oil, gold, pound, euro dollar, 2008-06-30
| Rates | Close | Change |
|---|---|---|
| Oil | 141.74 | 2.61 |
| Gold | 929.5 | 16 |
| $ to £ | 1.9931 | 0.0064 |
| € to £ | 1.2621 | -0.001 |
| $ to € | 1.5792 | 0.0064 |
ftse, dow, nasdaq, 2008-06-30
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5529.9 | 11.7 |
| Dow | 11346.5 | -106.9 |
| NASDAQ | 2315.6 | -5.8 |
UK stutters to near recession pace, as saving ratio plummets to lowest ever level
Here is the good news. We are 0.9 per cent better off than a year ago. That’s after allowing for inflation and tax. So that’s all right then; sure, the economy is slowing down but, even so, we still got better off.
It is just that when you drill into the latest data from the Office for National Statistics, all of a sudden the picture looks a lot less rosy. And we are left questioning the data.
Latest estimates out at the end of last week suggest the UK economy expanded by a mere 0.3 per cent in the first quarter – that is barely above recession pace.
Furthermore, and this is a little odd, our savings ratio, which is already far too low, fell to just 1.1 per cent in the first quarter. The ONS have never recorded this ratio so low. Never, not since records began in 1959.
And from beyond the Office for National Statistics, other data out at the end of last week paints an even more bleak picture. The UK’s Consumer Confidence index from GfK NOP fell to its lowest level since 1990, while Hometrack recorded the biggest monthly fall in house prices in June it has yet seen.
Actually, though, it does kind of make sense. Recently the ONS also revealed data to suggest the High Street enjoyed its biggest ever year-on-year rise since 1986. This may seem odd, but put it all together, and the jigsaw pieces reveal a picture.
The ONS has salaries rising by 4.8 per cent in the first quarter of this year compared to last. But it also had our taxes going up too, from 33.5, to 34.5 per cent of our salaries. As for our disposable income, well that went up by 3.4 per cent; deduct from that a 2.5 per cent inflation rate, and we are left with the real change in our disposable income of 0.9 per cent.
It may not be much of an improvement, but at least it is an improvement, and we should all be celebrating that.
It is just that the retail price index is typically a full percentage point higher, so actually, if you adjust disposable income for retail price inflation, we are slightly worse off.
Some of us are more adversely affected by rising petrol prices, others by the rising price of food. So while the average person may be marginally worse off, some people, for example those who have a longish car journey into work every day, will be a lot worse off.
Combine this with other data from the ONS released a few weeks ago showing unemployment is up, and you can see why GDP growth was so tiny.
But why, then, did the High Street enjoy such a booming May? Or at least, booming according to the ONS.
Surely the only possible explanation for this lies in the falling savings ratio.
But that, though, opens up a can of worms
The UK saving ratio has long been far too low. It is like that in the US too, but in our main economic contemporaries in Europe, countries such as France and Germany, saving is much higher.
Earlier this year, Martin Weale, the Director of the National Institute of Economic and Social Research, said: “In France, Spain and Italy, wealth and saving are close to adequate. Consumption needs to fall no more than 2 per cent in France, Italy and Spain. But the United Kingdom has a long history of low saving and needs to cut consumption by 8.5 per cent if today’s adults are to avoid imposing a burden on future generations. The total wealth shortfall in the United Kingdom is over £1400bn, or the equivalent of about thirteen Northern Rocks.”
Banks want us to save more now, of course. In its current TV ads, the Halifax tries to portray the delights of saving by transposing the words “we are saving” on to the tune of that famous Rod Stewart song about sailing.
Banks need us to save more, so that they have more money to lend out. If we all were to start saving more, maybe they wouldn’t need to tap shareholders and sovereign wealth funds for so much money at the moment.
Furthermore, in times of hardship we do tend to save more.
But no, it appears that the spend-now:pay-later culture is so strong, that even the severe economic conditions we are currently going through are not enough.
In the short-term it is perhaps no bad thing. Low savings mean high spending, mean the High Street is given surprising strength.
But in the long-term it is just not affordable. Growth based on lower savings is not sustainable.
Surely, if you cut though everything, the real cause of the current economic crisis is a savings ratio which is too low. And yet, there is no sign of this underlying ill being cured.
