December 17, 2007 | posted by Michael Baxter in IABN | comments (0) |

Last week the US found itself in the spotlight of public opinion. At the UN climate conference in Bali, the US delegation was on the receiving end of boos and hisses. It was cast as the villain of the piece and then when eventually it appeared to backtrack, it was a funny kind of backtracking. The Bali conference did little more than agree it needs to agree, and yet the US appears to have even been dragged kicking and screaming that far. Is the US really the bogeyman in the battle against the war on the terror of global warming, or does Uncle Sam have a point?

You need to cast your mind back to the signing of the Kyoto agreement. The US delegation under Bill Clinton and his number two Al Gore were up for it. But their plans got rejected by the US Senate. Perhaps the real inconvenient truth is that the US government and its representatives have to be seen to be cynical and obtrusive, because any hint of a capitulation, and Senate will have those concerned for breakfast.

You also need to bear in mind that there seem to be almost as many opinions on the subject of climate change, as there were delegates at the Bali conference.

And then there were those who stayed away from the conference. One view circulating around some blogs, and even expressed in UK mainstream media, is that the Bali conference itself was damaging to the environment.

For example on one blog, “Spiked,” someone called Ethan wrote “The sight of 10,000 suits flying halfway round the world just to chit-chat about saving the planet, with absolutely no sign that they will do anything useful, is enough to make me regurgitate my lentil loaf. Puking exhaust fumes from their jets as they sip champagne (a drink stuffed full of little bubbles of climate chaos) in first class, they then stomp all over a once-beautiful island, stay in fabulous (ie, hugely destructive) hotels, eat food that has also been whizzed around the planet…”

Perhaps though the problem is that the cause of fighting climate change has been confused with the cause of anti-globalisation. Currently there is much criticism of supermarkets importing their food from the other side of the world; the inference being that we should all buy local. Others seem to think that the fundamental problem is that we have grown greedy, that economic growth is a bad thing, and that we all need to slow down.

But actually, many of these arguments do the cause of fighting global warming more harm than good. It is possible to be pro globalisation, pro the market, pro international trade and economic growth, but worry about climate change too.

Sometimes environmental damage is inevitable. Build a wind turbine, and there is a carbon cost in the construction. The great and the good and the rest of us need to discuss this issue. Conferences in nice hotels are inevitable. You can’t not have conferences discussing this most important of issues because some damage to the environment will be the result.

There are also a wealth of authoritative reports out there suggesting that the cost of stopping global warming is really not that high at all. For example, according to Stephen Schneider, climatologist at Stanford University, the cost of slowing global warming will be around $20 trillion. That might seem huge, but this figure doesn’t apply to the amount that needs to be spent upfront. Rather, this is the total amount that needs to be spent by the end of this century. It works out at as the equivalent of one year’s worth of growth. In other words, the level of global wealth that would have been enjoyed in the year 2100 will be put back a year to 2101.

Drill down though through the rhetoric, and it appears that the US argument really rests on two points.

Firstly, it’s the idea that the cost of fighting global warming needs to be shared between developed and developing countries. As Dana Perino, press secretary at the White House said “The US does have serious concerns. Negotiations must [now] proceed on the view that the problem of climate change cannot be adequately addressed through commitments for emissions cuts by developed countries alone.”

It is true that China and India are responsible for an ever-growing level of carbon emissions. And soon both will overtake the US as emitters of carbon dioxide. They argue that as the West developed without regard to pollution, it is simply not equitable that their development has to be held back by the concerns that the West ignored.

But in a way maybe the problem here is similar to the one currently pervading credit markets. It’s one of trust. There is real acceptance of the importance of fighting climate change in China, but until the US dips its toe in the water of change, China is unlikely to do so.

The world’s richest country needs to make the first step, and from the resulting position of occupying the morale high ground, only then can the US lecture China and India on how they must do more.

