Noise Noise Noise
1 October 2008
Managing Director, Worldwide Financial Planning Writes:
You will perhaps remember an article I wrote in June this year. In it I put our current situation down to greed across the board. It has been most interesting that without fail, every financial commentator and fund manager I spoke to believed ...
1 October 2008
Managing Director, Worldwide Financial Planning Writes:
You will perhaps remember an article I wrote in June this year. In it I put our current situation down to greed across the board. It has been most interesting that without fail, every financial commentator and fund manager I spoke to believed that supply and demand was behind the rise in market prices of oil and food i.e. commodities. I must admit to feeling like a mouse swimming against a raging current with my belief that the whole thing was driven by speculation.
The key point about the article was that commodities had remained at their average level until in 2003, they boomed. They all soared by virtually the same price with oil popping from $30 to $147. Common sense says we either had a 400% increase in population (aliens I assume) or supply had fallen by 80%. Neither were true and I pointed to the truth - investments in commodity index traded strategies had stood at $13billion in 2003. That’s the highest it had ever been. The total amount invested at May 2008 was a staggering $260 billion.
Thankfully Michael Masters presented to the Senate and this may well have unearthed the problem we have today.
One of the problems we have in society is greed and the investment banks, with their swash buckling stupidity are now being bailed out because of the potential impact they may all have in terms of packs of cards. Is it really fair? Obviously not.
It is their excessive risk-taking that has caused this situation. They have caused havoc by betting short on stocks and vice versa. Betting short simply means they move a market by betting a stock will fall. This causes unrest and as such destabilises the market. It is not the same as buying and selling stocks and shares, this is normal market behaviour and whilst causing volatility in price movements, can do no harm.
The other side to this is long speculators i.e. those who bet on the price going up via derivatives. A derivative is basically a bet on the market going up and pays a multiple of the price movement. Worse still are those who leverage to invest. Leveraging is where they basically borrow cash to invest. This creates abnormal market conditions and can drive a price upwards unnecessarily.
The downside for those who bet up or down is that when it goes the wrong way, they lose a fortune. If you marry that to their investment into buying up mortgage debt that had only one future, the lot was due to come crashing down.
For those who didn’t believe it, the evidence is now firmly on your lap. Oil bombed from $147 to $90 (all the aliens must have gone home). On Monday last week, Royal Dutch Shell announced it had increased oil production - the response? Oil increased by near 25% the following day! Explain that one.
As always no supply and demand problem here. The nervousness that so much cash was being pumped into the market by the US government, which would have an inevitable downward effect on the dollar, scared investors into oil (a normal safe haven against a falling dollar).
This creates the same inflationary problems again. Is it time to now ban this type of speculative trading? Is it time to regulate these individuals and organisations into non existence? I really hope so.
At this point all the noise is positive - many of the big US banks are agreeing that greater regulation is now essential and the fact that the US government is pumping in cash gives them that power. Mr Darling has also agreed and this week could see the rest of the world shoring up the financial banks. The alternative is not pretty.
If you have a financial query call Peter on 0845 230 9876, e-mail info@wwfp.net
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.
Economic outlook for the next six months
29 August 2008Reader writes What is your outlook for the economy over the next six months to year in terms of growth?The 'economy' is a big subject. For some it could mean house prices, and for others it could mean the returns on their investments. I have covered these two ...
29 August 2008
Reader writes
What is your outlook for the economy over the next six months to year in terms of growth?
The 'economy' is a big subject. For some it could mean house prices, and for others it could mean the returns on their investments. I have covered these two over the last month so no need to for me to dwell other than saying that I see no reason for changing the view I had in 2003 that the property market was overheated then. We have five years of excess growth on top of that to somehow account for, coupled with less money in the consumer's pocket. Because of the 'denial' syndrome, property prices will remain flat until forced sales bring out the real price. The great public tends to 'anchor' themselves to a previous price of any asset and that is generally where most people go wrong. Anything that can get cheap can get a lot cheaper. I am very confident that will happen.
For me the key issues relate to inflation so let's look closer at that. We all know the Bank of England has a target inflation of between 2-3%. It's widely expected that this inflation could hit near 5% in September/October leaving the Bank the enjoyable task of scribbling letters to the Chancellor. Much will depend on how much of the energy costs are passed on by the utility companies.
Energy is one of the biggest issues driving inflation. The recent CPI report showed that gas, electricity and petrol accounted for 1.4% of the 3.8% inflation. Take out the impact of food prices and you will see that inflation comes down to a mere 1.6% so don’t eat, drink, drive or try and stay warm, and everything will be fine.1
I have recently covered the issues with the price of oil and food, and put more than 50% of its meteoric rise down to the institutions purchasing futures in them. Whilst much of the recent headlines continued to say that it was driven by demand, we pointed out that demand had been falling for some time, and that this 'noise' was effectively being created by the market makers. This has come out in the open over the last few weeks as I suspect those exposed to commodity futures have offloaded them and commodities have bombed.
I am pretty confident that this will have a collapse in the cost of inflation over the next six months and this will have a very positive impact on the economy over the next year. With the threat of higher inflation lifted, the Bank of England is in a better position to ease interest rates and inject cash into the economy, something which the housing market desperately needs, although I suspect this is too late.
The consumer does need an injection however. Over the last year they have seen the cost of goods rise by more than their incomes. Add in higher national insurance, the abolition of the 10% tax band and the disappearance of the upward only value of property, its easy to see why people are spending less - because they don’t have as much. It won't be long before that unrest makes its way through to higher wage demands, something the government will not want, the ugliest inflation - wage inflation.
With all that in mind, the consumer will be spending less, so costs have to come down and so we have another downward pressure on inflation. When all this comes through into real prices and in turn to inflationary figures I suspect it will be a surge, but it won't be without pain in between.
One thing to keep in mind that may give you comfort. According to JPMF, 67% of the UK's economy (where they will get most of their taxes from) relates to spending on the high street. They will need to stimulate that sooner or later and the only real way to do that is to drop the mortgage rate or taxes.
If you have a financial question call email Peter on 0845 230 9876 or e-mail info@wwfp.net
Source:-
1 Iggo's Insight
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.
