The FTSE is called 150 points up the Dow had a 900 bounce from the lows, Oil and Gold have bounced and really the only thing that is still up ess aitch one tee creek without a paddle is the Pound.
Sterling is now at 1.1649-1.1653 vs the Euro which means that against our major trading partner (whose currency has also dropped alarmingly) we are over 20pc off from the average levels from prior to 2008. Much of this has been in the last few weeks. Without the prop of high interest rates (a prop manufactured by our central bank over the last 10 years) the pound is now seen by virtually every trader as an easy sell. High interest rates, and the corresponding high exchange rate, have meant that manufacturing (generally) in the UK has been fighting a losing battle against the rest of the world for years and now, when this artificial support has been kicked away (years too late), we survey a landscape of retail services, support services, financial services in fact a myriad of ‘services’ but without any manufacturing or exporting base on which to ground it.
The problem with a totally service based economy is that without external impetus it is essentially eating itself as money goes round and round in an ever diminishing circle. Small countries with big neighbours can afford to go down this road but I fear that the UK economy will be in a truly dire situation before the ‘turning point’ is reached. Now that the rest of the world is not adding the required growth as they themselves slip into negative growth the huge state apparatus built by ‘Our Gordon’ will suck the life out of what remains of the private sector.
We might foresee an environment where the Treasury in a desperate attempt to keep State employees in work will issue huge slugs of debt. With interest rates possibly falling to 2 maybe 1pc it might be thought to be a good time to be borrowing “for the future”. Unfortunately investors are not always this gullible and it would not surprise me to see a very steep 1 to 5 year yield curve with 3mth money down at 3pc but five year at 5pc.
Public Sector debt levels are reaching very unnerving levels and the usual trick of this government in offloading debt into ‘off balance sheet’ vehicles continues. Nationwide and RBS are issuing 2 and 3 years AAA 100pc UK Treasury guaranteed debt at some 60-80 pips over UK Gilts. Please can somebody tell me why an investor would buy a 3yr Gilt at 2.99pc when he could get the same credit risk with 80 pips more from a Government Guaranteed Bank debt. The debt is merely guaranteed by the state but is not actually recorded as a state liability. A “not so clever” trick but one that will keep the numbers down.
As mentioned the FTSE is opening some 150 points to the good and our clients are counting the shekels as they were buying into any weakness yesterday. The huge Dow rally came as something of a relief to many! The only problem with the move higher is that it appears to have been built on fear of what the G20 are going to do this weekend rather than on any fundamental change (indeed the numbers out yesterday were actually worse than forecast). This might make the current levels just a temporary relief and, indeed, in early action we have seen a general surge toward the exit signs. I feel that cash might be the place to be for the time being (try telling my wife, who seems to believe that the natural living space for a tenner is in some retail outlets’ till!)
Hopefully we might have a quieter day as traders try to guess which way everyone will jump on Monday after the great and the good have their little shindig. Next week also has the natural break of the US Thanksgiving holiday (Thursday and Friday) which generally takes two days out of the trading month for the whole globe.
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