Using China as an excuse not to embrace the challenge of climate change is a truly quite shameful aspect of US policy. And it seems US politicians are confusing their paranoia over China, and its refusal to appreciate the yuan with their duty to lead the world into fighting global warming.

The other argument put forward by the US is not quite so short-sighted. The US delegation argued that the idea being put forward in Bali to curb carbon emissions amounted to little more than a form of rationing.

Rationing, after all, is seen in the US as a socialist policy which is doomed to fail becase any form of rationing creates problems elsewhere in the chain.

Ken Green at the American Enterprise Institute seemed to sum it up pretty well when he said “It’s not ever going to be done through rationing and regulation and redistribution of wealth.”

Instead, he said “It’s going to be done through markets and technology.”

The big problem you have with global warming issues is that the true cost of production is not borne by the producer. Economic theory tells us that the answer to external costs is tax. Tax on supply will enable the price mechanism to appropriately allocate resources, allowing for these external costs. The issue is, how can you enforce a global tax on pollution?

Then there is the issue of the Amazon rainforest. It has been calculated that an acre of rain forest is worth more to the world as being a sponge soaking up carbon, as an oxygen pump helping create the air we breath, and as a source of future medicines, than it is as agricultural land for Brazilian farmers. The snag is, from Brazil’s point of view, it does make economic sense to chop down the trees of its forests. It has been argued that the rest of the world should pay Brazil to leave its rain forests alone, so that Brazil is adequately remunerated for providing the rest of the world with the benefits of its rainforest. If you like, Brazil wants to be paid with providing us with air. Air it seems, is shortly to come with a price tag.

But, the ultimate solution to global warning does not rest with us all staying at home, buying food from local farmers and in reversing globalisation, which by the way would have the effect of condemning many billions more people to poverty in the future. Surely the answer lies in developing a technological solution, which can only come with incentives.

That’s why the US believes the ultimate solution to solving global warming lies with the markets. There is a real danger, however, that the cause of saving the planet is being hijacked by those with quite different priorities.

December 13, 2007 | posted by Michael Baxter in IABN | comments (0) |

Of that plethora of reports relating to the UK housing market, the monthly survey from the Royal Institution of Chartered Surveyors (RICS) has much to commend it. Sure, it is just a survey, it asks estate agents what they think. During the three months to November, were house prices up or down on a year ago? Or, are there more or less enquiries from new buyers? It takes the percentage number who said up, or depending on the question asked, more, and takes from that the percentage number who said less, or down. The balance forms its various indices. At least, that’s the principle behind the RICS surveys.

It doesn’t sound very scientific - not like reports from the Nationwide or Halifax, for example, which have access to data on mortgage offers.

Yet the RICS survey has a number of advantages. For one thing, averages based on data can be distorted by buying behaviour. If, in one month, there is a fall in the number of smaller properties sold, and sales in the number of larger properties sold stay constant, then average house prices will rise - so that’s a distortion. Halifax data is based on mortgages offered - but it takes no account of whether the mortgages are taken up - or whether the final price of the property sold changed after the mortgage offer.

But perhaps the real attractiveness with RICS lies in two other features of its data. For one thing, if you represent the RICS data with a graph it forms a smooth curve over time - unlike the yo-yo-like appearance of data from the Halifax and Nationwide.

But the real benefit of the RICS data is simply this. Empirical evidence suggests it works.

The headline RICS index - the one that asks if prices are up or down, has consistently provided a guide to the underlying trend revealed by the Nationwide and Halifax data a couple of months later.

And RICS data related to new buyers enquiries provides a good guide to what will happen after that. But an even-better index is the one that measures housing stock.

Bear in mind then that the latest Halifax report revealed a third successive month of price falls, and the Nationwide revealed the biggest monthly fall in 12 years. So if the various RICS indices remain weak, we can be fairly sure that further data announcements from the big two mortgage lenders will be on the downside.

Okay, that’s enough teasing, this is what RICS revealed.

Its headline index fell to 40.6, the lowest level since May 2005.

The index for tracking new buyers improved - but don’t get too excited. It rose from an awful -41, to a very bad -31

But, most worrying, the stock of unsold property on surveyors’ books jumped by 8.7 per cent , following last month’s rise of 9.7 per cent . Average stocks on surveyors’ books were 71.2 in November compared to 65.5 in October, and on year-ago levels they are up by 9.0%, the first increase since December 2005.

So, sit down now, get your pen ready, the exam will begin. There is just one question. If stock levels are high and demand is low, what happens?

December 13, 2007 | posted by Michael Baxter in IABN | comments (0) |

It was a case of horses for courses. Each of the five banks involved in yesterday’s big announcement had their own particular measures. In the UK and Canada, the central banks are changing the rules as to what constitutes collateral. For example, if a bank wants to borrow from the Bank of England it can now offer securities backed by credit card and even property as collateral. Incidentally, the UK’s bank will not accept collateral related to US residential assets, and therein lies a tale, but for another day.

In the US, the Fed is widening the net, and will be lending to more banks than normal, while in the Eurozone and Switzerland, central banks will be offering liquidity to banks in the form of dollars.

The banks are of course pumping out money, lots of it. The Bank of England was due to be making £2.85 billion worth of assets available on 18 December, but instead it is freeing up £11.35 billion. The Fed is pumping in $40 billion, and providing the ECB and the Swiss central banks with $24 billion worth of dollars for them to in turn make available.

Perhaps even more importantly, however, is the cost of the new money. In the US there are two rates of interest. There is the official bank rate, and then the discount rate. The discount rate is half a per cent higher than the Fed rate, and when banks borrow from the Fed they normally pay interest based on this discount rate. Yesterday the Fed introduced something new, the Term Auction Facility (TAF). The TAF facility will be much cheaper than the discount rate: closer in fact to the Fed’s fund rate of 4.25 per cent, and will be available to a wide range of banks.

There was also a hint yesterday that TAF could become a permanent feature.

As for the Bank of England, it will also be making the money it supplies available at a much cheaper rate, instead of the 1 per cent over base that its previous, largely unsuccessful cash injections were charged at.

That these five banks have clubbed together is in itself significant, but it doesn’t end there. Central banks in Sweden, Japan and Australia have all now announced their own plans to inject money into the system.

The problem that these banks are trying to solve, of course, is the shortage of credit out there. When the Fed and Bank of England recently cut interest rates, the money market rates barely flickered. For you, me and the rest of us, there appears to have been no benefit from the recent rate cuts. So, by pumping money into the system, it is hoped that, at last, money market rates will fall.

Whenever John Wayne waded into battle, you knew it was just a matter of time before his side won. But will yesterday’s attempt by the central banks make them the hero?

There are underlying problems, and whether you think yesterday’s action will help seems to depend on how serious you think these underlying problems are.

It seems as if every day some bank announces a write-down. Yesterday it was the turn of the Bank of America and Wachovia. Earlier in the week it was UBS, we know more will follow. Whether it will be the Royal Bank of Big Write-Downs, Merrill Lynched by Losses, or someone else: it is clear the full story of bank losses has not yet been told.

But, perhaps not even that is the real point. The real worry surely sits with borrowers. How affordable is our debt? Recently it became the fashion to take out interest only mortgages: is that a sign of good modern practice, as we adjust to today’s paradigm, or is this just plain madness: a short-term fix to a long-term problem?

Some mergers and acquisitions have been funded by debt, and cash. But the cash component was often itself funded by debt from another deal. It’s debt built upon debt, built upon debt. A tower of funding levers.

As for what the central banks did yesterday, well there is a phrase to describe it: Moral hazard, which occurs when central banks lend money to banks and others who are in trouble because they have taken on too much debt. For the last few months, the Bank of England has worried about this moral hazard. It didn’t want to reward banks for reckless risk-taking. But now it’s all different. The banks have ditched their concerns about moral hazard, and gone for moral fog instead.

