Down in Putney, along the bank of the Thames, there’s an oldish Jag parked on a side street with a personalised number plate. Given the one time reliability reputation of Jags, it was perhaps chosen with some justification.

It reads: PE51MST.

The word fits the view prevailing on the UK economic outlook – whether you’re a central bankers, a politician or most likely amongst the majority economists call ‘consumers’. Bad news is chasing us down the street…

The Bank of England says it could be recession down the road. Inflation is going up for some time to come – north of 3%, unemployment is starting to edge up too, credit is harder to come by and costs more – in spite of the best efforts of the Bank of England, house prices are going down and house building has slumped, commercial property prices have too – by 16% since last summer says the Bank of England. Our leading banks have lost billions – Barclays announces another £1bn write down this morning – and once proudly touted government golden rules on borrowing become instead lead weights around Gordon Brown’s increasingly vulnerable neck.

Okay so we’ve had our fill of the bad news. Is there anything we can be OPT1M1ST about? Well, looking at the stock market Mr Market’s mood appears to be cautiously more positive. The FTSE 100 hit a low for the year to date on March 17 closing a little over 5,400. It’s up 15% since at a little over 6,200. MoneyWeek is bullish on Japan and the Nikkei is showing signs of recovery. It hit a four month high close today.

UK stock market sentiment as measured by Sharescope has risen since its March low though remains marginally bearish. As we’ve said, stock markets are the great expectation machines and always straining their eyes on the horizon to see what’s coming…then discounting it before it arrives.

The worst of the credit crisis is over they say but as we can see from Barclays latest £1bn write down and collapsing bank shares, it is by no means over. The FTSE 100 is marginally higher today yet RBS, a constituent of it, has slumped 14%. The bank has given up half its market value over the past year, a grim stat that causes some degree of personal financial pain to your editor. Given the bank is reported to be sounding out shareholders about the level of support for top management; it has hardly a vote of confidence.

Commodities have edged down from their highs perhaps only temporarily but no boom lasts forever. Central bankers will hope this one ends sooner rather than later and the market price mechanism will assert itself once again as the universal regulator of demand. Oil is a little down from its high at $124 and food prices are showing signs of stabilising reports the FT.

As for the Eurozone, “old Europe” – France and Germany – is leading the charge. European growth in the first quarter came in at 0.7% against consensus of 0.5% and that in spite of the drag of sluggish Med economies such as Spain and Italy.

Growth has hit its fastest pace in 12 years in Germany and surprised on the upside in France. Eurozone rates remain at 4% as inflation has bubbled up to a 3.6% high in March, easing to 3.3% in April. If he can keep that virtuous cycle going in the face of ‘cost shocks from abroad’ the European Central Bank’s Jean-Claude Trichet will be in clover.

*** News from the frontline on the ongoing creative destruction of traditional print media… Johnston Press plc, a regional newspaper publishing business with a heavy debt load, is raising £200m plus in emergency funds as ad revenue wilts under the pressure of the internet.

“Traditionally,” reports the Independent “three-quarters of its revenue comes from ad sales.” Those sales have been falling relentlessly. Last year classified ads fell over 3%, car ads more than 8% and larger display ads 4%. Ad revenue fell another 4% in January and February this year. We’ve said it before, we’ll say it again. Sooner or later someone is going to start closing newspapers.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Old Europe, New Growth

Economic climate change…

Relentless rises in commodity price emissions is increasing the inflation content of the world’s economic atmosphere threatening the universal life force of the world economy – ie growth.

Economic climatologists aka central bankers are beavering away trying to contain the inflation content while scratching their heads about how to tackle spiralling commodity prices.

Or as Mervyn King would have it at a press conference this morning, a sequence of cost shocks is coming from abroad. No prizes for guessing what – oil, food, energy yada yada. OPEC’s not pumping enough, Indians eating too much (see below) etc. This is the increasingly heavy monkey on the back of a Bank looking to loosen monetary policy – mainly by cutting interest rates.