Maybe, in the long-term, the only possible solution is much higher interest rates. Not now, of course, that would be economic suicide. When food and oil prices finally start to subside, then would be the time to focus policy on fixing this true underlying ill.
Falling house prices: is it just a credit crunch thing?
In yesterday’s Sunday Times, economics editor David Smith puzzled on why house prices were falling so fast.
“I have been puzzling about why Nationwide and Halifax surveys have been showing such sharp price drops, at least as bad as the corresponding stage of the early 1990s slump, when economic conditions are more favourable today,” he said.
Well, fret not. The reason can be revealed.
House prices are falling today at a pace that is comparable to the levels seen in the early 1990s because they are even more overpriced today.
There are two other key points.
Firstly, one of the key arguments put forward to justify higher house prices in the noughties than in the early 1990s was that thanks to lower interest rates they had become more affordable. But this was an illusion. Smoke, mirrors and a good deal of gullibility are the only real differences between the housing market today than in the early 1990s.
Secondly, the economic strength was itself something of an illusion.
Okay, so why is that so. First the smoke. This is called inflation. Higher inflation makes debt more affordable in the long-term. It appeared that house prices were more affordable today, thanks to lower interest rates. But actually, over the 25-year period that most mortgages are supposed to last, it seems that they are perhaps more expensive today – as inflation does not erode the true value of debt like it used to.
The mirrors are created by the removal of tax relief on mortgages. In the early 1990s we are able to reclaim some of our mortgage payments back – it was called MIRAS; you can’t do that today.
The gullibility, well, it is that thing about whenever a bubble is in full sway, we don’t see it. House prices were rising, for no better reason than they had risen before. That is called a bubble.
Mr Smith argued the true cause of the property downturn is a shortage of credit. As if the credit crunch was some kind of external factor that had nothing to do with what had been going on before.
But, as was argued in the article above, the fundamental problem with the UK has been a saving ratio which is too low. This hid the true underlying nature of the UK economy.
When saving is too low, there is insufficient money available to fund borrowing.
This is why we have a credit crunch, and this is why our banks are having to go to sovereign wealth funds, from countries that have much higher savings ratios.,
So, rather than see the credit crunch as some kind of external shock, it seems far more likely that the factors that caused the credit crunch are in fact the factors that resulted from the inevitable unwinding of the unsustainable boom.
There is one other point. Thanks to the lower wage inflation we have these days, it takes much longer for rising wage levels to make house prices seem affordable.
So in the past, if house prices were too high, but wage inflation was running at say 9 per cent a year (in 1990 inflation was 9.5 per cent), then in no time the lack of balance was corrected.
It is not like that now. House prices were too high, and unless they crashed, they would remain too high for years, as wages only very slowly rose to close the gap.
It was always inevitable that at some point during their period, some economic crisis would bring everything to its head.
PS News in this morning from the Bank of England revealed yet another fall in mortgage approvals, this time to 42,000 in May from 58,000 in April. Approvals are now 37 per cent of the level seen a year earlier, and way below the low point seen in the early 1990s. Capital Economics said: “At face value, approvals are now pointing to house price falls of 15 per cent to 20 per cent this year.”
Dow fall brings back memories of the 1930s
Hearing the latest scores from the markets seems more interesting then listening to the football results these days, such is the frequency with which records get broken. Then again, when you look at the daily changes, these seem more like the cricket results.
The Dow Jones had another bad day in the field on Friday, seeing another 106 runs scored against it. This follows a 358 innings put in by the bears on Thursday.
It certainly seems to be the case that the bears have got some fast bowlers in their side at the moment, while the Dow has got a batting line up which could not even make the England team.
In fact, with just one day to go, the Dow appears to be on course for suffering its worst June since the 1930s. At close of play on Friday, the Dow stood at 11,346; that’s 1,291 points below the end-of-May price, or 10 per cent down. It is also 2,817 points down on the all-time high set last October, meaning it is 20 per cent down.
But, frankly, the real surprise should surely be that the market rose so high in the first place.
Last autumn, the economic news was pretty grim, but the traders on Wall Street seemed to have their head firmly buried in the sand.
