You may be forgiven for wondering what all the noise is about in markets at the moment. I for one am puzzled by the amount of unnecessary extra information and confusion being created.
On one hand I hear that rates need to drop to c3.75% to kick-start the economy.
This was followed by another leading manager in the same group detailing that the interest rate drops were inevitable, but also too late. Anyone reading the reports would agree that the consensus was that rates would fall. Mmm…how wrong can you be?
In the recent monetary policy committee meeting one of the members offered a rate drop of 0.5% in one hit, whilst the majority agreed the fall should be 0.25%. Within one month however the Bank of England (BOE) are now saying there will be no rate rises until 2010. How noisy is that?
Just how are you expected to hear with all the noise, especially when you receive mixed messages like this from the BOE?
Many fund groups have been telling me that the dollar had been dumped in favour of oil, which was driving oil prices up further, causing greater inflationary risks and pressures. They went on to explain that oil was being noisily and unnecessarily driven upwards with much talk about the $200 price being breached.
Comments have now begun to float that oil isn’t seen as a one way bet and many now believe the dollar to represent better value, and oil is too much risk for the potential return!
If that’s the case, we could then consider inflationary issues less of a risk. The dollar would become more attractive, oil less attractive, and food less attractive as a fuel source and used for what it is…food.
Inflation would ease, interest rates could fall and the housing and retail market can enjoy a nice healthy recovery. Life would be great.
The message on the high street is different. I noticed how few are in the pubs spending. Manchester united v Chelsea Champion’s league final would normally have been packed but the pubs were 25% full. I also notice that the cost of clothing and material goods is falling like property, due to oversupply and lack of demand – a clear recessionary sign.
I tapped into the views of Warren Buffet and Charlie Munger. They agreed strongly on three things: Oil production was about to peak (price has to rise), they were bearish about the dollar and also bearish about the stock market! My head began to hurt.
Jupiter’s Tony Nutt has interesting views though:
He points to a few anomalies with markets selling stocks trading cheaply at 4x earnings and buying mining at 40x earnings – a clear sign of sentiment purchasing rather than a monetary one. He points to this masking a number of opportunities.
He was slightly more upbeat on the housing market than I am and detailed that the spending boom in the UK in the late 80s was much worse than today. He also mentioned that this time round 82% of owners had put down a minimum 10% deposit whereas only 52% had done so in the last boom. I suspect that 10% has already disappeared however.
There is no doubt that spending will continue to ease, whilst those who have no savings slow up and create a barrier between themselves and pain by saving! This will also have a downward effect on inflation outside of the fuel and food costs.
Nutt is also more upbeat than others about the US, pointing to the fact that the economy is slowing more to maturity than a recession. He also points to the fact that exports are up 16% (a volume greater than the entire German economy).
In any event he believes we are near the bottom of interest rates in the UK as the inflationary fears are still very strong.
I suspect we will have a quiet time for equities through summer before the markets regain confidence so enjoy the break.
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