Dear readers looking for good news stop reading now and return in what Mr King calls the medium term, say 2010ish. By that time the economy may be growing at trend again, inflation may be back around 2%, a deflated sterling will have helped iron out the current account deficit and boost tourism and this increasingly wounded government finally will have been put out of its misery by the electorate. Recapitalised banks will be expanding their lending as they report bumper profits from the higher margin business they have been doing for the past couple of years…

Consumers will have rediscovered the wonderful bargains at charity shops and the benefits of making do. They have bought a cash ISA or two. First time buyers have returned to a more affordable housing market to snap up the bargain repos and negative equity distressed sellers. There’s a dearth of estate agents to help them out, though.

Meantime, back in the present, fasten your seatbelts say the Bank of England Inflation Report: “The near term outlook for inflation has deteriorated markedly over the past three months,” it begins. Rising prices will squeeze consumer spending and so cut growth “perhaps sharply”. Commercial property prices have fallen 16% since last summer and house prices are now falling too. Though Mr King agrees with your editor on one point on the housing market…

The ‘90s house price crash was precipitated by a doubling of interest rates he said (as a consequence of the ERM straightjacket) and a big increase in unemployment. Neither of which are present today. At least not yet. The Evening Standard reports the City is clocking up job losses at the rate of 300 a week. But are these the kind of types to linger on the rock and roll (dole) for months on end? Odds against methinks. New opportunities no doubt beckon in Dubai, Singapore and all points East. Time to follow the money.

The net net for the UK economy is the climate’s changed and we’re all affected. Or in Bank speak, the economy is “rebalancing”. It’s a process that’s going to take some time and could yet be torpedoed by Johnny Foreigner and those unwelcome “shocks from abroad”.

*** Americans should go on a diet…

They should rethink their energy policy too.

That’s the angry response from India at perceived slights from the Bush administration. Official comments appeared to lay the blame for rising food prices on India reports the International Herald Tribune.

Americans on average consume 50% more calories than Indians says Pradeep Mehta, the secretary general for the Centre for International Trade, Economics and the Environment. And if they would slim down to the weight of the average middle class Indian “many people in sub-Saharan Africa would find food on their plates.” He added money saved from the fall in liposuctions could be channelled into famine relief. Lardy Brits could no doubt chip in a bob or two on that score as well.

As to the comments, we can’t be sure but there appears to have been something lost in translation here. According to reports Bush commented in a press conference that “ when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” In our book that is no more than stating how it is. Basic economics.

Aggregate demand goes up; price follows it to a new place where supply can once again eyeball demand. If there was criticism in Bush’s words, it was of a subtle and coded nature which belies his plain speaking Texan reputation.

Perhaps the Indians are being a little sensitive…certainly more assertive. 300m middle class Indians is an awesome prospect. It’s the equivalent of the entire US population driving SUVs… demanding air conditioning, flat screen TVs and more calories. Their economic progress, amongst others, will prove an increasing shock to ours.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Cost Shocks From Abroad 

He said, ‘“Look, those are the bankers’ and brokers’ yachts.” ‘“Where are all the customers’ yachts?” asked the naive investor.’

This old Wall St joke spawned the title for your editor’s favourite investment book, from which this extract comes – Where are all the Customers Yachts by Fred Schwed Jnr. It first appeared in 1940 and related to Schwed’s brief experience on Wall St as a broker in the early 1920s.

He was the son of a short seller who went bust in the ‘20s. Expelled from Princeton for having a girl in his room he lasted only two years on Wall St but long enough to understand how it works. In defiance of the Puritanical work ethic often associated with America, he preferred golf and drink. Billionaire financial information entrepreneur and New York mayor, Michael Bloomberg called the book a “hilarious classic that proves the more things change the more they stay the same”. His other written credits are few save this and a children’s book – Wacky the Small Boy – who perhaps grew up to become Wacky the prop desk trader, or Wacky the hedge fund manager…

I was reminded of this thanks to a report in today’s Telegraph. As the economic climate deteriorates, the knives are out for the financiers and corporate elite. Brussels is gearing up for an all out attack on bonus culture. The short-term pay structure of such schemes has become “deformed” and encourages excessive risk taking with little thought for the interests of “stakeholders” or “society” according to a confidential document prepared for EU finance ministers. Well, most EU finance ministers… Britain’s Alistair Darling and free market allies from Eastern Europe have been excluded! Curbs on bonuses, stock options and golden parachutes are on the table for the interventionists. Angela Merkel wants a €1m cap on pay… No free marketeer the German Chancellor.

