Thursday, 23 October 2008

Where will we go from here?

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.

17 comments:

ken from glos said...

Have a look at the B.D.I as well that tells you the state of international shipping movements.It has gone way way down.

I sit here reading all the Financial blogs and i am beginning to think that the 70,s was a doddle!

Good luck to you all.

bofl said...

hello.......i think that you are right.......

i used to be a bond trader some years ago......also traded stocks a little........

until all the debt is purged from the system the markets/assets will go down.......imho gold is falling because china growth is slowing.so a lot of spec money is getting out.add to that if the west goes tits up then who will buy things that arent neccessities?

most people in the uk dont have much in savings and they have many bills coming alomg soon........

are you in trading etc?

Blue Eyes said...

Which is better: Japan-style deflation or Argentine hyper-inflation? I would say a decade of no grow but not a massive recession is better isn't it? I still think that rates should be slashed, though.

CityUnslicker said...

BOFL - no not a trader, just interested blogger.

BE - I prefer the former but looks like we get the latter at the moment.

semafu said...

yep, i was spooked by the falls in gold.

CityUnslicker said...

semafu - elliot wave followers reckon it could be going back toward $300 it started from 10 years ago.

Doubt it myself, will probably cash in when it gets to $700.

sammy said...

I once had a conversation in Spain with a French guy who owned the hotel we were staying in - he had lived in Brazil at one point - he said there's no better training for business and entrepreneurship than living in a country with 20% inflation

bofl said...

we have 20% inflation here.dont tell anyone-they cook the books!!!!!!

sammy said...

Warren Buffett's shareholder letters provide some perspective - his comments on inflation and the value of the dollar in the late 70s are interesting, given current concerns...
They're all on the Berkshire Hathaway website if anyone is interested.

NorrieC said...

You may want to review this bloggers reasoning behind the gold price. I can't prove he's right but it seems a logical explanation for such a low price when it is scarce and the mint is on back order.
http://tradeforce.blogspot.com/2008/10/gold-prepare-for-lift-off.html

Anonymous said...

Your worst case scenarios seem rather mild. For some industrial strength doom I recommend:

Market Ticker Blog & Forum

Nouriel Roubini

Mish's Global Economic Trend Analysis

They got the bad news that will leave you feeling physically ill, especially the Forums at the top link. I could recommend hundreds more, but there is only so much doom one can stand per day.

These are American centric sites, but higher quality TEOTWAKI you will not find. I'm over the pond myself, in Canada.

Good luck and God Speed to all in the UK.

Anonymous said...

Oh I forgot to mention the 'Hayman Advisors' letter to clients that was re-printed in FT the other day.

A concise one-page summary of the great un-winding and costs totaled.

Let's just say it is not good, and leave it at that. Be sitting down before you read it.

CityUnslicker said...

thanks for the lniks anon. Enough to ruin anyone's breakfast...

dearieme said...

None of this would have happened if we'd all stuck to eating proper breakfasts. The Decline of the West coincides with the Rise of Silly Diets. If we go back to porridge, the old b & e (and a slice of black pudding, too, please, Mum), All Will Be Well.

And I defy anyone to prove that that is any dafter than the garbage from most economists.

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