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

Be the first to comment on this article! Now you can post your thoughts, reactions and views on the topics we talk about.
To comment, click here

That seems to be the view of many this morning. Why didn’t the Bank’s Monetary Policy Committee (MPC) go further?

Those who hoped they would had their woes compounded yesterday. Signs are that the cut, already small, won’t be much felt by consumers. Nationwide, Royal Bank of Scotland, Alliance and Leicester and Britannia actually raised their rates yesterday.

So, in light of the fact that appears to have achieved little, was yesterday’s decision the right one? Should the MPC have gone further? Or (controversial), should it have stuck to its inflation-fighting mandate and left rates on hold? After all, the Consumer Price Index (CPI), the measure of inflation against which the MPC is judged, rose by 2.5% in February. That’s half a percentage point above the MPC’s inflation target of 2%.

I think the MPC fudged it. It made a decision based on fighting recession, not inflation. But it couched that decision in language that makes a weak attempt to tie it to inflationary concerns.

“Credit conditions have tightened and the availability of credit appears to be worsening,” said an MPC statement yesterday. The MPC also added that the slowdown in the economy will create spare capacity and ease inflationary pressures.

Of course, it’s easy to sit on the sidelines and carp. The MPC had a very tricky call to make yesterday. But by straying from its core objective, it has ensured its credibility has taken a hit. That’s likely to mean even trickier decisions in the months ahead.

Retail market “ugly”, Sir Philip Green says

One person not impressed by the MPC’s move is fashion magnate Sir Philip Green. The Kate Moss groupie gave a profit warning for his BHS chain yesterday, and predicts a shake-out in the retail market, which he describes as “ugly.”

The whole sector worries Green, and he sees little chance that yesterday’s rate cut would revive demand and predicted that the “very challenging” conditions would sort out good retailers from bad.

Green stopped short of calling time on any of his retail rivals, though.

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If there’s one thing the market can’t stand, it’s profit warnings. To us, the domestic retail sector looks as ugly as Green says.

The US has plenty of money — but not enough to buy with it…

The move by the BOE’s Monetary Policy Committee (MPC) was the third quarter point rate reduction since December as the United Kingdom faces many of the same problems currently plaguing the U.S. economy including a housing slump.

U.K. inflation is currently at 2.5%, above the BOE’s desired 2% target rate, but the central bank feels the current risks to economic growth outweigh inflationary concerns.

“Credit conditions have tightened and the availability of credit appears to be worsening,” the MPC said in its policy statement.

The statement did not foreshadow another rate cut when the MPC next meets in May.

“With today’s move arguably only providing a partial offset to the recent tightening of credit conditions, RBC Capital Markets suspects that the pressure is on for a follow up cut in somewhat short order and, indeed, sees some significant risk of a further 25-basis-point reduction in May, ” Richard McGuire, economist and fixed-income strategist at RBC Capital Markets, told MarketWatch.

Meanwhile, the ECB, led by President Jean- Claude Trichet elected to maintain its current interest rate due to inflation pressures.

“We are experiencing a rather protracted period of temporarily high annual rates of inflation,” Bloomberg News reported Trichet said at a press conference in Frankfurt yesterday after the ECB vote. While financial-market tension may have “a broader than currently expected impact on the real economy,” ensuring price stability is “very serious for us,” he said.

European inflation is currently at a 16-year high. And while Europe’s growth is expected to slow, the IMF forecast it would expand at a 1.2% rate, twice the 0.6% that is expected for the United States.

The U.S. Federal Reserve has cut its rate by 3% to 2.25% since September.

“The world is caught between ice and fire – slower growth and inflation,” Dominique Strauss-Kahn, managing director of the IMF, said yesterday. “Inflation is back.”

I wrote this week that I had a hunch the Bank of England might keep rates on hold. It wasn’t a nailed-on prediction, merely a sneaking suspicion. Nonetheless, I said it, and I was wrong. The Monetary Policy Committee (MPC) today voted to cut the base rate by a quarter-point, to 5%.

There are a lot of questions arising from this decision. Is it enough? Will it do any good anyway? Are private lenders simply ignoring the central bank and tightening credit anyway? We’ll be looking at these questions in the days and weeks ahead.

Today, though, it’s the pound that’s concerning me most. We’ve grown accustomed to hearing stories of how much Britons can now buy in America, but this is a consequence of the weak dollar, not of a strong pound.

Sterling hit an all-time low against the euro yesterday, at €1.25. And there’s no reason to think the fall will stop there. While the MPC cut rates, the European Central Bank (ECB) left theirs on hold. There is widespread anticipation that the MPC will have to lower rates again this year. The ECB, however, is expected to take a more hawkish line. This suggests the pound will fall further against the euro.