There is no “concrete legislation” on the table notes the Telegraph but the mood is clear enough. After the private sector lash the public sector backlash and unsurprisingly, the proposal is viewed with alarm in the City…and we suspect their yacht brokers too.

Back to the topic of oil for a moment…now $3 down from its $126 peak and never far from our thoughts. The US’s thirst for oil is matched by its increasing dependence on others to provide it. In 1973, the US imported 33% of its oil. Today the figure is nearer double at about 60%. By 2020 it could be importing 70% of its needs says Gideon Rachman in the FT.

Meanwhile, on the other side of the Pacific, the competition continues to intensify. Chinese oil consumption doubled between 1994 and 2003 and will double again by 2010 when the International Energy Agency expects it to be the world’s largest consumer of energy. Overall, the world will need 50% more energy needs by 2030 thinks the IEA. Mr Rachman notes:

“While western politicians routinely worry about globalisation, they have yet to focus on a more plausible threat. It is not the outsourcing of well-paid jobs; or the inflow of cheap goods: it is the globalisation of western patterns of consumption. If the Chinese and Indians eventually eat and drive like Americans and Europeans, the current inflation in fuel and food prices could be just the beginning. The environmental implications are also obvious – and alarming.”

But as China emerges, one stage of its economic development appears to be ending notes a Bloomberg report…

“The end of an era of China’s mighty export industry has begun,” says Tao Dong Asia chief economist for Credit Suisse. A third of the factories in China’s southern Guangdong province which produce 30% of China’s exports will be closed in three years time he reckons.

Vietnam (voted top emerging market destination for manufacturing business by PwC last year), India and other Asian nations are aggressively pursuing foreign investment. Chinese labour is now being undercut by Vietnam and India. Vietnamese labour is more than 40% cheaper and Indian labour cheaper still. This won’t weaken Chinese growth but rather change the shape of it as it moves into higher up the manufacturing food chain into value added businesses such as computer chips, cars and electronics.

An interesting feature of Chinese economic growth is its geographic concentration. Four provinces in the south-east of the country account for 60% of the country’s exports. As such average incomes in the richest regions coastal are ten times those in the poorest in Western China. In spite of money spent on infrastructure, the transportation and other costs make heading West an uncompetitive option for business in comparison to other options such as Vietnam. The spread of prosperity in this notionally Communist country to the 700m in the west of the country is a major issue thinks Morgan Stanley’s Stephen Roach:

“It is absolutely key that China pushes its development model westward. The jury’s out on whether they will pull it off.”

Regards,

Rob Mackrill
The Daily Reckoning

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Now even Hugh Hefner is having trouble making money from his adult brand of publishing. His Playboy publishing and media empire posted a quarterly loss on weaker TV and publishing revenues reports Yahoo Finance. “The worse-than-expected results illustrate the trouble that Playboy and other publishers and television companies face as more people get their entertainment online, and often for free.”

And that’s the beauty of the ‘net for consumer. A lot of what you fancy with little of what you don’t i.e. paying for stuff. Not so great for the publishers who have been struggling to figure out how to make the internet pay. Expect to see a culling of national newspaper as they stop printing in the next few years and as for TV, well one glance at the schedules tells us the medium is beaten.

Returning for a moment to the subject of ballooning commodity prices… The week-end FT finds an indication of the increases in speculation – the futures market. Commodity futures have increased fivefold in the past three years says John Authors in the FT citing energy consultant, Philip Verleger.

Originally commodity futures were used as a hedging tool for producers against a change in prices, now they are considered an investment in their own right. And The Sunday Times’ David Smith notes “something odd” going on in the oil market following last week’s announcement of a large rise in crude stocks by the US Department of Energy. “Instead of falling, prices hit a new record.” A rampant bull on the charge..? Oil is down a little today to $125 against something unusual in recent times, a stronger dollar.

