Friday, 23 January 2009

Britain is in Official Recession - No its much worse

“What I want to see is people who are mortgage holders having access to mortgages at prices they can afford. That's what tomorrow's programme is all about.”
Gordon Brown

Presenter: "You’ve said that over the long term, the US dollar is doomed. What are your thoughts on the British Pound?"
Rogers: "More doomed. It will disappear sooner. If it weren’t for the North Sea, the British Pound would have already disappeared. It’s more doomed. The UK has been exporting oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have nothing else to sell to the world once the oil dries up."
Jim Rogers, CEO Rogers Holdings

It was another week packed full of financial news. Ireland looks on the verge of bankruptcy as they continue to guarantee all their banks, Spain lost its triple A rating, the prime minister of Iceland resigned for health reasons as its citizens begin to falsely blame the free market for their problems. David Cameron predicts Britain will soon require a bailout from the IMF just like the seventies, British banks were hammered with RBS shares down 60% at one point and its market capitalisation only worth £4.5B compared with £78B a year and half ago. “Reykjavik-on-Thames”, as London has become know to the world, is slowly collapsing, with defaults on British loans still to come. Bailouts and printing is the solution the Government proposes. Britain has even begun outdueling Ben Bernanke with the pound in free fall. Even with the pounds spectacular collapse now worse than the great depression, manufacturing still continues to shrink at a time when the UK economy is horribly balanced. As the off book liabilities are slowly included in the official debt readings, British debt now stands at its highest as a proportion of the economy since the dark days of 1978. To top off the financial Armageddon Northern Rock staff got a 10% bonus. This is what happens when you don't let business fail and distort free markets with all the imbalances becoming ever more clear.

The UK hasn't been the only nation is trouble. Ireland consistently blame the Euro, despite the fact that it is the euro that has sheltered them from early collapse just like Iceland. Just like Britain, Ireland continue to prop up the banks a policy that will lead to ruin. These banks have to fail - I can't emphasis this enough. There is a belief that they are too big to fail, however contrary to popular belief the bigger business, the quicker you have to let it fail. If we let these businesses go bust, it frees up scarce capital and labour that can be used more productively. Currently the UK government believes it can prop up the entire banking sector, a sign of incompetence or desperation. The fact that the government has not disclosed the full details of this second bailout attempt has spooked the market with the Government now believing it can beat the market. However, as history has shown, the market is much smarter than any individual or group of people - fundamentals always prevail.

It was also the week that a man from Alabama, who co-founded one of the most profitable investment funds during the seventies, told everyone to sell their Sterling. Jim Rogers has been telling people to sell the pound for years now, as he is one of the rare commentators on TV that talks sense (he also said the Federal Reserve should be abolished, which I also agree with, see my first post for a video of this). Then of course the pound fell, in which commentators began to point the finger at him that this was somehow intentional and he profited from it. I doubt it. Jim for a start is a buy and hold long term investor, in which he always comments he can never time markets, he's the "worlds worst trader" as he likes to be known. Jim has said sell the pound on numerous occasions without the pound flinching, its just this one got more publicity due to what was happening with all these disastrous policies our government is currently carrying out. Speculators placed bets as they assumed other speculators would bet on a fall so bet against Sterling. That's all that happened. It's the market pricing mechanism, not a conspiracy theory of 'fat cats' profiteering.

Demonisation of the Speculator

Of course people and in particular the left always like to portray the speculator as a breed of capitalists with no morals, always cutting a profit from the little man. Speculators, when they are doing their job properly are a crucial mechanism for the free markets pricing mechanism. Their job is to predict the future. In order for future demand to be met it is the job of the speculator to try and anticipate shortages of certain goods, therefore they place bets on goods and companies which they think are cheap, channeling capital to the required areas. There is great risk in it, as predicting the short term future is very hard but this increases the agility and responsiveness of the free market, in effecting keeping it one step ahead. Speculators don't gain as is commonly misperceived, they generally lose. It's like the lottery, there are big rewards for the few who bet correctly however there are far more loser's as greed gets the better. In the end they subsidise society. The recent spike in commodities we saw in 2008 was speculators anticipating the supply/demand imbalances, so directed capital towards these areas and pumped the price up. Of course the price of all these collapsed with great speed, wiping out gains that many had made and creating huge loses. To explain why the price collapsed and why commodities didn't gradually rise instead experienced violent up and down trends, means explaining how unsound money and fractional reserve banking has distorted free markets and their pricing mechanisms. I will leave that for a latter post.

The truth is Jim doesn't move markets, fundamentals move markets. Markets can stray, but they will always align themselves with the fundamentals and at the moment there are no fundamentals for the UK, as I explained in a previous post. Government spin about the 'green shoots of recovery' or the next imminent 'housing boom', will not change the markets sentiment. It seems that the UK is going towards the path of bankruptcy. Full Steam ahead, as Mervin King begins operation 'Money Print', magnifying the destruction. This could well destroy our currency over the coming years. The worrying thing is if the pound does collapse, there is little tools the MPC could deploy to stop the rot. We have very little foreign reserves of only around $60B, but our economy has trillions worth of external liabilities. By causing investors to loose confidence in the pound, this makes these external liabilities more expensive as the pound falls. To support the Pound the MPC could sell these foreign reserves and buy Sterling, but it wouldn't be nearly enough. The only thing they could do would be to raise interest rates through the roof, double digits, and this time it would be worse than the seventies. This is the end game, in all probability years away however if the worse happened, months. Like I've said, its only a matter of time before the UK loses its AAA rating, just like Spain has recently and who knows where it will stop.

Solutions to the issues above are simple:
  • Stop inflating the currency. Stop interest rate cuts and printing money.
  • Let the market take over. The Government needs to stop bailing everyone out and let them collapse.
  • Cut government spending. Start reforming outdated institutions such as the NHS, whose costs are unsustainable over the course of coming decades.
  • Let people loose their jobs and homes. We need to free up labour and capital and put it to more productive uses, quickly. Stopping this process will further ruin the economy.
  • Gradually, over time, abolish the Central Bank. Free up banks to be part of the market, thus stopping the mass inflation that always occurs.
Most importantly do nothing. Let the market take over, in the short run it means substantial pain, but its better than causing irreversible damage, like we are seeing now. However the above won't happen. With the governments recent announcement that Northern Rock may start lending again it is further evidence of the desperation that is setting in. I joked with my dad a few months ago that by the time I look into buying a house I will have to go to the government for a mortgage. That joke seems to be quickly becoming reality. Gordon Brown likes to deflect the responsibility of this Depression onto 'Global forces' and 'sub-prime mortgages' but the UK is a mess from its own doings and it goes from bad to worse every week. A recent report on Channel 4 news that I saw while writing this article, posed the question if this was a normal recession, or something much worse with footage from the seventies shown. It was quite clearly not a question, but a statement, that this is clearly worse than a recession. As the months go on, and if these polices continue, I'm afraid the UK is in real trouble. My 'UK Bubble RIP' post, in which I thought we may have seen a high in the UK in our lifetimes may become true. Jim Rogers seems to agree.

"The idea that you can fix a period of excess borrowing and excess consumption by more borrowing and more consumption to me is just ludicrous ... I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it ... The City of London is finished, the financial centre of the world is moving east ... All the money is in Asia. Why would it go back to the West? You don’t need London.”
Jim Rogers, CEO Rogers Holdings

No comments:

Post a Comment