But things change. Economic headwinds blow harder. Dire situations get direr. And the pound hit a 12 year low yesterday. We were prepared for that, though…

In a moment, I’ll tell you what we did — and what you need to do to protect against further falls in sterling.

But first, let’s take in the news from Threadneedle Street…

I predicted in June that the next interest rate move would be up, not down. But in yesterday’s Quarterly Inflation Report, King dropped a heavy hint that — despite inflation hitting 4.4% – the Bank may actually prefer to cut them instead.

I can see why. Inflation, as I wrote yesterday, looks like it will hit a peak in the next few months. World commodities prices are falling.

The UK economy, meanwhile, continues its march towards recession. Yesterday’s unemployment figures show unemployment rising at its fastest rate for 16 years. An extra 20,100 people joined the jobless ranks last month.

The Bank has slashed its growth forecasts. The general expectation, therefore, is that the MPC will hold rates steady for a bit, then look to cut them as soon as it reasonably can.

Unsurprisingly, the currency markets reacted to this new stance by selling the pound. It fell against both the dollar and the euro. The sterling trade-weighted index — which measures the pound against a basket of currencies — dropped 1.8% to 90.8 points. This is the index’s lowest level since December 1996.

I believe worse is to come for the pound. Most British investors have exclusively pound-denominated portfolios. A sensible course of action, therefore, is to hedge against further sterling falls.

That’s exactly what I told Fleet Street Letter readers to do on Saturday. The investment we recommended rose yesterday as the pound fell.

As I mentioned on Tuesday, we’re playing this through the euro. It’s not a pure currency trade — our investment gives you a steady income as well. Many commentators are saying the euro is overvalued right now. I addressed these concerns on Tuesday (you can read my piece here), and I believe this is an investment worth holding.

To find out more, you need to be a Fleet Street Letter reader. Become one today, and your welcome pack will include the most recent issue (Saturday’s). This will tell you what you need to know about our chosen sterling hedge.

Here’s what you need to do, before the pound falls any further.

Why British investors don’t buy silver

It’s Thursday, so we’re answering your investment questions. If you have an investment-related question, send it in. The email address is askfleetstreet@fspinvest.co.uk

Here’s today’s selection:

Q: A lot is said about buying silver. How on earth do you do so in the UK? Gold is relatively easy. But silver? — RC

A: I passed this on to our sector expert Garry White, editor of Smart Commodities.

Says Garry:

“There is a major difference between gold and silver. You have to pay VAT on silver bullion purchases in the UK, but you do not pay anything on gold purchases.

“This wipes out silver bullion’s value as an investment for UK residents.

“Why buy silver bars and pay 17.5% to the taxman, when you can buy gold bullion and the taxman has to buy his own lunch? That’s why it’s difficult to buy silver bullion as an investment here. There is simply no demand.

“The best way to invest in silver is therefore via an exchange traded commodity (ETC) provider. It takes away the VAT problem. An example would be www.etfsecurities.com. There are others on the market too, so you should shop around.”

Here’s Theo’s answer:

“I’ve spent quite some time chart-gazing as I used to work on a trading service.

“There are hundreds of systems and strategies that can, at times, provide quite contradictory signals. It can all be a bit overwhelming.

“But the first thing you need to think about when trading short-term is nothing to do with Elliott Wave Theorem, Fibonacci or any other convoluted strategy.

“Any good trade begins with the basics, price and volume.

“Price: The levels at which the investment is trading. Is it over-valued or undervalued? Fundamental investors measure value through metrics like the P/E (price-to-earnings) ratio. The technical investor’s value tool is the moving average. It’s basically the average of the previous closing prices rounded up over any length of days.

“If a stock is rising above its long-run moving average, beware of a potential pull back (otherwise known as mean-reversion).

“Volume: Volume is the amount of shares changing hands. If there are very few trades being made in a stock or index, or it is illiquid, the price could be set for a fall.

“If a stock is rising with low levels of shares trading hands (volume), again, look out for mean-reversion.

“The price and the volume should be confirming the trade you intend to take. If a share is flying high but no one is buying it, it could fall hard.

“Take a look at the FTSE 100 in early May for an example. The index traded as high as 6,300. But one market maker said at the time: “I thought it was Christmas day, volumes are just so low.” The index was also trading significantly above the long-term (200 day) moving average.

“What soon followed, as we all remember, was an almighty pull-back. The beginnings of the official bear market.

“When buying short-term investments, we ideally want a stock that has a consistent level of volume and is trading above its major moving averages. However, if that stock is over-extended — trading very far above those averages — beware for a pull-back.”

Thanks Theo. I know that some readers are very interested in technical analysis (or ‘charting’). So I had a word with our products man Darren Hughes.”You got anything for someone interested in technical analysis?” I asked.

“Yeah,” he said. “But only for the right people.”

“What do you mean?”

“Well,” he said. “This is only for people who are comfortable trading the stock market. It’s not for newcomers. Also, as you know, virtually every product and service we offer has our standard money back guarantee. Try it, see if you like it, and if you don’t you can have a refund.”

“But this one doesn’t?”

“This one doesn’t. People are buying it because they like the system and they see that it makes money. But… once you’re in, you’re in. You have to be the right kind of person.”

The system Darren showed me is something called the ‘Pure Matrix’. And while you don’t need to be a world’s expert on stocks (the Pure Matrix teaches you what you need to know), you do need some experience.

Find if you’re the right kind of person for this — as well as how much this system could make you…

Until tomorrow

Ben Traynor

Source: Pound hits 12 year low. Here’s what we recommend

I can imagine Ruislip was quite a pleasant little place fifty years ago. Happy schoolchildren played in the streets, housewives paused to exchange pleasantries with the butcher and the baker, and occasionally a Singer Sunbeam, an Austin Healey or a Ford Zephyr would pass along the high street.

Not any longer.

Subsumed into Greater London, Ruislip is just an ugly suburb, indistinguishable from a hundred others, and ruined by constant traffic. I am part of it, so I can hardly complain. But I can complain about some of the fatuous comments that I hear every time the subject of motoring is discussed.

No radio phone-in is complete without somebody arguing that motorists should be punished. ‘They are burning precious fossil fuel and they are destroying the environment. Hit them where it hurts. In their pocket!’

I can only assume that these do-gooders assume that each and every day motorists jump into their cars just for the sheer joy of motoring. If this was ever a relaxing pastime it certainly is not any more, and the basis of any debate on our overcrowded roads should be that people drive because they have to get from A to B and not for the fun of it.

Unfortunately our whole social-economic system has been built on the premise that driving is quick, easy and cheap.There is no better example of this than the out-of-town shopping centre. It was in the 1970s that urban planners decided that it would be a good idea to situate our supermarkets miles away from where anybody lived, and I am sure that the cost of petrol never entered their heads.

So today we are obliged to use the car to go shopping and, with public transport not offering a convenient or cheap alternative, the same applies to visiting friends, going to the hospital, taking the family to watch the football or whatever.

They’re crazy in Nottingham

Many of us have to drive to work. But I hear that employers in Nottingham are going to be taxed on the number of parking spaces that they make available to their staff. They could be asked to pay as much as £185 per parking space, rising to £350 by 2014.

Why? Because Nottingham city councillors say that will encourage commuters to use public transport, and lead to a cleaner and less congested city. This is a crazy idea and simply does not get to the root of the problem. Nobody is going to walk to a bus stop, hang around waiting, and suffer the frustration of late running buses if he can drive to work in half the time.

So if Nottingham goes ahead with this ridiculous scheme it will make no difference to patterns of travel. Instead it will just impose a cost upon those doing business in Nottingham and persuade some of the city’s employers to up sticks and reduce the number of jobs on offer.

All too often I hear these money grabbing measures dressed up as environmental initiatives. Take the government’s plans to slap a higher road tax on older gas-guzzling cars. As it happens my own car is so old that it would not be affected, but still the proposal is utterly disgraceful and wrong.

