Markets in almost Armageddon, what’s the way forward now?

Reader Writes:

With the markets in almost Armageddon can you shine any light of hope for the way forward?

Someone once told me ‘ there is no such thing as good or bad, it’s just your thinking that does that’. I am advised it was Shakespeare but that’s unlikely as I don’t like him.

Whilst the market and property was rising, I was neither happy nor sad. The current scenario is exactly as we wrote about two years ago and I am really quite emotionless about it. It makes sense that we should be where we are. The joys of torrid conditions like these are that they separate the men from the boys. Anomalies and poor operating methods are blown out of existence. Every year we have four seasons, all of which do a job, and markets only enjoy a storm every so often. Whilst this one is a bad one, the trees with the biggest roots will still be standing.

Understanding takes much of the concern out and I will endeavour to explain what I highlighted in July.

We have seen an unbelievable situation occur in the last year. On one side we had interest rates under pressure to remain high because of inflation, on the other we have a falling housing market, plummeting spending on the high street and a lack of spare capital.

Inflation, as we pointed out in June, was being caused by speculators on commodities. Many of those have since been burned by bad decisions. Speculators bought up large positions in commodities such as oil, copper, wheat etc. As a consequence these goods quadrupled in price. We then felt the result via increased inflation, but could do nothing about it.

I pointed out that inflation would die when these speculators felt they were close to the top. The reason for this is because many of them had bought their commodities on margin. This means they had borrowed up to £92 of every £100 they had invested in commodities.

If the price of commodities starts to fall, these deals will go pear shaped, and the loss would be exponential. And so there would come a time that commodities would be dumped, and that would be when the market was close to its peak. It has reached that in my view. As the commodity deals close, commodities like oil, wheat etc will collapse in price and as such inflation will fall off.

So much so, inflationary pressures could easily become deflationary problems. As a consequence, a reasonably forwardly thinking and well informed government might consider reducing interest rates as early as November to introduce capital into the system and free up spending. This is essential. I am pretty confident this will happen within the year and into next year there will be further sharp falls.

There will continue to be further pain with the tail end of a recession but that will wash its way out over the next 18 months.

Now why else might I be so confident? Well I may be cynical, but much noise exists from the government about how bad the situation currently is. One might think they are not being helpful with that noise. One might also think they are actually bringing forward the inevitable. ‘Get the recession over with now and ready for an election’ might actually be a good plan.

Now we all know that economical changes take a good 18 months to flow through the system. Eighteen months from the expected date of the election (May 2010) is actually November 2008. Great work Sherlock.

Remember everyone was explaining that oil was driven by supply and demand and hurricanes (I seem to remember we have been having these for years, even as far back as the wizard of Oz). We told you that investments in commodities in index traded strategies was at its highest in 2003 at $13b. In 2008 it reached $260b. A lot of this was bought on margin and when they are dumped expect the above to happen. Then you may have to vote for someone who followed our script!!

If you have an investment query call Peter on 0800 0112825, e-mail info@wwfp.net or take a look at our section on Investment.

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.

Tags: commodities, inflation, interest rates, markets, UK economy

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