It was the spare ribs last night… a favourite, but demanding in terms of mastication. So there I was happily munching away when suddenly… crunch! Perhaps ‘crack’ would be more accurate, as an upper molar succumbed to the pressure. At times like these it’s fortunate to have the necessary help close at hand, which is why I’m grateful my dentist lives three doors down.

Talking of dentists makes me think of something I was reading by Nassim Nicholas Taleb (a personal hero now, after only a few pages!) in his book The Black Swan. He recounts begin advised at Wharton Business School to do something scalable in his work. ‘Scalable’ meaning you could generate more income without commensurately more effort unlike, say, some professions such as dentistry. Their earnings are limited by the amount of people they can see who have broken teeth. He dismissed the advice, but wound up in an investment bank on Wall Street anyway. An investment bank must be hard to beat as a scalable business. As Taleb says, it takes as little effort to buy 100,000 shares as it does to buy 100.

But I digress. What happened this week? Well, it was something of a week where ‘past performance is not necessarily an accurate guide to future results’. UK employment levels have never been higher, yet job cuts in retail and the City are starting to mount. In the City 1,300 jobs will go from UBS and Merrill Lynch, and late on Friday Citigroup announced cuts of 9,000 staff worldwide. Home catalogue and educational supplies business Findel plc had a record year last year, but dished out a profits warning on Thursday and duly saw its shares punished.

Prime Minister Gordon Brown has been in the US. His visit coincided unfortunately with that of the Pope and he’s not Tony Blair, so he was ignored to some degree according to press reports. He’s been talking to the investment banks and asking for transparency so we can all know the worst and get on with our financially-squeezed lives. Around $250bn in subprime related losses has been disclosed, to date, from a total estimated by the IMF and others to be in the region of $1trn.

The unfolding impact of the credit squeeze has seen three-quarters of the mortgage deals available last summer withdrawn, according to the Daily Mail, though mortgage lending rose 5% in March over February. It is also expected to see a huge rights issue announced next week from Britain’s second largest bank, RBS. It is thought £10bn will be asked of shareholders. A sum approaching a third of its market value.

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Gold remains popular as a hedge against bubbling global cost-push inflation driven by ever higher commodity prices and dollar weakness. It traded at $935 late on Friday. Food shortages continue amid panic breaking out among importing nations such as the Philippines and Bangladesh who are struggling to secure necessary supplies. One in the eye for Ricardian economics of specialisation and competitive advantage. These nations if they have any sense will want to be self-sufficient in future. Rice hit a record $1,000 a tonne. Wheat, maize (corn), soybean etc. are similar stories of higher prices. With maize (corn) it has US biofuel demand helping it along.

On the currency markets, the dollar is weak and so is the pound, except against the dollar. The euro continues to strengthen and inflation ticking up to 3.6% will dampen hopes for an interest rate cut and do little to weaken it in the short term.

Finally, there is no sermon from Peter this week as he is away on a well-earned break. Okay, gotta run. The dentist’s chair awaits. Oh joy.

Enjoy your week-end.

Regards,

Rob Mackrill
The Daily Reckoning

On April 7, Taipan Daily stated, “The global food crunch could make the credit crunch look tame.” (You can read that episode here.)

This week, the financial elite said much the same. As The New York Times reports, “The world’s economic ministers declared… that shortages and skyrocketing prices for food posed a potentially greater threat to economic and political stability than the turmoil in capital markets.”

Two weeks or so ago, Taipan Daily wrote, “If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.” Now the picture is clearly becoming worse. Kazakhstan, one of the world’s biggest wheat exporters, has halted outside sales. Major rice producers are banning exports, too. On the other side of the ledger, countries like Haiti are descending into chaos.

This is very serious business. The food crunch is well on its way to eclipsing the credit crunch… but that doesn’t mean the credit crunch has gone away.

Turning to credit and housing for a moment, the news flow from California continues to shock and amaze. West Coast home prices are now heading into “free fall” as a result of the credit crunch.

It turns out that Golden State home prices soared to insane levels with the help of “jumbo loans” — extra-large borrowing packages that required huge leverage to take on. Now that the banks are pulling in their horns, those loans have disappeared. They are simply nowhere to be found, and the Fannie Mae / Freddie Mac substitutes aren’t nearly as generous. The most a homebuyer can hope to borrow these days — without paying backbreaking fees — is something like $417,000.

That’s barely enough to cover the back patio in Calfornia. Or at least, that’s the way it used to be. With no more jumbo loans, there is no more market for $85K-a-year households buying $700K worth of house. This leaves a huge gap between what new buyers can buy and what desperate sellers are hoping to fetch. For California in general — and especially for the higher priced urban areas — $417K is a long, long way down.

Think of Wile E. Coyote taking a gulp as he realizes there is no ground beneath his feet. Or Tom Petty belting out “Free Fallin’” on the radio.

It’s a looong day, livin’ in Reseda… There’s a freeway, runnin’ through the yard…

Anyway, enough of that.

As usual, though, the news isn’t all bad. (It almost never is.) Ann Sosnowski has found a way to make credit lemons into lemonade for Diligent Investor readers. Her latest pick can help put you on the path to a recession-proof portfolio, and give you the opportunity to turn a nice profit to boot. Take a look. And despite all the troubles out there, enjoy your weekend!