Under any circumstances at all it is wrong to levy retrospective taxes, punishing people for perfectly reasonable and valid decisions that they made several years ago. But aside from the moral issue and the suspicion that this is just an excuse for the Government to raise yet more tax revenue, it will not address the real problem which is that our society and economy is ordered on the basis that travel is cheap.

Today we also have the debate about lorry drivers. I reckon that Shell tanker drivers earning around £35,000 a year for doing nothing more complicated than driving a tanker have nothing to complain about. But for our other truckers who are faced with the soaring cost of diesel the matter is quite different.

Again I hear plenty of people saying that there are too many trucks on the roads, and that the cost of road freight should be increased to discourage it. But this is unrealistic nonsense. Any UK road haulage firms that are forced out of business will simply be replaced by those from the Continent.

Unless somebody can come up with a new way of getting goods from central warehouses to supermarket shelves, they will go by road. It is just a question of whether they are carried in British trucks or foreign trucks and I know which we should be encouraging.

The point is that we drive because we have to. You could double the cost of motoring and it would make precious little difference. If you live, as we do, in what might be described as a de-localised society, people have to drive.

This is the case in this country, and doubly so in the USA. So Governments need to be a bit more imaginative about this. Slapping extra costs on motorists in the hope that they will leave their cars in the garage will make not work.

Instead the Government should immediately reduce fuel duty for UK road hauliers so that their livelihood is not taken by rivals from across the Channel. It should do everything possible to improve public transport. It should encourage town planners to ensure that essential services are within walking distance. And it should recognise that the biggest burden of all upon our road network and the environment in general comes from our ever increasing population.

Regards,
Tom Bulford
for The Penny Sleuth

Source: Dark Thoughts In Ruislip

But we have to remember that the credit crunch did not start in the banking sector. It started with housing.

After nine success quarters of expansion, the UK economy finally showed weakness in 2008.

After a twelve year bull market in housing, where average prices were £61,115 in 1995 to £198,664 in 2007, an increase of 225% we are finally seeing the housing market hit the skids.

Trend watchers would say about bloody time. ‘The climb in property was due to pop,’ clever chartists would tell you. The bull run was in its third phase, according to Dow Theory. This is where all newsflow was positive and the dumb money was piling into the investment. A sudden reversal in fortunes was, as it invariably is, on the cards.

But this is not the stock market, this is the property market and property has its own theories.

It’s called HPA, or house price affordability.

What it measures is the average earnings of UK consumers against the average price of a house. It is literally a price-to-earnings ratio for property assets.

Just like the dot-com stocks that looked overvalued in 2000, house prices are looking equally overheated today on the basis of fundamental value.

Average wages are, according to Capital Economics, approximately £30,000 a year.

Average house prices are £178,555.

178,555 / 30,000 = 6.

6 is bad. 6 is much higher than the long-term average 3.7.

Problem is that it’s even worse now. BusinessWeek claim that today the HPA ratio is now 11.

11 times your salary!? Probably overzealous from Business Week, but still pretty dire. Never fear though, as we’re alright as long as the cost of taking out mortgages is cheap.

D’oh!

The cost of borrowing has skyrocketed since the credit crunch. The nationalisations, share price capitulations and never-ending writedowns have a pretty effective way of killing the mood.

Banks have gone from lending to each other at a low of 3.4% in 2003 to around 5.8% today, even nearing 7% in late 2007.

So the banks don’t want to lend to each other, and if they do, they do so at a big premium.

So, a house buyer is between a rock and a hard place.

Houses are too expensive and debt is too expensive. Demand and supply are both, therefore, a bit limp.

If houses are too expensive you need to borrow a lot of money. If the amount of money you are borrowing is set at too costly a rate, you’re only likely to take the loan if you believe house prices are still going up.

And this is where sentiment comes into the mix.