Reader writes
What is your outlook for the economy over the next six months to year in terms of growth?
The 'economy' is a big subject. For some it could mean house prices, and for others it could mean the returns on their investments. I have covered these two over the last month so no need to for me to dwell other than saying that I see no reason for changing the view I had in 2003 that the property market was overheated then. We have five years of excess growth on top of that to somehow account for, coupled with less money in the consumer's pocket. Because of the 'denial' syndrome, property prices will remain flat until forced sales bring out the real price. The great public tends to 'anchor' themselves to a previous price of any asset and that is generally where most people go wrong. Anything that can get cheap can get a lot cheaper. I am very confident that will happen.
For me the key issues relate to inflation so let's look closer at that. We all know the Bank of England has a target inflation of between 2-3%. It's widely expected that this inflation could hit near 5% in September/October leaving the Bank the enjoyable task of scribbling letters to the Chancellor. Much will depend on how much of the energy costs are passed on by the utility companies.
Energy is one of the biggest issues driving inflation. The recent CPI report showed that gas, electricity and petrol accounted for 1.4% of the 3.8% inflation. Take out the impact of food prices and you will see that inflation comes down to a mere 1.6% so don’t eat, drink, drive or try and stay warm, and everything will be fine.1
I have recently covered the issues with the price of oil and food, and put more than 50% of its meteoric rise down to the institutions purchasing futures in them. Whilst much of the recent headlines continued to say that it was driven by demand, we pointed out that demand had been falling for some time, and that this 'noise' was effectively being created by the market makers. This has come out in the open over the last few weeks as I suspect those exposed to commodity futures have offloaded them and commodities have bombed.
I am pretty confident that this will have a collapse in the cost of inflation over the next six months and this will have a very positive impact on the economy over the next year. With the threat of higher inflation lifted, the Bank of England is in a better position to ease interest rates and inject cash into the economy, something which the housing market desperately needs, although I suspect this is too late.
The consumer does need an injection however. Over the last year they have seen the cost of goods rise by more than their incomes. Add in higher national insurance, the abolition of the 10% tax band and the disappearance of the upward only value of property, its easy to see why people are spending less - because they don’t have as much. It won't be long before that unrest makes its way through to higher wage demands, something the government will not want, the ugliest inflation - wage inflation.
With all that in mind, the consumer will be spending less, so costs have to come down and so we have another downward pressure on inflation. When all this comes through into real prices and in turn to inflationary figures I suspect it will be a surge, but it won't be without pain in between.
One thing to keep in mind that may give you comfort. According to JPMF, 67% of the UK's economy (where they will get most of their taxes from) relates to spending on the high street. They will need to stimulate that sooner or later and the only real way to do that is to drop the mortgage rate or taxes.
If you have a financial question call email Peter on 0845 230 9876 or e-mail info@wwfp.net
Source:-
1 Iggo's Insight
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.
Make the right investment decision and you'll smile in the sunshine...
30th July 2008
Managing Director, Worldwide Financial Planning, writes:
It was a long time ago that actions of investors surprised me anymore and the recent mistakes in property will probably repeat themselves time and time again in many forms. And that’s fine.
The basics of ‘buy when a market is under pressure’ ...
30th July 2008
Managing Director, Worldwide Financial Planning, writes:
It was a long time ago that actions of investors surprised me anymore and the recent mistakes in property will probably repeat themselves time and time again in many forms. And that’s fine.
The basics of ‘buy when a market is under pressure’ and ‘sell when everything around you says that you should buy more’ have never been more true.
Every paper and news bulletin I read eight months ago said we would avoid recession and that property was holding up. That’s noise and is unhelpful. We told you different.
Not one of those bulletins is now forecasting anything other than doom, and it's inevitable it will have its price as everyone tightens their belts in anticipation.
It is when all around you are losing their heads that great decisions can be made. Anyone can smile in the sunshine.
Just like we told everyone in this article to cool it two years ago, there will be a time to heat it up again. I am comfortable that markets are manipulated by the very wealthy, that’s how the great world game works. The key is in understanding it and to do that you must think like a very wealthy person who knows no boundaries.
Buying a television in December and trying to sell it back to the shops in February is not good business. Similarly buying any investment is all about buying at the right time, and to do that, you need to be able to understand what is happening around you.
A good read is ‘extraordinary popular delusions and the madness of crowds’. Why do people believe so collectively for absolutely no reason? It is in understanding this that you can easily see why a collective of 1+1 is often much less than two, and in effect can easily become zero.
Why in 1624 did everyone suffer from Tulip mania? If you can’t remember, ask your older brother. Tulips traded for more than gold. Now they don’t!
Not one person I know has fundamentally challenged the whole green story yet you are condemned for talking about it in anyway negative. A delusion is a hallucination or misunderstanding, and they are often there because we want them there – a fantasy.
Making good investment decisions is all about retaining your emotional intelligence like my Air South West pilot after we were whacked by lightening (not funny in the middle of a black storm cloud when you are being turfed around like a paper bag). He calmly advised ‘sorry about that ladies and gentlemen we appear to have been hit by lightening’. ‘Oh is that what it was’ I said to myself, ‘I thought someone had sneezed’.
We have a choice to see panic, anxiety, and all the stuff that makes your stomach churn. Your brain can go backwards and concern itself with the past and decisions you can’t change or you can look at what you can do with the future. Which is the better thought?
To the educated on any subject it’s all information, just information. Anything more than that is unhelpful.
My pilot knows the leading edge of his wing is slightly higher than the trailing edge, which causes the plane to force air downwards. He also knows his mate Isaac Newton says of motion, that every action causes an equal and opposite reaction i.e. whilst the plane is pushing air downwards, air is also sucking the plane up. What a doddle when you are in a storm!
If you learn one thing, is that for you to gain in any investment, there has to be an equal and opposite loss somewhere else. If you sell a car for £100 more than its worth, someone lost £100.
The investment world works just like that, and to win you need to make more right decisions than wrong. On that note I’ll reiterate my most common statement: there is no such thing as good or bad, it's just your thinking that does that.
If you would like to ask Peter about your investment portfolio call Peter on 0845 230 9876, e-mail info@wwfp.net
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.
