This from Fleet Street Daily:

I attended a most interesting lecture last night at the London School of Economics. It left me feeling that anyone who rushes back into the stock market now must be barking mad (you’ll see why in a moment).

Entitled ‘The Subprime Crisis’, it was given by Professor Robert Shiller of Yale. Shiller’s well worth hearing on this stuff. A former advisor to new US Treasury boss Tim Geithner (“He had no idea this was coming”), Shiller forewarned of both the dotcom bubble and the more recent one in housing.

The lecture kicked off with a quick recap of how we got to where we are. These were the highlights:

• Psychological factors played a huge role. Irrational exuberance (a term coined by Alan Greenspan and borrowed by Shiller for the title of his 2000 book) caused bubbles to appear all across the world . Word spread that by simply buying stocks, or a house, you can become effortlessly wealthy. You can’t.
• Genuine financial advice was only available to the wealthy. Anyone who gives you free or “affordable” advice isn’t really advising you at all. They’re trying to sell to you. Hence many subprime borrowers got in over their heads – basic questions like “Can you afford this?” “What if interest rates rise, or you lose your job?” were left unasked.
• Individuals fell victim to Groupthink. Groupthink is where it’s in the interests of individuals to subordinate what they really think to what is acceptable to the consensus. Imagine a rating agency employee in 2006 saying to his boss: “I want to downgrade this debt. I think we’re going to have another Great Depression…” Not exactly a smart career move!

We were then shown charts of stock indices, p/e ratios and volatility going all the way back to 1870. Let’s start with the volatility.

There are only three points in history where we observe extreme volatility. One is right now. The others are 1987 and 1929.

The real terms p/e ratios chart was even scarier. The big bubble run up from 1982 to 2000 appears like the Matterhorn rising out of some hillocks. This, of course, is the bubble that’s now being corrected.

In percentage terms, we’ve only ever seen such a bubble once before since 1870. Yep, you guessed it…before 1929!

Why you should remain wary of equities

Shiller told us that, in real terms, the S&P fell 80% in the 1930s. So far it is only down 54%.

This means you still have a once-in-a-lifetime opportunity to lose a lot of money very quickly. Will you take it? I for one hope you don’t…

Most of us have never been in this position at any time before throughout our lifetimes. Who alive today has first-hand experience of investing during a prolonged, worldwide, stock market and real economy Depression?

All we have to go on is the lesson from history. And that lesson says…stay out! Keep your cash as cash.

Why some will try to lure you back in…and why they might succeed

I believe we’re seeing a lot of Groupthink in the financial sector right now. Finance types make their living from stocks markets. So it’s in their interests to talk the best stock market game they feel they can get away with.

They did it during the bubble, happily perpetuating the notion that stocks generally go up so go ahead and fill your boots.

That nonsense won’t fly now. But there’s another nonsense that will – the idea that the correction thus far has left an unprecedented number of “screaming bargains” for you to put your money into. Thanks to Groupthink, many commentators are now crowding round this dangerous consensus.

Right now is not a time to speculate. It’s a time to protect your money. The best way to do that is to hang onto it.

It’s tempting to feel ‘contrarian’…to think that you could be among the financially savvy if only you’re brave enough. That’s why this consensus will enjoy some success… for a bit.

But it’s a thin line between bravery and foolhardiness. Do you wish to gamble that you’ll fall on the right side?

Another reason investors might be suckered back in early is that they worry about missing the boat. But I’m going to paraphrase a much smarter bear than my average self – Albert Edwards of SocGen. Investors needn’t worry about missing the party this time.

You can afford to be late.

Source: This Man’s Message Could Save You From Financial Ruin

More from Fleet Street Daily:

Let’s have a think about what’s going to happen after the downturn (it may seem hard to believe right now, but there will be an after the downturn). What will the world look like?

The answer will depend on what the jury decides in what is the most important trial of our times: Man versus Capitalism. The outlook for Capitalism isn’t good…

As Ambrose Evans-Pritchard writes in today’s Telegraph:

‘At this point I have given up hoping that we will draw the right conclusions from this crisis. The universal verdict is that capitalism has run amok.’

