I have spent far too much time recently reading blogs, books and watching telly about the current financial crisis. However, it has made me take some decisions which are 180 degrees from what I was thinking a few months ago - events are moving so fast at the moment. I note even the FTSE predicitions market is NEVER right anymore, the betting is just pure guessing.
When I started this blog, I said its purpose was to explain complex financial issues to all, so with that in mind below is a snapshot of what next year may bring to the world and UK.
However, one year and a bit into the financial credit crunch some key decisions have been made that will shape the future for all of us. The banks were bailed out, something I would have been totally against this time last year, but in reality it was needed to stave off immiediate disaster. What was less clear is what long-term effects this will have on us all.
Some though are obvious, the great de-leverage continues across the world. So much so that for once, ALL financial bubbles are bursting at the same time. Not just UK property, but Commodities, Shipping, currencies, BRIC stock markets - everything. This has and is causing massive deflation in a very short space of time. All that excess money is simpy vanishing away and taking the prices away with it. It is also producing some odd effects; in times of stress, Gold is seen as a safe bet even gold is pushed in all the media these days as the only true safe haven. It is now 33% down from its high of the year and I shifted my ETF into short gold with some success last week. De-leverage will bring everything down in price for a while yet. How long it impossible to know, but it will be a few months more would be my guess. The FTSE won't reach 6500 for some time that is for sure, perhaps half of that if the de-leverage continues much into next year.
As this deflation bites across the world consumption will fall and there will be a deep recession. The next stage is potentially worse; there are 2 scenarios.
1 - All the money poured into the banks frees up the system and the world goes back to work, albeit with lower prices, less leverage and bigger public debts in the Western economies.
2- Too much money is created, people realise this and so inflation kicks-in at a very high level. this wipes out the debt, but takes all the savings with it. Worst case we get hyper-inflation, time to put money then into real things, houses, gold etc.
Which of these happens, or a milder combination of both depends on events not too far away. If the G20 meet on November 15th and agree a new bretton woods, then some element of stability will out and the worst of the doomsayers will be wrong. But the Governments have a very poor record of economic management in the crisis to date, so I think scenario two is a distinct possibility.