‘Cheer Up’ Says the Bank

Rob Mackrill — Thu, 01 May 2008 17:31:01 +0000

In England, it’s local elections. In London, it’s decision time for choosing a Mayor too… Ken, Boris or Brian..?

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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Meanwhile back in the economy…Manufacturing growth continues to weaken according to the latest from the Chartered Institute of Purchasing and Supply. Factory gate prices continue to rise at a clip as do input costs. Not surprising given the trajectory of commodity prices but further food for thought for Mervyn King and the MPC to ponder in their next move on interest rates.

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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Add to that commercial property is likely to kick in with big losses for the banks and we’ve certainly had our fill of bad news. But from the banking sector we’re unlikely to hear any more of it in any event according to a report from the Mail on Sunday. The Bank of England has overridden the Freedom of Information Act and imposed a news black-out on bank funding it claims. If correct, the public will never know which banks needed what and when. It may even be withheld beyond the 30-year period when all but the most sensitive information is released. Ignorance might be bliss for the bankers terrorised by what happened to Northern Rock, but it’s hardly reassuring for depositors entrusting their savings to the flimsy fig leaf of an inadequate compensation scheme.One day last month leading British bank HBOS found itself victim to a “bear raid” which sent its stock price plummeting, much to the fury of the FSA. Bear raids, for non-Canadians, amount to speculators selling short with the intention of making a profit from the fall in a share price. More controversially with this tactic is the nature of the encouragement the shares get to fall – false rumours, whispering campaigns, blogs and so on.

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$)

	April 1	April 30	Loss (%)
Gold	920.5	865.1	6
Silver	1726	1659	3.9
Platinum	2000	1940	3
Palladium	448	431.65	3.6

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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‘Cheer Up’ Says the Bank