They returned their head to that position in April and May this year, when the Dow shot up, at one point passing 13,000. George Soros warned at the time he expected markets to see another dip, and he was dead right – although, frankly, you didn’t need to be a financial guru to think markets had gone too high.
And so the comparisons with the 1930s continue. And yes, it is like that decade; there are many parallels, but, really, there is no reason yet to think it will get anywhere near that bad.
The 1930s saw a series of quite inept policy mistakes. Banks went bust in their droves, authorities were far too slow to grasp the seriousness of the situation. No one can accuse Mervyn King and Ben Bernanke of not taking it all seriously. In fact, Bernanke probably knows more about the 1930s depression than anyone else alive; that is what he specialised in during his days working in academia.
The bail-out of Northern Rock, criticised though it was, shows why this is not like the 1930s.
If banks were allowed to collapse, leaving depositors with no way of getting their money back, then it would be like the 1930s. Fortunately, it seems unlikely this will happen.
Banks and builders try to find right stuff
Rights issues are in the news again. Bradford and Bingley has turned Clive Cowdery, its would-be investor, away with a flea in his ear. HBOS’s share price seems to be fluctuating up and down and around its planned rights issue price – leaving the fundraising in doubt one moment, and sure to go ahead the next; and now Britain’s biggest house builder, Taylor Wimpey, has joined the fundraising trail.
For Bradford and Bingley, it all seemed a tad odd. On the face of it Clive Cowdrey’s offer, via his vehicle Resolution, seems to win hands down over the plan B&B had hatched. Yet the bank wouldn’t even let him view its accounts.
The snag was really two-fold. Firstly it didn’t know, secondly it couldn’t dare.
It didn’t really know for sure that Resolution could put up the money it had outlined. Secondly, it was scared of losing TPG, the investor it had already found. You see, TPG’s offer is pretty firm, Resolution’s had a shadow of doubt. If it turned TPG away, and then Resolution didn’t come through, then the fear was TPG would not come back. And it appears this was a scenario it just couldn’t dare allow to happen. That the bank was scared to lose one deal, even though another deal seemed so much better, does appear to tell us something, however. It tells us about the nature of Bradford and Bingley’s balance sheet, and how much it needs the cash injection.
Meanwhile, HBOS is seeking to raise £4bn. Trouble is, the money was to be raised via a rights issue at £275p a share – but since the bank revealed its plans for this issue, the share price has been fluctuating around the level of the rights issue.
The whole point of a rights issue, from an investor’s point of view, is that you are supposed to acquire shares quite cheaply, so on the face of it there is no point in taking part in the rights issue. But here is the odd thing. HBOS shareholders can sell their entitlement to take part in the rights issue on the open market. This is known as nil-paid rights.
Now, on the face of it, you would expect the price of nil-paid rights to be exactly the same as the difference between the actual HBOS share price and the rights issue price – which is roughly zero. (Well, actually, you would expect the nil-paid rights to have a slight premium because these rights are free of stamp duty.)
But at close of play on Friday, the nil-paid rights were trading at around 15p. Far more than can be explained by the stamp-duty differential. So it seems the market for nil-paid rights thinks the market for ordinary shares is wrong – that the HBOS share price has been driven too low by speculation, perhaps.
Finally, there’s Taylor Wimpey. It is knocking £660 million off the value of its land and property holdings, and raising £500 million.
Now, a year ago, when the company was formed with the merger of George Wimpey and Taylor Woodrow, its land holdings were valued at £6bn. So that means it has written off just over 10 per cent of these assets. If house prices fall by a total of 20 per cent or more, then presumably it will have to write off more from the value of these assets. Total bank lending to the company is in the region of £1.9bn.
oil, gold, pound, euro dollar, 2008-06-27
| Rates | Close | Change |
|---|---|---|
| Oil | 139.13 | 4.93 |
| Gold | 913.5 | 24.5 |
| $ to £ | 1.9867 | 0.0123 |
| € to £ | 1.2631 | 0.0042 |
| $ to € | 1.5728 | 0.0044 |
ftse, dow, nasdaq, 2008-06-27
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5518.2 | -147.9 |
| Dow | 11453.4 | -358.4 |
| NASDAQ | 2321.4 | -79.9 |