Across the river is the great "City" of London...where finance is the #1 industry...
..where earnest men and women toil long hours in glass towers. What are they doing?
'Look at this chart,' they tell clients. 'It shows how much you can expect to make at different risk levels. And see this curve? It is what we call the 'efficient frontier,' where the risk/reward relationship is optimized by proper asset allocation.'
'Wow,' you say. 'You must have some pretty smart cookies working for you.'
'Well, we do our best,' says the young man, modestly.
In a normal economy, 'finance' performs a useful function - helping to match up people who have capital with people who need it. But even when it is on the level, the profession is full of bombast and flimflam.
Those numbers, presented so confidently to customers, were 9/10ths smoke and 1/10th mirror. The new book by Rogoff and Reinhart confirms a point made by our friend Nassim Taleb: both the theory and practice of modern portfolio analysis were flawed. The theory was flawed because people are not reliable. They don't always react in the way their models predict. What they did in the past may or may not be what they do in the future. And the practice was flawed because the past that the number crunchers looked at was limited to the last 25 years; it was the period since 1980, for which they had the figures! In other words, their models were based on numbers only from the boom years.
The US dollar is getting trashed, Strategic Short Report's Dan Amoss tells us.
The greenback "is increasingly being viewed as a 'funding' currency in the carry trade," Dan continues.
"In other words, leveraged speculators are borrowing US dollars in the short-term money markets at near-zero rates to buy bonds in higher- yielding currencies like the Australian dollar or the euro. If this trend remains in place, it will continue to drive down the exchange rate of the US dollar, and drive demand for gold up.
"This trashing of the dollar is not bullish for America as a whole. It's dangerous for the viability of the middle class. It's good for exporters of agricultural products, specialized manufactured products, and energy producers, but bad for everyone who pays for lots of imported products, or imports that are incorporated into the supply chains of businesses that sell to US consumers.
"I think this claim that 'a weak dollar is good for exports' is narrow- minded and misleading. It ignores the fact that a weak dollar would drive capital out of the US, into economies that are paying a real return on their currencies."
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Joe on 29 September 2009:
I noticed this today.
Stagggering is all I can say. It is the rate of increase as much as the sheer scale that is truly awesome.
http://www.timesonline.co.uk/multimedia/archive/00617/counter2_617262a.swf
Watch it for a minute, if you dare. Panick quitely and avoid standing near any large windows on elevated floors of tall buildings !
Comment by Claytonator on 29 September 2009:
This is equally, if not scarier http://brillig.com/debt_clock/ - it's updated real time also, not monthly.
Comment by Gerry on 29 September 2009:
The fat lady is warming up. She is not singing just yet but is about to come on stage soon.
Comment by Coffee Addict on 30 September 2009:
The diversified & stable investment approach (based on versions of the modern portfolio theory) and probably applied by your super fund completely ignores following:
- the reality of tectonic changes to the world of business and finance.
- the reality of the bastards in those glass towers (and some like my self) who can cream 3 digit profits in current conditions (with your super fund on the losing side of the trades).
- SP volatility (beta) is not the same as risk (actual risk contunues to be completely mispriced by the market IMO).
I accept that the post MPT differentiates upward volatility from downward volatility (or something like that) BUT that isn't enough to save your retirement funds.
30 years ago I sat though economics lectures delivered by the late Victor Argy. Victor (a monetarist) and Bill appear to sing from the following song book . Fiscal policy to hold interest rates either high or low will ALWAYS be defeated by international capital flows and arbitrage opportunities.
Comment by Ross on 30 September 2009:
Ah CA! Sitting on my shelf - Victor Argy's The Postwar International Money Crisis - an Analysis 1981. For Ken Henry on p178, Tax Push Inflation - the Evidence. Of course Ken was one of those brats that took his Whitlam era public sector pay rises and bought his bubble house on a fixed rate loan. I'm the bugger that had to pay for it after coming into the workforce right behind him during the Fraser austerity. Once a ticket clipper always a ticket clipper.
And some fun for the people or the cranky sheeple as you will
http://www.youtube.com/watch?v=RYA0DsPcbaU&feature=player_embedded#t=251
http://www.youtube.com/watch?v=DiTikduJ15Y&feature=player_embedded#t=254
Comment by Ned S on 30 September 2009:
"the reality of the bastards in those glass towers (and some like my self) who can cream 3 digit profits in current conditions (with your super fund on the losing side of the trades)." I figured out that was how it all worked back in the dot com days CA. And decided I had a philosophical objection to my super sitting in an industry fund like a big fat chook waiting to be plucked - With do nothing managers raking off a fee for rebalancing the remnants of the portfolio occassionally. And their best advice being You need to put more in to make up for what we've lost. So decided to go my own way - For better or worse.
Comment by tar and feathers on 1 October 2009:
Some Nations holding excess US bucks are wanting to dump it so purchasing anything of value makes sense. But I thought the bond market was another bubble waiting to pop, why with so many countries wanting cash are they will to swap their cash bonds for $US of any amount.....? Seems that all nations are keeping the $US artificially high, and if they are loading up on small to large amounts of US$, (yea noted the UK debt clock is also bad) that's a real concern because debt is being created through $US currency that could keep on diving, countries that traded their promissory currency for US toilet paper are stuck with that currency they can't purchase anything with.....I think that means those countries go to the US and demand to be paid back ie the repo of USA. Hmm interesting. If the banks are loaded up with US$ do deposits get screwed?.......DR we need a better analysis than "buy gold".