“The Memetic Theory of House Prices”

Richard Dawkins, the famous atheist, has a theory explaining sentiment in the housing (or any) market that is very well presented, funnily enough, by the End Poverty pressure group.

“[Memes] are anything, any message sent from one person to another. It spreads much like a virus until it reaches the whole of society and forms a consensus.

“In the housing market, memes propagate of the overall state of the market. System-wide memes say whether the market is thriving or in recession spread. At times the housing market is in boom, thus the boom meme is dominant. At other times it is the slump meme that forms the consensus.”

What this is saying is house prices rose because people believed they would rise. Now, we can see, they are falling, in part, because people believe they would fall.

Now it’s not all mania and panic, there are fundamental justifications both on the up- and down-side, but it is certainly part of the process and that part is sentiment.

You have only to look at the doom and gloom headlines being generated by the mainstream press to see the pendulum has swung decisively against property.

So, housing has lost the hearts and minds. Every part of every framework, from the mathematical to the touchy-feely is shouting out GO SHORT HOUSING!

How Low Will It Go?

OK. Now we’ve got the basics we can produce an estimate.

Firstly, looking at house price affordability, our housing P/E ratio. The long-term average is 3.7.

If prices are going to ‘revert to the mean’ this implies a fall of 30%. Why not more? Because year-on-year earnings growth is also thrown into the mix. So, on fundamental grounds, we’ve got good reason to be bearish on UK property.

Then we factor in the popular sentiment, or ‘memetic’ momentum.

This could swing things even further as a market in the throes of panic is likely to over-sell and push prices as artificially low as it pushed things artificially high.

However, two considerations.

Markets do not always fall back to their historic averages. Trends can shift and that means that the ‘crash’ could be less than our antiquated metrics allow us to anticipate.

Also, sentiment can change. If popular opinion goes back the other way, and everyone decides that the 5% or so of price decline is quite enough it may prompt a turnaround, an artificial turnaround, but something that will re-light the fire that is imbedded in every British citizen.

A belief that amuses many of our foreign neighbours.

It is the belief that owning a house is a god-given right. The inbuilt desire to buy houses has not completely gone away, and once the press find a new theme that fire can be rekindled. This may be the x-factor that is shifting the trend upwards.

The 30% call is complex, there are so many variables and considerations in housing that can shift our projections a few ticks higher or a few ticks lower. In either case, our position is clear. Go short housing… any way you cut it, the market looks broke.

Theo Casey

Source: House Price Affordability

Just 58,000 loans were made last month. That compares with 64,000 in March and 113,000 in April 2007. House prices will keep falling. But they’ll take their time — the market is drying up, with many would-be sellers pulling out of deals rather than dropping their prices.

It’s like a massive staring contest between buyers and sellers. Who will blink first? My money’s on the sellers — once they realise prices aren’t recovering any time soon, they’ll bite the bullet and drop them. Just a little bit… Then a little bit more…

So what’s the upshot for the housing market? A ‘soft landing’ or a short, sharp shock? And what about the economy?

Let’s start with housing. Fundamentally, houses are too expensive. But it’s hard to say how far and how fast they’re going to fall.

It all comes down to affordability. In theory, it should be easy to calculate the ‘correct’ level for house prices. How much do people earn, and what multiple of that can they affordably borrow? Run the numbers, and you get an idea of where house prices ‘should’ be.

But here’s where it gets tricky. We can get wage data pretty easily. But many would-be buyers have other capital to draw on. First-time buyers regularly rely on borrowing from parents, for example.

And besides, many current homeowners have demonstrated they’re all too willing to buy at a price considerably above what they can afford. Who’s to say the rest have learned from their mistakes?

Both of these factors make it hard to say exactly how far house prices need to fall to be ‘affordable’. But the good news, from our perspective, is that it doesn’t really matter. We’re confident we know which way they’re going, and that tells us a lot when it comes to where we should (and shouldn’t) invest.

Let’s move onto the wider economy. If house prices are coming down slowly, does that mean a ‘soft landing’ for the economy too? And is this preferable to a short, sharp shock?