Managing Director, Worldwide Financial Planning, writes:
It was a long time ago that actions of investors surprised me anymore and the recent mistakes in property will probably repeat themselves time and time again in many forms. And that’s fine.
The basics of ‘buy when a market is under pressure’ and ‘sell when everything around you says that you should buy more’ have never been more true.
Every paper and news bulletin I read eight months ago said we would avoid recession and that property was holding up. That’s noise and is unhelpful. We told you different.
Not one of those bulletins is now forecasting anything other than doom, and it's inevitable it will have its price as everyone tightens their belts in anticipation.
It is when all around you are losing their heads that great decisions can be made. Anyone can smile in the sunshine.
Just like we told everyone in this article to cool it two years ago, there will be a time to heat it up again. I am comfortable that markets are manipulated by the very wealthy, that’s how the great world game works. The key is in understanding it and to do that you must think like a very wealthy person who knows no boundaries.
Buying a television in December and trying to sell it back to the shops in February is not good business. Similarly buying any investment is all about buying at the right time, and to do that, you need to be able to understand what is happening around you.
A good read is ‘extraordinary popular delusions and the madness of crowds’. Why do people believe so collectively for absolutely no reason? It is in understanding this that you can easily see why a collective of 1+1 is often much less than two, and in effect can easily become zero.
Why in 1624 did everyone suffer from Tulip mania? If you can’t remember, ask your older brother. Tulips traded for more than gold. Now they don’t!
Not one person I know has fundamentally challenged the whole green story yet you are condemned for talking about it in anyway negative. A delusion is a hallucination or misunderstanding, and they are often there because we want them there – a fantasy.
Making good investment decisions is all about retaining your emotional intelligence like my Air South West pilot after we were whacked by lightening (not funny in the middle of a black storm cloud when you are being turfed around like a paper bag). He calmly advised ‘sorry about that ladies and gentlemen we appear to have been hit by lightening’. ‘Oh is that what it was’ I said to myself, ‘I thought someone had sneezed’.
We have a choice to see panic, anxiety, and all the stuff that makes your stomach churn. Your brain can go backwards and concern itself with the past and decisions you can’t change or you can look at what you can do with the future. Which is the better thought?
To the educated on any subject it’s all information, just information. Anything more than that is unhelpful.
My pilot knows the leading edge of his wing is slightly higher than the trailing edge, which causes the plane to force air downwards. He also knows his mate Isaac Newton says of motion, that every action causes an equal and opposite reaction i.e. whilst the plane is pushing air downwards, air is also sucking the plane up. What a doddle when you are in a storm!
If you learn one thing, is that for you to gain in any investment, there has to be an equal and opposite loss somewhere else. If you sell a car for £100 more than its worth, someone lost £100.
The investment world works just like that, and to win you need to make more right decisions than wrong. On that note I’ll reiterate my most common statement: there is no such thing as good or bad, it's just your thinking that does that.
If you would like to ask Peter about your investment portfolio call Peter on 0845 230 9876, e-mail info@wwfp.net
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.
The Shell Oil Strike
27th June 2008
Managing Director, Worldwide Financial Planning, writes:
I can’t remember who said it, but it wasn’t me:
‘If inflation continues the two-car garage will be replaced by the two-family garage’.
This is a stark reminder as the impact of inflation makes its way back through to the picket line.
I was ...
27th June 2008
Managing Director, Worldwide Financial Planning, writes:
I can’t remember who said it, but it wasn’t me:
‘If inflation continues the two-car garage will be replaced by the two-family garage’.
This is a stark reminder as the impact of inflation makes its way back through to the picket line.
I was most amused by the rationale offered from the Shell tankers union, explaining why I wasn’t able to buy any diesel, as all the forecourts around me dried up.
I bumped into one of the carers for my mother in law who asked what she could do with no fuel. How could she get to look after people who were effectively bed ridden and couldn’t be transferred without her? The feeling of discontent grows and grows, and I wonder how the government will score themselves against their target of managing an economy.
In the meantime the poor shell drivers asked for a minimum wage of £36,000. Really. I suspect there would be a queue outside their picket line for jobs! They were offered a 6% rise on all elements of pay and yet they still decided to strike. Amazing.
The reason given was that Shell made lots of money and they should see some of it. What a pile of nonsense. If Shell made a loss, would the staff remortgage and inject the capital into Shell with no chance of capital return?
They should be paid what they are due (which may or may not be more than 6%) and what Shell makes is irrelevant. The national officer carried on with his view that they deserved extra money because of the extra cost of food and fuel in the world. What a barrel of laughter he is. So in return he cuts off supply, thereby driving up demand and catapulting prices.
World inflation is not Shell’s problem, it’s the problem of mismanaged economies from borrowing too much, a weakening dollar and as last week’s column pointed out, a 1900% increase in the buying of commodities by large financial institutions over the last five years. This has catapulted the cost of food and fuel through the roof. To blame Shell, is at best irresponsible.
We all need to remember that oil companies are under as much pressure to make money as others and they have a responsibility to run their business and be accountable to shareholders.
If you look closely at the price of fuel, you may see that in April alone 58% of the price of fuel is down to government taxation. Without tax, the total cost of a litre would be 48.8p.
Let’s also remember it is conservatively estimated that 60% of the price of oil today is the fault of commodity traders. If that’s the case, petrol would have come down to c46.4p and if the government took its tax off we could be down to 19.49p. Aaaah what a simple life it would be without governments and capitalists.
Interestingly for the benefit of the Union’s national officer, pre tax cost of fuel in the UK is the 3rd lowest in all EU states. When you add the UK’s tax onto it, it’s the 19th lowest. Food for thought.
This scenario is likely to continue whilst nothing is done about the commodity traders who have hoarded these assets over the last five years. Remember the total amount allocated to commodity index trading strategies in 2003 was a mere $13 billion. It’s $260 billion now. Once this disappears, the inflation risk will disappear and with it the threat on interest rates and normality will resume. In the meantime many will dine on it driving up their wage demands for reasons that have as much to do with Shell as knitting jelly.
Expect more of the same in the way of strikes though. People have been allowed to believe their house was a never ending ATM and this debt will make its way through to many more wage related inflationary demands. It’s all a great game.