Continues below …

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And some news closer to home…

The damage caused by rampant commodity prices can be clearly seen in the latest government statistics. UK producer prices rose 7.5% year on year – their fastest pace since 1986. Comments Geoffrey Dicks, and economist with the Royal Bank of Scotland:

“There is a wall of costs out there waiting to dump on the U.K. consumer.”

Recent soundings of sentiment suggest consumers have a good idea of what’s coming. One such dumping looking to be coming soon are higher energy bills. They could rise as much as 46% this year reports The Telegraph.

As for the wider economy it will “skate close to recession” over the next 6-9 months says the British Chamber of Commerce in a new report. Quarterly growth will hover a little above 0% and if oil maintains its current elevated level expect 4% CPI inflation in the second half of the year. Against this backdrop, life doesn’t get any easier for Mervyn King and co trying to coax UK plc. back to at least trend growth with further cuts in interest rates.

More billions in bank losses, today… HSBC plc. revealed another $5bn in bad subprime debt and write downs to take its total losses up to $20bn (how they must rue buying US subprime lender Household International). The bank comments the US is likely to go into recession this year and doesn’t see a US housing market recovery until next year.

On the subject of house price crashes, research from Goldman Sachs finds this is the first suffered in the US since the 1970s based on their definition of a 15% fall in inflation-adjusted prices. During that period most other industrialised countries have suffered at least one and Canada, Finland, Germany, Italy, Japan, Korea Sweden

Switzerland and the UK have had two. Yes, there are still those of us around who remember the value of your home can fall as well as rise.

Finally, some news of our own. This week will be our last. The Daily Reckoning is closing on Saturday but dear readers will continue to hear from us on a daily basis as the Fleet Street Daily from next Monday.

Regards,

Rob Mackrill
The Daily Reckoning

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The Sunday Times’ advice appears to have fallen on deaf ears. The following day, Monday, oil hit $120. Another record. Rebel attacks in Nigeria disrupted production and renewed Turkish action against Kurdish insurgents in Northern Iraq were given as reasons why. They combined to push West Texas Intermediate sweet light crude to $120.36. Brent Crude hit a peak too – $118.58. Nigeria and Iraq combined accounted for 5.5% of global production in 2006 according to BP. Where would the price go we wonder if Saudi – accounting for 13% – announced peak oil?

As it is Goldman Sachs weigh in with another oil price forecast this morning. It suggests the Sunday Times is at best a little early on their call. We could see $150-200 oil in the next two years they calculate as supply plays tortoise to the hare that is demand. Shell CFO Peter Voser reiterated last week they see a market that is well supplied but still think prices will rise from here. Morgan Stanley analyst Hussein Allidina reminds us:

“The global oil market currently has very little margin for error with spare capacity constrained.”

Brazil may have found an offshore “elephant” or two but the stuff is six miles below ground and requires a pushing of the technology frontier to develop. Whether that proves economically viable remains to be seen.

Predicting the peak and the duration of the up cycle in oil prices this time around remains a tricky one admit Goldman Sachs. As we’ve noted before, Jim Rogers is less shy on the broad subject of commodities in general. Expect the commodity bull to run to 2014 or beyond he says (adding he’ll shout when it’s time to get out!). And the key driver is the industrialisation of the developing world: first and foremost, China. And there consumption continues to rise in spite of the relentless rise of crude – up 25% this year alone. In China’s case its thirst comes with the added kicker of inventory stockpiling ahead of the Olympics.

So it doesn’t look like the strengthening headwinds of oil prices (or commodity prices generally) are going away any time soon. And that hurts everyone – from the car driving commuter at the micro level all the way up to UK plc. Ernst & Young’s Item Club reckon a $150 oil price could cut growth to nearer 1% or less next year and push up inflation. At $200 we could see 6% inflation by 2010 they warn. Mervyn King will be an experienced letter writer (to the Chancellor) should that day come to pass.

So while the eye of the credit market storm looks to have passed, commodity prices continue to agitate and could yet sink even the modest economic growth projections of the industrialised world.

Warren Buffett told the 31,000 faithful at the Berkshire Hathaway annual shareholder jamboree that the worst has passed for Wall St but not the man in the street. Those with mortgages that is. There’s a lot more pain to come for US mortgage holders predicts capitalism’s nearest thing to a rock star.