So what will the world look like after the guilty verdict is in? Let’s get ball rolling with three predictions about what the future global economy will look like:

1. The state will play a much larger role

This is pretty much nailed on already. Governments have already gone beyond being Lenders of Last Resort. Here in Britain, the government is buying into the banks directly.

It won’t stop there, either. Economies are shrinking and people are losing jobs. Governments will do whatever they can to minimise the damage, including giving people jobs directly. It would be political suicide not to.

2. Capital will be allocated less efficiently

For investors, this is the biggy. The prevailing “wisdom” has it that bankers are reckless mercenaries who throw money at ludicrously risky propositions in the hope of receiving a fat bonus before the whole thing blows up in their employer’s face.

While there may be an element of truth in that, let’s not get carried away. Banks exist to make money, and, by and large, it’s in their interests to lend where the return will be highest — while keeping risk to an acceptable level, of course. But that ‘acceptable level’ is now being redefined.

We will see tighter regulation of financial institutions. We could also see governments morph into reluctant banks managers as they attempt to keep the system on its feet. If this happens, expect lending decisions to be taking for political motives rather than profit motives. That is to say, the most profitable businesses — the ones that would deliver the most economic growth — will not necessarily be the ones that are funded.

Businesses that ten years ago would have had no problem getting a loan — and, crucially, that would have used that loan to fund profitable enterprises — will find it harder to get funds. As such, they will find it harder to grow, and shareholders will suffer.

To cut a long story short — the world of the future will be a harder place to make money.

3. Protectionism will end dollar hegemony

To be honest, there’s loads of culprits I could choose when I’m playing the Who Will Knife The Dollar game. But I’ve got this sneaking suspicion — call it a hunch — that protectionism will be the catalyst. Let me explain.

Whoever wins the US Presidential election, America is in big trouble. It will be hard to resist calls to whack up tariff barriers, and protect domestic jobs from foreign competition. A weakening dollar may help US exports a bit… but the US is in a bind.

If the dollar falls too much, foreign dollar holders (eg China and the oil-rich Gulf nations) will start dumping it. The US does well out of being the world’s reserve currency. Such a move would threaten that.

So what will the US do? It could pursue a strong dollar policy (I’m not sure how, but we’ll gloss over that here!). But that would hit exporters, and hit jobs. So, in response, some bright spark will start banging the drum for protectionism.

In desperation, the US government will reach for the lifeline. Foreigners who sell goods to Americans will suddenly find their access to the world’s biggest consumer market has been severely curtailed. Bad for them… but bad for America, too.

You see, those foreign dollar holders can see the currency’s fundamentals are weak. They’re sitting on all this money whose value is in the hands of a monetary authority (the Fed) and a government whose sole concern right now is fighting the downturn. The Fed has slashed rates, and there’s a strong chance the printing presses will soon go into overdrive.

So why are foreign dollar holders playing ball? Because, as things stand, it’s still in their interests to do so. Why would they want to antagonise a nation they do so much business with? Why would they impoverish their best customers?

But throw protectionism into the equation, and the incentives change. This is particularly true in the case of goods exporters like China. Overnight, the US market is less important to them.
Now, will this be enough to tip the balance? Will it reduce their incentive to co-operate enough so that they take their ball back and stop playing? Hard to say… but I think we’re going to find out.

One thing at a time… we need to get there first

Those are my three predictions for today. But many moons will pass through the night sky before this whole thing turns around. For now, we must do two things. We must prepare, and we must protect.

Source: Man Vs Capitalism – The World After The Downturn…

Last Wednesday gold hit an 11-month low. It prompted a lot of head scratching. How come, amid all this chaos, the classic safe haven investment was having such a bad time?

We gave our answer last Thursday, when we asked if gold’s dip was buying opportunity, or a signal to get out. Our answer was the former – buying opportunity.

“The overall background for gold is actually bullish,” wrote our commodities expert Garry White.

On Friday I followed this up with a piece called ‘Why gold’s weakness is temporary’.

