©2008 Investment and Business News. All Rights Reserved.

©2008 Investment and Business News. All Rights Reserved.

©2008 Investment and Business News. All Rights Reserved.

Meanwhile, the price of oil as measured on the New York Mercantile Exchange at midnight last night, when we took our daily reading, had a four in front of it; it was trading at $48.70, the lowest level since May 2005.

As for sterling, it was down again.

Today, in this article we are taking a closer look at the current state of play on the markets. Then, below, we are looking at the current value of the FTSE and comparing two views: one that markets have reached bottom, and that from now on in the only way is up, and another more pessimistic view.

Then, in today’s third article, we really attempt to crawl under the skin of the markets, and ask: is it a mistake to compare the shenanigans of this year with 1929? Could it be that, actually, 1998 was the year that was truly analogous with that momentous year from the pre-war period? Was the boom of the last ten years an illusion? But, even if that is the case, maybe it has all turned out for the best, anyway.

But first, here is a closer look at the markets.

In the US, it seems that the big fear doing the rounds relates to Citibank, until recently the world’s biggest bank. The US government is throwing another $25bn at the bank; 50,00 staff across the world are losing their job; and still the rumours persist. The bank’s share price just keeps falling, it was down to a 13-year low last night.

As for the Detroit Three, GM, Ford and Chrysler, the latest news here is that Congress has kind of agreed it will provide money – around $25bn in all – but the three companies have to produce plans to show the money will enable the companies to move towards a viable business model. It is far from clear that they can do this.

The fall in oil provides reason for cheer. This publication predicted oil would fall long before it was fashionable to do so, but, even so, the extent of the fall does come as a surprise.

Business cycles are like this, of course. Demand exceeds supply, price goes up, customers start looking at ways they can cut back, money is spent on ramping up supply, and it all goes into reverse. Price falls, we all relax, little money is invested, and the cycle begins again. The collapse of GM, Ford and Chrysler is symptomatic of this. Oil forced consumers to look for more fuel efficient cars, and demand for oil fell. Who knows, maybe if oil falls much further, those massive pick up trucks may come back into fashion.

Whether this is good news for the long-term, however, remains to be seen. It seems that once the global economy starts expanding again, oil supply will fall a long way off demand and its price will rocket. This is why many say that in the longer-term oil will go back up in price.

It does not have to be that way. There are alternatives out there. If governments were to spend their money on developing renewable sources of energy, and creating jobs in these sectors that could provide economic prosperity in the future, instead of subsidizing yesterday’s industries, it is quite possible we could see the emergence of a new world, in which for the first time since industrialization, oil is of minor importance.

As for the currencies, it does seem that the graphs provide quite surprising findings.

Sure, the pound is down against the dollar, but only to the kind of levels seen in 2002 and again in 1993. Both of those occasions came during the UK’s longest-ever run of economic growth.

The danger, of course, is that sterling continues to fall. There has to be a strong chance now of much bigger falls in the pound in coming weeks. If things do indeed turn out that way, it may then be impossible for the Bank of England to cut rates to the extent people are anticipating.

At face value, things are upside down right now on the currency markets. Sterling is doing badly because the prospects for the UK are so poor. Yet the prospects for the US economy are just as bad.

It is quite bizarre, really. Money is flowing into the US. The yield on US treasury bills is getting ridiculously low because, right now, safety is the overriding priority. So, people put their money into an economy which is virtually on its knees.

But what the global economy really needs is to see a certain re-balance: for the US to consume less, and for most of the rest of the world to consume more. For as long as the dollar keeps going up, this is unlikely to happen, which is why the world really does need to see some kind of new system for international exchange – a Bretton Woods II – although if this ever will happen remains open to doubt. There doesn’t seem to be anyone with the vision, the economic insight, and the charisma required to create such an international consensus. The world really needs to see some kind of hybrid of Barack Obama and John Maynard Keynes. Maybe, just maybe, an Obama–Paul Volcker double act could provide that fix.

So, which way next then for equities? There seem to be two schools of thought. To find out what they are, read the next article .

©2008 Investment and Business News. All Rights Reserved.

Is that analysis right?

This morning, CNNMoney quoted Phil Orlando, chief equity market strategist at Federated Investors, as saying: “Typically in a recession, the stock market bottoms when it perceives the slowdown is about halfway or three-quarters of the way through. Investors decided they’ve had enough and start pushing stocks higher before the news improves. But this time around, investors will need to see the evidence first.”

Meanwhile, in an article on the Interactive Investor site, Ken Fisher of Fisher Investments argued: “Bear markets arrive when investors run to the sidelines because things seem bad without potential redemption – basic human nature causes many to rationalise a way to believe misery will endure and progress remain dormant forever. These same folk end up missing the initial surge of the next bull market. Fact is, today doesn’t much matter. Today’s fundamentals were priced in long ago. Markets constantly look way into the distant future – so should you.”

It is also true to say the value of companies projecting profits for next year (p/e ratio) is on the cheap side.

According to data from Thomson Datastream and dug out by Capital Economics, the average p/e ratio for the Datastream All Share Index for the last 20 years is 16.3. Over the last ten years the average is 17.3; as of November 19 it was just 8.3.