If you have a financial query call Peter on 0845 230 9876, e-mail info@wwfp.net
Source:
Guardian
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.
Managing Director, Worldwide Financial Planning, writes:
I can’t remember who said it, but it wasn’t me:
‘If inflation continues the two-car garage will be replaced by the two-family garage’.
This is a stark reminder as the impact of inflation makes its way back through to the picket line.
I was most amused by the rationale offered from the Shell tankers union, explaining why I wasn’t able to buy any diesel, as all the forecourts around me dried up.
I bumped into one of the carers for my mother in law who asked what she could do with no fuel. How could she get to look after people who were effectively bed ridden and couldn’t be transferred without her? The feeling of discontent grows and grows, and I wonder how the government will score themselves against their target of managing an economy.
In the meantime the poor shell drivers asked for a minimum wage of £36,000. Really. I suspect there would be a queue outside their picket line for jobs! They were offered a 6% rise on all elements of pay and yet they still decided to strike. Amazing.
The reason given was that Shell made lots of money and they should see some of it. What a pile of nonsense. If Shell made a loss, would the staff remortgage and inject the capital into Shell with no chance of capital return?
They should be paid what they are due (which may or may not be more than 6%) and what Shell makes is irrelevant. The national officer carried on with his view that they deserved extra money because of the extra cost of food and fuel in the world. What a barrel of laughter he is. So in return he cuts off supply, thereby driving up demand and catapulting prices.
World inflation is not Shell’s problem, it’s the problem of mismanaged economies from borrowing too much, a weakening dollar and as last week’s column pointed out, a 1900% increase in the buying of commodities by large financial institutions over the last five years. This has catapulted the cost of food and fuel through the roof. To blame Shell, is at best irresponsible.
We all need to remember that oil companies are under as much pressure to make money as others and they have a responsibility to run their business and be accountable to shareholders.
If you look closely at the price of fuel, you may see that in April alone 58% of the price of fuel is down to government taxation. Without tax, the total cost of a litre would be 48.8p.
Let’s also remember it is conservatively estimated that 60% of the price of oil today is the fault of commodity traders. If that’s the case, petrol would have come down to c46.4p and if the government took its tax off we could be down to 19.49p. Aaaah what a simple life it would be without governments and capitalists.
Interestingly for the benefit of the Union’s national officer, pre tax cost of fuel in the UK is the 3rd lowest in all EU states. When you add the UK’s tax onto it, it’s the 19th lowest. Food for thought.
This scenario is likely to continue whilst nothing is done about the commodity traders who have hoarded these assets over the last five years. Remember the total amount allocated to commodity index trading strategies in 2003 was a mere $13 billion. It’s $260 billion now. Once this disappears, the inflation risk will disappear and with it the threat on interest rates and normality will resume. In the meantime many will dine on it driving up their wage demands for reasons that have as much to do with Shell as knitting jelly.
Expect more of the same in the way of strikes though. People have been allowed to believe their house was a never ending ATM and this debt will make its way through to many more wage related inflationary demands. It’s all a great game.
If you have a financial query call Peter on 0845 230 9876, e-mail info@wwfp.net
Source:
Guardian
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.
Oil and Food Inflation We know who has the silver paintbrush for this cloud
23rd June 2008
Managing Director, Worldwide Financial Planning writes:
At no point in the past has there been greater confusion about the future than today. I will attempt to explain why we are in such a state of flux by explaining the real culprit behind rising food and fuel. Stay with me ...
23rd June 2008
Managing Director, Worldwide Financial Planning writes:
At no point in the past has there been greater confusion about the future than today. I will attempt to explain why we are in such a state of flux by explaining the real culprit behind rising food and fuel. Stay with me on this one.
The ‘bong’ news headlines brimmed with despair last week with reports about the price of oil. The world is doomed it would appear, or is it?
On one side we have driving inflation caused by issues we cannot control (food and energy), and on the other side we have a plummeting economy with house prices taking a bashing, and the Times reporting that house completions dropped to a 30 year low.
The news now reports that interest rates will have to rise to curb inflation! Are you really suggesting that I will eat less or drive less because you take money out of my pocket through interest rate rises?
Whilst dealing with any matter I have always believed that if something does not make sense, it is either wrong or I am stupid. I always investigate both options.
The real villain is purported to be two issues, namely the ‘credit crunch’ and food/energy costs driven up by excessive demand.
Nothing could be further from the truth, and it is very concerning why nothing is being done about it.
For years we are being told that the soaring price of oil relates to fighting in Iraq (caused by who), attacks on oil facilities in Nigeria, labour issues in Norway and Asian demand (China appears to be taking most of the flack here). More scaremongering appeared last week with the concerns of the tanker driver strikes driving prices up.
Goldman Sachs predicted $200 per barrel of oil which has caused immense concern as various journalists actually believed it and printed it. (1) Whilst it could easily become a self fulfilling prophecy, it was interesting to note that Goldman Sachs has a neutral weighting on some of its oil holdings like Exxon Mobile, which doesn’t follow that they believe oil will go to $200. Why miss out on that gain? Something is not making sense.
The cost of an asset is driven by supply and demand. If supply is flat, demand must be increasing for the price to go up. If supply is interrupted and demand stays the same or goes up, the price goes up, and of course there is the counter argument to all of this.
So let’s look closer at supply and demand to see if this accounts for the price rises.
According to CNN, brimming oil tankers sit off the coast of Iran and Louisiana. The strategic petroleum reserve has been filled, demand is flat and the U.S. has cut back dramatically on energy consumption. The Department of Transportation shows figures in March have the steepest decline in driving miles ever recorded in history. Americans drove 4.3% less miles than the year before (11 billion miles, or a very long way whatever way you look at it)(3). Construction across the western world is reducing. Gasoline demand in the UK fell a massive 7% in April against last year.(2)
So we know that supply is fine (in fact we have an abundance), and demand is falling!
What can possibly be driving oil upwards? A falling dollar, buying on margin and also speculation are the key drivers.