Well, it seems the forces of nature have reasserted themselves. It just took a Lehman’s sized push to rouse them, that’s all…

From a low of $740.75 last Wednesday, gold has soared all the way up to $862.90. Anyone who bought gold last week will, despite the gloom, probably be smiling right now.

The obvious question, though, is whether this surge means the opportunity has passed. I was chatting to colleague Bill Bonner about this last night:

“A lot of people had been buying gold as an inflation hedge. Now they’re buying it as a deflation hedge… it works both ways.”

If you’re a short-term trader, you may be kicking yourself if you missed the big move. But those of us who invest for the long run look at things differently. Gold is a hedge. History has shown it’s an investment that tends to keep its head when others are losing it.

That’s not to say it’s a one-way street. This week’s gains could well be reversed. But hard core gold fans won’t be fazed if that happens. Gold isn’t something you buy to get rich quick. You buy it “just in case”…

The investment lesson of this week’s rally is that when a flight to safety occurs gold is the place to be. And, as I’ll be revealing in future editions of FSD, there are plenty of reasons to believe even more investors will be running for the hills.

Source: Gold Soars $122. The Lesson Investors Should Learn

Frustratingly I don’t have time to give it all the usual full on FSD treatment. But here are a few thoughts on the latest dramas:

• HBoS shares have continued falling. They fell 30% this morning – more fall-out from the Lehman business (there are concerns about HBoS’s reliance on wholesale funding. LIBOR, the interest rate at which London private banks lend to each other, hit a seven-year high on Monday night). Will the next act in this production feature Northern Rock-style queues outside branches of Halifax? We shall see…
• Fresh from refusing to guarantee Lehman’s (LEH) liabilities, the US Fed has turned back into Good Cop. It will lend $85 billion to insurers American International Group (AIG), taking an equity stake in return. The Fed now owns 79.9% of AIG
• Just to confuse things slightly, though, the Fed voted to keep interest rates on hold at 2%. OK, so these are already pretty low. But the decision confounded those who expected recent turmoil would result in further rate slashing.

Just a quick point on the Fed before I head back in. It’s often said that the key task of a central bank is to manage expectations. Make sure no one gets it in their head that inflation is out of control (if they do, they’ll want higher wages… meaning higher inflation is more likely).

But the Fed has a dual mandate – unlike the Bank of England it has to take account of economic output. And the Fed’s dual mandate seems to have given it a split personality. Sometimes it is good to confound expectations. To keep everyone guessing. It’s a way for policymakers to retain and exert control.

But there’s a downside. In such volatile markets as these, keeping people guessing fuels uncertainty. As such, it can exacerbate volatility. This week’s news is especially bad if you’re British. That’s because we’re heavily exposed to the global financial sector – as evidence by HBoS’s plight.

So, you won’t be surprised to hear, I’m still very bearish on the pound. Sterling’s weakness looks set to continue.

To find out why – and how you can prepare for it – read my Britain’s Going Bust – Again report here.

Until next time

Ben Traynor, Editor

Source: Bad Week For Finance – Especially For Britons

We had a good response to yesterday’s piece on gold. One reader wrote in:

‘Gold clearly seems to be moving contrary to the direction that received wisdom would suggest as “normal” given the calamitous economic situation the world finds itself in. So what is providing the downward pressure and what might cause it to reverse?’

To answer this, let’s start by looking at the mechanics of making money from gold. For simplicity, I’m going to assume you just buy physical gold. Your profit or loss depends solely on what happens to the gold price between the time you buy and the time you sell.

By buying gold you are, in effect, buying in the belief that in future, more people will buy it than will sell it. This is true of making a gain on any exchange traded asset. The tricky part is working out whether or not said asset will be more attractive in future than it is today.

That’s the tricky part with buying a share too. But with a share, you tend to have a bit more to go on. For a start, you can undertake fundamental analysis. You can look at balance sheets, earnings forecasts.You can hazard a guess at what profits might be in the future, and what that will mean for the share price (after all, as the name suggests, a share is your entitlement to share in a company’s fortunes. Higher profits, for example, could translate into higher dividends, attracting more investment in the shares and pushing up their price).

