Six months ago the nation’s prime concern was inflation. When Mervyn King, Governor of The Bank of England, revealed inflation at 3.3 per cent in May it was a national crisis. The fear was palpable when levels hit 5.2 per cent in August.
You’ll remember Gordon Brown instructed us all to take a pay cut.
And now the focus has switched to the global downturn, he wants us to spend our way out of this recession. Spend with what money, Gordon?
Well, at least the pressure on what little money we do have has eased, slightly. The latest quarterly inflation report shows that inflation in the UK has reversed.
This is hardly surprising given how far food and fuel prices have fallen of late. Oil has more than halved from a peak of $147 to just $60. ‘Soft commodities’ used in food, like wheat and corn, have also sunk amidst the spreading recession and deleveraging of financial markets.
If these two factors, the twin catalysts of inflation, are receding and stay low, inflation is the least of our worries.
And that’s how many are coming to see it. French Bank SocGen sees the oil market range-bound between $60 – $85 for the ‘foreseeable’ future. With demand withering, that much is possible, though it will probably not stay that low for long.
SogGen Energy Research: No longer oil bulls
All this begs an important question.
With prices knocked off highs and consumption at historic lows, is deflation, rather than, the big risk and what would that mean for the economy?
Deflation or just disinflation?
Deflation is where prices fall, which almost sounds like a good thing.
But a deflationary spiral is definitely a bad thing. It would all but cement the odds of a global recession as prices fall causing profits to fall causing income to fall in a depression pushing spiral.
Deflation is a strong term to describe the current momentum. I’d rather call it disinflationary. But next week’s revelation of the official inflation reading will tell all. Are we looking at an even deeper recession than we’ve already come to accept?
I hope not.
Interest rates are falling and further financial stimulus is on the way.
Cutting taxes, lowering interest rates, fiscal stimulus – these actions by The Bank of England should prevent deflation-proper while not re-stoking inflation.
Unfortunately, even though inflation is falling, theoretically a good thing for a currency, the pound in your pocket is losing value.
So what should you do?
Stocks are not currently the answer
In theory, stocks are a good hedge against inflation.
Unlike bonds, the investor is not stuck with a set rate of interest. Stocks have the potential for inflation-beating growth. However, in the current climate, stocks are taking a worse beating than the pound.
Eventually, stocks will weather this storm. The Fleet Street Letter holds those stocks that should thrive in any environment. These are big, defensive groups with the cash to finance their own growth and to take over struggling rivals.
Crucially, we also hold a more direct play on the falling pound.
At the moment, our proprietary indicator series is telling us to focus on this investment, a hedge against the pound that has outperformed the stock market by 27 per cent since recommendation on 9 August. And given the latest worrying tone in the Bank of England’s inflation report this morning, it has further to go.
(Past performance is not a reliable indicator of future results)
Meanwhile, when the time is right to re-enter our favourite stocks, we will inform our subscribers.
In short, The Fleet Street Letter offers UK investors crucial diversification from inflation and deflation and what’s more, we tell you when to go one way, with our hedges, or the other, with our inflation-beating stocks.
To learn more about this opportunity and why our profitable inflationary hedge is still an opportunity, Click Here.
I think that the likelihood of true deflation lies with the oil price. Should it sink to $40 - $50, and stay there, deflation will be odds on. This is unlikely, but then so was the FTSE going below 4,000 or Lehman Brothers going bankrupt. In a time when the unlikely becomes that much more possible, it is time to play defensively and we can help you do just that.
Best wishes,
Theo Casey
For Fleet Street Daily
The Daily Reckoning – Delaying the Process of Correction
Poor Mountain House, California.
The town is underwater, reports the International Herald Tribune. Nine out of ten houses are worth less than their mortgages. There are some 1,856 mortgaged properties in the zip code area of Mountain House. Only 209 of them have any positive equity.
How the screw turns! Is this the “ownership society” promoted by the Bush Administration? Now, people own less than ever!
There are said to be almost 8 million houses with negative equity in the US.
Of course, people own a lot less in stocks than they did a few months ago, too. Worldwide, stocks have shucked off about $28 trillion worth of value.
Poor... rich... middle class – everyone has been hit. The marginal homeowner has already been tossed out onto the street. And now comes word that an extraordinary resort in Montana, designed for the super-rich, has gone bust.
“Where did the money go,” asked Montana governor Brian Schweitzer, speaking of Tim and Edna Blixseth’s swanky resort in the Gallatin mountains.
Of course, he might have been referring to almost anything – the Russian stock market, the oil market, the mining industry, Wall Street... everywhere you look... from trailer parks to Park Avenue... poof! – the money’s disappeared.
The oil price is signaling more doom and gloom ahead too. It slipped below $60 yesterday...
You can read the Daily Reckoning in full here.
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