Beware - More Interest Rate Cuts To Come

"I can’t see that happening. It would cause mayhem in the stock market and that’s not what the Bank wants."

I was replying to colleague Theo Casey’s "off the wall" suggestion yesterday morning that the Bank of England could cut rates by 200 basis points.

We were having a spur of the moment editorial sweepstake on how much the Bank would cut. Not because we had nothing else to do... but as a way to spark a debate and generate ideas.

Some of us thought we were being pretty bold arguing that the Bank had to cut by 100 basis points — double the consensus prediction. But in the end, Theo was right to be even bolder (although not quite that bold...)

The question is, what happens next? Initially, it looked like the stock market was spooked by the heftier-than expected 150 basis point reduction. That’s not surprising.

Up to now, Mervyn King and his crew have acted cautiously — often far too cautiously — with monetary policy. They’ve been sticking to their inflation-fighting mandate, hoping that by it would allow the economy room to grow.

So to suddenly lop a third off the base rate looks like a clear sign of panic from the Bank. It shouts loud and clear: "We’re up that bad creek. Where the hell’s the paddle?"

Or, as Ben Traynor, Theo’s colleague at The Fleet Street Letter, puts it: "This is a sign for anyone who’s been slow to pick up on it that our economy is in intensive care."

Of course, as a regular reader of Fleet Street Daily, you knew this more than many, probably more than your neighbour and more than the average guy in the pub. In fact, you may have become a little bored of my colleagues talking down the UK, talking down the markets and talking down the pound.

But we make no apologies for it. We say it how we see it. Our job is to help you beat the guy in the pub to good investment opportunities and to help you steer through the markets’ movements.

At the very least, I hope that you’ve been able to take some action in protecting yourself — and even profiting — from the events that are unfolding. Ben and Theo have been relentless in spelling out the dangers and in offering a solution.

If the headlines about that are hitting the finance pages of mainstream press today in any way help to convince you of these threats in the market, that’s all well and good. But are they offering a solution? No, none of the ones I’ve seen, at any rate.

Meanwhile, Messrs Casey and Traynor have a plan. They’ve already been playing the falling sterling trend with a smart stock market proof investment. It’s been making money while equities — and, crucially, the pound — have been falling. And it’s paid investors some income too.

Although they first wrote about this in August, there’s still ample opportunity. Yesterday’s drastic Bank of England hatchet job has given investors not already in this position even more reason to get in now. Let’s face it now, sterling is heading lower.

I’ll show you what I mean.

You’ll read a lot of commentary in the press saying that enough is enough. That yesterday’s move to set the base rate at 3% is all that needs to be done. Here at Fleet Street, we’re not convinced.

Casey and Traynor at The Fleet Street Letter believe rates could soon be as low as 2%. We could see another emergency rate cut like the 0.5% we had in October.

Hedge fund manager, Hugh Hendry, made the point well in a recent Dispatches programme on Channel 4. He said:

"If we are to avoid depression (forget recession, it is already upon us), interest rates have got to come down.

"It is just madness that our rates are higher than in America or in Europe.

"If I was in their shoes I would slash rates overnight to just two percent. Whether even such a drastic course of action could save us now, I have my doubts."

But will 2% be the floor for UK interest rates? We can’t possibly tell. All we know is that there are another 200 basis points of ammo below that in case things are as bad as they look.

Consider this extract from the statement accompanying the rate cut yesterday:

"Output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional Agents point to continued severe contraction in the near term."

The Bank is worried and we should be too. Expect there to be more weakness in the value of the pound sterling and for it to erode the value of your investments.

If you are not fully aware of the scale of UK Plc’s problems, then you should check out Theo Casey and Ben Traynor’s latest work for The Fleet Street Letter. You can read it here and find out how you can protect your self and profit as the pound is crushed.

Frank Hemsley
For Fleet Street Daily

Too many people want to be a contrarian

By Ben Traynor

I had dinner with an old friend last night. We go way back — we both spent our formative years grappling with Lagrange multipliers, IS-LM curves, and all the other weird and wonderful aspects that make up a Cambridge economics degree.

"Because I studied economics," my friend told me, "loads of people are asking me what I think about the markets, like I’m some kind of oracle! They’re looking to do a bit of cheeky share buying, maybe make some money out of all this."

I’m encountering something similar myself. There seems to be an idea among some investors that things have already been so bad, they have to start getting better soon. But that’s just a hope. There are still people out there who hold shares. Those people could choose to buy more... or, they could sell the shares they have (either because they want to or because they’re forced to do so to cover losses elsewhere). On balance, I think there’s still too much of a risk that the latter will happen to justify beefing up your equities exposure.

Of course, those who are taking this as an opportunity to bargain hunt are to be commended, at least in principle. We’re bargain hunting ourselves at The Fleet Street Letter. But, rather than dive in now and risk getting clobbered by weak market fundamentals, we’re keeping the stocks on a Watchlist (we have three at present).

There is also this notion that an investor is automatically rewarded for being a contrarian. That boldness is enough. Of course, this is often true. My friend made a bit of money buying HBOS recently. But, as he admitted himself, "it was a total fluke!" (I also teased him that this was trading, not investing).

One cannot define oneself as a contrarian. The number of people I meet, read and see on the television who are doing so tells me as much. They can’t all be going against the herd.

Rather, it is the behaviour of others that determines whether or not the individual is contrarian. If he has undertaken his own analysis, looked beyond the mainstream for ideas, and reached an independent decision that is one step ahead of the pack... then he is a contrarian. But trying to be ‘contrarian’ because everyone else is doing it can never, ever work. By definition it cannot work.

If you want an example of this "I’m not the herd" herd mentality, check this out from an American e-letter I subscribe to:

‘If we look at the best weeks ever on record for the Dow, we see that they were all bear market rallies. The week ending June 26, 1931, saw the Dow soar by 16.1%, its best ever. But the absolute low was still over a year away. In fact, except for that week in 1974 and last week, all of the best 15 weeks of the Dow took place in the 1930s, and most were bear market rallies.’

So keep your wits about you! If you do aspire to being a genuine contrarian (and if you’re serious about making money from your investment, you should), keep ignoring the herd. Even if they’ve now disguised themselves as the type of investor you aspire to be.

The Daily Reckoning — Apocalypse Now

By Bill Bonner

Nobama rally... Nobama bounce... Nobama bull market... Nobama nuthin’...

Instead, the Dow fell another 443 points yesterday. The index has fallen almost 1,000 points since the election results were announced.

Oil fell too, and seems to be ready to drop below $60. As for gold, it lost more than $8 yesterday. That’s the way it’s been going. Gold loses value... but stocks lose more. ‘Sell stocks on rallies, buy gold on dips’ has been good advice. But it doesn’t feel very good. In a bear market, he who loses least wins. But even he doesn’t feel like much of a winner — not when cash is outperforming him.

Why no ‘bama rally? Maybe investors are afraid that Obama is going to do what he said he would do — raise taxes?

We don’t doubt it. But an increase in the top marginal rate from 35% to 39% is not going to make that much difference. Neither is an increase in the tax on dividends.

No, we suspect investors are just looking ahead and realizing that the whole US economy is going into rehab. And they figure they might need their cash for a little rehab of their own.

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Beware - More Interest Rate Cuts To Come

Beware - More Rate Cuts To Come