Of course, fundamentals are not the only factor that affect share prices. But we look at them because we know everyone else is. If our view about what they tell us turns out to be right — and others agree with us after we’ve bought in — then, other things equal, we make a profit.

Let’s now contrast this with gold. Gold does not pay a dividend. Gold does not issue statements to the stock exchange, or publish annual results. Of course, gold does have its own fundamentals. We have the physical users of gold on the demand side and the gold miners on the supply side. Studying these can give you clues about where the price is going in the long run.

The trouble is, the gold price is heavily affected by investment demand, as opposed to physical demand (from, say, jewellers). And investors tend to look less at gold’s fundamentals and more at macroeconomic and monetary factors. This holds the key to understanding the recent movements in the price of gold.

For much of this year the gold price has appeared to be inversely related to the perceived fate of the US economy (the key word in the sentence is ‘perceived’). This is hardly surprising since gold, like most commodities, is priced in dollars.

For the first few months of 2008, the US was — according to world opinion — Economic Disaster Zone Number One. The outlook for the dollar was calamitous. Gold, meanwhile, soared, smashing through the $1,000 mark.

But as spring moved into summer, doubts about other economies grew louder. Global investors cottoned onto the fact that the economic hardship would not be confined to the US. Britain and the eurozone looked, to some eyes, even more shaky than America. A bit later and it became official that Britain’s economy had stalled, while the eurozone’s had gone into reverse.

Meanwhile, earlier dollar weakness was causing a mini export boom in the States. New economic data were not as bad as many had feared. The perception shifted — perhaps the dollar wasn’t all that bad… and other currencies not all that good… As a result, one of the earlier upwards drivers of the gold price — the perception that it was a crucial hedge against the doomed dollar — was weakened. I believe this has played a part in why gold has been falling. However, as I’ve written before, I do not believe the long run outlook for the greenback is strong.

There are, of course, other factors in play. As Garry White noted yesterday, the falling oil price has played a part. There will also be indirect causes behind recent weakness — such as investors selling gold to cover losses from other investments.

The broad Fleet Street consensus, though, is that gold’s current weakness is temporary.

For more on this read our mining specialists Erin and Isabel on why the tide will turn for gold.

Lehman Brothers: Bear Stearns 2?

Non-controversial prediction of the week: the bigwigs at the Fed will make another Sunday announcement à la Bear Stearns. Barclays (BARC) and Bank of America (BAC) are in the frame as potential victims, sorry, buyers of Lehman. But they’ll probably want some kind of Fed guarantee…The Fed is involved in a game of tiggy (you may know it as ‘tag’) with the US Treasury. Last week it was the Treasury who stepped in to rescue Fannie (FNM) and Freddie (FRE). In doing so they ‘tagged’ the Fed, whose turn it is now to get out the mop and clean up the latest mess.

So on Monday morning we could be waking up to the details of yet another taxpayer-backed mercy mission…

Time for the May sellers to come back?

Doncaster Racecourse will tomorrow host the St Leger, one of the most famous races in the calendar.

So it’s time to take stock of one of investment’s most well known adages: Sell in May and go away… don’t come back ‘til St Leger’s Day.

Did this turn out to be good advice?

As Theo Casey wrote back in May:

If the market is going to fall this summer, which it probably will:

Blame the deteriorating property market;
Blame the deleveraging investment banks;
Blame the volatile debt markets;
Blame the stingy UK consumer;
Or blame HM Revenue & Customs’ ill-conceived proposals.

But leave St Leger out of it.

Today’ Theo revisits this, to see if tomorrow’s horse race means it’s a good time to invest in shares again… and if not, when will be?

This company could be invaluable to China

There’s just time to tell you about a new report that’s coming out next week. I only got a draft copy this morning, and haven’t had a chance to study it properly.

So I’m afraid the details are a little sketchy for now. But what I have read is exciting. The report relates to a “Company X”, which could turn out to be the biggest profit play on the boom in China.

The report describes this as “one of those rare investment situations that simply don’t occur that often”.