The hope is that central banks can find a happy medium They can stoke up liquidity, without just creating problems for the future. The fear is that the current problems are so entrenched, that the central banks can only make a difference by pouring fuel on the underlying fire.

December 13, 2007 | posted by Michael Baxter in IABN | comments (0) |

We hope you enjoy Investment & Business News from Defaqto. We have been producing this newsletter for almost 5 years now. Maybe you are new to it, maybe you have been receiving the product right from day one.

You will have noticed that the product has changed a lot over the last few years. It has evolved from just a few words and lots of links, to a succinct round up of news to the more analytical product we have today.

Do you like it more or less now?

How often do you read the newsletter? How can it be improved? Please take the trouble to fill in this questionnaire. Only with your feedback can we get this product right for you.

December 13, 2007 | posted by Michael Baxter in IABN | comments (0) |

Just for a moment, put yourself into your grandparents’ shoes, or if you are an especially young reader, your great-grandparents’. And while you metaphorically clump up and down in these old shoes try and imagine what it was like in the 1920s in the UK, and 1930s in the US. Things were grim. The economy was in crisis, unemployment was rising, there was only one thing for it. If you had any sense at all, you saved your money. You cut back. If there was a phrase to sum up the attitude of Brits in that era it was this one: neither a lender nor a borrower be.

Yet, this was the wrong thing to do. At least that’s what Keynes reckoned. Perhaps Britain’s brainiest man of the last century, he said that actually we all needed to do the precise opposite. Keynes argued that what the economy needed was spending. To get demand up there, and try and create an upward spiral of greater spending, leading to more jobs, fuelling more spending. The advice came too late to make a significant impact on the UK’s malaise, but in the US his ideas were adopted in what was known as the New Deal: jobs for jobs’ sake.

No doubt an anthropologist would tell you that it isn’t really that practical to wear the shoes of your forebears. After all, our feet are a lot bigger these days, but Keynes’s big idea was perhaps the first attempt to explain how a government could take action to avoid the natural swings of the economy.

His ideas have since been adapted, ridiculed, enhanced, and tweaked, until all of a sudden we thought we had the answer: the elixir of everlasting economic prosperity.

Now, try and recall the shoes you were wearing 12 years ago, and lever your mind into them. Back then, the US was due a recession, but at the helm was Alan Greenspan. Evolution of the economic world had thrown up a peculiarly well-adapted specimen: a central banker extraordinaire. Mr Greenspan put the brakes on when the economy was booming; he tried to slow things down before they got out of hand, and, perhaps uniquely amongst the men and women who have had influence over the big economies of the world, he engineered an economic slowdown. It was a controlled slowdown, and arguably the US avoided recession because of it. In 1996 it was firing on all cylinders again. The US had skipped the downbeat of the economic cycle. Mr Greenspan said, in his book, “The Age of Turbulence”, “in hindsight the soft landing of 1996 was one of the Fed’s proudest accomplishments of my tenure.” In the UK we have benefited similarly since, and have enjoyed 61 quarters now without a single fall in quarterly growth.

And now, don your current shoes. The history lesson is over.

Yesterday saw the latest stage in an attempt by the authorities to manage the global economy. Be under no doubt, the economic outlook right now is dreadful. In another era, in an era in which we had not yet had the benefits of hearing the insights of Keynes take on the world, economic depression would be inevitable.

So the Fed, ECB, Bank of Canada, Swiss National Bank and our very own Bank of England have launched the lifeboat. It’s the most significant action taken by central banks since 9/11. But then, 9/11 was different: the truth is that yesterday’s development will go down in the economic history books as a key moment. One of those big days. But, when our descendants choose to take a deep breath and put themselves in our shoes, will they be doing this knowing that in hindsight we had discovered the cure to economic hangover, or instead were the banks merely taking in more of the hair that poisoned them?

