What follows is a precis of information gathered from conversations
with investors and Private Bankers, statistics provided from one of
these (Kleinwort Benson) laced with a few of my own conclusions.
xxxxxxxxxxxxx cs 11/3/09
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BRITAIN'S ECONOMY - BLEAK PROSPECTS 11 March 2009
The Background
Our banks had two fundamental weaknesses - their assets and their
liabilities both of which are distinctly 'BAD" , You don't get much
more fundamental than that!
The assets were not only the sub-prime mortgages from the States but
also the shaky mortgages here in Britain, due to reckless and frankly
stupid lending policies.
Their bad liabilities were caused by the banks' incredible
abandonment of the ethos of the building societies which was only to
lend as much as the deposits they had received from savers, a policy
which Building Societies still largely observe today. The fact that
they were even allowed to do this was a failure of government
regulation. The banks filled the gap by borrowing from other banks
and especially from foreign ones.
Right now the banks are not lending because they have insufficient
capital and don't want to because everything is such a bad risk in
the present recession. Once wounded they've retreated into their
shells and are contemplating their navels.
What Now?
The banks now find the assets they do have are depreciating each day
which makes their balance sheets worse and so their reluctance to
lend is reinforced by their inability to! So they put their prices
up and are tougher which makes life difficult for their customers who
cut wages and postpone investment which slows the economy down which
hurts the banks. It's a vicious circle. The public see the economy
faltering and put off purchases "because it will be even cheaper
later". So demand for loans dries up - that's another vicious
circle! Falling prices decreases the value of assets which starts
the downward spiral all over again.
The Recession----A few facts:
== since 2007 peak, house prices down 20% , commercial property down
35%, equities down 43%.
== UK + Eurozone in recession since July 2008 (US since January 2008)
== The final quarter of 2008 was the worst quarter for both the UK
and the world economy since 1982 (Japan since 1970)
== Forecast for USA, Japan and Europe ex-UK for 2009 is -2% ] Likely
to be a significant underestimate) .
== UK will be significantly worse and with "little clarity" for 2010
== This is already a severe recession and it has only just got going
Who's doing What? (excluding Quantitative Easing)
== USA $700bn initially for buying 'toxic assets' but soon changed to
bail-out for banks and car makers! More promised. Obama wants
emphasis on direct assistance of this kind and has kick started that
with $787bn of tax cuts and infrastructure spending
== UK - £60bn new capital for banks and insurance of potential
'toxic assets' for £585 bn - so far. £15bn in VAT tax cut (ends
31/12/09)
== Holland, Ireland, France, Germany, Belgium have all taken shares
in their banks through capital injections. Germany has a 'stimulus
plan' of ?50bn.
== World-wide massive interest rate cuts
After DEflation is INflation the real killer?
The suggestion is that Deflation will continue for about 21/2 years
and during this period it is hoped that measures being taken will
restore the economy because during this period as prices fall debts
do not!
The follow-up to that is that with the economy awash with money from
all these stimuli that inflation is not likely, - IT IS CERTAIN!
Governments like inflation because they can borrow today and pay
back with devalued currency later. They cheat the savers with what
effectively is a "stealth" wealth tax.
So to Quantitative Easing
The effect already of the state (Bank of England) buying gilts from
banks is to put money into the banks which is 'repatriating' those
gilts. But the price following the announcement that it was
proposing to spend enormous sums - up to £150bn with £75bn
initially - on public-sector and corporate debt has already put the
price of those gilts up by nearly 20% with the consequential effect
of drastically cutting the yield on them. This forces interbank
lending rates down. It also enables Gordon Brown's government to
continue financing more cheaply its recklessly profligate spending.
But the trouble is what will the banks do with all this extra cash.
The consensus - a pessimistic one - is that they will not spend it on
lending but merely put it back on deposit but in their names in the
Bank of England whence it came in the first place. There's yet
another vicious circle.
So the scepticism is rife where it matters - where decisions are taken.
Recommendations to investors.
Yields on equities have now overtaken yields on gilts for the first
time in ages!!! (The chart I have starts in 1980 with gilts yielding
12.5% with equities down at 5%. The fall in yield on government
bonds has been falling consistently since the 12.5% until with this
last dip it is around 2.6%. Meanwhile equities which eased to 3% in
1988 have since been on a gently rising slope until the recent leap
to 5.85%
Since this covers a wide range of industrial and commercial companies
the "good" companies are doing much better. So there are great
opportunities to invest well in equities right now. But those
opportunities carry great risks too! Investors who want to maintain
their incomes in these difficult times will have to take
substantially more risk, but it's the only way. Cash is definitely a
'No-No' right now.
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