed, allegedly “austere” Britain
recovered from the 1930s slump faster than “New Deal” America where, in H.L.
Mencken’s withering phrase, Roosevelt was “addicted to the spending arts”.


“The real “hoax” is the
neo-Keynesian delusion that sub-optimal capital projects and monetary
manipulations led by the knowledge-poor mechanisms of the state can do a better
job than the relatively better informed, risk-disciplined actions of players in
properly constituted markets. The Skidelsky / Miller imagery of the economy as
a single automobile – a fixed construct with all parts known to the manufacturer
– precisely illustrates the misconception that centrally operated levers and
controls are appropriate to outcomes in the social sciences, and would have
been gently derided by the unfailingly polite Hayek as such..”


Letter to the editor of The Financial Times from
Mr Peter Smaill of Borthwick, Midlothian, UK.

“..But today we have involved ourselves in a colossal
muddle, having blundered in the control of a delicate machine, the working of
which we do not understand. The result is that our possibilities of wealth may
run to waste for a time — perhaps for a long time.”


John Maynard Keynes, “The Great Slump of 1930”
in Essays in Persuasion.


In the long and colourful history of dispatches sent by us with an
adolescently naïve hope to the letters editor of The Financial Times, here is
one that made it through past enemy lines on November 23, 2011:

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End of Empire

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“He was a portly, middle-aged
figure in an ill-fitted suit, scuffed black shoes, and the sort of sagging thin
black socks I came to recognize as a symbol of Britain’s long economic decline.
There were other features incongruous with his station in life. Cowlicks
standing high on the back of his head took on lives of their own; his clothes
were as rumpled as if he had slept in them. He was the boss of an operation of
several hundred people, and he looked like a bum or as if he had just awakened
from a long nap.”


Account of a British investment banker in the
1980s, from ‘Liar’s Poker’ by Michael Lewis.


For Michael Lewis, Britain’s long economic decline was exemplified
by the sagging black socks of a native merchant banker. To an earlier generation,
Britain’s ‘end of Empire’ moment came similarly not with a bang, but with a
whimper. British sovereign finances had been slowly and surely mauled by the
cost of two dreadful global wars, but we limped on until July 1956. Egypt’s
President Nasser nationalized the Suez Canal and with our oil supplies at risk,
Britain sought aid from the IMF. The United States said ‘No’. Indeed the US,
Britain’s largest creditor, also threatened to sell some of its massive holdings
in UK government debt. Joining the fray, Saudi Arabia began an oil embargo
against Britain and France. Sensing an opportunity to increase its influence in
the Middle East at the expense of its faltering old ally, the US refused to
make up the shortfall in energy supplies unless Britain agreed to an immediate
military withdrawal from the region. The British Chancellor, Harold Macmillan,
warned the Prime Minister, Anthony Eden, that our foreign exchange reserves
were running out. The country would soon be unable to feed itself. Britain
blinked first, and our days of Empire were over.

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Value investing

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“Sir, With reference to your
report “Leading bullion bank declares end to gold’s decade-long rise” (February
2): Oh dear ! Why make it complicated ? If you expect lots of monetary
expansion over the coming  years, paper
money’s value can be expected to decline. If you expect governments to stop
trashing their currencies, it probably won’t. That is what the future price of
gold will reflect, pure and simple.”


–       Alasdair
Macleod, Head of Research, GoldMoney, in a letter to the Financial Times.


“The world's central banks last
year bought 534.6 tons of gold in 2012, the most since 1964, as global gold
demand hit a record value level, the World Gold Council said Thursday in a
quarterly report. Purchases by central banks for the full year rose 17%
compared with 2011, while fourth-quarter purchases of 145 tons marked a 29%
rise from the same period a year earlier.”


–       MarketWatch
/ The Wall Street Journal, 14th February 2013.

“Where is the wisdom we have lost
in knowledge ?

 Where is the knowledge we have lost in
information ?”