Again, I think it’s going to take its sweet time sorting itself out. And here’s the kicker — the longer it takes, the greater the likelihood of a recession. I’ll explain why in just a second.

First, I want to answer the question of which we should be rooting for — the gentle decline or the brutal shock. My terminology is deliberately chosen to reflect the way I suspect the Government will view it.

The argument against a short shock can be summarised in one word — hysteresis. Hysteresis is the economic phenomenon of path dependency. A shock, so the argument goes, sets in train a series of events that can become self-sustaining.

An example would be long-term mass unemployment. If a large number of people are put out of work in one go, not all of them will find alternative employment quickly. Those that don’t will become deskilled, demotivated and will find it harder to get back into work. The shock, therefore, delivers its own persistent structural problem.

I think this argument has a lot of merit. But I still believe facing the inevitable, and quickly, is the preferable course of action. It all comes down to our irascible, temperamental friend Sentiment.

The longer this uncertainty drags on, the more entrenched negative sentiment will become. This will make a recession not only more likely, but more difficult to get out of.

Sadly I reckon this is exactly the scenario we’re facing. A long, drawn out recession. A few false dawns, with everyone, their confidence battered, scurrying for cover again at the first wobble.

The investment lesson is clear. Avoid companies with a high level of exposure to the British consumer. This would include most banks and retailers.

Put your money with firms whose profits aren’t wholly dependent on the spending habits of Mr and Mrs UK.

Because Mr and Mrs UK are about to go into hibernation…

Soros Watch: George warns of oil bubble

Back in 1992, when he was single-handedly forcing the pound out of the Exchange Rate Mechanism, George Soros was Mr Hot Money himself. What a difference sixteen years makes!

Today, oil is around $127 a barrel. And Gorgeous George has bounced into the debate on his Space Hopper of Righteousness. He warns that there is “a bubble in the making” — too many speculators in the oil market.

Soros will tell US lawmakers that oil is not a proper asset class. He says it is desirable to discourage commodity index investing, though not by regulation.

We’re not quite sure what to make of these comments. Cynics that we are, we tend to assume, as a jumping-off point, that investment bigwigs rarely make public comments unless they have a position to talk up.

“Soros is wary that too many speculators on one side of the market will cause a crash,” explains birthday boy Theo Casey of Fleet Street Research fame. “Of course, Soros is a past master at sweeping up profits in this kind of crash.

“But I think there’s a difference this time. I’m going to give him the benefit of the doubt, and say he’s simply offering advice from the goodness of his heart.”

I’m not sure if Theo’s being sarcastic there. And I can’t really ask him outright — it is his birthday.

Brown getting confident over 42 day proposal

Home secretary Jacqui Smith has been doing the rounds of backbenchers. She’s aiming to drum up support for Gordon Brown’s proposal to increase the maximum duration terror suspects can be held without charge to 42 days.

Sadly, it seems to be working. The 42 day proposal is a massive issue; there’s not enough space to go into it here. But it does irritate me that this important debate has been reduced to the level of party politics.

Brown’s government has been pulling U-turns aplenty of late, which is why he’s so desperate to hold his ground on this one. Brown wants to win this so he can stand in front of a camera and say “See? I am strong! I am! I am! I am!”

After the various eurozone finance ministers gather for the traditional ‘family photo shoot’, “there will be some speeches, the cutting of a 10th birthday cake and then a closing concert”, says Raphael Anspach, a spokesperson for the ECB, rather enthusiastically. Sounds fun.

But before the string section pipes up, we recommend that the organisers have a think about sticking a cork in the trombones.  The second ten years are going to be a lot less triumphant than the first ten…

When the euro fell to 90 cents to the US dollar in the early 2000s, it was derided as a ‘toilet currency’ by nationalistic curmudgeons and currency traders alike. One single currency, it was thought, couldn’t possibly represent a jumble of nations on different economic cycles, not to mention a cacophony of countries with wildly divergent industrial bases and monetary needs.