December 12, 2007 | posted by Michael Baxter in IABN | comments (0) |

Not so long ago, it was widely accepted that sooner or later Sainsbury’s would claw its way back above Asda and become the supermarket with the second-largest share in the UK. But this year the gap has stopped closing.

According to the latest data from the TNS WORLDPANEL, Asda has seen its market share grow from 16.5 per cent to 16.6 per cent over the last year. Sainsbury’s on the other hand has also seen its share expand by 0.1 percentage points too, growing from 16 to 16.1 per cent.

Mind you, while the two kids Asda and Sainsbury’s eek out market share, the mother of all supermarkets, Tesco, still outshines the rest. Its market share is now 31.7 per cent, from 31.5 per cent a year ago and 30.5 per cent the year before that.

Actually though, looking further down the latest TNS data, the big winners of the year seem to be Iceland and the smaller independent retailers. Iceland saw its share grow by 8.2 per cent, while what TNS refers to as ‘other multiples’ saw their market share leap by 11 per cent. Mind you, they have got a lot of catching up to do before they rattle the big four supermarkets. Iceland’s market share, even after the year of rapid growth, is still only 1.7 per cent, while “other multiples” have a share of 1.6 per cent

December 12, 2007 | posted by Michael Baxter in IABN | comments (0) |

Yesterday, the Council of Mortgage Lenders (CML) released its latest data on the cost of mortgage payments to First-Time Buyers, and once again affordability is down.

This is how CML put it: “First-time buyers contributed 20.6 per cent of their income towards mortgage interest, up from 20.4 per cent in September and the highest level since 1991, and movers contributed 17.6 per cent, up from 17.5 per cent in September and the highest level since 1992.

Although the current percentage of income going towards mortgage interest payments is the highest since 1991, in 1990 the ratio was much higher, peaking in the third quarter of 1990, with 28.1 per cent of first-time buyers’ income going towards mortgage interest payments.

But, perhaps this statistic is a tad misleading. For one thing, the CML data only takes into account interest payments, and ignores the cost of repaying the mortgage. This is a very dangerous omission. Given that the average cost of a mortgage to salary in October was 3.36 times salary, but in the third quarter of 1990 the ratio was 2.31, you will see that the cost of repaying the mortgage is much higher today. In fact, it would seem that for a 25-year mortgage, the cost of repayments to income would be 4 percentage points higher.

Also bear in mind that back in the early ’90s, tax relief (MIRAS) was available on mortgage payments. Taking MIRAS and the extra cost of repaying a mortgage into account, it seems likely that actually the percentage of income that the first-time buyer has to fork out on the total cost of a mortgage, is higher today than ever before.

Still with mortgages, Citizens Advice has had a go at mortgage lenders. It said, “Dubious advice from brokers, irresponsible lending decisions and aggressive arrears management by sub-prime lenders are driving the current increase in mortgage arrears, court action and repossessions.” It also reckons that regulation and safety nets currently in place are failing to protect vulnerable borrowers.

Citizens Advice Chief Executive David Harker said, “The cavalier behaviour of some brokers and sub-prime lenders is seriously undermining home ownership and hitting the most-vulnerable borrowers hardest. Our research suggests that many aspiring home owners have been missold unsuitable and costly home loans that are doomed to fail from the start. Many sub-prime lenders are flouting the rules on responsible lending by granting loans when it’s clear the borrower will not be able to afford to repay it from the very outset, then getting tough immediately things go wrong. Far from providing housing security and a valuable asset, home ownership has proved a fast track to debt and homelessness for many vulnerable borrowers on low incomes.”

