Wake Up!

Jim Mellon and Al Chalabi, authors of "Wake up!" , have emailed their latest interesting and useful newsletter. It concludes:

Our strongest recommendations are as follows:

• Prepare for rising inflation – continue to buy gold;
• Sell government bonds;
• Look for cheaply valued strong stocks – BAE and BP in the UK are two examples, and in the US we like Pfizer.
• Deploy cash wisely – our current favourites are, believe it or not, the British pound; the yen is weakening, but at 100 yen to the dollar it is a buy again.
• Avoid the US dollar and the Euro.

Like that bit about the pound - I was scratching around looking for something to save what's left of the savings.

Reversion to mean

Echoing recent comments by Vitaliy Katsenelson (also on Barron's), Jeremy Grantham thinks profit margins will decline towards normal and the Standard & Poor's 500 will head from its current c. 1334 to 1100 in the year 2010 - a drop of about 18%.

Grantham is emphatic that borrowed money is not a stimulant to the economy:

I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology.

That last sentence is really pregnant. I'm not sure about the man-hours (the closer we approach peasanthood, the harder we'll work), but I think that on both sides of the Atlantic, we've been falling down on the other three.

In Britain, our government has failed to distinguish between investing in education, and managing it - and where it has tried to do the latter, has pursued a Romantic-heritage political agenda. Capital investment? Going abroad. Technology? Ditto - and eagerly taken up (if not positively filched) by our Eastern trading partners.

I live in what used to be Car City; now, the vast Longbridge site is being redeveloped for housing and shops - in other words, open prison for the new ex-industrial underclass.

But Rome, too, kept control of its plebs with bread and circuses for a couple more centuries, before it fell.