If you read my comments on a regular basis then this should come as no surprise and in fact could almost be one of those Basil Fawlty moments where these revelations have been no more than an amazing announcement of the stunningly obvious. To add to this, the Pound lurched downwards against the Dollar, underlining the lack of confidence that others have in the management of our economy.
Again unsurprisingly, this has brought out the usual wails from the Jeremiahs around the media, forecasting scenarios of horror that have all the appeal of a short break with Dante at his Inferno Weekend Lodge. In fact there was nothing especially surprising or unexpected in the news, but it was a week for the pessimists and resultant market nerves. These times are of course worrying and I don’t want to make light of them, but they are a period we have to go through. This will include deranged and erratic markets, made worse by hedge fund managers selling out to cover margin calls, as well as others just giving up and running back to cash. So, with Halloween coming up, perhaps we should ask some of those commentators to stop terrifying everyone and take off their scary masks and behave more responsibly.
There is, of course, no magic potion which can save us all but rather like a rotten cold (or flu, as I call it), it just takes time with all the remedies just providing remedial succour rather than an outright cure. What the governments have provided is significant, but on their own are little more than a financial ‘Lemsip Max’ – they can ease the symptoms but the cure has to run its course over time.
So in this backdrop of apparent unremitting gloom, let me remind you of some flickering lights that may not be the light at the end of the tunnel, but at least some light to show us the path.
1-the cost of money in the UK will come down further. Very slowly the LIBOR rates are easing, but they are still abnormally high – however they are moving in the right direction. Mervyn King in his speech last week seemed to imply a further interest rate cut to come and hopefully a significant one. If this is passed on to borrowers, and LIBOR continues to ease and the banks start lending more, then this won’t solve the issue but will certainly soothe some of the pain.
2-Sterling’s fall from grace may be ruining our overseas holiday plans, but overseas investments and income will certainly benefit. Although we may not be the metal bashing exporter of days gone by, we are still a valuable exporter of technology and intellectual property. Additionally, all those with a higher proportion of overseas investments (that we at 7IM have been promulgating) will be seeing that benefit as well.
Perhaps that may at last help stop our fixation with yet more imported consumer goods – they just got more expensive and we can’t afford them anyway. One figure often overlooked in the daily maelstrom of economic data is our Trade Deficit. My colleague, Alex Scott, has pointed out to me the latest figure published the other day was a record level of £8.2 billion for August – the worst figure since records began in 1697 – I am sure Queen Anne would not be amused.
3-from a record of $147 only a few months ago, the price of crude oil has plummeted to around $66. This, of course, is causing huge pain to the producers, and especially those who have ramped up their expenditure on the rising price – notably Russia and Venezuela, and OPEC’s moves to cut production may do little in the face of falling demand. Nonetheless such a drop will be beneficial, especially next year in laying the foundations for a slowly recovering economy. Perhaps this could be one of the most important elements in stabilising inflation and manufacturers’ costs?
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Last Friday saw figures confirm what has been apparent to some of us for some time, that we are in a downturn, as the UK’s GDP contracted by about 2.0% annualised in the third quarter. This is the first fall in GDP since Q2 1992. The rest of the world may have sneezed, but we seem certainly to have caught the flu, let’s hope it is not pneumonia. We have enjoyed 16 years of growth and rude health, and perhaps in the last few years we have burned the candle at both ends, fuelled by excess borrowing on our credit cards or by equity release. Now we are going to have some time for recuperation as we all pay off our credit card bills and regain our health.
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And finally....... News from the US, that must come as a great relief to the Almighty, where it seems that an action against God has failed. Apparently as no address could be provided, the Summons papers could not be served. I thought our local church was the house of God? Yes that might be true, but he is probably not on the Electoral Roll.
Have a good weekend,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited