The papers were full of it this morning. A "shock" to the market.
Yesterday’s producer price index data revealed there’s a lot of inflation waiting to work its way through the system. Apparently, according to the press, this was a shock.
And I have to admit, The Market didn’t look himself when we met up for a beer last night.
"What’s up?" I asked.
"It... it just came out of nowhere," said a disconsolate The Market, staring into his Kronenbourg. "All this inflation data — bang! Just like that!"
Now, The Market and I have been friends for a long time. I love him to bits. But I also know he can be a bit of a drama queen. He’s prone to mood swings and overreactions, as anyone who knows him will attest. So I decided to tread gently.
"Well," I said. "It wasn’t entirely out of the blue. Was it?"
"What do you mean?"
"A lot of prices have been going up for some time now. Take oil. Since it passed $100 it’s barely paused for breath. It’s now at around $135. That’s bound to have an inflationary impact, on everything from petrol to toilet roll."
I paused to let this sink in a bit. The Market opened a packet of crisps. (He didn’t offer me one. He never does — thinks only of himself).
"The thing is," he said, "everyone’s just assumed that because the economy’s going bad, the Bank of England will automatically lower rates to bail us out. But now it looks like they’ll raise them instead. I just totally wasn’t expecting that. Why would they do such a thing?"
"It’s their job!" I said. "They have to fight inflation. It’s what they do."
"But what about the housing market?" he asked.
Ah! The Market was making a common mistake. We Britons have become so obsessed by house prices that some of us think that nothing else matters.
Yes, they’re important. Take this morning’s news. The volume of house sales has hit a 30-year low. That’s very concerning.
But one thing we shouldn’t be is shocked. House prices got ahead of themselves. People borrowed more than they could afford, because money was cheap. Now we’re seeing the (inevitable) correction.
Buyers and sellers can’t agree on what a house is worth, which is why volumes are drying up. They’re engaged in a big staring match — but the buyers are going to win. Prices have further to fall — our research bod Theo calculates they could go down by 30%.
But Britain’s housing market is merely a bit-player in a far bigger production. Britain has to pay more now for vital supplies than ever before. We’re competing with foreigners around the globe who have more disposable income than ever before. This is why our cost of living is rising. It’s also why The Market was in such a state last night.
"Listen," I told him. "You probably won’t want to hear this. You may find it a tad depressing. But the fact is, things are going to get worse before they get better. I’m telling you this as a friend. I hate seeing you like this — pouring booze and crisps down your neck because all those traders and investors have caught you unawares."
The Market nodded.
"What should I do then?" he asked.
"Accept it. Prepare. There still are some good companies — focus on those. I’ll introduce you to my mate Theo. He’s found a few. Companies that offer you some protection from a UK downturn."
"Cheers, mate," said The Market.
"No worries," I said. "If you prepare for the worst, and it doesn’t happen, then so be it. Better that than not preparing and getting caught out."
And on that note, we finished our drinks and went our separate ways. In case you didn’t spot it (as if), there’s a moral tale in my conversation with The Market. The UK economy might be a depressing place right now. But prepare correctly, and you will come out smiling.
The Financial Soviet Authority
"This is just communism, isn’t it?" asked my colleague Grimsby Glenn as we went to fetch our breakfast this morning.
We were talking about the Bradford and Bingley (B&B) rights issue. Plan A had been to raise £400 million. UBS and Citigroup were drafted in as the lead underwriters.
But last Monday, Plan A was thrown in the bin. Plan B was born — sell some of the business to Texas Pacific Group, and do a smaller, but more heavily-discounted, rights issue for £258 million.
Last Monday, you’ll remember, was when B&B shares plunged 30%. The FSA had to step in to suspend trading.
Now the FSA are getting more proactive. You see, UBS and Citigroup have already been worked over by that credit crisis thing. There’s a concern about what will happen if those two banks end up holding a lot of unwanted B&B stock.
So the FSA has stuck its nose, both arms and most of its face into the affair. The Times reports that the regulator is "putting pressure" on the Big Five UK banks to pitch in and help poor little Bradford pay for a new bowler hat (note for foreign readers — B&B used to run a TV ad where the bank was represented by two men — Bradford and Bingley — who wore bowler hats. How quaint).
The Big Five, of course, are HSBC, Royal Bank of Scotland (which has its own Rights Issue to worry about), HBOS (ditto), Barclays and Lloyds TSB.
"Bradford and Bingley got into trouble. So they need to ask shareholders for money. Fair dos, but why’s the FSA dragging a load of other banks into the mess? That’s not how it’s supposed to work — this is communism!"
Ah, Glenn! How saddening it is when we see how the world really works...
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A new commodity hits the headlines
Three commodities — wheat, soybeans and rice — have all recently soared. Now a new foodstuff is hitting all time highs — corn.
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Until tomorrow
Ben Traynor
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