EclecticLip

(originally written Nov 2; posted Nov 16) 

It looks like the Democrats are going to get clobbered in next week’s tomorrow’s today’s US elections.  Economic malaise tends to do this to governing parties, which is one reason currency devaluation is the policy-du-jour: if country A can make its currency cheaper, it becomes more competitive and can export goods (and unemployment!) to countries B, C and D, whose currencies remain more expensive.  It’s this kind of race to the bottom which has given gold aficionados their current decade in the sun.  Of course, though Hemingway never lived to write about it, the sun also sets… 

The Tea Party’s emergence has been an interesting but predictable phenomenon.  The stagnation in American incomes for the past generation has finally hit a boiling point (what took so long?).  Increased prosperity has largely been confined to the top 1% — and even then mainly the top 0.1% — of income earners in the population; those nice folks whose job titles begin with “Chief” and end with “Officer”. 

In many cases, union-busting concessions levied in the name of improving competitiveness went straight into C-suite compensation: “trickle-up economics”, as it were.  I don’t have the American numbers handy, but here are some Canadian ones.  Perhaps one day, left-leaning parties will realize that they’ll get more support if they confine talk of tax increases to the very, very topmost folks.  Noblesse oblige, and all that.

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My brother forwarded me this article in the Financial Times recently.  Superficially about the fall of Rome and other civilizations, as chronicled by Joseph Tainter’s Collapse of Complex Societies, it links back to the fact that the complexity of the financial sector has increased far faster than the balance of the economy — the “real” economy.

The example of diminishing returns on increased complexity may also be observed in that the financial sector’s robustness in the recent past has relied on leverage, basically meaning that to make their money, they had to bet increasingly more. 

In this sense, complexity is a crippling strength — because it’s useful and produces great results at first, it continues to be turned to, even when the incremental benefits diminish and even dissipate away.  But because it once produced great results, there’s little impetus to try other ideas…

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(Originally written Sept 29 - posted Oct 13)

Joe Romm ran a competition at Climate Progress, to write what Canada would be like in 2050 if the pollution lobby held sway.  This is what I came up with, summoning everything I could from my rhetorical repertoire to write a melancholy dirge.

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Another of my financial commentaries (”worth every penny you paid!”)…

Due to persistent economic stagnation, countries are trying to push their currencies lower.  (See the Der Spiegel article here.)  The reasoning is that if the currency is worth less, countries’ exports will be more competitive, and through greater exports they can recover economic health.  The problem is that everyone can’t do this at once — and right now everyone is trying to do this all at once.  Now, try as I might, I couldn’t make an elegant “currencies are worth less” / “currencies are worthless” pun, so I’ll just commemorate my valiant efforts with this here sentence. 

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(posted Oct 9) 

As this article (a longer preview is available here) from the Boston Globe points out, urban planners in some American cities are trying to figure out how to retrench – often because a declining population and economic hardship have shrunk the tax base. 

This WSJ article here — subtitled “asphalt is replaced by cheaper grave; back to the stone age” (my emphasis) — describes how some states have deliberately moved back to gravel roads. 

To my knowledge, the same hasn’t happened in Canada, perhaps because severe income inequality hasn’t spurred a generation of plutocrat-friendly legislation… yet.  (Income inequality tends to make the impoverished vote conservative — perhaps out of a sense that an “other” is keeping them from breaking into the “haves” class?) 

This seems vaguely analogous to the Byzantine Empire’s decision during the Macedonian Revival, to keep its borders manageable and not overextend itself.  It must’ve been tempting for the Emperors to keep more modest borders than were achieved under the dynamic duo of Justinian and Belisarius, but they were ultimately better off for it. 

Right now, cities and states are having to retrench their infrastructure — a more realistic scenario under their current constraints, which must nevertheless be gnashingly frustrating for all parties involved.  Just as it must’ve been for the Macedonian Emperors…

Joseph Heath’s economics primer Filthy Lucre was chosen as the club’s 23rd book summary.  This choice was spurred by the seemingly-unprecedented furore about the implementation of the HST in British Columbia.  In light of this, it was felt appropriate to do a book on economics; and this tome, which critiques fallacious right-wing and left-wing ideas, seemed a good, neutral choice.

