Investors Swap Stocks For Bonds To Flee Collpasing Markets

Not Everyone In The City Is Suffering...

Date 25/09/2008

The Right Side

Ben Traynor

"I was speaking to a friend of mine in the City last night," says Fleet Street Letter investment director Theo Casey. "He says he’s rolling in business. He’s never made more transactions."

Who is this mysterious friend of Theo’s? More to the point, what’s his bag? What business is he in that he is having such a ball right now?

The answer gives us a good idea of the financial temperature right now. You see, Theo’s chum is a bond dealer.

Investors are scared. They’re yanking their money out of stocks and putting it into bonds. They’re running away from a global financial system that’s collapsing in on itself.

Will they be safe in bonds? Time will tell...

Hoping to lure them back are the erstwhile Guardians of Finance — the Ben Bernankes and Henry Paulsons of the world. The politicians are chipping in too — Gordon Brown has a five point plan to "rebuild the world financial system". George Bush has been on the telly.

Here’s what I think is happening. The Guardians are gearing up to pump some more liquidity into the system. They’re terrified of deflation — no one wants to preside over a 1930s rerun.

But they also know that such a move won’t work... yet (eventually, of course, there’ll come a time when it doesn’t work at all). Reflating now would be like trying to pump up a lilo with a hole in it. They need to patch up the holes.

That’s what Henry Paulson’s $700 billion bail-out is all about. The US Treasury secretary knows that financial faith is in short supply. Investors are dumping shares, while banks won’t lend to each other. The interbank lending rate shot up as it became apparent that Paulson’s bail-out was struggling in Congress.

The plan is to offer to buy all the bad assets and remove uncertainty over what they are worth (one commentator calls it mark-to-Paulson accounting, which I rather like). The idea is that, with toxic assets out of the equation, the risk profile of private banks will improve. Confidence will return, the system will be patched up.

Then the world’s monetary authorities can start working their foot on the foot pump — until the whole ragged bouncy castle is once more standing.

Will it work? We’ll see. In the mean time, the flight to bonds — and to harder assets — will continue.

[Editor’s note: The Fleet Street Letter has a bond play in its portfolio. This investment also offers a way to hedge against the continued demise of the British economy. ]

At last! Some really, really good news!

Colleague Garry White was very chipper yesterday. Our commodities guru has long been dismayed by Britain’s energy strategy. Last week, while we were in France, he expressed his delight at being in a country that had got it together when it came to future power generation.

But now — belatedly — Britain looks to have made a breakthrough.

"Finally we have some good news," says Garry. "The right thing has been done to secure Britain’s future prosperity. We should all be pleased."

And that’s not all. This is a trend Garry has been following for years. He already has investments in place to capitalise on it — and, this Saturday, Garry will unveil another.

Find out why Garry’s so happy — and how you could profit by investing in one very special company.

Until tomorrow

Ben Traynor

Editor

Fleet Street Daily

Selected articles:

Theo Casey on the risks associated with Exchange Traded Funds (ETFs).

Garry White on why Britain’s energy strategy may be back on track..

The Daily Reckoning — Who’s bailing out Wall Street?

Here come da judge...

Oh Dear Reader, it may be a cruel, cruel world for some... but it’s a delight to us!

Little by little, gradually, haltingly... the commentators are putting two and two together. In just 4 days, global stock markets lost more than $3 trillion. Then, the fellows who saw no danger at all — Greenspan, Bernanke and Paulson — suddenly insisted that if immediate action were not taken the world’s whole financial system would implode! Meltdown! Collapse!

What did that mean, exactly? They didn’t say. But it sounded like big trouble. And people want to avoid trouble at all costs — especially if the costs can be laid on someone else.

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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