Berkshire Hathaway actually took a 64% earnings hit in the first quarter from derivative losses but with a $40bn war chest it’s a good time to be a value investor with an eye for a bargain. He’s shopping in Europe too and is rumoured to be adding to his insurance empire by buying RBS’s insurance business. Elsewhere, US private equity firm Apollo wants a piece of battered UK house builder Barratt. And another private equity house, Blackrock, is buying $15bn worth of subprime mortgage debt from UBS.

Another home builder, Bovis might find interest from value investors too, following a profits warning today. Buyer reservations collapsed 70% since it released year end results on March 10. The shares at 457.75p are down 2.8% today as at 12.30pm. From a 52-week high of 1,160p and against a tangible book value of 562p/share according to the caveated calculations of ADVFN.

With European bourses showing up red today and the FTSE100 down 44, last week’s optimism is starting to wilt under the pressure.

Regards,

Rob Mackrill
The Daily Reckoning

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At least, since it started monitoring customer mood with its own survey four short years ago. Says their chief economist Fionnuala Earley:

“Food and fuel prices remain high and with house prices no longer rising it is unlikely that consumer confidence will pick up very quickly.”

The Daily Mail agrees under a headline “Broke Britain”. Families have less to spend as household income is eaten up by “unavoidable outgoings”. Discretionary spending – what’s left over after the “unavoidables” – is at its lowest level since 1991.

Economic forecasters Capital Economics expect food prices to continue to rise for some time yet at an annualised 6% and electricity prices will rise up to 10% in the second half. The average Council Tax bill is up 4% and the average water bill up 5.8%.
—————————————————————-

—FLEET STREET LETTER ALERT—

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

But for contrarian-minded investors, this spells opportunity.

The Fleet Street Letter has just been given permission to share three such money moves with you today.

You can read the full briefing here

Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to
lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

—————————————————————-

And then there’s the inexorable rise of the oil price. It notched up another record hitting $122 yesterday. For the car driver presently, that translates into 110p for an average litre of unleaded petrol. A level that means it has now crossed the £5/gallon threshold and filling the tank sets you back a wallet-denting £75. An average litre of diesel costs even more at 120p, or £82 a tankful.

But hey, don’t worry CPI inflation is only 2.5% when you factor in all those DVDs, flat screen TVs etc. etc. it all pans out…doesn’t it? Add in too the darkening cloud hanging over the housing market… But the frontline casualties to date look like house builders and, as we suspected, estate agents.

Estate agents are going to the wall in numbers. As we know the credit crunch begat the mortgage famine which in turn begat a recession in housing transactions. That last part is a potential stake to the heart of those whose business is to broker the deals for a fee. No deals, no fees. No fees, no business. A slump in home sales has seen 1,000 estate agents close to date and 4,000 lose their jobs.

It’s a strange situation Peter Bolton King, chief executive of the National Association of Estate Agents, tells the Mail:

‘The irony is that there is no shortage of people who want to move house, but without mortgages they just can’t do so. Estate agents are having to close because there just isn’t enough movement in the housing market.’

I know, our hearts bleed for the poor unfortunates. Given their infestation in many high streets, some trimming may be no bad thing but the death of the market helps no one in the end. In Argentina they have a saying: La plata que no se meuva, se meura. Money that doesn’t move, dies. Putting aside the phrase probably arose during their ruinous experience of hyperinflation the central thought is one of the nature of markets – a market that doesn’t move, dies. And in the case of the UK housing market presently, it’s showing a weak pulse.

(Hispanic speakers are welcome to correct my rusty linguistics!)

*** There’s still plenty of money around judging by an art market that continues to make the headlines. Monet’s ‘A Railway Bridge at Argenteuil’, “considered a prime example of high Impressionism” says the International Herald Tribune fetched a record $37m yesterday.

The previous owners paid $12.6m in 1988. A prize possession no doubt but aesthetic pleasure aside in investment terms that’s a modest return – a little over 5.5%pa. For that you can keep your Monet your editor will stick with his more humble investment trust savings scheme.