Either of these three could be crippling the world and in turn could starve the poorest countries to death. Let’s investigate:
There is no doubt the dollar has taken a bashing with no real blame being taken by Mr Bush and his mates. Bush took over a national debt of $5.8 trillion which is now over $9 trillion –great work.(4) This will continue putting pressure on the dollar. Comments from Bush one week of ‘the economy is in good shape’ followed the following week by Bernanke stating that the economy will get worse before it gets better, will do little to make the dollar attractive.
Oil (denominated in Dollars) is another alternative to the dollar as an investment and whilst the dollar is weak, oil will remain attractive, forcing the price upwards. Ok so that’s a reason for upward price but not the dramatic rise we have seen.
There are two key issues that are driving the price upward and they are buying on margin and also index speculators.
The average world price of oil since 1869 has been $21.66. The average since 1970 has been $32.23. (5) On few occasions since this period has the price risen above the average, in fact it’s only the late 70’s that is notable with the remainder of time being flat. The 70’s can easily be put down to the Arab oil embargo, the Iranian revolution along with the Iran/Iraq war and US price controls kicking in.
The graph, as I said, is virtually flat. That is of course until we get to 2003 when it rockets from $30 to the high we saw last week of $139.
If I look at one other chart the graph is alarming. That chart is the problem – the purchasing of commodities. The purchase of commodities (of which oil is one) has been greater in the last five years than the rest of history. Wait for this. In 2003 the amount allocated in total to index trading strategies (buying commodities) was $13 billion. This is the highest it has been. Since then the total amount grew by $247 billion. Read that again.(6)
The graph is a straight line upward which is almost identical to the price of oil. Interestingly the amount of WTI crude oil futures rose 439% over the last 5.25 years and the price of oil rose by 363%..(6) It’s easy to see the comparison.
The biggest concern however is the type of index trader. The normal every day trader buys and sells shares and commodities and creates liquidity so that is normal market conditions. The institutional investor above is dangerous in that they buy and hold. They are effectively hoarding these assets and starving the world, driving the cost of living through the roof. The culprits are US corporate and government pension funds, sovereign wealth funds, university endowment funds and other institutional investors.(6)
Could it be that the latter are banks?
China has had the blame for demand increases. Really? According to the DOE the annual demand for petroleum has increased by 1.88 million barrels to 2.8 million. This is a total increase of 920 million. Index speculators demand has been broadly equal at 848 million. Their demand is almost equal to the entire demand of China, but they are hoarding it.(6)
Food is the same, with index speculators having effectively stockpiled enough wheat to supply every American with bread, pasta and baked goods for two years and enough corn for one. The numbers do not make economical sense. Once again, I am either stupid or it is wrong.
Michael Masters delivered a written testimony before the Committee on Homeland Security and Governmental Affairs, US Senate on the 20th May 2008.
In it, he damned the situation, and explained we were heading for disasters in terms of starvation and food riots. He explained that the purchase of commodities should be heavily regulated. He highlighted that the problem had been made created by the commodity futures trading commission (CFTC) loophole.
In 1936 when Congress passed the commodity exchange act they did so with the understanding that the market could not be dominated by speculators. Unfortunately they have since slipped up. They granted Wall Street banks an exemption from speculative position limits (basically no restriction on what bets they make). This loophole has created others so if hedge funds for example want to take a position beyond their limits in oil/wheat etc they can enter a swap with a Wall Street bank who will do it.
The CFTC classifies futures contracts purchased through the Swaps loophole as ‘commercial’ rather than non commercial, thereby distorting the data and opening the door for unlimited speculator activity. The results are all there to see. Failing economies are sat between struggling house prices, poor spending on the high street, record debt and the threat of higher interest rates because of inflation driven by the outside forces above.
Masters goes on to outline the steps needed to be taken to put an end to this before its too late: Prohibit the commodity index replication strategies within pensions; Close the Swaps loophole to force everyone to have clear position limits they can take; The CFTC should be compelled to reclassify all the positions in their commercial category, thereby providing transparency to see who is actually trading.
If they don’t, the average investor will be carried along by it all, will assist with the momentum by purchasing more, and in turn drive the market up. I suspect it will be just in time for another twaddle excuse to be used to plummet the price shortly after the larger investment institutions have put on their designer parachutes and bailed out.
As a consequence oil and the food costs will plummet and normality will resume. George Soros, the billionaire financier has already condemned the institutional investors following a ‘craze’.
In the last few days talk of higher inflation in the US has been met with the view that interest rates will need to rise thereby strengthening the dollar and weakening oil.
Notwithstanding that there is no ethical or moral reason why strong steps should not be taken to regulate the above arrangements immediately so how long will it take congress to carry it out. How long indeed.
If you have a query on investments call Peter on 0845 230 9876 or e-mail info@wwfp.net.
Sources
(1) Market watch
(2) Yahoo news
(3) CNN
(4) Washington post
(5) WTRG
(6) Michael masters
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.
Managing Director, Worldwide Financial Planning writes:
At no point in the past has there been greater confusion about the future than today. I will attempt to explain why we are in such a state of flux by explaining the real culprit behind rising food and fuel. Stay with me on this one.
The ‘bong’ news headlines brimmed with despair last week with reports about the price of oil. The world is doomed it would appear, or is it?
On one side we have driving inflation caused by issues we cannot control (food and energy), and on the other side we have a plummeting economy with house prices taking a bashing, and the Times reporting that house completions dropped to a 30 year low.
The news now reports that interest rates will have to rise to curb inflation! Are you really suggesting that I will eat less or drive less because you take money out of my pocket through interest rate rises?
Whilst dealing with any matter I have always believed that if something does not make sense, it is either wrong or I am stupid. I always investigate both options.
The real villain is purported to be two issues, namely the ‘credit crunch’ and food/energy costs driven up by excessive demand.
Nothing could be further from the truth, and it is very concerning why nothing is being done about it.
For years we are being told that the soaring price of oil relates to fighting in Iraq (caused by who), attacks on oil facilities in Nigeria, labour issues in Norway and Asian demand (China appears to be taking most of the flack here). More scaremongering appeared last week with the concerns of the tanker driver strikes driving prices up.
Goldman Sachs predicted $200 per barrel of oil which has caused immense concern as various journalists actually believed it and printed it. (1) Whilst it could easily become a self fulfilling prophecy, it was interesting to note that Goldman Sachs has a neutral weighting on some of its oil holdings like Exxon Mobile, which doesn’t follow that they believe oil will go to $200. Why miss out on that gain? Something is not making sense.
