Citigroup, America’s largest bank, is about to slash 10% of its roughly 65,000 workforce. That’s a whopping 6,500 former high-fliers who are going to wake up a a new jobless reality. “Some staff could be told today that their services will no longer be required,” says The Times.

A “new wave” of the credit crisis is now battering banks and lenders that steered clear of toxic subprime-related loans, says The Washington Post. Ordinary borrowers simply can’t pay back their loans thanks to the downturn in the US economy.

Billionaire speculator and head of Soros Fund Management says we’re facing the worst financial crisis since the Great Depression.

But many in the financial community are saying the worst is over. Why? Merryn Somerset Webb in Money Week says most fund managers are still in denial about the state of the market.

Merryn reckons you first need to believe in it to know how to invest…

How do you cope with a credit crunch? That’s the question I was asked to address in a talk to a group of Dutch pension fund managers earlier this week. The answer? First, you have to accept that it isn’t going away.

And this is where the problem seems to lie for much of the financial community – my reluctant audience included. For months now, we have had to put up with listening to men with important job titles telling us that the worst is over, and that we can “look across the valley” to the good times beyond the current gloom. But looking at the way this crisis is playing out, I’m pretty sure we won’t really be able to do that for some time to come.

In a recent note, James Montier of Société Générale reminds us of the stages of the average bubble. First comes a perfectly legitimate boom of some kind. Then comes the credit creation that makes it into a bubble. Next up is “euphoria” as “everyone starts to buy into the new era” as prices are seen as only ever rising. New valuation measures are introduced to justify absurd prices, and a “wave of over-optimism” means even the cleverest of people end up overestimating potential profits and underestimating risk. Sounds familiar doesn’t it?

Then the bad bit comes. First, “distress,” as the huge amount of leverage built up in the euphoria stage starts to be a problem and the market in question tanks. And finally “revulsion” – the stage where “investors are so scarred by the events in which they participated that they can no longer bring themselves to participate in the market at all”.

So where are we now? Well, we most certainly aren’t at revulsion. There are a few panicky voices out there. Witness the report out from analysts at RBS (NYSE:RBS) this week. It comes a little late to the table (after the market stripped of energy and mining is already down 30-odd per cent), but forecasts a “potentially very nasty August to October period” and notes that the housing/credit downturn will last “a long time”. Cash, says its author is “the key safe haven.” You can add to that the very public worries of George Soros – “we are now in a period of wealth destruction,” he says – plus a few other überbears.

But while they all make a lot of noise (and good headlines), there aren’t actually that many of them. Most ordinary fund managers are sticking with the echoes of their euphoria and lacing their strategies with copious quantities of hope. They think that equities are cheap and that the anti-crunch measures taken by the central banks over the last 10 months have pretty much done the trick.

I had a meeting with one manager recently who had a vast holding in Bradford & Bingley (BB) and said that he could see fabulous bargains emerging all over the UK market. B&B is clearly one of these would-be bargains, despite its exposure to the most obviously bad thing in the UK economy (buy-to-let), but he also pointed to Home Retail Group, owner of Argos, a company that looks cheap in price/earnings (p/e) terms.

I suspect he hasn’t a good year ahead of him. Equities only look cheap because most of the earnings forecasts are wrong. The ‘e’ bit of the p/e equation in the case of most retailers is probably more of a fantasy than a forecast – and, if you accept that collapsing house prices and falling real wages aren’t good for consumption, then it is likely to remain so.

Profit margins in the west have been at record highs for years. This looks to be just the time for them to revert to the mean. That implies a fall in company earnings in Europe of at least 20 per cent, say analysts at Morgan Stanley (MS).

Right now they are still forecast, for reasons I can’t begin to understand, to grow an average of over 10 per cent in Europe and 8 per cent in the UK. At the same time, the credit crunch is still very much with us. Try getting a mortgage, raising the limit on your credit card or borrowing money to start a new business if you aren’t convinced. There is also now no denying that the crunch is hitting real economies, nor that there are probably some very unhelpful rate rises ahead.

Both the Bank of England and the European Central Bank have made it clear that they haven’t gone soft on inflation, so with it looking increasingly entrenched everywhere from the UK to Argentina and Vietnam they are, as Hugh Hendry of Eclectica Asset Management puts it, looking more and more likely to “turn Austrian” (the Austrian school is pretty strict on inflation). Given the astonishing amount of debt in the system at the moment – both personal and corporate – that’s going to hurt. Mortgage debt alone, says Hendry, is more than 100 per cent of GDP. Look at all these elements and we seem to be more at the “distress” stage than at the end of the crunch, or indeed the bear market.