But CML is not having it. “The Citizens Advice evidence is based on a very skewed sample of borrowers,” it said. “First, those who seek the advice of Citizens Advice are, by definition, those who have not managed to reach a mutually satisfactory arrears management plan with their lender. Citizens Advice itself also points out that the borrowers covered by the cases in this report typically have lower incomes than the national average. This is not typical of borrowers in the non-conforming sector as a whole, and it is not reasonable to assume that its clients represent typical borrowers in this sector.”

The truth is probably a bit of both. Sub-prime lending was nowhere near as irresponsible as it was in the US, but wherever a market takes a turn for the worse, all kinds of examples of bad practice inevitably come out of the woodwork.

But there is another way in which the UK has taken a far more irresponsible approach to mortgages and the housing sector than the US. If you want to look for someone to blame, blame instead the plethora of TV programmes on housing and the assumption that was implicit to the advice given by many lenders in the industry, that house prices only ever go up.

December 12, 2007 | posted by Michael Baxter in IABN | comments (0) |

“I can’t remember a time when the Fed’s credibility with the markets has been lower than it is today,” said Stephen Stanley, chief economist at RBS Greenwich Capital, to Bloomberg yesterday. He added “Practically everyone has something to be disappointed with.”

Markets had been hoping the Fed would roar into life yesterday, slash interest rates, and try and kick-start the economy. Instead the Fed whimpered, cutting interest rates by a miserly quarter of a per cent and markets went out and sold, with the Dow falling 294 points. It was a massive fall, but then this has been a year of extraordinary volatility, and the index has seen bigger one-day falls than that three times this year.

The markets were nonplussed with what the Fed had to say either. “Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” said the Fed. “Economic growth is slowing… softening in business and consumer spending! Has the Fed lost the plot altogether?” they asked. “Things are much more serious than that,” they said incredulously.

It’s not a unique experience for the Fed. In his book “The Age of Turbulence” Alan Greenspan put much emphasis on the pressure he and his fellow Fed rate setters were placed under to lower interest rates in times of trouble - even when he felt that inflationary pressures made this inadvisable.

It’s the same today - inflation is rising - Capital Economics has estimated that US inflation could hit 5 per cent this month and the Fed is caught in the middle

Many blame the Fed for creating an unsustainable credit boom when it lowered interest rates by too much earlier this decade. Right now the US economy is in real danger of hitting recession - but inflation is far from conquered. If the Fed simply bows to the pressure and cuts rates, stimulates the economy and puts fears over inflation to one side, it would merely be shoring up problems for the future. At 4.25 per cent it seems probable that when the US inflation data is revealed later this week, we will find the real rate of interest in the US is negative.

Rates have fallen by a whole percentage point in just three months, that is dramatic rate cutting - especially in a time of rising inflation. Rather than blaming the Fed for the fact that the Dow fell to 13,432 last night, maybe the markets should look closer to home and blame themselves for the absurd optimism that led the index to rise so high in the first place.

December 12, 2007 | posted by Michael Baxter in IABN | comments (0) |

Back in September of this year, China’s imports from the US came to $5.6 billion and yet its exports were no less than a stunning $29 billion. The economy from behind the Great Wall is exporting almost six times more than it is importing from the US and Uncle Sam doesn’t like it. Right now China is the single-biggest contributor to global growth. If the US does hit recession then many will be relying on China to get us all out of jail. But then China is blamed by many for creating an environment in which the global economy is out of balance. China is still a nation of savers. If the country really is going to save the global economy next year, then it will need to consume a lot more, and see a dramatic rise in exports. How realistic is this?

The last few days have seen a raft of data coming out of China. First the good news. November saw the fastest rate of retail sales growth ever recorded in China (records go back to 1999). In total, retail sales jumped by an impressive 18.8 per cent on last year.

But there is a snag. Last year household spending made up just 36 per cent of China’s GDP. To put that in context, in the US household consumption is around 50 per cent of GDP. Some say it is the massive level of Chinese savings that has created the recent environment of low global inflation, with global demand falling short of capacity. It is certainly the case that high Chinese savings have helped create the US balance of payments deficit which has led to a massive flow of money into the US, which perhaps helped keep the supply of credit so high during the last few years of lending and borrowing madness.