Sterling’s decline is a serious matter — and not just for those planning holidays on the continent. One of the big challenges facing Britain’s economy is that, despite weakening domestic demand as we flirt with recession, there’s still a lot of inflation to contend with.

The big inflationary worries concern what’s called “cost-push” inflation. The prices of food, energy and raw materials are on the rise, pushing up our cost of living. These prices are set globally, so British policy-makers can’t do much to change them. How much we in Britain pay for such vital commodities depends on how strong our currency is.

The further the pound falls, the more skint we’re all going to feel.

Private equity’s on the come back trail… has the credit crisis bottomed?

Time to play the Rocky theme tune — private equity is back! Apollo, a distressed debt specialist, and Permira, a British buyout group, are snapping up the debt of UK bingo merchants Gala Coral.

Meanwhile, CVC and Blackstone, those stalwarts of leveraged deals, are teaming up to grab 29.9% of Mitchells and Butlers, the troubled British pub group.

After months of acquisitions being scuppered by frozen credit lines, the market is beginning to thaw. But Bill Bonner, who’s currently holed up in Argentina, sounds a note of caution for anyone tempted to think it’ll be plain sailing from now on.

Take stock markets. Bill points out that the S&P 500, for example, is still selling for more than 18 times earnings.

“There’s still plenty of room on the downside,” he warns. “The bubble in finance is over. It’ll probably take many years before value appears and prices begin to rise — just look at what happened in the Nasdaq. Or Japan! Many people thought Japanese stocks were a once-in-a-lifetime bargain after the Nikkei Dow crashed in 1990. Well, they’re an even bigger bargain today!”

Oil hits record high

Former gymnast Garry White is doing cartwheels today (at least, he is in his head). These days Garry, our commodities man, is far more likely to be found at a Bloomberg terminal than on the asymmetric bars. But the fact remains, today, Garry is a happy man.

“Oil’s hit $112.21,” he announced cheerily this morning. Stockpiles of both refined oil (gasoline) and crude oil have fallen… and it’s another shot in the arm for Garry’s oil plays.

Garry has more on this in today’s piece, together with the rest of the commodities news… including why one major authority thinks the gold price is about to soar.

Iran props up the dollar

An interesting story from emerging markets specialist Manraaj Singh today.

“Iran’s clerical regime is helping prop up the dollar,” he told me this morning. I gave him a puzzled look.

“I’m serious,” he said. “The Gulf states are desperate to break their peg from the dollar. It’s causing record inflation — but so far only Kuwait has dared to do it. That’s because the other states need America to protect them from Iran, and they don’t want to annoy them by breaking the peg.”

So, unable to ditch the failing greenback, what are the Gulf states doing to protect their wealth? Manraaj tells me they’re diversifying like crazy, and it’s creating great investment opportunities.

Find out which two investments Manraaj thinks will be the big winners as the Middle East spreads its petrodollars worldwide… and why he thinks the region is less than two years away from launching its own single currency.

Goldman finally buckles

More reason to fear the credit crunch will rumble on came from Goldman Sachs yesterday. I’ll let my esteemed colleague Theo Casey talk you through it:

“Yesterday Goldman was the first US bank to show its hand. The results were worse than expected.

“The world’s most profitable investment firm reported that its hard-to-value securities, so called Level 3 assets, jumped 40% to $96.4bn.

“There are three asset types to know when divvying up investment bank balance sheets:

• Level 1 assets are valued by available market prices in active markets. These include stocks, futures and options.
• Level 2 assets are priced using “observable inputs,” which means recent similar transactions. Loans, mortgages and over-the-counter stocks fall into this category.
• Then there’s Level 3. These assets are measured using “unobservable inputs,” and it’s as bad as it sounds. It means that even though the firms can’t actually see the value of their assets, they’re allowed to put them down as earnings based on their own “subjective assumptions.” In other words, they guess.

“When you hear the BBC News refer to “subprime-related” losses, what they mean is Level 3 assets that couldn’t be shifted. The world’s most profitable investment bank, we found out yesterday, has rather a lot of them.

“So it just got 40% harder to value Goldman Sachs. That’s because it involves guessing what the bank will fetch for its Level 3 assets, which has proven to be a market that no one wants to be in.

“With uncertainty in the market to the tune of $96bn — and that’s just one bank — it looks like suggestions that we’re over the credit crunch may be more to do with making headlines than making money.”

As Theo wisely notes, we need to look beyond the headlines. There’s plenty of bad news out there waiting to hit the markets.

Until tomorrow

Ben Traynor

One of the potential market movers this week – for both
the UK stock market and the forex markets – is the Bank
of England rate decision tomorrow.

