I hate being wrong. Fortunately (or unfortunately, depending on how you view it), life has given me plenty of chances to get used to it. Today I’ve been handed another one. Lucky me.

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