Bank of England supremo Mervyn King was asked a straight question yesterday. And like a champion of plain-speaking gave the straightest answer possible.
The question, from the Commons Treasury committee, concerned whether or not, given recent market upheavals, the Bank is leaning towards a cut in interest rates.
"Yes," replied Merv. I’d say without blinking, but I wasn’t there. And he probably did blink... it’s what he does.
But with the London Inter Bank Offer Rate (LIBOR) looking sticky at 5.995%, a rate cut may not have much of an impact. Indeed, credit conditions, as King acknowledged, are looking tight as ever. Mortgage approvals in February were down a third compared to a year earlier, according to a report by the British Bankers Association. Higher lending costs are being blamed.
Since a rate cut looks unlikely to do the business, Merv’s making noises about doing something else. That something else being to take illiquid, mortgage-backed securities onto the Bank of England’s balance sheet, most likely by swapping them for liquid ones. This will make the banks look more attractive to each other, and so they’ll be more willing to lend to each other again.
That, at least, would be the hope.
King says there’ll be two conditions attached to any intervention. The first is that any losses will still be incurred by the banks and their shareholders (as it should be).
The second is that banks should not use public money to subsidise new commercial lending. It’s this second condition that could prove tricky. Banks lend — it’s what they do. It’s how they make money.
If the funds are there... the temptation will be too. And since they’ll be making new loans anyway (which is the point of the exercise), how do we know whether or not they’re subsidised by public funds?
"This is really the only course of action the Bank can take," says Profit Watch mogul Frank Hemsley. "All these nasty assets are hanging around like a bad stink, and that’s why banks won’t lend to each other. But," he adds, "it’ll be an absolute scandal if the bankers use taxpayers’ money to make a private profit. It was their greed that got us all into this mess to start with!"
The US slows down, but Wall Street is oblivious
The S&P 500 closed down 0.88% yesterday. But that’s not enough for Bill Bonner, who sees a definite gap between what’s happening in the real economy and what the markets are doing.
"The US is probably already in recession," he says. "The implications of what’s happening in the real economy are simple — sell US stocks and property. So far, though, the stock market and technical outlook are not confirming this advice."
Bill also points out that over the last ten years the S&P has gone nowhere, while inflation has eaten into shareholders’ wealth by some 25-30%. Inflation is something many investors don’t think about when calculating their gains, but Bill shows why it’s something you should definitely be aware of.
Dollar falls as eurozone rates look likely to stay put
Jean-Claude Trichet, head of the European Central Bank, hinted yesterday that eurozone rates will not be cut for some time. Which was bad news for the greenback. One euro will buy you $1.58 — an all-time high.
If Bill didn’t persuade you above to avoid the US, this should. Holding dollar-denominated assets doesn’t look too clever right now.
A good day for commodities...
On the commodities front, however, things are a lot more chipper. Garry White practically skipped into this morning’s meeting.
Gold rose $14.20 yesterday, although it’s retreated slightly to hit $950. Oil was up $4 a barrel yesterday (it’s now at $107 following today’s Iraqi pipeline attack).
Corn is up... industrial metals are up... good times for all in the garden of Garry.
But that’s not the only reason Garry’s chuffed. He has a new hero — Nicolas Sarkozy, or as Garry calls him, Europe’s Mr Nuclear. Sarkozy, along with his new wife Carla Bruni, is on a state visit to Britain. And Garry thinks it couldn’t have come at a better time.
"Nuclear energy is clean, it’s proven and it’s efficient," he says. "We’re only just waking up to the fact that we need it. But the French — they get 80% of their power from nuclear."
The big problem in Britain is a lack of qualified nuclear engineers. The industry here has been ignored for over 20 years.
"Some people won’t like to hear this," Garry says, "but we need the French. They have the expertise we badly lack."
But while Garry’s concerned about Britain’s energy requirements, he’s more concerned with his portfolio — which he reckons will get a major boost as the world goes nuclear.
Readers of Garry’s Smart Commodities are sitting pretty — Garry’s found them a great uranium play to make sure they don’t miss this trend.
"This is happening, and it’s happening now!" he says. "Sarkozy’s signed deals with China, he’s been to South Africa, the Middle East... the world is going nuclear, and you need to get in now or you’ll miss it."
Garry’s pretty clued up about these things, so when he talks, we listen. Nuclear power is one of five core commodities trends Garry has identified. These five trends look set to make a killing for investors who make the right moves now. With Garry’s help, I believe you could be one of them.
And finally...
A little bit of fun to finish on today. Reuters reports that a used Bear Stearns T-shirt was sold on eBay earlier this week for $151. That’s enough to get you 15 Bear shares at the price JP Morgan are paying...
Until tomorrow
Ben Traynor
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