–       From
‘The Rock’ by T. S. Eliot.



Price is what you pay; value is what you get. Warren Buffett’s
rightly celebrated aphorism carries an especial resonance when, courtesy of near-zero
interest rates and global competitive currency debauchery, it is increasingly
difficult to assess the value of anything, as denominated in units of anything
else. To put it another way, the business of rational investing becomes almost
existentially problematic when a significant number of market players are
pursuing maximum nominal returns without a second thought as to the real value
of those returns. Hedge fund manager Kyle Bass alluded to this problem recently
when he pointed out that the Zimbabwean stock market had been the last decade’s
best performer, but that owning the entire index would only buy you three eggs.
It is not just Zimbabwe. Markets everywhere, in just about everything, have now
decoupled not just from their underlying economies but from reality.

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The constant taking of the soft political option

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“On October 15, the mark’s rate
against the pound passed 18 milliards. On October 21, after the mark had moved
in three days from 24 milliards to 80 milliards to the pound, Lord D’Abernon
noted with some statistical glee that (at 60 milliards) this was ‘approximately
equal to one mark for every second which has elapsed since the birth of
Christ’. At the end of the month the banknote circulation amounted to 2,496,822,909,038,000,000
marks, and still everybody called for more.”


–       From
‘When money dies: the nightmare of the Weimar hyperinflation’ by Adam



The internet has been nicely
described by Lars Nelson of the New York Daily News as


“a vanity press for the


Notwithstanding the bitter
accuracy of this statement, we flit from time to time to sites like Twitter to
attempt quixotically to redress the balance of popular opinion away from
wrong-headed nonsense with regard to the financial world in favour of rational
(perhaps even moral ?) analysis. Last
week we engaged in the following conversation:

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This is going to end badly

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“Our experts think that equity
valuations now look attractive.”


–       From
a Fidelity advertisement in the FT, 2 – 3 February 2013.



You may want to frame that one. As always, only time will tell. But
on the basis that it makes sense in general terms to buy low and sell high, how
should we view the current behaviour of the S&P 500, for example ?
Financial analyst and commentator Doug Wakefield
has published a chart summarising the last 13 years of the benchmark US stock
index with some helpful notation..

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Nobody knows

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“Economists, like royal children,
are not punished for their errors.”


–       James



We lost another client last week. This makes a grand total of two
clients who have left us over the past year, not because we lost them money,
but because apparently we didn’t make them enough. Since the rate at which we are
attracting brand new clients is comfortably outpacing the rate at which we lose
relatively new clients, this shouldn’t be an immediate cause for concern either
for us or for our clients, but it is a little galling nonetheless. We take some
pains to try and communicate our philosophy and process on a regular basis, but
such communications for some clients are evidently insufficiently compelling when
set against a bull market in common stocks and other risk assets. The market’s
going up ! And what have you guys done for me lately ?

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Poor Tim Harford

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“The world is moving step by step
towards a de facto Gold Standard,
without any meetings of G20 leaders to announce the idea or bless the project.”


–       Ambrose
Evans-Pritchard, The
Daily Telegraph



Few publications have the capacity to enrage like the Financial
Times. On the one hand, it carries thoughtful, well written and engaging
commentary from the likes of John Kay, Luke Johnson and Gillian Tett. On the
other hand, it regularly publishes Martin Wolf. The latest weekend edition does
not disappoint. Tim Harford, hitherto unobjectionable, publishes what can only
be an elaborate ironic joke against gold, ‘The Bundesbank takes back its

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Eastern promise

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Tweet of the week


“We’re a £ trillion in debt and
Andy Burnham’s issuing statements about Frosties.

