The Week
The Week, 09/01/09
Belated Humbug
The Bank of England has made another grand gesture in reducing interest rates to their lowest level since the institution was founded more than 300 years ago. Surely it is now time to call a halt.
The latest reduction in base rate is by half a point to 1.5%, giving the opportunity for one more headline grabber next month. Surely there is no need for any more – indeed further reductions are likely to be counter-productive despite unreasonable accusations that the Bank has been timid.
We’ve all got the message that the economy, here as in the US and elsewhere, needed drastic action. Too many pieces of action can simply underline the dire state of the world and hit confidence.
Meanwhile savers are being punished while lenders are not always getting the benefits of the cuts. If we don’t save and borrowers are encouraged to run up more debts, Alistair Darling will indeed find himself printing more inflation-fuelling money.
Then what? The choice will be between runaway inflation and yanking interest rates back up in an unseemly fashion.
Now the siren voices, confident that the Bank can be bounced into zero interest rates are urging the Government to print more money. Quite how they think that will make a jot of difference is beyond me. Demand for cash creates the need to print more money, as in Zimbabwe. If there is no demand for cash then there is no point in printing any more.
Despite everything, the London Stock Market made an extraordinary return from the long Christmas weekend with six consecutive days of gains. The rally has understandably run out of steam as cautious investors baulk at pushing much above 4,400 points.
I took the view in the final quarter of 2007 that if we could get through January 2008 without too much bad news we would stand well for the rest of the year. We didn’t. Unperturbed, I took the same stance at the end of 2008 and I stick to my guns.
I believe that pretty well all the bad news from the banks is over (though that view is not shared universally). So much has been written off bank assets that we are likely to see assets written up rather than down in value in due course.
There is, admittedly, plenty of other bad news around. Apart from the High Street, where Marks & Spencer has joined the job cutters and Tesco has resorted to another round of price cutting, the motor industry is in pretty bad shape. President-elect Barrack Obama is welcome to try propping up the ailing US car giants.
Yet this January’s bad news is unfortunate rather than disastrous. We are talking about a downturn, sharp as it may be, rather than the end of the world as we know it. And this time round share prices are much lower than they were a year ago, so a lot more bad news has been priced in.
Investors should not get too carried away yet, though. The heavy falls in the first three months of last year were all recovered by June before the markets started to fall again. So a good start to 2009 could be undone just as easily. Nonetheless, it is fair to start believing that the stock market has finally bottomed and that we shall not see the lows of 2003 repeated.
Belated humbug
The festive season is over (I subscribe to the view that 12th night is undisputably January 5th) so please excuse a sour note on what was seen as a heart-warming Christmas story. A woman who could not afford presents for her family won £1m on the lottery in the week before Christmas.
How come she had £5 to blow on lottery tickets if she could not afford presents? Far from being a cause for celebration, this story demonstrates what is going wrong in this country and elsewhere. It will encourage more people who cannot manage their finances to behave with even less responsibility.
Primrose path
The well-trodden route that starts with irresponsibility and leads to disaster followed by suing other people remains as attractive as ever. The Icelandic Government persists with its fanciful notion of forcing the UK Government to pay for the excesses of its own banks and is threatening to take the case to the European Court.
Remember, the black hole that the Icelandic Government allowed the banks it should have been regulating to dig was so large that the country was forced to renege on its compensation scheme to UK savers.
Even its lawyers, perhaps mindful of the difficulty of getting paid their substantial fees in the event of failure, have advised against one planned legal campaign in this country. Let us hope that they also choose to discourage any other attempt to pursue this utterly unworthy cause.
Rodney Hobson
Author, Shares Made Simple and Small Companies, Big Profits