Like I say, I don’t have many details right now. But I’ll have more for you next week…

Until tomorrow

Ben Traynor, Editor

Source: Why Gold’s Weakness Is Temporary

This from Fleet Street Daily:

Monday was one of the best chances traders had to make money in quite a while. And, once the markets realise the Fannie/Freddie bail-out is not the magic bullet they hoped, it could be a while yet before we see another rally like yesterday’s.

So, [due to a technical problem at the Stock Exchange] much of London missed out on the worldwide equities field day. The big question, though, is whether the Fannie/Freddie news, and the rally that followed it, mark a turning point for the financial crisis.

I suspect not. I suspect traders and investors were so desperate for a psychological boost, they latched onto something everyone knew was going to happen anyway. Probably most knew the rally was phony. But they also reckoned (rightly, as it turned out) that the market as a whole would react favourably to the news from the US — despite the fact that it was wholly anticipated.

If enough people buy stocks because they expect a rally, it becomes a self-fulfilling prophecy. Markets are always driven by sentiment. That is especially true in these volatile times.

Profit Hunter’s Manraaj Singh agrees. As he wrote to his subscribers yesterday:

“We have seen markets rally at every suggestion of a government bail-out of the US financial sector throughout this crisis. Just think back to March when the Fed provided $29 billion of financing for JP Morgan’s bail-out of Bear Stearns.”

Manraaj reckons the roots of the crisis persist:

“The latest bail-out has given markets a big psychological boost. But it still doesn’t tackle the systemic risk within the financial system. To do that, the US government would have to take clear steps to buy up most of the dodgy debt floating about in the US financial system”What we’re seeing here is just another dead cat bounce.”

There are other reasons to be cautious. One indicator we like here at Fleet Street is the Baltic Dry Index. The Baltic Dry Index tracks the movement of freight shipping rates. As such it gives an indication of the state of world demand for goods and raw materials.

The Index has been falling since June. Yesterday it continued its downward trend. Real economies are still facing all the same problems they did last week. Yesterday’s stock market exuberance can’t hide that.

Any optimism right now should, at most, be cautious optimism. And pretty soon I expect it will be relegated back to mere caution.

Source: Time For Cautious Optimism? Or Just Caution?

Things appear to be going from bad to worse over in Britain. The latest growth forecasts from the OECD say the country is already in recession, and is the only major economy to reach this dreaded condition…so far. Ben Traynor at Fleet Street Daily says the outlook is grim for the the economy, the FTSE index and the British pound. But there are still ways to make profits when times are hard.

This from Ben:

Theo Casey and I have been taken to task by a reader. He writes:”Please, don’t encourage politicians to lie or be economical with the truth. It should not be acceptable to let them lie.”

It’s a fair one. You’ll recall that on Monday we were talking about Alistair Darling’s weekend truth outburst. The chancellor had told the nation what we all already know – that the economic situation is bleak.

“What Darling has done is confirm fears,” wrote Theo. “Consumers, investors and businesses that were not previously worried, now are. They have been told from the highest office in the land that it’s time to cut back.”

If you regularly read Fleet Street Daily, you’ll be used to hearing that things are bleak (I don’t especially enjoy writing as much, but the way things are are the way things are). But, believe it or not, there are some people who still set store by the official government forecast that the economy won’t enter recession. So you’d expect negative talk from the chancellor to have an economic impact (indeed it did. The FTSE 100 and the pound fell hard on the back of Darling’s comments).

But I take our reader’s point on board. We don’t encourage the chancellor to lie. We’re just acknowledging that his moment of honesty has made a bad situation that little bit worse.

Not that it makes much odds this late in the game. Darling could talk the economy up, down or sideways for all the difference it would make now – as an influential new report demonstrates.

The Organisation for Economic Co-operation and Development (OECD) has published its growth forecasts for the G7 group of leading economies. Here’s what the OECD predicts for the rest of this year:

GDP Growth in the G7 countries (annualised quarter on quarter growth, %)

	2008 Q3	2008 Q4
Japan	2.4	1.4
United States	0.9	0.7
Canada	0.8	2
G7	0.8	0.7
Euro	0.4	0.8
France	0.2	0.6
Germany	0	0.1
Italy	0	0.6
United Kingdom	-0.3	-0.4

Source: OECD

As you can see, it reckons the UK has already slipped into recession. By the end of this year, according to the forecast, we will have posted two consecutive quarters of negative growth.