It’s verging on the impossible to predict the short-term movements of markets but it’s worth bearing in mind that a good rally doesn’t tell you a nasty bear market has ended. More often than not it’s just the bear keeping your hopes up, so it can have a good stamp on them a few months later.

Montier’s “road to revulsion” is littered with false hopes – just ask the Japanese, who in their grindingly awful bear market of the last 15-odd years have had to put up with several 40 per cent-plus rallies followed by similar mini-crashes.

The road can also take valuations down lower than anyone could consider reasonable and it can do so very slowly: the average duration of a real bear market, say Morgan Stanley analysts, is 14 years. If ours really started in 2000, that means there are six years to go.

So, returning to my opening question – how do you cope with the crunch? First you need to believe in it and then perhaps you need to make sure you have a lot more cash in your portfolio than you have shares in B&B and Argos.

Source: How to cope with the credit crunch

Traders focused instead on disruptions to Nigerian supply and heightened Middle East tensions — namely Iran’s threat of a “devastating” response to any attack on its nuclear sites by Israel.

On Friday, Pentagon officials said a large-scale Israeli military exercise in the eastern Mediterranean early this month may have been a dress rehearsal by Israeli forces for an attack on Iranian nuclear facilities.

Meanwhile, an oil summit in Jeddah in Saudi Arabia turned out to be something of a damp squib. The Saudis said they would produce more crude oil this year if the market needs it — pledged to add another 200,000 barrels a day in July to May’s 300,000 barrels-a-day increase.

“Mildy positive” is how one oil analyst put it…

Light, sweet crude for August delivery rose $1.42 at $136.78 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe.

“Bubble or not, oil prices have room to run higher,” says Merryn Somerset Webb in MoneyWeek magazine.

Oil is hogging the headlines again this morning, which is convenient. At near-$140 a barrel, the oil price is a good scapegoat for all our economic ills.

No wonder Gordon Brown hopped on a plane to Jeddah to attend yesterday’s meeting. Not only did it get him away from an increasingly hostile electorate, but it also drew attention away from his own shoddy economic policies and the mess they’ve left us in.

The upshot of the meeting was that Saudi Arabia confirmed it will raise oil production to a 30-year high. But no one thinks it’ll make a difference right away.

There’s plenty of debate over why the oil price is moving higher. I suspect that it’s run ahead of itself somewhat for the time being, though that’s not to say it can’t go any higher – I’ll get onto that in a minute.

But in the meantime, we should look on the bright side, even as we wince at the petrol pump. Because if the current oil price is indeed a bubble, it’s a good bubble…

What do I mean by a good bubble? There’s an interesting little piece by Sumit Paul-Choudhury in this week’s New Scientist. He talks about American journalist Daniel Gross’s 2007 book, Pop! Why Bubbles are Great for the Economy. In the book, Gross argues that bubbles aren’t necessarily a bad thing. They leave financial carnage, but they create the infrastructure of the future. For example, the internet boom and bust left us with a global fibre-optic network that would never have been built without the irrational exuberance of the dot.com era.

Paul-Choudhury quotes physicist-turned-risk specialist Didier Sornette’s argument that “it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns.”

In other words, it takes ridiculously high prices to persuade individuals to take the ridiculously large risks needed to make big changes in the way we do things.

So if, as various Opec members claim, the current surge in the oil price is at least partly down to speculation, then what particular benefits is this bubble bringing us?

Quite a few, as it happens. Assuming we aren’t actually running out, and the Saudis aren’t bluffing about their reserves, then a massive run-up in prices like this acts as a dry-run for a real emergency. If oil really ran out, and we didn’t have a replacement, we would be in such deep trouble it doesn’t bear thinking about (though if you want to scare yourself, a quick Google search on the words ‘Peak Oil’ will bring you up a host of websites with plenty to say on just how bad the end of the oil age could be). So a bit of panic now, while we are still pumping the stuff out of the ground to a comfortable level, is exactly what we need.

At $140 a barrel, there’s as much incentive as anyone needs to find new sources of oil (such as the tar sands, and even oil shale), and more importantly, substitutes. At $10 a barrel, no one’s going to take the time and trouble to find a way to make an electric car viable. At over $100 a barrel, it’s a Nobel prize winner.

