I’ve started so I’ll finish…
In Monday’s Market Notes I wrote that last weeks’ Budget revealed public debt – how much the government owes the private sector each year – would balloon to at least 79% of GDP by 2013.
Today I pick up where I left off because this matter is so very important. The UK has already broken Gordon Brown’s golden rule, where no more than 40% of GDP could be in the “national debt”. And now Alistair Darling has confirmed that we will break the Maastricht Treaty guideline of keeping a country’s gross debt under 60% of GDP.
This is pitiful, but there is an even worse debt barrier we are on the verge breaking through. Public debt could well rise over 100% of GDP and the consequences would be unprecedented for a British economy.
In 1995, it happened to Canada (114% gross debt to GDP) and in 1998 it happened to Japan (120% gross debt to GDP).
In both cases, the countries had their sovereign debt ratings downgraded. They were stripped of their all-important AAA scores from the major ratings agencies. Sovereign debt ratings are the way that agencies like S&P and Moody’s gauge a country’s financial strength using government bonds as a reference point. It’s a way of comparing your Switzerlands (rated the highest rating of AAA) with your Sri Lankas (rated B+).
We’ve seen over the course of the credit crunch what happens when companies have their top grades cut. The likes of RBS and Barclays have seen their shares and bonds tumble, their operation lending costs rise and their creditors ask for their money back.
It goes one step further if a country loses its rating...
UK PLC under fire
Firstly, it can have a knock on effect on commerce in the country, especially now. Industries reliant on government support – like banks and automakers – will struggle to inspire confidence among stakeholders if the governments from which they are borrowing have troubles of their own.
For examples of this, look no further than Ireland’s banking sector. There is a huge number of Irish and international savers that hold deposits in the Irish banking system. And yet being protected by the Irish government is not the insurance policy it once was since the ratings agencies warned they might cut the emerald isle’s triple-A rating. It is causing many savers to flee these banks, a fear highlighted by Brian Durrant in The Fleet Street Letter:
“Whether Ireland will default over the next couple of years no one really knows. What we can say is that concerns about sovereign default will mount over the coming months and years and this is a concern if you have a bank account with an Irish Bank covered by the Irish government’s deposit guarantee scheme.”
Now we’ve got the same concerns facing us here in the UK – especially in the event of a downgrade, which, if Japan and Canada’s history is any guide, is looking more a case of when rather than if.
That means we could face another drop in the pound. If you are not already positioned to protect yourself from this, then you need to act now.
You see, the worse the picture becomes with the state of the British economy, the more chance there is for the quantitative easing (QE) process to rise above the current £150bn limit. The government will stop at nothing to try and win the election and that means taking the kitchen sink approach to “fixing” the economy. More money will have to be created to try and restore growth to the economy. And the more new money is created, the more devalued our currency will become.
How you can protect yourself
What does all of this mean for you? Well, the pound in your pocket is still under threat.
Looking at the numbers, it seems that there is trouble ahead for the UK. The ratings agencies have yet to pull the trigger and cut the UK’s AAA rating. But they have voiced disquiet. At this stage it seems that a swift recovery of growth or an immediate change in government policy could keep us from incurring a downgrade. Neither is imminent, so in the meantime a tactical position that will protect your wealth from further falls in the pound is definitely still a priority. This isn’t an investment recommendation, it’s an insurance policy.
I concede that it has become rather mainstream to talk about pound weakness.
However, remember that it wasn’t when we first warned investors to insure against the pound last August. That warning has paid off well. Since then, the economic picture has gotten worse, not better. The continuing deterioration will bring fresh weakness for the pound, and we recommend you take action.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is Investment Director for The Fleet Street Letter. Get their latest “Sterling Crisis” report – showing you how to protect yourself – by clicking here now.
MARKET NOTES
A battered and bruised housing market as lending falls back further
BY SHIVVY ARORA The housing market picture has been conflicting of late. A rise here, a fall there and you’re left scratching your head in confusion.
We’ll happily demystify it for you. There may have been small glimpses of hope with the rate of house price falls reducing and what not. But these tiny shafts of light won’t impact the larger picture until they show staying power, which they’re not.
One of the main signs of a housing market recovery is an increase in lending. So let’s look at the chart below. It shows the British Bankers’ Association (BBA) March update on the number of mortgages approved for house purchases. You can see the 25% fall in the 12 months to March – only 26,097 mortgages were approved last month, down from 34,920 a year ago.
Approvals have fallen back even further recently
Source: Société Générale, Datastream
Lending may have picked up from its scary 18,000 November low last year (circled). But it is slowing again on the dire economic situation, fears of uncertain employment and the hesitance of banks to lend. The recent fall was as much as 7% on the previous month.
David Dooks, director of statistics at the BBA, said the figures showed it would be ”unrealistic to expect the mortgage market to recover in a steady and consistent way in the current economic environment".
We don’t see credit availability for house buyers improving to a healthy level this year. And any pick-up is likely to be painfully slow and prone to relapses. And that means the housing market won’t be bottoming out any time soon.
The Daily Reckoning – Voodoo economics
London, England
Wednesday, April 29 2009
Finally... we’re back in London. We left at the beginning of April... went to San Diego and Los Angeles... then to Buenos Aires and Salta... then to Paris for a few days... and now we’re back. London was cold and rainy yesterday... just like we left it. Not exactly home... but it will do.
But what’s this?
The city seems to be winding down. All those hot shots in the financial sector aren’t so hot any more. In the space of just ten years, the percentage of GDP generated by the financial sector almost doubled – from 5.5% in 1996 to 10.8% a decade later. But now the whole sector is shrinking... along with bonuses... payrolls... and expense accounts.
And since Britain counted so heavily on the financial high fliers and their money... the whole country seems to have gone into a funk.
Tax revenues are collapsing. Deficits are soaring. The UK’s national budget deficit is already at 12%... about even with the US. But if current trends continue, she’ll soon have the largest deficit in the developed world.
But here comes the bad news. Your editor didn’t mind when investor and speculators lost trillions. He barely noticed when the US government practically nationalized the largest banks, insurance and automobile companies. He hardly blinked when $13 trillion of the nation’s treasure was committed to a foolhardy effort to combat capitalism. But now they are going too far.
In an effort to raise money, the British government is raising your editor’s taxes! Yes... your poor editor pays taxes in several countries. And now the Brits are raising their rates to levels that rival those of the highest tax jurisdictions in the world – Sweden, Norway and the Netherlands.
The trouble with this strategy is that your editor just bought a pair of Argentine boots. And these boots are made for walking. If these news taxes pinch too hard he – and thousands of other people working, vaguely, in the financial sector – is likely to walk right out of here.
But to where? Ah... there’s the rub…
Read on…
To read the Daily Reckoning in full, click here.
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