The cost of an asset is driven by supply and demand. If supply is flat, demand must be increasing for the price to go up. If supply is interrupted and demand stays the same or goes up, the price goes up, and of course there is the counter argument to all of this.
So let’s look closer at supply and demand to see if this accounts for the price rises.
According to CNN, brimming oil tankers sit off the coast of Iran and Louisiana. The strategic petroleum reserve has been filled, demand is flat and the U.S. has cut back dramatically on energy consumption. The Department of Transportation shows figures in March have the steepest decline in driving miles ever recorded in history. Americans drove 4.3% less miles than the year before (11 billion miles, or a very long way whatever way you look at it)(3). Construction across the western world is reducing. Gasoline demand in the UK fell a massive 7% in April against last year.(2)
So we know that supply is fine (in fact we have an abundance), and demand is falling!
What can possibly be driving oil upwards? A falling dollar, buying on margin and also speculation are the key drivers.
Either of these three could be crippling the world and in turn could starve the poorest countries to death. Let’s investigate:
There is no doubt the dollar has taken a bashing with no real blame being taken by Mr Bush and his mates. Bush took over a national debt of $5.8 trillion which is now over $9 trillion –great work.(4) This will continue putting pressure on the dollar. Comments from Bush one week of ‘the economy is in good shape’ followed the following week by Bernanke stating that the economy will get worse before it gets better, will do little to make the dollar attractive.
Oil (denominated in Dollars) is another alternative to the dollar as an investment and whilst the dollar is weak, oil will remain attractive, forcing the price upwards. Ok so that’s a reason for upward price but not the dramatic rise we have seen.
There are two key issues that are driving the price upward and they are buying on margin and also index speculators.
The average world price of oil since 1869 has been $21.66. The average since 1970 has been $32.23. (5) On few occasions since this period has the price risen above the average, in fact it’s only the late 70’s that is notable with the remainder of time being flat. The 70’s can easily be put down to the Arab oil embargo, the Iranian revolution along with the Iran/Iraq war and US price controls kicking in.
The graph, as I said, is virtually flat. That is of course until we get to 2003 when it rockets from $30 to the high we saw last week of $139.
If I look at one other chart the graph is alarming. That chart is the problem – the purchasing of commodities. The purchase of commodities (of which oil is one) has been greater in the last five years than the rest of history. Wait for this. In 2003 the amount allocated in total to index trading strategies (buying commodities) was $13 billion. This is the highest it has been. Since then the total amount grew by $247 billion. Read that again.(6)
The graph is a straight line upward which is almost identical to the price of oil. Interestingly the amount of WTI crude oil futures rose 439% over the last 5.25 years and the price of oil rose by 363%..(6) It’s easy to see the comparison.
The biggest concern however is the type of index trader. The normal every day trader buys and sells shares and commodities and creates liquidity so that is normal market conditions. The institutional investor above is dangerous in that they buy and hold. They are effectively hoarding these assets and starving the world, driving the cost of living through the roof. The culprits are US corporate and government pension funds, sovereign wealth funds, university endowment funds and other institutional investors.(6)
Could it be that the latter are banks?
China has had the blame for demand increases. Really? According to the DOE the annual demand for petroleum has increased by 1.88 million barrels to 2.8 million. This is a total increase of 920 million. Index speculators demand has been broadly equal at 848 million. Their demand is almost equal to the entire demand of China, but they are hoarding it.(6)
Food is the same, with index speculators having effectively stockpiled enough wheat to supply every American with bread, pasta and baked goods for two years and enough corn for one. The numbers do not make economical sense. Once again, I am either stupid or it is wrong.
Michael Masters delivered a written testimony before the Committee on Homeland Security and Governmental Affairs, US Senate on the 20th May 2008.
In it, he damned the situation, and explained we were heading for disasters in terms of starvation and food riots. He explained that the purchase of commodities should be heavily regulated. He highlighted that the problem had been made created by the commodity futures trading commission (CFTC) loophole.
In 1936 when Congress passed the commodity exchange act they did so with the understanding that the market could not be dominated by speculators. Unfortunately they have since slipped up. They granted Wall Street banks an exemption from speculative position limits (basically no restriction on what bets they make). This loophole has created others so if hedge funds for example want to take a position beyond their limits in oil/wheat etc they can enter a swap with a Wall Street bank who will do it.
The CFTC classifies futures contracts purchased through the Swaps loophole as ‘commercial’ rather than non commercial, thereby distorting the data and opening the door for unlimited speculator activity. The results are all there to see. Failing economies are sat between struggling house prices, poor spending on the high street, record debt and the threat of higher interest rates because of inflation driven by the outside forces above.
Masters goes on to outline the steps needed to be taken to put an end to this before its too late: Prohibit the commodity index replication strategies within pensions; Close the Swaps loophole to force everyone to have clear position limits they can take; The CFTC should be compelled to reclassify all the positions in their commercial category, thereby providing transparency to see who is actually trading.
If they don’t, the average investor will be carried along by it all, will assist with the momentum by purchasing more, and in turn drive the market up. I suspect it will be just in time for another twaddle excuse to be used to plummet the price shortly after the larger investment institutions have put on their designer parachutes and bailed out.
As a consequence oil and the food costs will plummet and normality will resume. George Soros, the billionaire financier has already condemned the institutional investors following a ‘craze’.
In the last few days talk of higher inflation in the US has been met with the view that interest rates will need to rise thereby strengthening the dollar and weakening oil.
Notwithstanding that there is no ethical or moral reason why strong steps should not be taken to regulate the above arrangements immediately so how long will it take congress to carry it out. How long indeed.
If you have a query on investments call Peter on 0845 230 9876 or e-mail info@wwfp.net.
Sources
(1) Market watch
(2) Yahoo news
(3) CNN
(4) Washington post
(5) WTRG
(6) Michael masters
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.
The State of the Economy...what would Albert say?
30 April 2008
Managing Director, Worldwide Financial Planning, Writes:
Albert Einstein once said: "Only two things in life are certain, the universe is infinite and human stupidity, and I'm not sure about the former".