The hidden weaknesses of the euro countries

How things have changed. The euro is up 60% against the US dollar since George Bush first came to power, as both Gulf states and Asian countries have begun ditching the greenback for safer stores of value. And the euro’s share of global foreign currency reserves rose from 18% back in 1999 to more than 25% by 2007. But that doesn’t necessarily mean that the fundamental position of the euro is any better than it was eight years ago. Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart, but they’ve ignored the hidden weaknesses on this side of the Atlantic.

This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, “stagflation is a situation that we experienced some years ago, it could return,” said Spain’s Economy Minister Pedro Solbes earlier this month.

Why a strong euro is disastrous for Ireland

And that’s not the only problem. A strong euro might be good news for Germany, given the strength of its economy, but for Ireland, whose main export destinations are the UK and the US, it’s disastrous. Ireland has begun to lose its competitive advantage against other destinations for multinational companies, says Professor Rodney Thom, head of the School of Economics at University College Dublin, as it becomes more expensive to export pricey euro-denominated goods and services abroad.

“I never saw any advantages to us joining the euro”, says Professor Thom. “The last thing we needed was low interest rates when the economy was overheating”, and now that the currency has risen against sterling and the US dollar, “we’re losing our competitive edge. Ireland is on a limb”, he says, because it has given up one of the most significant economic levers open to any country – the ability to set its own interest rates.

In the 1990’s, when sterling depreciated 5% against the deutschmark, “the Irish central bank did something very clever”, he says. It let the Irish punt depreciate half way between the two currencies “to keep a balance. Now we can’t do that. The euro has given us a headache that we didn’t need.”

So there are plenty of things for Europe’s finance ministers to think about when they’re quaffing their champagne and gobbling their cake this Monday.

Source: It’s the ECB Birthday Party, but not Everyone gets Cake 

“Our services, with the credit crunch, are being overwhelmed by a whole new breed of debtor: middle class people” says Jamie Elliott of Transact, a financial advice charity.

Here’s the story in a nutshell. Lots of people (and not just those on low incomes) ran up lots of debts. Then the credit crunch happened. Now some of those people can’t pay their debts. And the credit crunch is to blame.

This story sort of makes sense… up to a point. But let’s not ignore the bit that happened before the credit crunch. The bit when lots of people signed forms that said ‘Give me a loan’.

The first step towards being unable to pay your debts is taking on those debts in the first place. Struggling debtors are victims of the earlier credit glut, of their own misjudgement, or of simple bad luck. The ‘crunch’ is merely the mechanism by which common sense has returned to the credit market.

It does astound me how quickly the credit crunch bogeyman has become a handy, off-the-peg blame shield. If a business has to issue a profit warning, then it happened “because of the credit crunch”.

Never mind that other factors may be at work — bad management… a flawed business model… failure to keep up with a changing market. Or plain bad luck.

But management know that sort of thing doesn’t go down well with shareholders. So, to get themselves out of a jam, they simply invoke The Double C.

Of course, there are genuine victims of the crunch. These include businesses who’ve set up potentially profitable deals, but who can’t get funding because lenders are twitchy.

Ultimately we’ll all be victims of the crunch. Because good deals won’t get done. Because productivity will be lost.

But that doesn’t mean the slowdown in the economy can simply be attributed to one handy scapegoat. It doesn’t work like that. Our troubles go much, much deeper than the credit crunch.

Britain’s economy has real structural problems. The tax burden has grown over the last ten years. Much of that money has been spent on increasing the size of the public sector.

Many new public sector jobs produce very little in the way of actual output — they involve men and women writing reports to ensure this or that public service meet this or that government target.

No doubt someone else is employed at our expense to ensure the people writing these reports hit their required targets.

Public money is being squandered on ornamental jobs. It’s no different from all those middle class debtors who ran up huge credit card bills buying shoes and clothes and plasma screen TVs. And then putting all the blame on American bankers when they can’t pay the bills.