There’s also more incentive for us to become more efficient consumers. In the developed nations, that means taking public transport and maybe walking or cycling more often. That’s one thing. But in many developing nations, where fuel prices are heavily subsidised, higher oil prices make it more and more painful for those governments to maintain these bonuses. Already, China and others are having to allow petrol prices to rise. That’s going to be painful, but in the long run it does two things.

It makes consumers in emerging markets more fuel-efficient; and it teaches their governments the folly of price controls.

All of this – a focus on new discoveries, the hunt for substitutes, increased efficiency on the behalf of consumers and governments – will eventually mean lower energy prices.

So if the oil price has run ahead of itself, effectively because investors and producers and consumers are all pricing it for a future shortage, then that’s a good thing. Because better to have to do all of this now, while we’ve still got petrol in our pumps, than have to do it once we’ve run out.

But when will the oil price come down? That’s a difficult question. I’m a believer in the argument that we’ve run out of cheap oil (certainly for now). The fact that there’s large and ongoing demand from emerging markets is also tough to argue with. So when I say that the price has run ahead of itself, I don’t mean we’re going to see $40 a barrel again any time soon.

However, we’ve known all this for ages – after all, we’ve written about it in MoneyWeek often enough. Nothing new has happened in the past 12 months in terms of supply and demand that could justify a 100% increase in the oil price. In fact, the global economic outlook has deteriorated sharply – which should mean that oil demand – or at least demand growth, will fall if anything.

But of course, the flipside of this argument is that if the oil price isn’t now driven by the fundamentals, then there’s no telling when the price will start to slip back. After all, it was obvious from at least four years ago that the housing market had lost sight of the fundamentals.

So how can you tell when the tide has turned? It’s not easy, but from my experience the most obvious sign of a turning point would be when everyone finally agrees that the oil price can only go higher. That’s when the big correction will hit.

Just before the credit bubble popped last year with the collapse of the Bear Stearns (BSC) hedge funds, the mood in the newspapers changed. There was talk of how even if credit terms were tightened, a ‘wall of money’ was waiting to come crashing in from the Middle East and Asia in the form of sovereign wealth funds. Even the most cautious commentators seemed to have thrown in the towel. Markets would stay high forever, the money would keep flowing – nothing had stopped it so far, so it seemed unstoppable.

Of course, then it stopped.

When it comes to oil, the mood is turning. City analysts’ forecasts are now ahead of the current price, rather than behind it. But there are still plenty of sceptical voices out there. That suggests to me that the oil price – and our petrol bills – still have plenty of room to run.

But cheer up. It just gives us all the more incentive to track down a substitute…

Source: The Bright Side to High Oil Prices

While the details of the conference were in danger of being overlooked in the hubbub surrounding the unwelcome and unexpected attendance of Zimbabwe’s President Robert Mugabe, some aid groups called for an African ‘green revolution’, while UN Secretary-General Ban Ki-moon argued that food production would have to grow by 50% by 2030 to stave off starvation. Hungry people, he warned, are angry people – a redundant observation, perhaps, given the doubling in food prices this past year has already seen riots from Buenos Aires to Manila.

There are some forces driving the current food crisis that this week’s UN food summit can’t tackle, says The Guardian, be it terrible harvests or rising demand from China and India. However, “there is one measure ministers might take that could have a real and rapid impact: call a go-slow on biofuels”. According to the International Monetary Fund, biofuels have been responsible for 20%-30% of the rise in food prices.

And the Secretary General of the UN’s Food and Agriculture Organisation, Jacques Diouf, pulled no punches in denouncing America’s policy of diverting 100 million tonnes of cereals from human consumption “to satisfy a thirst for fuel for vehicles.”

Be that as it may, biofuels “have got too much attention”, says Bronwen Maddox in The Times, and the World Bank’s Robert Zoellick “rightly called for the issue not to dominate the summit”. Indeed, “a cocktail of factors – low stocks and a weak dollar, soaring energy prices, and “a hunger for richer foods” have also contributed to the current crisis, says the BBC’s Stephanie Holmes.

Even so, “politicians in Europe and America should recognise that the subsidised growing of bio-fuels has been an error”, says The Daily Telegraph. “Yet the EU refuses to accept this is mistaken and has decided that 10% of all transport fuel should come from biofuels by 2020. The subsidies should be repealed.”

