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Oh Dear - markets ()
13/5/2010
(119264)
Oh Dear
It doesn’t look good. Certainly it could have been worse. Without wishing to get too political, it came close to throat-cutting time as the threat of yet more Brown and a Lib-Lab-Labour coalition loomed briefly. What we have instead offers some hope – but it ain’t easy.
Just glancing at The Times Online this morning (Thursday), there is a practical illustration of the troubles ahead for the UK stock market. Look at the headline stories – ‘Eurozone widens Britain’s trade gap’, followed by ‘Sainsbury’s warns new Government over vat rise’, then ‘Repossessions likely to hit 15-year high’, and ‘Obama plans to punish oil firms with tax hike’, and finally ‘BT shares rise as it posts £1bn profit’.
Admittedly the BT story sounds good at first glance, but the sub-heading explains ‘Decision to cut 20,000 jobs helps company to save £1.8bn last year but income growth is not expected until 2013’.
Oh dear. It almost all appears unremittingly gloomy, with little sign that it will get better. In fact, the dangers are growing.
Plough through acres of highly sophisticated economic analysis, and out of the confusion a few simple outlines emerge – pretty well as our guest strategist has pointed out in his reports in recent days. The Western world is desperately over-borrowed, deep in debt. What is it doing to find a way out? Creating more power to borrow – each day another day older and deeper in debt.
We are – they are – shunting the bill for over-spending on to future generations. Nothing new there, but the size of the debt has soared. Crucially, the means of repaying it is shrinking, or being deliberately shrunk.
This massive eurozone bail-out is a nonsense, medium term. OK, it saved the day this week, averted a flood of sovereign debt selling which could have spilled over from Portugal, Italy and Spain into the UK. All it has done, however, is pushed the problem into 2013 when the Greeks will have even more enormous debts to repay (if they mange to survive repayment dates of earlier debt).
How will they repay? Er, pass. Of course they have to cut spending, wages and goodness knows what in Greece. The Greeks have lived way beyond their means for decades. Easy to sympathise with Germans who are asked to work until they are 67 so that Greeks can retire at 53. But then the Germans and the assembled Eurocracy turned a blind eye to fake Greek entry financial statements, so keen were they to expand the EU.
The Greeks have taken to the streets in defence of easy living. It makes no great difference. Cut or no cut, there is no way Greece can generate growth enough to repay all of the loans now lining up.
Next we have Spain imposing massive wage cuts to tackle budget deficits. A government which promised never to cut wages is slashing public sector pay by 5% this year, and freezing it for 2011, putting off pension rises, and abandoning infrastructure projects.
All well and good, perhaps, in the rush to cut deficits and keep bondholders happy. It pushes more political power into the hands of Eurocrats, desperate to stay aboard their great gravy train, keeping the eurozone intact. The arrogance of imagining that they should vet each member’s budget before it is submitted to domestic voters.
Does it generate the growth required to repay massive debts in the years ahead? Probably not. No-one said it was easy.
Across Europe we face a massive reduction in demand, spending cuts and lower wages all round. Where is the demand which will fuel growth to come from? Who will be making the money to pay taxes? How will public spending be financed if the tax take is shrinking and the extra borrowings must stop?
Each spending cut shrinks the chances of the growth in revenues needed to repay debt. How can that debt come down? The easiest, most obvious way is by accelerating inflation.
Set against this grim European background, Britain does not look quite so bad. At least we are outside the eurozone, and can watch the pound slide, hopefully raising exports and generating some growth.
That, of course, is questionable. To succeed, that policy requires able buyers of our exports. Go back to the headline from The Times above. Our trade deficit is widening. Europe, even before the latest cutbacks, was struggling to buy so much from us.
The great hope must be elsewhere – the US, where there are some early signs of recovery – and the Far East, where China is working to keep growth going within manageable levels.
On a broad basis, then, the next few years are not going to be fun for anyone. In the UK, maybe the new coalition will work, sort of. Who knows? At least there is an early start on moves to cut the deficit, to scrap nonsensical spending like the national ID card, and to raise taxes (the national insurance rise).
That, though, does not augur well for UK company profits. The emergency budget is less than 50 days away. It can’t be good for consumer demand. That 20% vat looks likely.
The new team looks tough enough to take a real bite out of public sector spending. You can bet that will mean more unemployment, and growing industrial unrest. There is so much to do, none of it simple. Every pound saved from public spending is a pound less for some business to earn, some individual to spend.
It cannot be good for UK profits. The stock market looks ahead, they say. So it does. But there are times when you simply have to marvel at a logic which promotes package travel companies on hopes of more business in the wake of airline uncertainties created by the Iceland volcano while managing to ignore the hundreds of millions of pounds already lost in volcanic ash.
And after the spending cuts, who will have the money to fuel a package tour boom – or even a rise in any sort of retail spending?
If the impact of a shrinking UK economy – it must shrink to get debt down – is not good for most company profits, should we take refuge in gilts?
Oh dear. How long before the next round of panic as the debt comes up for repayment. In the UK, there is a relatively long run – much of it does not come up for 13 or 14 years. But in Europe? Do we get a early replay of the current panic, this time without much of an economy left to cut?
Oh dear. It’s being so gloomy keeps me cheerful. Or something like that.
Through the years, it has been hard for me to get into gold. That has meant many an opportunity missed. Look, though, at our super strategist’s recent comments, and it is hard to argue against buying something in gold or thereabouts. My personal stake is in Aquarius Platinum (AQP), but that is not a specific recommendation.
None of this means there will not be profits to be made in the market. More than ever, it is being jerked around by a form of manipulation. The big boys move in and out of the bigger, more liquid stocks with great abandon, it seems, recommending them one week, downgrading them a month later, snatching a turn along the way.
That underlines the need to stay alert and to run a tightish stop loss on almost everything, taking profits quickly. The underlying dangers in this market remain. The chance of a very nasty crunch as the recovery in the USA starts to stutter, then fail, is very much alive.
The small, speculative stocks we follow remain as vulnerable as ever, but offer the hope of gain as specific events unfold. Only stay with them if you are using money you can afford to lose. Alongside them we have a batch of high yielders. They look as good a defence as anything against current uncertainties.
A good chunk of cash looks sensible in any portfolio, despite the poor returns available on deposits.
Good luck.
Ends
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