It’s all part of the same cry-baby credit crunch culture.

We need the private sector to create real wealth to pay for the public sector. If the two get out of balance, the sums don’t add up. Not enough tax comes in to fund the public wage bill. This is a precarious way to run an economy.

Now the house of cards is teetering, and our leaders are invoking The Double C as an excuse.

In desperation, the Government is now scrabbling around trying to raise cash wherever it can. It cut the 10p rate, but that backfired. A similar U-turn is on the cards over proposals to tax corporate profits made outside the UK.

Face it, fellas. The game’s up.

But where there’s crisis, there is also opportunity. Below, Garry White and Manraaj Singh take a look at two different ways investors can actually benefit from the havoc wreaked by the crunch…

Say Hello to The Daily Reckoning

From today, Fleet Street Daily will be giving you more!

As well as everything you’ve come to expect from us — the latest UK economy and business news… the best ways to invest in commodities… Manraaj — we’ll now also bring you the daily thoughts of my American colleague Bill Bonner.

Since 1999, Bill has been entertaining readers each day with his Daily Reckoning essays. Taking in ancient history, financial hubris and the follies of money men and policy makers alike, The Daily Reckoning has proved immensely popular.

And now, we have it too!

So, without further ado, here is today’s Daily Reckoning.

Invest with the world’s greatest hedge fund manager One man who won’t be seeking debt advice any time soon is John Paulson. Because while many investors took a beating last year, hedge-fund boss Paulson made £3.7 billion.

Now Paulson has spied a great opportunity in the Gulf. And watching his every move is our very own Manraaj Singh of Profit Hunter!

“You’ve got a region that’s mega wealthy, and an investor who clearly knows his onions,” says Manraaj. “Now these two have come together… there’s only one word to describe the opportunity opening up as we speak: Pow!”

Find out what Manraaj believes is the best way to follow Paulson as he aims to clean up in Arabia.

Coaly Smoke, Batman!

Coal. Isn’t it dirty? Doesn’t it create a lot of nasty, carbony gas?

Perhaps. But those who forecast the demise of coal have been shown to be premature. In fact, as investors, we should take a serious look at the opportunity coal presents us right now. Because here is another great way to turn the credit crunch on its head — and make some money from it!

Right around the world, governments are facing the same problem. They need more electricity. And they need it now — they want to go nuclear, but that takes too long.

“It takes 12-15 years to build a nuclear reactor,” says Garry White, our man with the commodities plan. “The world can’t wait that long. Why do you think our government wants to keep Kingsnorth going? Because we still need coal-fired power stations”.

Governments the world over are turning to coal to fill the energy gap. As a result, coal prices have soared. But, as Garry explains in today’s Smart Commodities, there’s no reason to expect this bull run is over.

And Garry’s found an interesting way for you to invest in this boom. You see, there are a lot of great coal mining deals kicking around right now. But, unlike those middle class debtors mentioned above, these deals have become genuine victims of the credit crunch.

Miners can’t get funding for exploration, even though they could be sitting on an extremely profitable resource. That’s where the company Garry’s found comes in…

Garry’s investment offers these miners two things. The first is funding. The second is a wealth of mining expertise.

“This is a truly unique investment,” says an enthusiastic Garry. “It offers investors a great way to get early-stage mining exposure.”

Early-stage exposure is the way to make the biggest returns from mining. But that’s not all this investment offers…

“You also get a dividend stream — something virtually unheard of from explorers,” adds Garry.

Take it from me — Garry is very excited by this one. He’s just spent ten minutes telling me (and, it turned out, the entire office) about it. He was on his feet for most of that — a sure sign that our man has the bit between his teeth.

Find out how you can get exposure to one of the hottest commodities on earth with Garry’s unique investment.

Until tomorrow

Ben TraynorSource: Britain’s Crybaby Credit Crunch Culture

The country’s leaders should, however, not be lulled into a false sense of security. The International Monetary Fund (IMF) delivered a particularly hard hitting assessment of prospects and given that the economic imbalances in this country are as severe as in the United States there is no room for complacency.