Or perhaps a permanent interest bearing share (PIBs) is worth a look these days. One of these unfashionable and little known fixed interest investments – the Britannia 5.555% – is yielding over 8% Collins Stewart advises in a note this morning. No doubt a good deal more than you’d get in even Britannia’s most generous savings account.

More adventurous investors might like to consider what is perhaps the last of the emerging markets: Africa. The pros have been turning their sights on it. The FT reports today ICAP plc, the interdealer broker, is setting up a hedge fund investing in Africa and the Middle East. The region has not escaped the attention of our own emerging markets expert Manraaj Dheensay. He’s found a great opportunity to invest in the region and interested readers should look out to hear more about it from Manraaj, coming through this Saturday.

Regards,

Rob Mackrill
The Daily Reckoning

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To comment, click here.

But then stock markets don’t deal in the present. They are “the great expectation machine” as one author had it. They look as far ahead as they can and try to picture how it will look. Evidently, they see an improving picture later in the year. Sounds encouraging, though as with all forecasts it could prove dead wrong. Much as the Met Office produces long-range weather forecasts using the latest technology which also can go hopelessly awry. Even their short term forecasting can be a disaster for those of us who remember Michael Fish dismissing the wild notion of a hurricane one fateful evening in October ’87.

What financial markets spy in the distance and what the rest of us experience day to day are two different things, of course. Warren Buffett thinks the US recession will be longer and deeper than most expect as consumers struggle with a wealth squeeze from falling house prices coupled with higher expenses from fuel and food prices. The Fed lopped another 25 basis points off the Fed funds rate as new data reveals the US grew in the fourth quarter of last year, but not by much. US interest rates now sit at 2%, about half the rate of inflation.

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Recession is not the central forecast for most analysts of the UK economy but the signs of deterioration continue apace. Most visibly in the housing market, a powerful symbol in our home owning culture, which continues to weaken. British bank HBOS is the latest to report house prices are falling – by 3.7% over the year to April.

Easing commodity prices if sustained will be welcomed by the world’s central bankers. It takes some of the “push” out of “cost-push” inflation – where higher input costs force higher prices – and opens up more wiggle room for further easing in interest rates. The impact of relentless price increases showed up once again in the latest UK factory gate prices this week.

Manufacturers have been paying more for raw materials and charging higher prices on finished goods.Given a slowing global economy, commodity prices should ease up as aggregate demand turns down. But then there’s the elephant in the room in the shape of China. As such a sustained easing of commodity is probably a big ask, at the very least until after the closing ceremony at the Beijing Olympics this summer.

The dollar has rallied from its recent low against the euro. A euro now buys $1.54 against a recent low of $1.60. As for the pound, it buys you a satisfactory $1.98 if you’re flying west and a miserly €1.28 if you’re flying east.

Our currency of choice, gold, has had a tough week down around $90 since its mid-April high. Is it over for gold? Not in our book. The inflation-adjusted high is more than twice its current level and when central banks are done reflating the global economy, we suspect it could go a lot higher yet.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning

What was Mr Brown expecting? He’s run the country into the ground and people are showing their disapproval at the polling stations.

After screwing up the banking sector and making many, many people’s financial situation worse… the country has stood up together with Paddy Chayefsky like exuberance and stated: “I’m as mad as hell… and I’m not going to take it anymore”.

The country’s mad, we’re mad, the finance sector’s crippled – what can be done?

Well consider this…

The finance sector makes up one third of our economic output, contributes £20 billion to the trade balance… and accounted for nearly HALF of UK GDP growth in 2007.

There are now more finance sector workers in Britain than there are construction workers, farmers and factory workers combined.

And they are in trouble!

Let me ask you something dear reader…

What do you think’s going to happen to the domestic economy… and to YOUR savings and investments… if Britain’s ‘Miracle Money Machine’ has its output slashed by one tenth… one third… or even half?

Well – as the pound continues to perform disastrously against the Euro and the dollar… investment banks brace themselves for further fallout… it’s time to batten down the hatches, because you’re about to find out.

Below you’ll find the link to a brand new Crisis Report published by The Fleet Street Letter. They’ve also identified three stocks poised to benefit from the finance sector-led recession they believe has to kick off in 2008.