Alarmingly, the OECD reckons Britain’s is the only major economy that will hit recession this year. So if they haven’t already, the newspapers will soon be raiding their archives for those ‘sick man of Europe’ articles penned 30 years ago.

One thing is abundantly clear. Going forward, Britain will be a bad place to do business. This, we expect, will have a negative impact on investments.

But there is protective action you can take. We’ve already identified one major global trend which British investors can exploit. This trend is set to continue regardless of what happens to the British economy. Find out here how you could profit from this trend.

And later this week I’ll be unveiling a brand new report that offers you an alternative to stocks. We expect the investment we’ve identified will actually benefit as Britain’s economy weakens.

Source: Can Telling A Lie Save The Economy?

Today we’re tackling perhaps the most fundamental question in investment. What’s going to happen next?

I could embark on a truistic homily about how it’s not given to man to know his fate… how we must play the hand we’re dealt… or something along those lines.

But you already know all that. So… what do we think will happen next?

I cornered Theo Casey, The Fleet Street Letter’s investment director, and asked him a monster question.

What will be the next big move for the stock market? “Well,” he answered, in his typically cautious, investorish manner. “I wouldn’t want to pin my eyeballs to this… but a fall below 5,000 is a real possibility.”

The FTSE 100 is, at the time of writing, at 5,628. A fall below 5,000 would be calamitous.

“Of course,” adds Theo, “I do hope I’m wrong. But I’m preparing in case I’m right.”

Theo’s not alone in this view. Several prominent analysts have expressed similar concerns. It raises the obvious question – is there anything we can do about this?

Well, there is one obvious answer – one that tends to get forgotten. You can simply hold cash. I’ve already told readers of The Fleet Street Letter that there is nothing wrong, at times like this, in holding more cash than you’re used to.

That may not be terribly exciting advice. But, to me, it makes sense.

“But you don’t have to completely cash out,” adds Theo. “There is a way you can prepare. However, I fear many investors will do the one thing they shouldn’t, mistakenly believing it’s the best way to minimize risk.”

Read on to discover what investors should – and shouldn’t – do to prepare their portfolios

Source: How You Should (and shouldn’t) Prepare for a FTSE Nosedive

Received wisdom has it that China will be dragged down by the other major world economies. But let’s not be so hasty. The signs are that there’s still plenty of life left in the Dragon. And that’s not just good news for China — it’s great news for western investors looking for growth.

The first part of the “China will suffer too” story went a bit like this: as western economies slowed, they would curb their demand for Chinese imports. As a result, China’s export engine would stall, undermining its economic growth story. Fair enough as far it goes — a similar fate has befallen Germany.

Indeed, China’s exports have been hit. For the period January to July, China’s trade surplus fell 9.6%. But there are signs that the domestic economy is taking up the slack.

Retail sales in July showed growth of 23.3% year-on-year. That’s a record high. Meanwhile, China’s urban fixed-asset investment in the first half of the year was 27.3% higher than a year earlier.

It all suggests a big difference between China’s economy and those of Britain, Europe and the US. A difference that can be summed up in one word — confidence.

That’s not to say China will continue to post record growth rates. There probably will be a slowdown — but a slowdown in China, with its double-digit growth, still leaves room for some impressive figures.

“As the authorities appear to have now shifted their top priority from curbing inflation to fuelling economic growth, investors keen to enter the Chinese market have been given an injection of confidence,” says Sherman Chan of Moody’s Economy.com. “Investment will likely continue to grow at a breakneck pace.”

Zhu Baoliang, senior economist at the State Information Centre, adds this:

“Although export and trade surplus growth could continue to fall in the coming months and the economy is set to decline, the overall economy can still manage to grow at 10% this year.”

The bottom line is simple — despite the likelihood that its economy will weaken, there is still growth in China. China will continue to be a major global driver.