Source: Biofuels Power Global Food Crisis Talks

The Fall of Northern Rock

The book is peppered with confessions of ignorance. He picked up not a single warning signal from the beginning of the debacle to the end. In early 2007, he thought nothing could stop the bank’s “fantastic progress”. When the share price started to fall later in the year, he assumed, along with his colleagues, that the media, jealous of the bank’s previous successes, had “it in” for it.

Walters knew little of the bank’s funding methods and was “blissfully unaware” that the sub-prime crisis in America might threaten Northern Rock – as, indeed, were his bosses, who launched a new discount tracker for buy-to-let investors in August 2007. And even in early September, just before all hell broke loose in Newcastle, he was busy flying off for a holiday in San Francisco with, as he says himself, very little idea of “what was really going on behind the scenes”.

It all seems rather extraordinary given that, although he wasn’t exactly a board director, Walters was head of commercial lending for the Leeds office, and given that even the most junior of financial journalists and analysts across the City had a very good idea of exactly what was going on behind the scenes.

Still, compare it with this week’s debacle – the profits warning and bungled rights issue at Bradford & Bingley (B&B) – and it doesn’t seem so odd after all. It looks like a mixture of total lack of awareness and mild stupidity is par for the course across the UK banking sector. Just like Northern Rock, B&B has clearly spent the last few years in total denial – refusing to accept that the housing market was in a bubble and hence fuelling the fire of its own destruction by providing the credit to keep the bubble growing.

And just like Northern Rock, senior management appeared to be blissfully unaware of the all-too-obvious risks to their business. At the start of this year, even as volumes – the canary in the coal mine to the housing market – collapsed across the country, B&B announced that it was relying on growth in its buy-to-let business to keep things going. Whoops.

But just as delusional as the bankers are those who were still holding B&B shares on Monday when their bad news at last appeared. Who didn’t know about the credit crunch? That buy-to-let in Britain is bust? That falling house prices and rising mortgage rates always lead to arrears and defaults? And who had forgotten that bubbles always end in corruption (B&B also announced on Monday that they’d lost £15m to mortgage fraud)? You might want to check one of them isn’t running your pension fund.

Source: Make Sure You Check Who’s Running Your Funds

The ECB has established itself as a credible central bank, with the euro flying high against its major rivals; eurozone inflation is lower than in the previous decade and the euro accounts for 27% of global forex reserves.

Meanwhile, sterling has slumped as the British economy has hit the skids, and, as Lex points out in the FT, sterling is now worth the equivalent of 2.44 deutschmarks, 16% below the ERM entry level – “a competitive rate to lock in for exporters”. Consumer prices over the past year and growth rates since 2004 have been similar to the eurozone’s, suggesting Britain has been converging with the eurozone. Given all this, the question of Britain joining the euro has re-emerged.

We’re better off out, says the FT’s Martin Wolf. Granted, entry seems plausible at current exchange rates and real interest rates have been higher here since 1999. But setting our own rates allowed us to restrain the credit bubble a bit; the eurozone’s lower rates would have led to an even bigger boom and inflation and credit “overshoot”. With the spending boom over, at least the falling pound can cushion the blow. Eurozone states in the same trouble don’t have this option.

Moreover, consumer prices between 1998 and 2008 rose by 18% here, the same as in Germany and less than France’s 20%, while GDP in 1999-2008 has grown by 28%, against 21% in the eurozone. “Remaining outside… preserves the safety valve of currency flexibility, while losing nothing in economic performance.”

In any case, the eurozone is heading for turbulence. Growth is on the slide, credit conditions are beginning to tighten and economic sentiment hit a near three-year low in April. And unemployment has now ticked up in Germany, boding ill for already fragile consumer confidence – which in France has hit a 20-year low.

The main problem, however, is the divergence between the periphery and the core. Portugal, Spain, Greece and Italy have become increasingly uncompetitive over the past few years due to the strengthening euro, racking up large current account deficits (around 9%-10% last year in the former three countries) that have dragged down the zone’s trade performance. The eurozone had a seasonally adjusted record current-account deficit of e15.3bn in March. In Spain, Ireland and Greece shrinking competitiveness has been masked by spending sprees induced by housing bubbles: prices rose threefold in Spain between 1997 and 2007.