But there is a snag with that way of looking at things. These p/e ratios are based on projected profits. If this economic crisis has been characterized by one theme throughout, it is that analysts, economists and forecasters have consistently underestimated how bad things were going to get.

Who is to really say what next year’s profits will be? They could end up being a lot lower than current projections.

The same argument applies to the belief markets recover before the economy does. Nobody really knows when the economy will recover.

Capital Economics has suggested that bond yields and equity prices have more or less been falling in tandem. And since interest rates are expected to fall further in the UK, one assumes bond yields have further to fall, too. Capital Economics also reckons the FTSE 100 is currently priced for a modest recession – and yet more and more people are saying the recession will be anything but modest.

On the other hand, share prices are supposed to be based on a prediction of all future dividends for a company, discounted to provide a net current value. Bad as this recession may be, the long-term potential of most businesses has surely not been affected by that much.

Warren Buffett once said: “My favourite time for holding a stock is forever.”

On the other hand, Keynes once said: “The market can remain irrational longer than you can remain solvent.”

If you take a long-term perspective, then it seems markets may well be cheap. But, how long is long term? Remember, the most famous thing Keynes said was: “In the long run we are all dead.”

©2008 Investment and Business News. All Rights Reserved.

Dig a little deeper, however, and a different picture emerges altogether. May we can trace today’s crisis back to 1999, or perhaps the year before.

If that is so, then either central banks and policy makers have played a blinder, creating boom where there should have been bust, or they have merely put the date back, and in the process are creating even more problems for the future.

1998 was the year we should have hit recession. That was the year after the Asia crisis, and the year of the Russian debt crisis and the collapse of the Hedge Fund Long Term Capital Management (LTCM). Many had predicted recession would follow.

But the IMF rushed in, and just about provided sufficient support to the economies for Asia and Russia to ensure they could repay their debt to the West, although not enough support to ensure the two economic regions didn’t suffer a nasty economic depression.

That was the year that Alan Greenspan got on the blower and managed to orchestrate a bail out of LTCM. Financial disaster was avoided, and banks barely got bruised.

Then in 1999 stock markets peaked – at least they peaked in the UK; the Dow Jones went on rising for two weeks into this decade.

The crash that followed really was nasty. Not quite 1929 proportions, but worse than anything else. It was even worse than in 1987, for this reason. In 1987 the recovery was swift. It took years for markets to recover from the combination of the dotcom crash, 9/11 and the collapse of WorldCom and Enron.

Be in no doubt, the events of that period would have been enough to throw the global economy into depression in any other era.

But this time there were two differences. First of all, debt surged. In the US in the year 2000, personal borrowing was just more than personal disposable income. In the years that followed, it increased by just short of half as much again, so that in 2007 personal borrowing in the US was 1.43 times personal disposable income. In the UK, the ratio went from 1.08 in 2000 to 1.71 in 2007.

In short, you can just about explain all growth in consumer spending since 2000 in terms of increased borrowing. This begs the question: if borrowing had not risen so high, would consumer spending have crashed – would the economies in the UK and US have hit a nasty recession?

At the same time there was the China and India effect. The rise of these two economic superpowers is having an enormous impact on the economy. For that reason, you can not really compare today’s economic events with the past; many of the factors involved are unique.

The rise of India and China also led to the problem of lack of global demand. In China, at one point savings hit 50 per cent of GDP.

Think about it, and then you can see that in a way the two issues described above, the rise in US and UK debt and the rise of India and China, were actually different facets of one phenomenon.

Today, stock indices are back to 2003 levels, but 2003 levels were themselves at 1997 levels.

So, we could say key Western stock markets have not really moved forward in 11 years. Maybe, the economy too needs to adjust, and fall to 1997 levels.

Except this: look at it from another point of view and it doesn’t make sense. Technological innovation over the last ten years has been something else. The world’s capacity to produce goods and services is clearly and easily at an-all time high.

It seems the real problem is this. For a decade or more the world has been moving out of balance. Debt has been too high in some parts of the world, too low elsewhere. The world needs to find its balance, and until that happens, bad news will mount.

But, the economic condition that matters is ability to produce – this is sky high.

The real problem today is one of lack of demand, and the solution really is a worldwide Keynesian push – it is just far from certain the US and UK should be doing this pushing.

©2008 Investment and Business News. All Rights Reserved.

But there is something upside down about all this.

In all, the IMF is lending $4.6bn. Just over half of this money is coming from fellow Nordic countries; the rest from the IMF pot.

In recent years, the Icelandic rate of interest has been high. This in turn encouraged the Icelanders to borrow from abroad, leaving them with an impossible loan once the krona crashed.

And what with banks borrowing from abroad too, the nation’s external financial requirement was 300 per cent of GDP.

It seems the great Iceland sale is now on. All must go. Banks must liquidate, and money is set to flee Iceland faster than water fleeing a melting iceberg.

Interest rates are now at 18 per cent, and it is thought they will stay that way.

It is a bit funny though, isn’t it? (That’s funny–peculiar, by the way.) The UK has similar problems, just not quite so severe. The answer to the UK’s problems, however, is the opposite – spend, cut rates, and spend some more.

©2008 Investment and Business News. All Rights Reserved.

©2008 Investment and Business News. All Rights Reserved.

©2008 Investment and Business News. All Rights Reserved.

©2008 Investment and Business News. All Rights Reserved.