“Spare ribs?”

I nod.

“That’s a classic,” exclaims my dentist cheerfully as he reaches for the tweezers to show me my extracted tooth.

“You’ve actually hit the nerve too, so normally people who do this are in agony.” So it could have been worse… but then he spoils it “but you’ll need root canal.” Oh good.

“Spare ribs, pork scratching, crusty nutty bread and toffee are the leading offenders,” he adds. Now we know. It’s a little late to salvage my broken molar but a small piece of advice worth passing on I thought, for any dear readers with sensitive teeth and little dental insurance.

A dentist should a good profession to be in right now. Pretty recession proof. People will always be breaking teeth and if the pain is sufficient, the cash will be found to fix the problem. Not all businesses can boast that sort of hold over their customers when times get hard.

A US recession and slower global growth generally mean inflation pressures ease up reckons economist Nouriel Roubini. Unless there is a shock. A supply side shock. If that happens then we are looking at stagflation. Stagnant growth with inflation.

Supply side shocks look like they could come from a number of directions. But how would it look at street level? Well, we expect the usual round-up of suspects.

Credit rationing: as the banks have seen vast swathes of their capital evaporate and are now strapped for cash. The disappearing UK mortgage market continued yesterday when Abbey pulled their entire buy-to-let range and increased their fixed rates, says the Fleet Street Daily. UK banks alone are short £37bn JP Morgan said yesterday, as RBS announces a deeply discounted £12bn rights issue and starts selling assets. Interesting that it upped its dividend 10% a couple of months ago. The next interim dividend will be paid as shares in lieu of cash.

Food rationing maybe, on account of shortages of basics staples such as rice. An issue that’s not only a problem for the developing world, as the New York Sun reports food rationing in the US too. Or another commodity… Sky high petrol prices is an obvious candidate as each day the oil prices seems to add a buck or more. It hit $120 late on Tuesday amid further dollar weakness. The euro broke through $.160 for the first time helped by the usual hawkish line from the European Central Bank and strong demand from Asian buyers.

Petrol prices have hit an unheard of $4 a gallon, says Red Hot Penny Shares editor Tom Bulford on a recent visit to Florida’s Disneyland. Still half the price we pay here and he notes even amidst a housing slump there is little sense of any possible shock coming to the affluent US car-centric way of life.

My oil trader friend came for dinner tonight. He predicted recession when we met pre-credit crunch in June last year. Now he sees oil hitting $200 at some point in the next five years.

At what point does it register as a really big problem? I wonder.

“When people stop driving their cars.”

**** So how exactly did UBS lose $38bn in subprime?

Well “one striking fact emerges,” reports the FT from the bank’s own post-mortem.

“Senior executives had no idea of the bank’s vast exposure to the complex mortgage-related derivatives.”

Ah.

Just as senior Barings banking executives more than a decade ago had no idea of the risk attaching to futures and options contracts. A mistake than enabled “star” trader Nick Leeson to bet the farm and lose at a Singapore financial casino thousands of miles away from the banks City HQ.

Other factors cited are statistical indicators that rely on historical events. “They are vulnerable to new-out-of-model,” reports the FT. That sounds like one of those Black Swans (a very rare event). And the thing about Black Swans is that those very rare events seem to happen a lot more frequently than people give credit for.

Regards,

Rob Mackrill
The Daily Reckoning

The Bank expects lenders to continue reducing the number of loans available well into the summer. Higher deposits will be needed, while the Bank also expects more borrowers to default.

Meanwhile the Co-operative Bank, whose profits have taken a £26 million hit due to write-downs, has pulled all of its two-year fixed rate deals.

Mervyn King, the Bank’s governor, is now under more pressure to cut the interest rate next week. Will he do it?

I took a straw poll in this morning’s editorial meeting. I was slightly disappointed at the consensus view: a quarter-point cut. That seems to be the prevailing attitude in the markets too.

I can’t shake this nagging feeling I have that Merv might take the opportunity to wrong-foot everyone and leave rates on hold. Call it a hunch. Leading expectations is his job, not following them. Maybe he’ll take the opportunity to look tough on inflation?

“But there’s a time and a place to be a stick-in-the-mud,” counters Theo Casey, my stock-picking comrade-in-arms. “The middle of a credit crunch isn’t it.”

Maybe he’s right. Maybe the market too, which has priced in a 70% plus chance of a quarter-point cut, is right (or 70% right). And sometimes it’s better to be right than to be different (though a quarter-point cut makes no difference to my long-run economic prognosis).

But still… that nagging hunch just won’t go away.

Away from the Threadneedle Street, and the Treasury has covered itself in… what’s the opposite of glory?It looks like it may be preparing to back down over “non doms” — foreign residents in Britain who pay less tax by claiming non-domiciled status. In a letter to the British Bankers’ Association it says it is “looking urgently at this issue with a view to addressing it through necessary amendments to the Finance Bill”.

“The non-doms have thrown their expensive toys out of their expensive prams,” says my colleague Frank Hemsley. “They’ve threatened to take their money and their business elsewhere — which is what everyone said would happen. And the government has panicked. They look like fools now.”

Indeed. Of course, it’s patently unfair that super-rich UK residents pay less tax than the rest of us when both they and we earn out money here. But by trying to be champion of fairness, the government could well have underestimated the economic implications.

It could be too late to repair the damage. Even if they scrap the £30,000 levy, many non-doms feel slighted, and worry the UK climate is turning unfavourable. What’s certain is that the benefits the government hoped to reap — looking strong on an emotionally divisive issue — will evaporate if they back track.

Frank’s right. They look like fools.

Has everything bottomed?

Bill Bonner, my sparring-partner on matters American, has a fixation with bottoms today:

“Look around you; you’ll see bottoms everywhere,” he says. “Yesterday, prices on just about everything were rebounding,” he adds, making this piece feel once again like a financial newsletter, and slightly less like a Carry On film.

“The euro rebounded against the dollar. Asian markets rose. Wheat, soy, rice prices — they’re all on the way back up. And the Commodities Research Bureau index – that rose too.”

So… is this the end of the crisis?

George Soros is predicting a few good weeks, but reckons we shouldn’t get complacent.

“We had a good bottom,” said Soros in an interview yesterday. But Soros believes the rally will last six weeks to three months, before reversing. “This will probably not prove to be the final bottom,” he said.

By the way, Soros is hawking his new book at the moment. He’s really no better than those ‘glamour’ models-turned authors Jordan, Abi Clancy and Alan Greenspan, is he?

The biofuels collapse has just begun

The Germans have pleased Garry White today. Our commodities expert is a long-standing opponent of biofuels, see. The German government has shelved plans to increase the compulsory ratio of bioethanol in petrol to 10% next year (the current level is 5%).

“Stay away from the biofuels sector,” warns Garry. “They are not as green as everyone thinks, and they are not a good investment. The risks are skewed to the downside.”

Western uncertainty is good news for Manraaj Singh

Another who suspects we’re seeing false bottoms at the moment is Manraaj Singh, our emerging markets wizard. Manraaj reckons there’s plenty of trouble ahead in western markets… and frankly, he’s delighted at the prospect!

“Uncertainty in western markets will speed up the flight of capital into emerging markets,” he says. “Remember, money always follows growth. Right now, the only real economic growth we’re seeing is in the emerging markets.”

Readers of Manraaj’s Profit Hunter service have great exposure to some of the world’s hottest-looking markets. He’s keeping his eagle-eye on the global markets… and I’ll be keeping you bang up-to-speed with his intrepid research.

Have a great weekend!

Until Monday

Ben Traynor