The Final Crash, by Hugo Bouleau (book review & interview)

Hugo Bouleau’s (pseudonym of the author) book was for me, perhaps the most riveting reading of 2008. I like to underline important sentences in books, it’s a habit I picked up from a history teacher in secondary school. Looking back through ‘The Final Crash’ I can safely say I went through a whole pencil!

Bouleau writes the book not only from his practitioner experience as an asset manager for a large private bank in the Channel Islands (he is also a fellow of the Securities & Investment Institute), not only from his educational background from City University in London, but from that of a concerned citizen of the world who realises the core issue of the financial crisis, the one that remains largely uncovered in the day to day reporting, that of debt and leverage, in particular, that of irresponsible debt, and excessive leverage.

Bouleau has since changed careers, having recently started a Sharia compliant Islamic Finance operation. I caught up with him on the phone just as …

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Inflation or Deflation…. 1923 or 1932?

TechTicker talk to Todd Harrison about the deflation or inflation question, many commentators have felt that inflation will be the true risk but that it is on the horizon for now and for that reason isn’t receiving enough attention, Gold is tenaciously holding the $900 dollar mark (give or take some volatility either side of that), and the truth likely lies somewhere in the middle. This video is worth a watch, it puts some interesting ideas into the debate.

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The name is 'Bond', 'Failed Bond', UK Economy 'Shaken', but not stirring.

The UK had a failed bond offering last week and that is giving the world some indication of the state of the UK economy. They have failed in their bond auction, something that has not happened since the mid 90’s, the cover gap was 0.93 which is markedly less than the 0.99 cover failure the UK witnessed in the 90’s.

Where to? Where will the bond market go? Where will currencies go? What is going to happen next?

I think you can take this domino and walk through the path it might take. A failed bond means that the UK will have to offer more interest in the future to attract investors, how can you do this? Well, you can continue to print money (which they are effectively already doing), and this will devalue your currency (which is happening already). With a devalued currency and more money you can thus pay off the higher rates you promised in your bond …

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The name is ‘Bond’, ‘Failed Bond’, UK Economy ‘Shaken’, but not stirring.

The UK had a failed bond offering last week and that is giving the world some indication of the state of the UK economy. They have failed in their bond auction, something that has not happened since the mid 90’s, the cover gap was 0.93 which is markedly less than the 0.99 cover failure the UK witnessed in the 90’s.

Where to? Where will the bond market go? Where will currencies go? What is going to happen next?

I think you can take this domino and walk through the path it might take. A failed bond means that the UK will have to offer more interest in the future to attract investors, how can you do this? Well, you can continue to print money (which they are effectively already doing), and this will devalue your currency (which is happening already). With a devalued currency and more money you can thus pay off the higher rates you promised in your bond …

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MV=PT, quantitative easy in the UK, will it work?

The equation at the heart of prices, the ‘Quantity theory of money‘, centuries old but redeveloped by the likes of Irving Fisher, Ludwig Von Mises and Simon Newcombe, as well as being an equation restated by Milton Friedman which resulted in a Nobel prize. The equation, known as the “quantity theory of money” is MV = PT.

M is the quantity of money, V is the speed money flows round the economy, P is the level of prices and T is the number of transactions.

The formula has had one consistent feature, namely controversy. If you believe V and T are stable, then control of the money supply guarantees control of inflation. Quantitative easing (which they are talking about presently in the UK) raises M, so if V is fixed, it will push up P or T or both.

In today’s recessionary and deflationary world, that would be a welcome result. However, if …

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The tipping point?

Today I am taking out the crystal ball, and asking it if these final weeks of December 2008 and the start of January 09′ are the tipping point of the greatest bear market since the 1930’s. The recession is huge, there has been billions in wealth wiped out, we passed the one trillion mark last month, the total is expected to be over 1.5 trillion USD in total.

The question is, how low will the path of this bear market go? [note: this is about the stock market and not the Irish property market] Central banks around the world are chopping rates, forming bailout packages and doing all possible to get the economy back on track. Today we will consider some of the reasons that we may be actually seeing the start of a tipping point.

I believe the trend will be that we saw what amounted to the greatest financial crash in modern history in nominal terms. The fallout in Q4 only escaped the ‘crash’ moniker (but ‘worldwide financial crisis’ doesn’t exactly have a …

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Where will the rent takers hide next?

Taking rent is perhaps the best and yet most unproductive part of an economy, in the past we have spoken about the concept of ‘rent taking’ regarding economic bubbles and the effects of same. The last few years have seen rent takers jumping from one resource to the next in search of a good place to rest.

In the dotcom boom the rent taking was in the real estate of cyberspace, buying ‘probable’ names and sitting on them was popular until it proved to be a pointless exercise as companies found other ways around the problem, in some cases (such as 20th Century Fox re-branding because somebody bought 21stCenturyFox.com etc.).

After that the low rates and capital gains to be found in housing caused the next boom bust, it is fair to say that it was the land owners (the original rent takers) who did the best in this scenario. In any case the money left housing from 2005 onwards (for instance Berkely group sold off half of their 26,000 land …

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Deflation or Inflation? What to expect in 2010

We have felt for quite some time that the risk of deflation will be met by monetary and fiscal stimulation to the point where it will give rise to several strong years of inflation. This extract is by James Grant of ‘Grants Interest Rate Observer‘. The question of ‘when’ the scales will tip in favour of inflation away from deflation is likely to be at some point in 2010.

This is why we are letting our clients know that we are watching the long term bond yields and when we see a divergence either in short to long or medium term to long we will be encouraging people to consider a longer term fixed rate. When the five year and one year cross that might be a good time, meanwhile, because more rate cuts are expected in 09′ it would not be the time yet for this kind of move.

We don’t have a crystal ball but we are keeping our eye on the bond market so that we can try to gauge …

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Fancy a bit of inflation? What does a $700bn bailout and the 6% national wage agreements have in common?

There are two types of inflation, ‘headline’ and ‘core’. Put simply headline inflation takes into account everything, petrol prices, the cost of food etc. it’s cosidered volatile (lots of up and down) and therefore is not used for economic forecasting. Core inflation however is used all the time, because it is considered more consistent and measurable.

So let’s take a look at things that might cause inflation? Well, for a start the US plan for a $700 billion bailout is going to cause inflation, the cost will effectively be $2,300 for every man woman and child alive in the USA. That is quite a consideration, and it is coming directly from tax money, the question I would have as an American would be ‘Why will I give $2,300 dollars to banks who didn’t and likely never will repay me?’, adopt an underwriting approach to it and yo would quickly give it the stamp of ‘failed application’. However, the coffer strings are not …

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