It would be more than easy to be cynical about the current state of the economy. We all ...
30 April 2008
Managing Director, Worldwide Financial Planning, Writes:
Albert Einstein once said: "Only two things in life are certain, the universe is infinite and human stupidity, and I\'m not sure about the former".
It would be more than easy to be cynical about the current state of the economy. We all know the bank of England can control rates, and in turn have more than an immediate impact on the economy.
In 2005 it was so obvious to all but the sleeping, that house prices had gone too far. A little blip of a rise in rates slowed the market for a second and off it went again.
The bank did not react with the necessary rate rises. Instead, house prices carried on well past where they were reasonable. The result is a massive demand for cash as consumers believed they were rich, and borrowed with the bank\'s confidence.
This expansion means they all need more income to service the debt, and with the demand for resources soaring, inflation has taken everything out of control.
The recent (far too late) increase in interest rates has meant that people have less to spend, with record debt, and the banks\' poor lending processes (blamed on a person called credit crunch) have now dried up money supply. The money supply has led to many people not being able to borrow, and as such has dried up demand for property. This, along with the increased supply has meant that you have falling house prices.
This has been coming for some time as we reported twelve months ago that completions were plummeting. Falling house prices, added to heavy debt means that people no longer have the \'fantasised\' wealth in their properties. If they don’t they don’t spend anymore. If they don’t spend anymore, prices on the high street fall. 67% of the UK\'s GDP comes from spending on the high street.1 If that GDP takes a hiding, the government won\'t get the taxes it needs to spend. What are the potential solutions there? Higher taxes are one of them. In the meantime the pretty-much uncontrollable inflation caused by soaring food and oil prices takes its toll on downward spiralling spending.
On the high street things are taking their toll.
Many suggest that the UK is safer from recession than the US because of our high employment rate. Nice story. If people are not buying goods and building homes, there is no need to make them or sell them, and there is no need to keep the people to do the jobs. The building industry is braced for thousands of job losses after Persimmon, the country\'s largest house builder said it would stop building on new sites until conditions improved.
In the meantime, on one hand oil and costs are driving industry\'s expenses up, whilst on the other, retailers were being forced to cut costs aggressively due to weakening demand.
None of this has been helped by the arrogance of lenders. They are choosing, (after irresponsible lending and poor decisions regarding their investments into disastrous collaterised debt obligations) to pass on the savings to borrowers. Perhaps, when they are dumped with thousands of properties with negative equity they may rue this opportunity.
It is generally believed that the £50 billion offered by Alastair Darling will assist, but in fairness the market has not responded and that tells a story. They know there is more news to come out. If the banks don’t pass the savings on, the momentum will only lead to negative sentiment, leading in turn to negative momentum. Given how far out of kilter the housing market is, it may soon be like stopping a runaway bull with five week old cucumber. But then we all have the ability to make great decisions and let\'s hope Gordon can get the rabbit out. Speaking of great decisions Gordon will probably have forgotten he sold 400 tonne of gold reserves back in 1999 for an average price of $275. It is priced today at $890. That means Gordon has missed out on 223% or in monetary terms a loss of $8,677,158,000.2 Wonder what Albert thinks.
Source 1 Times
Source 2 Kitco.com
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net.
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.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Managing Director, Worldwide Financial Planning, Writes:
Albert Einstein once said: "Only two things in life are certain, the universe is infinite and human stupidity, and I\'m not sure about the former".
It would be more than easy to be cynical about the current state of the economy. We all know the bank of England can control rates, and in turn have more than an immediate impact on the economy.
In 2005 it was so obvious to all but the sleeping, that house prices had gone too far. A little blip of a rise in rates slowed the market for a second and off it went again.
The bank did not react with the necessary rate rises. Instead, house prices carried on well past where they were reasonable. The result is a massive demand for cash as consumers believed they were rich, and borrowed with the bank\'s confidence.
This expansion means they all need more income to service the debt, and with the demand for resources soaring, inflation has taken everything out of control.
The recent (far too late) increase in interest rates has meant that people have less to spend, with record debt, and the banks\' poor lending processes (blamed on a person called credit crunch) have now dried up money supply. The money supply has led to many people not being able to borrow, and as such has dried up demand for property. This, along with the increased supply has meant that you have falling house prices.
This has been coming for some time as we reported twelve months ago that completions were plummeting. Falling house prices, added to heavy debt means that people no longer have the \'fantasised\' wealth in their properties. If they don’t they don’t spend anymore. If they don’t spend anymore, prices on the high street fall. 67% of the UK\'s GDP comes from spending on the high street.1 If that GDP takes a hiding, the government won\'t get the taxes it needs to spend. What are the potential solutions there? Higher taxes are one of them. In the meantime the pretty-much uncontrollable inflation caused by soaring food and oil prices takes its toll on downward spiralling spending.
On the high street things are taking their toll.
Many suggest that the UK is safer from recession than the US because of our high employment rate. Nice story. If people are not buying goods and building homes, there is no need to make them or sell them, and there is no need to keep the people to do the jobs. The building industry is braced for thousands of job losses after Persimmon, the country\'s largest house builder said it would stop building on new sites until conditions improved.
In the meantime, on one hand oil and costs are driving industry\'s expenses up, whilst on the other, retailers were being forced to cut costs aggressively due to weakening demand.
None of this has been helped by the arrogance of lenders. They are choosing, (after irresponsible lending and poor decisions regarding their investments into disastrous collaterised debt obligations) to pass on the savings to borrowers. Perhaps, when they are dumped with thousands of properties with negative equity they may rue this opportunity.
It is generally believed that the £50 billion offered by Alastair Darling will assist, but in fairness the market has not responded and that tells a story. They know there is more news to come out. If the banks don’t pass the savings on, the momentum will only lead to negative sentiment, leading in turn to negative momentum. Given how far out of kilter the housing market is, it may soon be like stopping a runaway bull with five week old cucumber. But then we all have the ability to make great decisions and let\'s hope Gordon can get the rabbit out. Speaking of great decisions Gordon will probably have forgotten he sold 400 tonne of gold reserves back in 1999 for an average price of $275. It is priced today at $890. That means Gordon has missed out on 223% or in monetary terms a loss of $8,677,158,000.2 Wonder what Albert thinks.