But now these have burst, with Spanish prices down 15% since September, and both countries look set for a nasty slowdown. With no control of interest rates and the hawkish ECB unlikely to cut rates soon, and without the option of devaluing their currencies, only cutting wage costs to improve competitiveness can help the periphery in the medium term. That means following in Germany’s footsteps by clamping down on labour costs – real German unit wage costs have stayed steady for a decade. But that also implies a severe slowdown: Germany only grew by an average of 0.6% in 2001-20005, says Wolf.

“As the boom-bust cycle turns ugly” the likely upshot is “a lot more irascible finance ministers” in the eurozone, as Wolfgang Munchau puts it in the FT. Political pressure on the ECB to water down its inflation targets and dash for growth may mount, denting its credibility and the currency. The pressure of adjusting to internal divergences may prove too much for some. “It is no coincidence,” as BNP Paribas pointed out earlier this year, “that all failed currency unions were abandoned during times of economic stress.”

Source: Should Britain Now Join the Euro?

The fast growth of the emerging world made it clear that demand for commodities of every kind was going to soar and a quick look at pretty much any part of this sector – whether precious metals or palm oil – left little doubt that supply wasn’t going to be there to meet it.

So I started being bullish on precious metals, industrial metals and any kind of fossil fuel seven years ago.

Then, three years ago, I started my love affair with soft commodities as I began to understand how people’s eating habits would change as incomes rise and, of course, as global governments decided that biofuels were the silver bullet that would kill off global warming.

Over the same period of time, it seemed obvious that the housing bubble and the consumer boom it was driving couldn’t go on for ever, something that would hit growth in the west hard.

I was far too early with much of this (I started trying to sell my own flat in 2003 – luckily no one bought it until mid-2007).

But still, when the time came, I wasn’t holding any houses, housebuilders, commercial property or retail stocks, either here or in the US. I’ve been very clear on all sorts of other things, too.

Sometimes, I’ve been right (recommending investing in Brazil for example) and sometimes completely wrong (buying uranium just as it tanked). But the point is this: it has been an easy time to have big opinions and I’ve had lots of them.

That’s not the case any more.

Sure, I still wouldn’t touch anything to do with property or western consumption with a bargepole. That bit is easy. And I wouldn’t buy most physical commodities right now, either – as oil starts to pull back from its mini bubble, other things will too.

On the other hand, I remain convinced that the commodities supercycle has many years to run as the Chinese and the Indians keep buying cars and building highways. Not being a trader, I’m not prepared to sell all my long term holdings in big oil and mining shares, either.

Then, there are stock markets themselves. Look at the numbers in isolation and they seem pretty cheap: the FTSE 100 trades on a price/earnings (p/e) ratio of a mere 11.5 times and yields 4.5 per cent.

That’s not bad. Until you think about how bad the economy might get as house prices keep falling, consumers stop spending and unemployment rises. If that means earnings don’t rise, 11.5 times is a high price to pay for equities. And then there’s inflation – now rampant everywhere.

There is an idea that equities are a good thing to hold in inflationary times – because they are a “real” asset they are supposed to hold their value. But it didn’t quite work out like that in the 1970s.

Instead, according to Barclays Capital, between 1969 and 1979 the average annual real return for UK equities was -2.3 per cent.

That’s better than bonds, but not exactly the kind of return that would have you rushing out to put your name on the list for one of Burberry’s £11,000 alligator skin handbags.

Thinking about inflation is confusing too: will prices still be rising next year?

Five years ago, it was easy to place your bets on inflation. Interest rates were low, money supply was rising far too fast around the world, commodity prices were beginning to break out, and it was already clear that the prices of jeans and DVD players imported from China couldn’t actually fall indefinitely.

So the fact that inflation is on the up everywhere shouldn’t come as too much of a surprise.

But if – as I think we can expect – the credit crunch really gathers pace and recession takes hold might we not see the return of deflation instead?

Société Générale’s number one bear Albert Edwards thinks so. He’s expecting the next few years to offer us a sample of Japanese-style deflation accompanied by a brutal bear market. Nasty.

I think I’m more inclined to expect stagflation than deflation, given how entrenched easy money policies are in the US. But, either way, there doesn’t seem to be a good reason to buy much in the way of western equities.

Now the good news. My ongoing confusion about the current state of our markets tells me one simple thing – that I should hang on to my gold.

The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.

But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.

There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.

We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won’t see, over the next few years, is stable growth with stable prices.