#SpareMe #LabourWasters”


–       Marcher
Lord @MarcherLord1



“An investment operation,” wrote Benjamin Graham and David Dodd in
1934’s ‘Security Analysis’, “is one which, upon thorough analysis, promises
safety of principal and a satisfactory return. Operations not meeting these
requirements are speculative.” So congratulations are due to the Federal Reserve,
the Bank of England and the European Central Bank. Having slashed policy rates
(and therefore by natural extension cash deposit rates) to all-time lows,
typically well below inflation (however defined), these bodies have managed to
turn just about every investor in the world into a speculator. Legions of
savers have felt compelled to play the stock market just to keep their capital
above water. Having forced reluctant punters into uncertain waters, will the
central banks ensure that these bathers aren’t swamped ? Can they even ? Should
they ?

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Out of the frying pan into the frying pan

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“The skill of the sports player
is not the result of superior knowledge of the future, but of an ability to
employ and execute good strategies for making decisions in a complex and
changing world. The same qualities are characteristic of the successful
executive. Managers who know the future are more often dangerous fools than
great visionaries.”


–       John
Kay, ‘Only
fools claim to know the future’



Only fools and economists, that is (this is known as tautology). Of
the money routinely misspent in the financial markets, that misspent on
economists is surely the most egregious. Any strategist, investor or fiduciary
knows that he may be wrong – but only the economist has the potential to be
wrong at least twice. Once in the overconfident forecasting of future economic
trends, and once again in extrapolating from those dubiously forecast economic
trends to make deductions about the likely investment outcome. “I may be only a
fish and chip shop lady,” said Pauline Hanson, “but some of these economists
need to get their heads out of the textbooks and get a job in the real world. I
would not even let one of them handle my grocery shopping.”

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Goons versus Gold

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“When, more than 100 years ago,
George Gilbert Williams, president of the famously conservative Chemical Bank,
was asked for the secret of his success, he replied: “The fear of God.” You can
have the fear of God or the socialisation of risk, but you cannot have both at


–       James
Grant in the Financial Times, ‘Banks should rediscover the art of caution’.



The role of economists, writes Charles Gave, along with that of
governments and central banks, is to promote a stable monetary and legal
framework for the risk-takers (entrepreneurs, money managers etc..) to make
their decisions as rationally as they can.


“Unfortunately, this has not
happened. Instead, in a new and improved declination of Friedrich Hayek’s
“fatal conceit,” we seem to be moving away from “scientific socialism” to
” – where the overconfident and overeducated
control-engineers are no longer members of the avant garde of the proletariat,
but plain, boring and well-meaning economists working in the entrails of the
world’s central banks. My intent is not to show why these economists will fail
(bigger and brighter minds such as Hayek, Mises, Friedman, etc. have already
done this) – but rather to review the
impact that the misguided manipulation of the price of money (exchange and
interest rates) is having on the notion of risk

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The Terminator

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“Our Russian psychosis has two
curious features. Firstly, that an 80 per cent Christian Orthodox society for
some reason reacts to a Mayan calendar which no one has ever seen. And
secondly, that the end of the world is perceived as an economic crisis that can
be survived on the banal level of consumption.”


–       Russian
broadsheet ‘Vedomosti’, quoted in The Daily Telegraph last Friday in an article
entitled ‘Russian residents buy up tinned goods and matches ahead of



Speaking of apocalypse, there is an increasingly urgent debate
occurring in what’s left of the financial markets over the stability of that
mountain of government debt that sets its long shadow over everything. The
mountain is not localised or restricted to any one region. As befits the
current economic climate, it’s global in scale and intractable in structure. As
Kyle Reese remarks of The Terminator in the film of the same name, the debt


“ out there. It can’t be
bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or
fear. And it absolutely will not stop, ever..”

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Sobering stuff

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“There’s a stereotype of Goldman
folks and he’s not really the stereotype. He’s a very good guy.”


–       Michael
Sabia, CEO, Caisse de depot et placement de Québec, quoted in The Financial



“Sir, Given the outpouring of
plaudits for our Mark Carney (with the FT leading the way), might we expect Mr
Carney to save money for the British government by walking across the Atlantic


–       Letter
to the FT from Mr John H. V. Gilbert of Vancouver, BC, Canada.



To Hampshire, and to the rather wonderful Four
Seasons Hotel, the setting for Citywire’s ‘Smart Beta’ retreat.. We went
specifically to hear from Russell Napier and Dylan Grice. In the event,
circumstances precluded Mr Grice’s attendance. But the first keynote speaker,
Mr Napier, managed to steal some thunder from SocGen’s notorious ‘Ice Age’
analytical team.

Napier has written the book on bear markets. Specifically, the book is titled
‘Anatomy of the Bear: lessons from Wall Street’s four great bottoms’, and it comes
highly recommended. And bear markets are not necessarily to be feared. Provided
one can survive them, they bring in their wake opportunities to create
significant wealth. But this is not automatically a rapid process. As Marc
Faber writes in his introduction to the book,

wisdom has it that great market bottoms, which offer lifetime buying
opportunities, occur quite soon after devastating market crashes. But, as
Russell shows in this book, great bear markets have long life-spans.. at its 1921
low, the Dow Jones Industrial Average was no higher than it had been in 1899 –
22 years earlier – while during that period nominal GDP had increased by 383%
and real GDP by 88% ! Similarly, by August 1982, the Dow was no higher than it
had been in April 1964, and was down by 70% in real, inflation-adjusted

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Managing the future

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“There is only one side of the
market and it is not the bull side or the bear side, but the right side.”


–       Jesse


Rogue trading respects few boundaries, either of
geography, or scale. Nick Leeson’s $1.4 billion hit in 1995 was enough to prove
fatal for Barings Bank. He was trading (i.e. punting) the Japanese stock market
via Singapore. Jérôme Kerviel’s 2008 “transgression” of $7.2 billion, as his
name implies, was an all-French affair, incurred at Société Générale, punting
European stock index futures. Japanese rogue traders, having carved out an
early name for themselves in the game, have lately been quiet (much like the
Japanese market). Toshihide Iguchi of Daiwa Bank – an alma mater of this author
– managed to pull off a definitively Japanese coup in 1995, by contriving to
lose $1.1 billion trading US Treasury bonds during one of the largest bull
markets for Treasury bonds in history
. Since Mr. Iguchi also managed to
forge more than 30,000 trading slips, he must also have owned one of the
largest desks in history, too. His countryman Yasuo Hamanaka, ‘Mr. 5 Per Cent’,
dropped $2.6 billion at Sumitomo Corporation punting copper. (Sweeping crass
generalisation alert: the Japanese, one suspects, are especially poor at
trading, since their culture rejects both risk-taking and individualism,
preferring instead the comforting drift of the masses, for better or worse.) If
one can draw any conclusions about the activities of Messrs Leeson, Kerviel
(case now on appeal – rogue traders have a tendency to be somewhat delusional),
Iguchi, Hamanaka and now Adoboli, among them would be the observation that it
takes at least two to tango: an errant trader with messianic delusions of
relevance, and an errant employer lacking even the most basic clue about
risk management.

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Too quiet on the western front

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“SIR – I wonder whether you might
have established some sort of record as the newspaper that most frequently
tells its readers of its support for a smaller state whilst simultaneously
endorsing candidates who espouse big government.”


“SIR – Your endorsement of Mr
Obama and his policies for a second term reminded me of Samuel Johnson’s
aphorism, that getting married a second time represents the triumph of hope
over experience.”


–       Letters
to The Economist from Richard Thoburn of London and Hal Carroll of Hell,
Michigan, respectively.


The original ‘Phoney War’ took place following Britain
and France’s declarations of war against Germany in 1939 and preceded the
Battle of France in 1940 (which of course didn’t last very long). Wikipedia
points out that Churchill called it ‘the Twilight War’ and others referred to
it as ‘der Sitzkrieg’ (the sitting war – a particularly off colour pun), ‘the
Bore War’ and ‘drôle de guerre’ (the funny war). There were no significant land
offensives. It was all just too quiet
on the western front.

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