The HST — which harmonized provincial and federal taxes (hence its initials, which stand for Harmonized Sales Tax) — seems to be sensible policy, from my reading; Canada’s most populous province, Ontario, implemented one at the same time without nearly as much rancour.  I imagine the backlash in BC stems from the governing Liberal Party (by Canadian standards a far-right-wing party, despite its name) committing during the recent election campaign that it wouldn’t implement an HST — then reversing its position several weeks after the election.

As always, if you enjoyed the book summary, please consider supporting the author by purchasing a copy of the book. 

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Filthy Lucre - summary 

Have been musing recently whether deliberate currency devaluation can be considered a “tragedy of the commons” situation.  In this case, the “commons” is the value of the unit of currency.

I don’t the analogy works perfectly, but it does seem to fit the theme that when times get tough, goverments which are loathe to cut back on spending rely instead on currency devaluation.  This creates a temporary competitive advantage — until the currency is debased enough to lose any meaningful value.

Admittedly, there are often reasons for not overtly cutting back on government spending, which we in the global north take for granted: Roman Emperors, for example, tended to die suddenly if they lost the support of the military.  And cutting social spending can cause extraordinary misery… so the slow bleeding of a currency gradually losing its value, may seem more palatable.  Especially if the diminished value of savings (primarily a concern of the wealthy) is countered by the arrival of new jobs, in light of the country’s newly-cheapened labour (primarily a concern of everyone else).

(Originally written Aug 11; posted Sept 5) 

I’ve noted a few times that gold rises pretty much during the university year, and falls in the summer months.  Being the conscientious and only mildly obsessive-compulsive type, it irked me that I didn’t have (favourably-selected) data at my fingertips to back up my statements. 

Fortunately, an American mutual fund manager pulled the data together recently; more fortunately, I stumbled across his editorial piece; and most fortunately of all, when I write these things, it looks like I’m hard at work. 

One of the funny things about investments is that they tend to follow loose patterns — they’re just predictable enough that you think you can make enough money on them, and just unpredictable enough to prevent you from doing so. 

One of the better-known investment rules — and one which actually works — is “sell in May and go away“.  The lesser-known back-half “and stay away until St. Leger Day” (roughly equivalent to Hallowe’en) sadly, is shrouded in relative obscurity, not unlike the three other stanzas for O Canada.  …what?  You’ve never heard “O Canada! Where pines and maples grow”?  Tish, tish…     

The funniest part of the “sell in May”/”buy in November” rule is that… it actually works.  From the Wikipedia article, the phenomenon has held up in 36 of 37 countries, and has worked in Britain for the past three hundred years.  As Wikipedia drily notes,
 
      “According to the efficient-market hypothesis, this is impossible.”
 
…which pretty much tells you all you need to know about the efficient-market hypothesis!  One wonders if ancient encyclopedias concluded their discussion of Magellan’s circumnavigation of the world with “according to the flat earth hypothesis, this is impossible”.

Oh — and bear in mind that a three-hundred year trend might have an off-year that one November you decide to bet everything on “black” at stock-market roulette. 

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But back to gold.  As explained in the article, and annotated by some charts, gold’s typical rise from August to May is largely a function of demand: weddings in India, Christmas festivities in the West, and Chinese New Year.  (The author also mentions Ramadan, but Ramadan shifts back by about ten days every year.  As such, over time, it won’t mesh with the others, which stay put in one part of the calendar.)

During this time period, there’s usually a swoon around October and one around March.  These tend to be due to the fact that investor “chum” notice the uptick in August-Sept or Jan-Feb, put in some savings, causing temporarily overbought conditions… leaving conditions ripe for market sharks to feed. 

Innumerable sources talk about how peer recognition matters for more people than money… though the latter itself has some importance too.   

I imagine that at most companies, pay is assigned at approximately market levels based on the responsibilities incurred.  As such, CEO pay tends to drift higher than junior engineer pay, because the market has been assigning a higher value to the former — despite the many examples where this has proven incorrect. 

For their part, markets are mechanisms for establishing the price of a good through transactions, based on perceived value of the participants.  If not enough buyers feel a banana is worth $3, they will tend not to buy until the price drifts to levels they’re willing to pay; if not enough sellers feel a banana is being properly valued at 3 cents, they will tend divert their productive elsewhere, until the price rises. 