So how does this relate to you, as a private investor? Well, buying Chinese shares directly isn’t an easy option. Nor is it a very good one. Besides, China’s stock market is extremely volatile – and you’re at an informational disadvantage.

So what can you do? Well, some time ago my colleagues and I at The Fleet Street Letter published a report. It reveals how British investors can benefit from global economic growth even while our economy stalls. Without buying dodgy foreign shares traded on hot house markets.

That report is still available. And with Britain’s economy now officially at a standstill, it is more timely than ever.

Many readers have already obtained a copy. But if you’re yet to do so, I urge you to take a look at it now.

Read on to find out how you could continue to grow your portfolio despite the stagnation of the UK economy.

Source: Exports Fall, But There’s Plenty Of Life Left In China

“This is just a transitory period of subdued growth and we will get through the other side and the growth will resume to more normal levels.” – Charles Bean, Bank of England deputy governor, August 25 2008.

“It’s fair to say that, if you look at the shocks impinging on us, this is at least as challenging a time as back in the 1970s.” – Charles Bean, Bank of England deputy governor, August 25 2008.

Charles Bean – who was Bank of England chief economist until taking over as deputy governor last month – said both of these things yesterday. He was speaking at Jackson Hole, Wyoming, during the annual conference of central bankers.

What are we to make of these two statements? And, more to the point, how much credence should we give to the Bank’s predictions?

Let’s kick off with statement one. Bean reckons we’ll see subdued growth for a bit, but then it’ll all be OK again. He based this statement on the prospect of lower inflation next year (I agree with this prognosis) and more stable credit markets (I’m more sceptical on this one).

Statement one is the sort of thing a public figure says when he wants to sound reassuring. But — and this is quite reasonable, of course — Bean was unable to stick his neck out and say how long he reckons the pain will last.

Moreover he was at pains to cover his behind, lest he be guilty of sowing false hope.

“We’ve got our fingers crossed that things will improve,” he said. “But there is the recognition that there is still a long way to go yet.”

“Fingers crossed” just about sums it up for statement one. The Bank has as much idea as the rest of us how long this problem will last. Its people are, basically, hoping for the best — giving an outward impression of calm while dropping heavy hints that we should batten down the hatches.

On to statement two. Bean says the situation is at least as bad as the 1970s. I agree.

There are several parallels between our current situation and the 1970s, including:

• Disgruntled public sector unions demanding higher pay
• The cost of energy (especially oil) has surged
• The economy has ground to a halt
• We have an unelected Labour prime minister struggling in the polls, so desperate to find a way out he’d sacrifice the economy for any short-term respite

A couple of words on that last point. In the 1970s it was Jim Callaghan who played the role of embattled, unelected PM. In the mid-1970s the economy was struggling. There is suspicion that the government, in cahoots with the Bank of England, attempted to engineer an export boom by way of a ‘managed depreciation’ of the pound.

Except the depreciation wasn’t ‘managed’. After the Bank cut rates in March 1976, the pound went off a cliff — and took the economy down with it.

Callaghan took over as PM in April of that year. By autumn there was a feeling that he would call an election — despite everything, Labour was ahead in the polls. But he didn’t (remind you of Gordon Brown in autumn 2007?).No, Callaghan stayed on. And, by doing so, he got to add the IMF crisis and the Winter of Discontent to his list of ‘accomplishments’.

Today, of course, we have Gordon Brown — a desperate man leading a collection of increasingly desperate MPs. It seems Brown may be bounced into imposing a windfall tax on oil companies. This could have a real negative impact on Britain, especially if oil companies with headquarters here decide to set up home elsewhere.

But it would make headlines in the short-term, so Brown might well go for it. Desperate times call, it seems, for knee-jerk responses.

That, however, is a whole other topic. For today, let’s content ourselves with making sense of Charlie Bean’s speech. Basically, things will be better one day, but we don’t know when. In the mean time, they will probably be worse. We don’t know how much worse, but probably at least as bad as 30 years ago (which was bad).

Source: What Is The Bank Really Saying?