Tim Price of PFG Wealth puts the case nicely. “There are few things you can count on in a full-blown economic and financial crisis,” he says.

“Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century.”

“But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength.”

You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).

Source: Why It Pays to Hang On to Gold

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market

In 2007 for example, prices rose by a whopping 25.3%, according to estate agency Knight Frank, posting the second-highest annual rise on record. As a result, an acre of farmland that only cost £3,000 three years ago can now fetch around £7,000, according to James Laing of Strutt & Parker.

But why has farmland – traditionally a money pit – suddenly soared in value? The obvious reason is the rising price of what is grown on it, including soft commodities such as wheat and corn. In addition, Irish and Danish farmers have helped to push prices up by buying British land in place of their own, which has now become too expensive. Irish buyers, for example, represented 4.8% of all buyers in 2007 – up from 2.5% the previous year – while Danish buyers accounted for 10.3% of purchases, compared to 9.3% in 2006. Many British farmers are also getting in on the act by expanding acreage to achieve economies of scale. This is hardly surprising when a tractor costs more than a top-of-the-range Mercedes.

Then there are the rich City workers who have been buying farmland partly as an investment, partly as a lifestyle choice and, in some cases, as a way to avoid tax – farmland owned at least two years after the purchase date escapes inheritance tax, provided it is still used for agricultural purposes. So, “it seems there has never been a better time to become a ‘gentleman farmer’”, says Emma Simon in The Daily Telegraph.

The trouble is, the best time to buy land cheaply may have passed by now. With crop prices on the up as the world clamours for food, farmers are in no hurry to exit – the proportion selling fell from 62.3% in 2006 to 58% in 2007. Farmland enthusiasts might, therefore, be best off in a broader agriculture fund, such as CF Eclectica Agriculture, or an ETF such as LSE:AGAP.

A week in the property market

• The Royal Institute of Chartered Surveyors (RICS) has predicted that house prices will fall by 7% this year, while sales will plunge by 40% if the mortgage shortage doesn’t ease.

• Savills, the estate agent, thinks house prices may drop by 25% over the next two years unless the Government intervenes.

• Estate agents now have an average of 73 unsold properties on their books – the highest number Rightmove has ever recorded.

• Rightmove announced that asking prices rose by 1.2% this month, taking the annual price rise to 2.20%, with an average house now costing £242,500. But Rightmove also conceded that this month’s figures are skewed by “discretionary spring sellers” of large homes, which actually “mask year-on-year falls in six out of ten regions”.

• The latest housebuilding figures from the UK Statistics Authority show that housing starts – new homes being built – fell 21% in the last quarter and are 24% lower than the first quarter of 2007. Completions are down 18% compared to the same period last year.

• “Nowadays, there is no money in it at all…we were completely shafted,” said home inspector Nick Cowley, quoted in The Sunday Times complaining about his fate, and that of his colleagues, after the Government delayed the full introduction of Hips.

Source: England’s Green and Pricey Land

He was a great fan – he read all my columns and had done well over the years out of taking some of my advice. I glowed with pride. Then came the fall. But, he went on, he had also lost a small fortune as a result of buying into the Japanese market – again on my advice – in 2007.

What did I suggest he did now? I shifted uncomfortably from foot to foot and prayed for the speeches to begin while the editor of a rival publication, irritatingly standing right next to me at the time, tried not to smirk too obviously.

It’s always horrible to feel responsible for other people losing money, but when it comes to Japan I really feel the pain: my own Isa is stuffed with Japan-related investments. So the fact that the Nikkei 225 was one of the world’s worst performing markets last year hasn’t exactly brought forward my retirement date.

So what did I tell him? That I was buying more. Japan is cheap in a way that no other developed markets are. A good 50% of Japanese stocks trade at less than their book value (the accounting value of their assets), for example. Dividend payouts are also rising. They have always been stingy, when they have existed at all, but over the past three years, the dividends offered by the biggest companies have been rising at double-digit rates.

And the economy isn’t doing badly at all. In the fourth quarter of last year, Japan grew at an annualised rate of 3.5% and in the first quarter of this year the numbers are expected to show that it grew at around 2.5%. Given that the best the US can do is 0.6% (and that number is bound to be revised down over the next few months), that looks pretty good.

Japan is currently the world’s fastest growing developed economy and given its links to Asia (twice as many Japanese exports go to Asia than to the US), it is likely to stay so.