We currently look for the UK economy to grow by 1.8% over 2008, marginally ahead of consensus (1.7%) and down from 3.0% in 2007. Although this would represent a slide back to sub-trend growth the greater concern surrounds the outlook for 2009 at which point the unwinding of the current account and personal indebtedness imbalances, coupled with the stretched state of government finances indicates a very real concern that growth in the future could be even weaker.

UK economy: the ongoing credit crisis

The most immediate problem surrounds the ongoing credit crisis and its adverse impact on the country’s financial institutions. Whilst politicians and banks argue regarding who might be to blame for the problems now affecting the global financial institutions, little has so far been done outside the US at present to resolve matters (although at the time of writing the Bank of England is rumoured to be planning to swap mortgage backed securities for, so far undisclosed amounts of government bonds for as long as possibly 1-3 years, along similar lines to the Fed’s Term Securities lending Facility).

The longer this dysfunctional state of affairs goes on, the greater the chances that serious damage might be done to the real economy. Given the significance of the financial sector to the UK economy’s well being, a prolonged period of dislocation could knock as much as 1.0% point off growth over the next twelve months.

Of greater concern is the adverse impact of the credit crunch on households and their spending intentions. Given that consumption accounts for around two-thirds of total activity, any adverse shocks emanating from the financial institutions are likely to have an even more significant (and lasting) impact. Here recent news has been far from encouraging with difficulties showing up, in particular, in the mortgage market.

The link between the mortgage market and consumption

Unsurprisingly, mortgage demand has fallen sharply over the past three months with potential buyers facing greater constraints than at any time since the last pronounced housing market downturn back in 1990-91. At present average house prices are expected to fall by between 5-10% over the next twelve months but with fairly pronounced regional variations. The figure could yet be exacerbated by the fact that the buyer holds the whip hand and distressed sellers may yet be forced to accept lower offers, particularly where no or only small chains exist.

Although the outlook for the housing market is bleak, the link between falling house prices and falling consumer spending is not obvious. Firstly, house prices have risen a long way in a relatively short space of time and many home owners will still be sitting on substantial equity built up over the past decade.

However, consumer confidence is undoubtedly impacted by falling house prices and concomitant negative media headlines regarding most people’s single biggest investment. In that confidence can be impacted by changes in, as well as the absolute level of, house prices any negative moves are likely to have an adverse effect on potential spending intentions.

Unemployment and savings

The other factor likely to impact on spending is households’ perception of employment prospects. Falling economic activity and falling corporate profitability can become self-reinforcing. Although the validity of labour market data has been called into question, it seems likely that when faced by sharply higher input costs, companies will attempt to maintain margins by cutting back their, generally, single biggest cost, labour.

We view rising unemployment as highly likely as the slowdown gathers pace and therefore, while consumer spending has held up pretty well so far, it cannot be guaranteed to continue as the slowdown begins to bite.

Furthermore, just as in the US, the UK’s household savings ratio recently plunged to all time low levels (see chart below). The combination of falling house prices and increased uncertainty regarding the outlook for the wider economy, coupled with fears over job prospects, are almost certain to encourage consumers to save more and consume less.

UK households’ savings ratio (%)

The corporate sector is less clear-cut

Turning to the corporate sector we believe that the outlook is less clear-cut, but by no means upbeat. Responding to concerns regarding falling demand, companies are likely to cut back investing intentions with construction spending under particular pressure following falls in commercial property prices.

Until Q3 2007 UK-based companies were racking up ever higher profits and margins had reached record levels. Whilst profitability is now under clear downward pressure and analyst earnings forecasts are being revised lower as a matter of course, many companies still have the benefit of being able to draw on retained profits built up over the past decade to see them through the downturn.

From an activity perspective much hinges on the ability of the export sector to limit the extent of the downturn (it alone cannot reverse it). In this context much depends on sterling’s fortunes on the foreign exchange markets.