My learned colleague, Ben Traynor, picked up on this in
today’s Fleet Street Daily e-letter…

—————————
Will there be a cut at all?
—————————

“The doves are out in force. The Bank of England’s
Monetary Policy Committee (MPC) meets tomorrow, and an
interest rate cut is most definitely on the agenda.

“Pretty much everyone, from homeowners to the
Confederation of British Industry (CBI) wants rates to
come down… the market has priced in a quarter-point
cut… and what’s this? Gordon Brown – the same Gordon
Brown who, as chancellor, granted the Bank operational
independence in 1997 – is also sticking his beak in.

“If you look at this situation, because we’ve got low
inflation we can cut interest rates,” the prime
minister said.

“Hang on, Gordon. Isn’t the MPC is supposed to set
rates independent of political considerations? Naughty,
naughty Mr Brown…

“In fact, there’s some speculation that Brown’s
comments may have angered the MPC hawks, who’ll now
argue more fervently to keep rates on hold. I’ve said
before I’ve got this hunch the MPC might take the
chance to wrong foot the market and boost its
credibility. Now that Brown’s lumbered into the debate,
might that now prove too tempting a proposition?”

Ben follows the UK economy closely for his readers and
tries to piece together events as they unfold,
examining how they affect the big picture… and what
it all means for investors.

Each working day he writes a round-up of the big events
that are moving the financial world – to keep his
readers one step ahead of the crowd. If you have a
second, sign up to Ben’s free Fleet Street Daily email:

http://signup.fspinvest.co.uk/LF/fsd.html?newsourcecode2=XFSDD304

————————————-

Looks like a half-point cut is out…
————————————-

Ben’s right about most people calling for a quarter-
point cut. In fact, 81% of economists surveyed by
Bloomberg have predicted a 25 basis point cut in UK
base rates when the Bank of England announces its
decision on Thursday at noon.

And whilst there may have been an outside chance of a
50-point cut – given the volume of bad news coming out
about the UK economy and the latest housing market data
– this morning’s better than expected UK manufacturing
output data should put paid to such drastic measures.
Personally, I doubt it’s strong enough to keep the Bank
from a quarter-point, though.

And with the European Central Bank likely to keep their
rates on hold, once the UK rate cut is announced, we
could see further pressure on the pound which is
hitting all-time lows against the euro on the back of
all that bad news for house prices and the IMF’s latest
UK growth forecasts.

And if we get anything totally unexpected tomorrow,
then watch for the market moves.

————————-
Gold continues to confuse
————————-

Meanwhile, gold’s not done with sending confusing
messages to traders. Anyone who’s been making lots of
money spread betting the shiny yellow stuff all the way
up from $600 or so must be hating all this indecision.
Gold is no longer a one-way ticket…

I’m still in the bullish camp – even if $1,000 seems a
long way off again. We all know just how quickly gold
can move, once the conditions are right. There could be
some more profit taking still to come… but gold will
likely be higher than it is now in six months time.
It’s just a case of waiting for that next leg higher.

Adrian Ash from BullionVault follow’s gold’s moves
daily. If you’re keen on knowing what makes gold move,
he’s a good guy to know about – here are his
observations today:

“Spot gold prices slid into the London opening on
Wednesday, reaching a four-session low of $903.60 per
ounce before bouncing 1.4% to recover the day’s losses
on news that US gasoline prices have reached a new
record high for consumers.

“The average price of regular unleaded has now risen to
$3.343 per gallon according to the AAA survey, almost
20% higher from this time last year.

“International commodity prices meantime reversed an
earlier 0.5% fall, while the US Dollar fell on the
currency markets and Wall Street stocks opened lower
from Tuesday’s close.

“The subprime crisis presents a strong case for gold,”
said Philip Klapwijk, head of the GFMS consultancy, at
the launch of the group’s Gold Survey 2008 today
in London.

“Pointing to growing risk aversion amongst investors,
negative real rates of interest on the US Dollar, and
sharply falling earnings from S&P equities, Klapwijk
also noted a hitherto overlooked threat – a “sharp
deterioration” in the United States’ fiscal position as
a result of “the Federal Reserve’s largesse” in bailing
out Wall Street banks.

“We’ve been told by pension and other institutional
investors that they’ve been looking at gold for a long
time,” Klapwijk said.

“Now they’ve taken a position – or they’re just about
to – they say they won’t be distracted by short-term
moves in the price.”

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————————————————-
Will margin calls lead the property market lower?
————————————————-

The key to the property market – and whether this
latest headline-grabbing 2.5% fall statistic has more
serious implications – looks to be buy-to-let
investors, specifically the ones who stumbled into it
late, when the party was in full swing. I’m talking
about all those people who got sucked in over the past
two or three years by the “Become an armchair property
millionaire!” newspaper ads for property seminars
promising spectacular gains.

