Getting the Bonfire Lit

By Justin Urquhart Stewart 09:10 5- Oct -2009

I think I can hear the sound of something disappearing down the plug hole. It may just be the money supply.

After a flush of excessive emergency stimulation packages, the world looks to see what effect have they had. To  change my metaphors, if I may, gallons of lighter fuel has been poured onto the very damp bonfire and the “burning” question has been – has it been enough not just to catch alight and burn the fuel, but to create enough heat to set the heart of the bonfire glowing again for the longer term. For those who specialise in autumn bonfires, chucking paraffin over it is usually rather ineffective. Good slow burning bonfires are created from a concentrated heat which is nurtured over time to burn more slowly and consistently. The question for the global economy will be – have we started the slow burning bonfire, or just seen a flash of fuel burn over the surface and just leaving a thin blue plume of smoke from a still damp pile of rotting leaves?

Looking at the data following the fuel laden stimulus packages to date, these figures do not seem to inspire much confidence.  For example, after all the stimulus packages China exports are down 23%, Japan’s down 36%  along with their industrial production down 23%, and Germany’s down 17%, France down 13% and the US down 11%. I wonder what would have happened without any stimulants at all?

Thus if the money supply is disappearing, are we not in danger of losing the lifeblood of the credit and capitalist system? If so then where does that leave us? Well probably further deflation. If I may quote Axel Weber the Bundesbank chief “we are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households” and for Germany I think we could also read a similar picture in the US and UK.

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Last week there was much excitement over the record set for the FTSE 100 with its best quarterly rise in history! By the way, history started in 1984 for the FTSE before which we had the much simpler FT30. A rise of almost 21% over that period has been remarkable and we have to go back to 1987 to find the next best quarter when between January and March of that year the where Index rose by 19% - at the risk of being a “Jeremiah” this was followed by the sharp “crash” or correction of October 1987. We must all remember that markets do not go up just in a straight line.

However, one of the factors and features of this recovery has not just been the supreme stimulus packages from the authorities, but also the better than expected corporate results which surprised the markets and further encouraged the bullish enthusiasm. More recently the rebirth of some M&A activity has heartened investors but a Goldman Sachs economist suggested that nervousness about the forthcoming earnings season might be adding to market wariness when saying “third quarter consensus earnings per share estimates in the US have been drifting down for the past two months” and more precisely “while 49% of S&P companies reported positive earnings surprises in the second quarter, only 25% beat on the revenue side” – which in English means that the rest was achieved by cost cutting which although helpful for a time, is not a recipe for a sustained future of growth.

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More focus back on the insurance sector is likely to continue. After the Resolution/Friends Provident deal, the market is looking at other likely candidates. Legal & General have been regularly put in the frame, with Standard Life also being mentioned in despatches. The key will be to find the acquisitors and here we should be watching the National Australia Bank (owners of Clydesdale and Yorkshire Banks) along with their fellow antipodeans AMP and QBE. One name that keeps on being mentioned and keeps on denying any interest is the Italian leviathan Generali who have currently only a tiny UK presence. All of this gutter mutter will keep the sector bubbling and no doubt none of this will have gone unnoticed by the silent watchers from those other Insurance giants lurking on the sidelines.  

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And finally..........another incongruous legal decision from the US legal system. A Mr Terrence Dickson, of Bristol, Pennsylvania, was leaving a house he had just broken into and burgled, by way of the garage. Unfortunately for Mr Dickson, the automatic garage door opener malfunctioned and he could not get the garage door to open.

Worse, he couldn't re-enter the house because the door connecting the garage to the house locked itself when Dickson pulled it shut. As a result he was forced to sit for eight days and to survive on a case of Pepsi and a large bag of dry dog food. As a consequence he sued the home owner's insurance company claiming undue mental anguish.

Amazingly, the jury said the insurance company must pay Dickson $500,000 for his “anguish”.  Memo to self – don’t leave anything in the garage that’s consumable except some WD40, Warfarin and Antifreeze. That should sort out his anguish.

Have a good week.