If we call the grouping of people in a market “peers” we could easily say market prices are a peer phenomenon — a peer assessment of value of the service / good in question, such as a year’s worth of junior engineering time.  Market prices are a form of peer recognition-of-value, or to be more precise, peer perception-of-value.  Presumably , if Ahab makes more money than Baal, that means he’s perceived to be more valuable.

In which case pay serves as a proxy for peer recognition (how you’re recognized among your peers, and/or by your peers, depending how hierarchical one’s firm is).  Which would go a long way towards explaining why it can be such a sensitive subject…

As an unabashed fan of Sprott Asset Management, and (hilariously small-time) unitholder in their mutual funds, I keep tabs on the writings coming from that gold-hoarding golden horde. 

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Here’s the latest from Sprott’s chief gold nut, John Embry.  I agree with the thesis that gold will hit an all-time high (in US dollars) — and probably within the next few months.  It’s been making all-time highs in Euros already.  But once that move starts making it to the front pages of newspapers (or The Economist) then it’s likely to take a year or two to consolidate its gains before eventually moving higher still.  At least, based on “history doesn’t repeat but it rhymes” theory.   The summer months tend to be fairly humdrum.

Gold does well in periods when stocks don’t, and vice versa.  So for gold to continue its decade or so of overperformance, one would expect general stocks not to do so well.  And in the US, that appears very likely.  In the past century, when stocks have been this richly valued, the S&P 500 index has returned a paltry 2% per year, over the subsequent decade.  So this data is consistent with the “gold-is-going-up” thesis.  Of course, there’s some selection bias on my part, in focusing on this supporting data. 

More selection bias comes from the link in this article (the link is titled “Japan - past the point of no return”) which elaborates the troublesome state of Japanese state finances: they took in more money last year from issuing bonds than they collected in taxes; the working-age population is falling even faster than the general population; and only Zimbabwe has a higher gov’t debt-to-GDP ratio. 

To be fair, it’s not all bad news: after the catastrophic misery that drastic cutbacks and higher taxes will cause, the resulting drop in the yen’s value should be of benefit for exporters.  Mind you, that’s about as ridiculous an attempt to be even-handed, as a historian who says “while the Chinese invented paper, in so doing, they invented paper cuts”.

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There was a story in the Globe & Mail the other day about how Sprott has actually *lost* assets under management, as some clients have been unhappy with his portfolio’s underperformance since the recovery in March of last year.  My guess is that successes in most stocks have been overwhelmed by the catastrophic losses in Timminco, a company which was trying to upgrade metallurgical silicon to solar grade.  In the past 2 years it went from from $30 to 82 cents.  [at time of original writing]  At one point Sprott owned 17% of the company, so that 97% loss most definitely weighed on shareholder returns.

From a contrarian perspective, this is interesting, and would be interpreted as meaning he’s due for some outperformance.  Media outlets generally cover streakiness — so a superstar who’s had a good run and gets glowing coverage (e.g. Eric Sprott circa 2008) is likely to have some bad years.  And a fallen titan who gets sympathetic coverage (e.g. Eric Sprott circa 2010) is due for a rebound.  Not that this should be interpreted as investment advice. 

Incidentally, he tried to buy some of the 191 tonnes of gold the IMF recently said it would put up for sale… but was rebuffed.  (Admittedly, he may not have been wearing a shirt or shoes…)  There’s a healthy minority who think the IMF only owns gold derivatives, and that Sprott was turned down because he would’ve asked for the bars to be moved to a vault in Toronto.  Maybe he wanted to swim in them, like Scrooge McDuck. 

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In you-can’t-make-this-stuff-up news, a whistleblower who’d sent emails to the US Commodities Futures Trading Commission, claiming JP Morgan Chase and others were manipulating commodities prices for fun and profit, was a victim of a hit-and-run a few days after his name surfaced in testimony.  (Fortunately he was also in a car at the time, and so was uninjured.)  I doubt the financial firms had anything to do with it, but this isn’t doing much for those institutions’ credibility in what I shall euphemistically call the “gold enthusiast” sector.