Click here to read the Crisis Report

Not only is the most dramatic asset bubble of modern times clearly over… not only are the recent falls in real estate and equities just a taste of what’s to come… but a sector that accounts for nearly one third of Britain’s entire economy is about to get hammered!

If City activity dries up, so does growth, says Damian Reece in The Daily Telegraph. “The entire southeast, from house prices to employment, is a geared play on global financial markets.”

According to its analysts this could be one of the biggest challenges to face the British economy in The Fleet Street Letter’s entire 70-year history.

And it’s hurtling towards your savings and investments like a freight train even as you read this.

And if you’re not ready yet, you’ll want to be soon.

The Fleet Street Letter has been helping its readers prepare their portfolios for the coming crisis since October 2005.

With the situation deteriorating daily, they’ve decided to issue some advice to you today.

Specifically, the team have identified three “gloom loving” stocks they believe will thrive during the finance sector-led recession.

This could be the most important investment advice you read this year.

Click here for the full briefing

Regards,

Rob Mackrill
The Daily Reckoning

P.S. If like 75% of the country you’re fed up with the way Labour are running the country into the ground… you may as well take the chance to make a little bit of money on the back of their ineptitude (it’s something that makes me feel a little better anyway). So give our report a read – you will not be disappointed…

Go here for the full report

London ’s leading index headed straight up at the open adding 69 points at the open to 6,156 following a good day on Wall St. yesterday.

The Dow put on 189 points to close above 13,000 for the first time since the start of the year – no doubt a significant closing level for technical analysts. The gain came as financial stocks made the running and in spite of ExxonMobil shedding 3.6%. Exxon is struggling to up production reports the FT as it falls victim to resource nationalism. African production fell 20% after it was forced to hand over more to host governments and its Venezuelan interests were nationalised.

Continues below …

FLEET STREET LETTER ALERT

3 “Gloom-Loving Stocks” for the Coming Recession

Dark clouds are gathering over the UK economy.

But for contrarian-minded investors, this spells opportunity.

The Fleet Street Letter has just been given permission to share three such money moves with you today.

You can read the full briefing here

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The bounce in US stocks reverberated around the time zones. The Nikkei was up over 2% to close above 14,000 and China’s leading index, the Shanghai Composite added almost 5% as it breaks out from a six month downtrend. European bourses are up across the board this morning.

So is it over? Or is this premature as the IHT suggests? Stock markets are forward looking by six months or so, so are presumable focused somewhere on the end of this year and the bulls see something better out there. But lest we get too carried away the world can look very different at street level. It was only on Monday that Warren Buffett was warning “ my general feeling is that the recession will be longer and deeper than most people think. This will not be short and shallow. I think consumers are feeling gas and food prices and not feeling they’ve got a lot of money for other things.”

Except perhaps for the one off “tax rebate” cheque sent to US taxpayers in the post this week. But some relief is coming too from a sector that of late has been a chronic thorn in the side of central bank inflation targets – the commodities market. Commodity prices have been falling of late across the board – energy, industrial and precious metals and agricultural commodities. The price of crude is down for a fourth day running with Brent Crude at $110 and West Texas light sweet crude a shade under $112. Lehman Bros said recently there was $20-30 of “hot money” in the crude price.

Why the pull back? It’s all about the dollar says commodity strategist, David Moore of Commonwealth Bank in Australia:

“The demand for investing in commodities as a hedge for U.S. dollar weakness has faded.”

Which gives us a clue as to the nature of the demand. There’s actual physical demand for commodities according to their use and then there’s more speculative investment demand. With the revival of interest in the sector, how much of the price is attributed to each? We don’t know but given the rapid rise in popularity of the commodity exchange-traded fund, we suspect the balance has tilted significantly in recent years towards the speculator.

That fading interest in hedging has helped the dollar claw itself back from a low point at 1.60 to the euro, to 1.54 now. When even central bankers are telling the market it’s not so bad, investors worries are starting to subside. Says Japanese fund manager Tetsu Emori:

“Worries about the financial market turmoil and even an economic slowdown seem to be softening, so that’s why people are selling gold.”

