Unemployment To Keep Rising As Economy Weakens

What’s going on today?

Well, there’s the Bank of England rate decision. The phrase ‘between a rock and a hard place’ has had a nice airing in newspapers up and down the land. What can the Bank do? Battle inflation by raising rates? Or help a weakening economy by lowering them?

To the surprise of nobody at all, the Bank decided to leave rates on hold today. That won’t really help anyone, but it won’t leave anyone feeling victimised either (apart from those who think a rate cut is a birthright whenever things look tough. They should just buy Alan Greenspan’s book and be done with it). The average first-time buyer now has to save an entire year’s salary just to stump up the deposit on a house. This, I believe, is a temporary phenomenon. Lenders are spooked, but to stay in business, they’re going to have to start lending sooner or later.

Nevertheless, it’s a sign of the times. And the times are not good.

Most worrying today is the news from the jobs front. For half of last year we had a crisis in the financial markets. It fed through to the big banks early this year. ‘Credit crunch’ became such a popular phrase, it entered the Oxford English Dictionary.

Then home builders, whose share prices took a hammering last year, took another hammering towards the end of spring. They’re still being hammered.

But, until recently, employment has held up. That’s because unemployment lags the economic cycle. People don’t get canned at the first sign of trouble. But the greater the strain becomes, the more employers have to let people go.

Unsurprisingly, the home builders are leading the way. Today we read that Bovis and Redrow sent another 1,000 construction workers to the dole queue. This is on top of the 900 jobs lost at Taylor Wimpey and the 1,100 lost at Persimmon during the last week.

Expect manufacturing to be next — the sector is already seeing its output contract. And then the service sector. The public sector will also have to contract, as tax revenues take a hit in the downturn.

All of which will drag confidence, profits and the economy as a whole down further. And we’ll see more lay-offs.

Indeed, today we discover that 11,000 manufacturing jobs are under threat. The Americans — who have plenty of their own problems right now — have turned protectionist. The Pentagon has torn up a contract with Airbus worth £18 billion. It puts jobs in the US, France and Germany under threat — as well as 11,000 here in Britain. Global economic woes are combining with domestic ones to create misery.

Those 11,000 face an uncertain wait as the bidding process — to build a fleet of tankers for the US Air Force — reopens. But they’re not alone. Sector by sector, insecurity creeps through the economy like a plague.

For all the current complaints about inflation, policymakers could soon look back wistfully to the time when they had cause to raise interest rates. Because people have already started cutting back... and we won’t be loosening our belts for a long time yet.

All of which means the recession is pretty much here. All we’re waiting on is some economists ringing a bell and saying "Yes, we’ve had two consecutive quarters of negative growth." And by then it will hardly be news...

It deeply saddens me to write this. I know from experience that being unemployed is horrible. No one likes the morning commute, but once you have no reason to do it, you feel like a second class citizen. A big part of the world has been shut off from you.

All we can do is brace ourselves for the worst. It’s going to be a tricky couple of years, to say the least.

Can a share protect you from rising prices?

"Weren’t equities meant to protect us from inflation?" asks colleague Andrew Vaughan.

It’s one of the bedrock cases for buying a share. If you hold cash, you’re guaranteed to lose out as inflation erodes your wealth. But buy a share and, if it goes up enough, your wealth maintains its purchasing power. Ideally it gains more. That’s the story, anyway. But recently theory and reality have diverged horribly. Will this continue?

For most stocks, almost certainly. But Andrew reckons there are some that, very soon, could be well worth getting into.

Here he looks at one company which, when the time is right, could offer the kind of inflation-beating credentials investors love.

Why you should ignore commodities bears

Tomorrow is World Population Day. A day devoted to raising awareness about how many of us there are in the world (to be honest, I’m reminded of that fact every morning on the District Line).

For the raw numbers, check out this population clock to see just how quickly this planet is filling up.

If you read Garry White’s contributions, you’ll already be aware of the investment angle on this. More people need more stuff. And that means those who control the "stuff" stand to make a fortune in the years ahead.

Next week, Garry publishes his latest investment report, giving you specific ways you could profit over the next decade.

For a sneak preview, check out why Garry reckons those who are calling a top for commodities will miss out on some massive opportunities

Until tomorrow

Ben Traynor

Today’s Daily Reckoning — It doesn’t take much to be happy...

The Dow resumed its downward slide yesterday. It lost 237 points as the deflation commandos continued their counterattack.

It’s war. And war is hell, as General Sherman said, before burning Atlanta to the ground.

Oil was unchanged in yesterday’s trading. Gold gained $5.

Most of yesterday’s hard fighting took place in the financial sector.

"Fed Sees Turmoil Persisting Deep Into Next Year," saith the New York Times.

The New York press tells us that Steve & Barry’s, a clothing retailer with 200 stores, has filed for Chapter 11. And Fannie Mae and Freddie Mac got walloped again. The two Mississippi Companies [a reference to the government-chartered company in 18th century France that dominated a huge bubble, went broke and practically bankrupted the nation] desperately need to raise money. But even though the two are backed by the US government and clearly "too big to fail," investors are being a lot more grudging with their money these days. Fannie had to pay 74 basis points over the Treasury rate to get cash, much more than in the past. Freddie’s stock dropped to $10. Fannie’s hit $15. Both traded as high as $60, if we recall correctly.

You can read today’s Daily Reckoning in full HERE. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Unemployment To Keep Rising As Economy Weakens

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Unemployment To Keep Rising As Economy Weakens