A rush to the exits by these “greater fools” as they
start receiving margin calls from their buy-to-let
mortgage lenders and we’ll start seeing a new surge of
supply in the market and lower or at least
stagnating prices.

Wow! Look at the oil price! $111 a barrel – more on
this and how to play it as we work it out…

That’s all for today.

Until Friday…

Best regards,

Frank Hemsley
Profit Watch

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Pretty much everyone, from homeowners to the Confederation of British Industry (CBI) wants rates to come down… the market has priced in a quarter-point cut… and what’s this? Gordon Brown — the same Gordon Brown who, as chancellor, granted the Bank operational independence in 1997 — is also sticking his beak in.

“If you look at this situation, because we’ve got low inflation we can cut interest rates,” the prime minister said.

Hang on, Gordon. Isn’t the MPC supposed to set rates independent of political considerations? Naughty, naughty Mr Brown…

In fact, there’s some speculation that Brown’s comments may have angered the MPC hawks, who’ll now argue more fervently to keep rates on hold. I’ve said before I’ve got this hunch the MPC might take the chance to wrong foot the market and boost its credibility. Now that Brown’s lumbered into the debate, might that now prove too tempting a proposition?

I’m at odds with my colleagues on this one. They, along with most people, expect the base rate to come down to 5% tomorrow. After all, there’s plenty of gloomy news about to prompt a loosening of monetary policy. Halifax has revealed that house prices fell 2.5% in March — the biggest (seasonally adjusted) monthly fall since September 1992, when they fell 3%.

Meanwhile private banks remain reluctant to lend. But there are signs that the market could be starting to find a solution. HSBC, which doesn’t rely on the money markets to make loans, is offering to match homeowners’ existing fixed-rate deals. Some of these mortgages rates are as low as 4.54%.

HSBC will do well out of this, mopping up a lot of new business. It’s benefiting from its strong position, brought about by a solid business model. It’s profiting from its competitors’ weaknesses.

That’s how capitalism works.

US Federal Reserve makes earth-shattering prediction

I’m going to be upfront with you. The headline above is sarcastic. It refers to the minutes of the Fed’s meeting of March 18, which were published yesterday.

The minutes contain such statements as “prolonged economic downturn could not be ruled out” and “many participants thought some contraction in economic activity in the first half of 2008 now appeared likely”.

Also making big waves is the International Monetary Fund (IMF). Today it made front page news (in Metro anyway) by putting a figure on how much the credit crisis will cost.

The figure, printed by the Times in a scary red typeface, is $945,000,000,000 — almost $1 trillion.

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Indeed, the IMF’s Global Financial Stability report, in which the estimate was published, contains the following line:

“The critical challenge now facing policymakers is to take immediate steps to mitigate the risks of an even more wrenching adjustment.”

The air rings with clamours for leaders to “Do something”. It’s what that something is that worries us…

Gold analysts… oil analysts… they’re all wrong!

Gold fell through $909 yesterday, and still looks to be falling. It’s making a few investors nervous about the yellow metal…

“Ignore them!” is the shout from our commodities desk — where Garry White (who’s already done nicely out of gold, thank you) reckons conditions are ripe to send the price much, much higher.

Oil, meanwhile, is around $108 a barrel. Garry doesn’t see that falling much either. Even oil analysts are starting to catch up with him. The Energy Information Administration, and arm of the US Department of Energy, last night upgraded its oil price forecast by a massive amount.

As well as gold, Garry’s got great exposure to oil, too. And he’s got a clever little move that could prove highly profitable — if you get in before 29 April that is…

Where the money is, that is where we shall go…

“This proves what I’ve been saying all along,” said an excited Manraaj Singh this morning, with that trademark gleam in his eye.

Manraaj, our emerging markets hot shot, was telling me about an auction that took place at Christie’s yesterday. Buyers paid huge sums for such artefacts as single leaf from an ancient Koran manuscript. The bids received shattered what Christie’s expected to get.

So why is Manraaj so excited? Because of who the buyers are, that’s why! There’s a huge amount of money out there in the developing world, and conspicuous consumption such as that seen yesterday proves it.

But this money isn’t just being spent at auctions. It’s being invested — and Manraaj is keeping a close eye on where it’s going.

“We’re talking trillions and trillions here,” he says. “If we make the right calls now, we’ll clean up!”

And that’s exactly what Manraaj plans to do! Find out how, with one specific investment, you could clean up as trillions of dollars of Gulf oil money is invested worldwide…

Until tomorrow.

Ben Traynor

Editor

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