You would have thought, though, that if China’s consumption has jumped by 18.8 per cent, the gap must be closing, and that troubled US and EU exporters can look forward to surging sales to China, while imports stop rising so fast. The problem is that while China’s consumption shot up, so too did its inflation. Consumer prices jumped 6.9 per cent in November. So if you subtract this inflation rate from the country’s economic growth of around 11.4 per cent, you are left with just 0.5 per cent. It would appear that the vast majority of China’s growing consumption was explained by economic growth and inflation and very little of it was down to consumer spending.

That’s a problem because saving is still so high relative to China’s consumption that the massive balance of payments surplus in China is likely to persist. In November, China’s overall surplus was $26.3 billion. It’s not just the US and UK that suffer from a massive trade deficit. Spain, Australia, Italy, Greece and Turkey all suffer from huge deficits too. What these countries need is for exports to rise faster than imports, and for as long as China’s growth is still so heavily export-reliant, then quite simply China does not supply the answer.

Further evidence that China does not have the answer to our ills came earlier this month when the US Conference board published a report with the headline “China’s Turbo Growth Not Sustainable Because of Growing Economic Imbalances.”

The Conference Board concluded that there’s too much investment in manufacturing and too little in social infrastructure (health, education, social security, low-cost housing, environmental clean-up). “Additional measures aimed at slowing investment growth in manufacturing are needed,” the report said, “along with renewed efforts to reduce the need for precautionary household savings and promote consumption.”

The Conference Board added “faster exchange rate appreciation, especially if combined with greater flexibility, could support such measures by reducing net exports and by shifting the domestic incentive framework in favour of services, which remain relatively under-developed in China, but offer enormous potential for future employment growth.”

But, maybe all the hype about China misses an important point. The level of poverty in the country is still huge. A recent report found that there are still around 300 million Chinese living on less than $1 a day. Such unequal distribution of wealth is creating resentment: China’s apparently relentless march to riches is not unstoppable. There is a real danger that the discontent bubbling beneath the surface could rise up. Much of the investment into China is wasted too: new roads, for example, bereft of traffic.

In a nation where such extreme poverty exists, it is far from clear actually that an appreciation of the currency is the answer at all. It certainly seems altogether far too early in the period of China’s growth to assume that this is the country that can bail us out.

December 11, 2007 | posted by Michael Baxter in IABN | comments (0) |

Today’s the day the Fed chooses the rate of interest. The general feeling seems to be that a quarter of a per cent cut will be announced, but some expect more.

Such is the anticipation of a rate cut, that markets went out and bought yesterday, with the Dow closing up another 100 points. At 13,727, the index is now more than 900 points up on the low point it sunk to on November 21. Furthermore, the index is just 400 points below the year high. So, it appears that the roller coaster that is the US stock market is currently in one of its up phases.

Incidentally, the FTSE is doing well too; it is now less than 200 points down on the year high, and almost 500 points up on its November low. You may recall that a fall of 10 per cent is officially known as a correction and back in November, both the UK and US headline indices had fallen by more than 10 per cent.

You will also recall the enormous pressure the Bank of England was under to lower interest rates. It’s like that in the US too. According to Bloomberg, analysts will be reading almost as much into what the Fed says as what it does. If it still says the risks between inflation and growth are “roughly” balanced, then markets will react negatively. If on the other hand it drops that phrase, and instead focuses on the pressure on growth, then markets will celebrate.

In other words, markets are only interested in the short term. If the Fed still bangs on about inflation, which by the way could hit 5 per cent in the US this month, then fury will erupt from Wall Street. If on the other hand, the Fed runs with the pack, markets will celebrate, but the real danger that inflation pressures are being left to build up in the future becomes greater.