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THE KNOWLEDGE 21
THE WORLD by Tim Price
IS UPSIDE DOWN
The world is not flat, but upside down. How else to account for the the good ship “Money” has slipped its moorings and, unanchored by
developing world sending its capital over to the “affluent” West, in the anything as troublesome as fiscal discipline, is being blown all over the
form both of government bond purchases and banking sector rescue harbour. Since regulatory fiat, investment banking “innovation” and
investments? Perhaps the delusion was not in having higher accounting procedure can effectively conjure up money out of
expectations for the Doha Round, but in believing in the existence of nothing, who is to say what any paper-based assets are really worth
something called global free trade in the first place. Textiles might be any more? Where financial markets are allowed to trade freely without
a special case, but as Pietra Rivoli pointed out in “The Travels of a T-Shirt the regulatory grit of short-selling special circumstances, it is no surprise
in the Global Economy” (Wiley, 2006), the only time in its entire that the shares of financial companies, the recent relief rally
existence that her Floridian T-shirt ever encountered a free market was notwithstanding, are on semi-permanent sale. Other manipulations:
when, as a second-hand cast-off, it entered the mitumba for-profit the unemployment rate, GDP, and the balance sheets of corporations,
market in used clothing in Africa. At all other times it was at the mercy pension funds and government agencies which significantly
of federal price supports, trade tariffs, lobbyists and an alphabet soup understate liabilities and exaggerate assets and likely future earnings.
of sundry protectionists. Of course, to truly ensure that all faith is lost in the financial
superstructure, it is not enough that politicians lie. Corporate executives
And of course, there is precious little evidence of free markets
are also required to be evasive. Happily, there has been no shortage
operating in the Anglo-Saxon banking world – rather, administrations on
of equivocation there: see, for example, the completeness and
both sides of the Atlantic seem determined to perpetuate a culture of
transparency of the rolling write-down process as announced by Merrill
privatising profits and socialising losses, and pulling any number of
Lynch over the past twelve months:
rabbits out of hats to avoid dealing with the messy reality that an
extraordinary period of easy money and increasingly lax lending But at least US banking institutions have defenestrated the more
standards has culminated in an appalling collapse of credit, obviously guilty accountable parties; their British counterparts are still
confidence and trust in the financial system. No matter how long the stuck firmly in denial mode. That points to further stock market losses by
property bear market persists, the distrust of financial institutions will likely the banking convoy of death.
outlast it. The late pursuit of short-sellers of banking stocks is only the
most recent manifestation of an ingrained authoritarian support for the As to the broader equity market, evidence of lower oil prices would
morally indefensible. doubtless help sentiment. Happily, there is a growing amount of the
stuff, and not just the primary trend in the price itself. In a recent letter
Short sellers aren’t the problem. Incompetent and venally conflicted to the Financial Times, a Mr. John Holmes wrote as follows:
financiers are.
“Sir, the peak of every speculative bubble is always marked by some
Charles Hugh Smith expands on this theme: has the USA, he asks, extraordinary event that demonstrates the excesses resulting from that
become a giant Enron? The Houston-based energy giant, it will be bubble. The news that oil prices have swollen Kuwait’s national coffers
recalled, was once the seventh largest corporation in the US by market so much that they are to invest $132 billion on a new city – the Silk City
capitalisation and claimed revenues of $111 billion in 2000. By late – and to build an international rail network linking with Damascus,
2001 it was bankrupt, having destroyed 20,000 jobs and $2 billion in Baghdad, Iran and China is the best sell signal that we could ever see
employee pensions. for the oil price.”
“How,” asks Charles, “is our entire financial system any different ?” So the oil market may be on the point of confirming a dramatic
softening – but that still leaves the ongoing deterioration in international
Bogus inflation numbers are the first factors Charles cites behind a
property markets, banks and consumer spending to contemplate. An
financial system “based on cooked books, lies and deceptions”.
environment of widespread de-leveraging on the part of financial
Readers who like to contemplate their economic statistics from
institutions suggests that investors now anticipating the return of easy
beneath a tinfoil (or tin, for that matter) helmet can use John Williams’
profits are likely to be disappointed. There are plenty of cheerleaders
Shadow Government Statistics website (www.shadowstats.com). The US
forecasting days of plenty – cheaper oil will help the market tone, but it
Government is not acting in isolation in ensuring its books are
does not cause our very real global economic problems to vanish
extensively cooked – the UK Treasury has now torn up the rule books
overnight. Investors still require three attributes: patience, discipline,
relating to something our prime minister once referred to as Prudence.
and a plan.
And normal conditions have been suspended for the banks, which
have now been given a one-year reprieve from the accountants for
Source: Tim Price, Director of Investment PFP Wealth
taking back debt assets onto the balance sheet. Widespread money
Management tim.price@pfpg.co.uk blog:
illusion is now entirely understandable: as we first wrote two years ago,
http://thepriceofeverything.typepad.co
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