Lessons from Recession

By now you've heard about India buying 200 tonnes of gold from the IMF. Alphaville quoted the Indian Finance Minister as sayingm "the European and US economies had 'collapsed.'" Alphaville also noted that this was "the strongest signal yet that Asian countries are moving away from the US currency."

I have no idea if that really is the "strongest signal" or how important it really is in the scheme of things, but it is relevant and there will be more comments like this in the news from healthier countries. But it is one small thing, not disruptive in a meaningful way, just part of a gradual move to the USD being a little less important which should ultimately make interest rates a little higher creating something of a headwind to US growth on most fronts. What it will not do, consistent with yesterday's post, is cause the complete breakdown of US society.

I found this article about how much people need to save for retirement. It was pretty good, but I would urge you not focus on replacing X% of your income but instead focus on your expenses. If you make $20,000 per month but live on $5000, then the $5000 becomes a more relevant starting point. From there you'd need to add some padding for one-off items (we had to get tires for our pick-up truck last week, ouch!), things you know will get more expensive like healthcare expenses and chances are your tax situation will change.

The other thing, save as much as you can. Many people don't, and it is such a simple thing to do.

Lessons that Jim Chanos says we've already forgotten.

1) Borrowing short and lending long is a still bad idea
2) Accounting matters...a lot
3) Conflicted Ratings Agencies: Still not unbiased observers
4) Regulate the activities not the actors
5) Black Swans are real
6) Glass and Steagall were right after all
7) Too big to fail = too big to exist
8) Quantitative easing has a cost
9) Insurance without reserves is not insurance
10) Shooting the messenger does not change reality

Nouriel Roubini is all over the place talking about the mother of all carry trades ending badly. Specifically the world is borrowing at "negative interest rates" and betting on high risk assets like emerging markets and commodities.

It will not be very often that I agree with him on magnitude, and I don't now either, but one thing is clear: this is a time of flux. We have just had (or are still having?) and extreme move in one direction that was in some part the result of an extreme move in another direction. More extreme moves that go faster than fundamentals dictate will very likely be part of the landscape for a while longer, which is why, although I expect to have more foreign exposure, I am moving slowly.

Comments

[Tony Petroski:]

"By now you've heard about India buying 200 tonnes of gold from the IMF. Alphaville quoted the Indian Finance Minister as sayingm "the European and US economies had 'collapsed.'" Alphaville also noted that this was "the strongest signal yet that Asian countries are moving away from the US currency.'"

I didn't know that. 200 tons is a lot and not easy to transfer. Since the IMF is subsidized about 25% or more by the U.S. government, it's a curious transaction for a collapsed economy.

"I have no idea if that really is the "strongest signal" or how important it really is in the scheme of things..."

Mr. Nusbaum. It's not really important in the scheme of things, but it suggests that the world has a finite appetite for green pieces of paper.

Nov 05 10:40 AM

[Robert Mart...:]

Roger,

America has debts it cannot pay and a currency it cannot support.

Unfortunately, this creates a "Debt Snowball", where loss of confidence feeds rising rates, and this makes our national debt ever harder to service. We face either devaluation or default within five years, and it makes sense for investors to focus on their living expenses, as you suggest.

This is the "New Normal": Be defensive, focus on what you can control, and adapt downward.

Thanks Roger!
Rob

Nov 05 11:23 AM

[Alan Young:]

$20,000 per month? Is that a typo?
If I were making that kind of money, saving would be no problem. It's the people making $2,000 (or even $7,000) per month who are having trouble.

Nov 05 01:26 PM

[Plant the s...:]

Yen carry trade worked because of almost a decade of low interest rate. Can the same work here given 8 months - 1 year before fed starts tightening and interest rates go back up?

Nov 06 03:17 PM