chuffy

 

31st January 2009

Situations may change but people never do

As we continue to witness the process of unwinding the stresses that have been building up in the World economy it is becoming more and more clear that it is going to take its own path, no matter what Governments try to do. An acceptance of this fact 12 months ago would have saved tens of billions, if not hundreds. Sadly here in the UK we are dictated more by a political timetable rather than an economic due the need to have a general election within the next 16 months.

The retreat from globalisation and the increasing pressure to adopt protectionist policies will become more appealing as the crisis deepens, but this movement could actually be the way forward.

There is always a temptation in a situation where a loss has been incurred to want to get back to the position before the loss was made. It is a perfectly natural need but when that position was actually a false one then it is in no-ones interest to try and recreate it.
The latest asset bubble was created by an unrealistically low interest rate environment that led to a lending and borrowing binge that appeared to flatter the risk takers, on both sides of the equation, who thought they weren’t risking anything because of the ever increasing price of the assets. To try and recreate the conditions that brought about the position we find ourselves in is not really going to help anyone, but from a political point of view, it is far more appealing.

To keep throwing ever-growing amounts of borrowed cash around and now the new form of printing cash, quantative easing, on the grand scale we now see may appear to some as grappling with the problem, but it has not had anything like the effect it was trumpeted.
This is because it is a top down solution and only a bottom up approach is going to have a long-term result. Unfortunately the time frame is too long for the policy makers and it doesn’t have the same headline grabbing effect.

The depression of the 1930s was blunted by the New Deal in the US when workers who hadn’t know employment for years were given jobs by the Federal Government. The real end came when the need to re-arm and industry ramped up production but the bottom up approach already sewed the seeds of recovery.
The current movement to shore up failed Banks and encourage over leveraged borrowers to borrow more while at the same time punish the prudent, is not going to have a long term effect.
The money spent so far would have a much greater impact if it had been handed over to those at a local level to take equity stakes in threatened properties combined with local initiatives.
This may well be the way it works out but not before increasing amounts are wasted in the attempt to look to be seen that something is happening.

I have taken the decision to sit on the sidelines for the time being. Even though we have central bank rates at near zero, it is still possible to get over 4% on saving bonds.
Property is still a big no go area, even with asset prices a good 20% off the peak. To me it will have to go another 20% lower before it comes anywhere near reasonable value.
Equities are very difficult to value because the biggest player in town is the Government and that is never a good position to be in. Another 500 points off down to 3500 on the FTSE 100 would see that index approaching value.
I just don’t believe the numbers that CEOs are predicting and that means it is safety first for me. 

 

 

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