Source 1 Times
Source 2 Kitco.com
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net.
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.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Are we heading into a recession?
25 April 2008
Reader Writes:
Do you believe we are going into a recession and what might this mean for us?
First of all let me define ‘recession’. In real terms it means a downturn but for the purposes of an economy, it is defined as two quarters of negative growth.
A ...
25 April 2008
Reader Writes:
Do you believe we are going into a recession and what might this mean for us?
First of all let me define ‘recession’. In real terms it means a downturn but for the purposes of an economy, it is defined as two quarters of negative growth.
A recession can be short-lived or can be more dramatic and depressive. Up to now we have lived in a booming environment with lots of cash to borrow at low rates with no negative issues in terms of repayment.
The public were fed this new ‘learned truth’ of wealth and they believed it. The worry is that many will not have prepared for a downturn and the effects could be dramatic.
Do I believe we are heading for recession? Yes I do, and I believe central banks have been too slow to avoid it. One of the leading financial fund managers in the UK, Philip Gibbs commented back in 2007 that rates need to fall and fall soon. He commented that if they did they could avert a serious downturn, and that as time went by the central banks were guilty of doing too little too late.
He also commented there was a serious problem, and if they were not aggressive with rates it could be a ‘potential bloodbath’. Central banks are seeing it slightly differently and with their pipes, slippers and rocking chairs, they ease closer to recession, blinded by their concerns of inflation.
Whilst inflation is an issue, it could soon not become one, as the high street crumbles. I was always told to watch who is in the pubs. ‘In difficult times or good, people always drink beer’, my analyst friend used to say. It is very notable there is less beer being drunk, as many pubs resemble a ghost town and that’s on a normal busy night.
So what are the signs: Six months ago the papers were signalling house prices were still growing. We told you they were falling. All the noise was positive but we told you that completions were plummeting. This is the real information behind the noise.
Now the noise is about desperation in house prices and everything we said two years ago is being printed – a real sign that sentiment and momentum is nose-diving. Other signs of recession are clear: sterling has fallen to record lows against the Euro, a real indicator that traders believe the UK is an unattractive place to invest. Only one in ten people believe that now is a good time to make a major purchase, a sign of economic gloom. Rising oil prices is driving up the cost of living and taking more money out of people’s pockets meaning they spend less, and so the circulation of money slows. It also keeps the pressure on interest rates to remain higher.
Only seconds after announcing his budget forecasts, Mr Darling is having to revise his growth forecasts. If he has it wrong, he will need more money. Where will that come from? Either way it won’t be positive for the high street.
Continued sub prime losses have meant that borrowing has tightened beyond belief. Money supply is tough, so long gone are the days of tapping into the house like an ATM.
Lastly the city has already begun announcing job cuts, a sure fire sign of a downturn. With less money being earned, less will be spent. Less being spent, equals less to go round, equals more job losses, which is a downward twister.
Companies concerned about spending, tighten their belts, stop advertising, and rely on protecting what they have got.
Central banks may well rue the comfort of their slippers when they look back, but the next few months will be critical. My view is they will loosen their grip on inflation by relaxing rates again next month even though all the noise they are giving is that they won't. Hold on tight for a rough ride.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net
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.
Reader Writes:
Do you believe we are going into a recession and what might this mean for us?
First of all let me define ‘recession’. In real terms it means a downturn but for the purposes of an economy, it is defined as two quarters of negative growth.
A recession can be short-lived or can be more dramatic and depressive. Up to now we have lived in a booming environment with lots of cash to borrow at low rates with no negative issues in terms of repayment.
The public were fed this new ‘learned truth’ of wealth and they believed it. The worry is that many will not have prepared for a downturn and the effects could be dramatic.
Do I believe we are heading for recession? Yes I do, and I believe central banks have been too slow to avoid it. One of the leading financial fund managers in the UK, Philip Gibbs commented back in 2007 that rates need to fall and fall soon. He commented that if they did they could avert a serious downturn, and that as time went by the central banks were guilty of doing too little too late.
He also commented there was a serious problem, and if they were not aggressive with rates it could be a ‘potential bloodbath’. Central banks are seeing it slightly differently and with their pipes, slippers and rocking chairs, they ease closer to recession, blinded by their concerns of inflation.
Whilst inflation is an issue, it could soon not become one, as the high street crumbles. I was always told to watch who is in the pubs. ‘In difficult times or good, people always drink beer’, my analyst friend used to say. It is very notable there is less beer being drunk, as many pubs resemble a ghost town and that’s on a normal busy night.
So what are the signs: Six months ago the papers were signalling house prices were still growing. We told you they were falling. All the noise was positive but we told you that completions were plummeting. This is the real information behind the noise.
Now the noise is about desperation in house prices and everything we said two years ago is being printed – a real sign that sentiment and momentum is nose-diving. Other signs of recession are clear: sterling has fallen to record lows against the Euro, a real indicator that traders believe the UK is an unattractive place to invest. Only one in ten people believe that now is a good time to make a major purchase, a sign of economic gloom. Rising oil prices is driving up the cost of living and taking more money out of people’s pockets meaning they spend less, and so the circulation of money slows. It also keeps the pressure on interest rates to remain higher.
Only seconds after announcing his budget forecasts, Mr Darling is having to revise his growth forecasts. If he has it wrong, he will need more money. Where will that come from? Either way it won’t be positive for the high street.
Continued sub prime losses have meant that borrowing has tightened beyond belief. Money supply is tough, so long gone are the days of tapping into the house like an ATM.
Lastly the city has already begun announcing job cuts, a sure fire sign of a downturn. With less money being earned, less will be spent. Less being spent, equals less to go round, equals more job losses, which is a downward twister.
Companies concerned about spending, tighten their belts, stop advertising, and rely on protecting what they have got.
Central banks may well rue the comfort of their slippers when they look back, but the next few months will be critical. My view is they will loosen their grip on inflation by relaxing rates again next month even though all the noise they are giving is that they won't. Hold on tight for a rough ride.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net
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.
'Your home may be repossessed if you do not keep up repayments on your mortgage'.
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'