Even more interesting is that fact that, after well over a decade of falling prices, Japan appears to have finally banished deflation. Food prices are rising (McDonald’s has eased the price of a Big Mac up from ¥250 to ¥280) as are energy prices.

But these obvious elements aren’t the only things that drove core inflation up to 1.2% year-on-year in March. Strip them out, says Jonathan Allum of broker KBC Financial Products, and inflation is still “mildly positive”. Better still, wages appear to be rising: the average base salary turned positive in November last year.

This is a very big deal. For far too long falling prices have put the Japanese off spending money (why buy something now if it will be cheaper tomorrow?) but if prices are rising – and workers have more money in their pockets – perhaps they will finally start to loosen their grip on their left-over-from-the-1980s Louis Vuitton wallets.

Already, says Christopher Wood of CLSA, Japanese consumers are expecting inflation to be running at 3.1% in 12 months’ time. This should do wonders for corporate pricing power (you can’t put prices up when people are expecting prices to fall but you sure can when they are expecting them to rise anyway) and for profit margins.

The other thing that might work to cheer up the Japanese consumer is the state of the property market.

Those who have placed very heavy bets on the UK property market on the basis that “we are a small island and demand is greater than supply” don’t like anyone to mention Japan. There, the long and totally insane bubble of the 1980s was justified on identical grounds. Then prices fell for 15 agonising years.

The good news – for Japanese homeowners if not for our own buy-to-let investors – is that they aren’t falling any more: residential land prices rose for the first time in 16 years last March.

Still, a lot of this has been true for some time and, as my new banker friend reminded me, it didn’t do us any good last year. Why might it now?

The answer is sentiment. Today most people hate Japan. Jonathan Allum points out that the week leading up to March 14 saw the biggest wave of foreigner selling since October 1987.

This is good news in the sense that the total capitulation of foreign buyers often marks a turning point for Japan. And so it has again. The point is that sentiment is beginning to turn. Right now very few investors have a stake in Japan. Soon they’re all going to want one.

So it’s best to get in before the rush – and the easiest way to do so is via the iShares MSCI Japan ETF (NYSE:EWJ).

Source: Bucking the Trend Could Help You Make It Big in Japan

First-quarter GDP growth reached 0.7%, exceeding forecasts and keeping the annual rate flat at 2.2%. Chalk it up to Germany, which accounts for about a third of the eurozone. Its quarterly growth rate hit a 12-year high of 1.5% in the first three months of this year, shrugging off the strong euro, high oil prices and global financial turmoil. It was helped by a rise in investment and consumer spending, the latter marking a recovery from a sharp fall in the autumn.

Growth is heading down…

Nonetheless, this seems likely to prove a “high-water mark” for the euro area, said The Economist. Germany’s GDP figure was boosted by abnormally strong construction activity, due to mild weather. This fillip could easily knock 0.4% off growth next quarter as it unwinds, said Capital Economics.

More importantly, reliable surveys, including the purchasing managers’ index – the PMI gauging manufacturing activity hit a three-year low in April – point to much slower growth this quarter; eurozone industrial production growth has shrunk to 2%, with March’s fall in capital goods production a “sign that the strong euro and weakening global demand may be starting to take their toll”. Even German firms are now feeling the pinch from the strong euro – shipments fell in February and March, said The Economist.

Consumption is a further worry. The zone’s retail sales declined for a fourth time in six months in March and are 1.6% down on last year. Given worries about inflation and real income growth having slid over the past four years, it’s hard to be confident that German consumption is set for a significant boost, despite recent falls in unemployment and high consumer savings. That’s a pity, since shoppers in another heavyweight economy, Spain, are all spent out now that their housing bubble has collapsed. Quarterly growth is at a 13-year low. The debt deleveraging process in Spain and Ireland “has barely started”, said Julian Callow of Barclays Capital. Italy, meanwhile, appears in danger of slipping into recession.

…as the credit crunch tightens

And the credit squeeze is worsening. The latest ECB survey covering the first quarter shows that 49% of lenders tightened standards for corporate loans, up from 41% in the previous survey. This is significant, said Liam Halligan in The Sunday Telegraph, because 85% of eurozone finance is made up of bank credit, compared to under half in America. So the first quarter may have looked good, but the data is set to look a lot “less flattering”, as ECB president Jean-ClaudeTrichet put it, from now on.

Source: A High Water Mark for The Eurozone