As such gold continues its slide south, at one point unwinding all the way to its $850 price at the start of the year. Just as the dollar stages something of a rally, the Gulf States may finally be coming to the conclusion that pegging to it is not after all such a good idea as dollar weakness adds to their domestic inflation problems. Something even Alan Greenspan actually advised them to do on a visit to the region. Kuwait has been the only one to drop its peg to date and has seen its currency appreciate almost 8% against the dollar since. Its Finance Minister Mustafa al-Shimali seems confident other Gulf Cooperation Council states will follow its lead – “some countries will do what we are doing.”

Here at home, the winds of political change look to have blown pretty hard yesterday. UK government worries about taking a pasting from the electorate in the local elections proved well founded. They did – their worst result for 40 years. With the Mayoral vote still pending, it could prove a very black day for New Labour. Still after 11 years in government you take some wear and tear, mistakes are made, support disintegrates, people get disillusioned or just fed up with the same old faces.

And it doesn’t help when the much touted UK economic miracle that has notched up 60 consecutive quarters of growth is looking a good deal less miraculous. The progressive puncturing of inflated house prices, aided and abetted by a mortgage famine is exposing gradually testing the debt-laden underbelly of once enthusiastic consumers. British bank HBOS announced house prices fell by 3.7% annualised over the year to April. It is the worst housing market performance since 1993 and comes on top of a controversial scrapping of the 10% starter tax rate. Who’s to blame? The government, of course. Much to the delight of the Tories for whom the ERM debacle is now but a fading memory.

Regards,

Rob Mackrill
The Daily Reckoning

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At least it’s Mayoral decision time for those 5.5m registered to vote in the polyglot Babel known as England’s capital. A quarter of Londoners were foreign born according to the 2001 census and with unknown immigration numbers since, that reading is likely a considerable understatement now.

For your editor it means another visit to the local junior school. In the past it has been a slightly bemusing experience trying to figure out what you’re supposed to do and where…not to mention some last minute dithering about the choice of the day. A decision usually reached via some trivial tipping point item.

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As for the Bank of England, often it is said the job of a central banker is to take the punch bowl away while the party’s still swinging. The job of reminding partygoers where the punch bowl is and that the brew was potent but not entirely poisonous is less familiar. But that is what it appears to be encouraging in its latest report.

Cheer up all you glum faces. The worst is behind us, they say. $1trn in subprime losses is way off the scale. They estimate a fraction of that sum – $170bn. The risk pendulum has swung too far. Financial markets have turned bipolar they say, from under-valuing risk to overvaluing it – from irrational exuberance to irrational gloom. Or in Bank speak:

“…estimates implied by prices in some credit markets are likely to overstate significantly the losses that will ultimately be felt by the financial system and the economy as a whole, as they appear to include unusually large discounts for illiquidity and uncertainty.”

Whether they have or not remains to be seen. As one commentator has it, it’s a buy note on asset-backed securities now selling at knock down prices. But confidence is in short supply and a rallying call from the top is worth a go. As things stand we’re a bank down – Northern Rock – with £100bn added to taxpayer liabilities, there’s a new £50bn bank funding facility on top, government coffers are empty and the interbank lending rate is still stuck 84 basis points over bank base.

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Successful raids such as the one on HBOS can have spectacular results. The trouble is “harmful manipulation” can really do lasting damage says research from the Oxford Said school of business and Wharton School. There is more than a loose connection between stock market value and actual economic worth they find. It is a conclusion that may well add power to the elbow of regulators seeking to reign in the short sellers.

*** Colleague Warren Green, passes on the scores for last month’s Daily Reckoning poll. Which commodity of gold, silver, platinum and palladium will rise most in April, we asked. Here’s how you scored

Gold 25%
Silver 41%
Platinum 17%
Palladium 15%

Unfortunately, Dear readers missed the fact it was trick question. Unfortunately, too, so did we. Your editor now makes a mental note to not to phrase such leading assumptions with questions in future.

These four precious metals actually fell over the month…

Price/oz (US$)

Click here if you would like to have your say on this month’s question Regards,

Rob Mackrill
The Daily Reckoning

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