Ishrc � Discussion Threads

[simon gordon] 16/9/2008 18:04

SLXX has HBoS, UBS and Citigroup = c.10% of the fund.

Two of three are in pretty serious trouble.

I'm staying away.

[kiwi2007] 16/9/2008 13:58

Apparently corporate bond spreads, the extra yields they pay over U.S. Treasuries, have hit record highs!!

Looking at the bonds held by SLXX they look pretty secure but in this market the baby's going out with the bathwater...

$ corp bonds (LQDE) are performing even worse!

[simon gordon] 16/9/2008 13:53

Ralph Silva, of Towergate, reckons that 30% of banks will merge/close as there is too much capacity in the market. He said the next six months will be volatile. Is the market now marking down SLXX for this type of view?

[simon gordon] 15/9/2008 10:46

Guardian - 15/9/08:

Many of these bankers are horrible people, but we will still need them. For years money moguls were allowed too much power. Now the excesses must be curbed, but without stifling growth

One of America's biggest investment fund bosses, Bill Gross, shocked fellow Republicans last week by suggesting that he will vote Democrat in the presidential election. "I ... think it's time for a rebalancing of interests between the wealthy and less wealthy," he said. It is interesting to speculate whether this outbreak of social conscience reflects humility, or merely the naked terror that is gripping the financial community on both sides of the Atlantic.

Regardless of whether the Wall Street giant Lehman Brothers is rescued from bankruptcy by a takeover - the subject of fevered speculation in recent days - the financial world is sailing uncharted waters. Nobody knows where the voyage will end, because they cannot work out the scale of irrecoverable liabilities.

A year ago, New York and London bankers shook their heads grimly over the fact that an estimated $1 trillion of supposed assets had vanished into space. Today the US taxpayer has accepted responsibility for the $5.4 trillion liabilities of the Freddie Mac and Fannie Mae mortgage businesses, without the remotest notion of how much of this money, too, will disappear down the Swanee. A mere trillion seems less serious money than it used to be.

Ordinary mortals who live outside the financial community are torn between delight at the humbling of the Masters of the Universe, who paid themselves fantastic rewards on the basis that only they knew how to manage capitalism, and awareness that we shall all end up paying for their failure. Half a century ago, the City of London was a quaint place which kept a few thousand rather dim ex-public schoolboys off the streets, and raised a little money for the real business of Britain - manufacturing ships, cars, textiles, washing machines and suchlike. Today, when the City's activities account for around one third of GNP, the nation is frighteningly vulnerable to their frailty.

The first good reason for not succumbing to schadenfreude about the financial catastrophe is that it highlights alarming issues about what Britain will live off in the 21st century. Our manufacturing base has moved east, never to return. A couple of years ago conventional wisdom held that this need not prevent us running a successful economy founded on services: tourism and suchlike; intellectual property (thank goodness the world works in English); and financial expertise, in which we were assured that we had no peers.

Today matters look rather different. Beyond the vast sums of money which the supposed wizards have lost, there is the question of reputations. Hardly a single institution, or its bosses, have emerged unscathed from the carnage.

Businesses such as Lehman Brothers and Merrill Lynch borrow stupendous sums in wholesale money markets, and use them to place bets in a fashion indistinguishable from punters at Newbury racecourse or in Las Vegas. Worse, at least in a horse race you can see the animal on which you stake your little all. In the City and on Wall Street, by contrast, billions have been wagered on financial instruments of a complexity beyond the understanding even of those who invented them. A wise financial journalist said: "The first rule of investment is not to put money into things you don't understand." American and European financial institutions have flouted this principle on a colossal scale. The panic prevailing in London and New York is driven by the fact that, even now, none of those involved can figure out how bad things are for their own businesses, never mind for the system as a whole.

It is sobering to hear one of those up to his neck in this universe acknowledge, without embarrassment: "What is happening represents a major failure of market capitalism." There is amazingly widespread agreement within the financial world, as well as outside it, that the first lesson of what has happened is that the big beasts of Wall Street and the City were allowed to become far too powerful in their own societies. For several decades, governments have deferred to the supposed wisdom and ruthless clout of bankers. Presidents and prime ministers have walked small in the company of those whose lightest word could move trillions.

Now, instead, those same people are on their knees to their governments and central banks, trying to save their own skins. The credibility of the financial community will take years to recover. Trust and confidence, pillars of capitalism, are at their lowest ebb for decades. Nobody can decide what anything is worth - shares, currencies, oil, houses, businesses. Until a basis of belief is re-established at some level, the scary times will continue.

Optimists, of whom some survive, say it is still unclear how badly the US and European financial crisis will impact on the real world. Many countries, including those in Asia, remain relatively unaffected. The Middle East is awash with oil money, and spending enthusiastically. Some "real" businesses in America and Europe report buoyant trading. They say that "real" people, thank goodness, are getting on with their lives, heedless of the dramas on trading floors - but if the credit crunch persists, if real people and real businesses find it hard to borrow money, then pain must spread.

When the dust settles, there will be a rebalancing of relative power between financial communities and regulators on both sides of the Atlantic. The kings of the market have been proved wrong. Unless the US and Britain want to go through this nightmare again in a few years' time, it will be made more difficult for banks to expose themselves to risk so recklessly.

Yet it would be naive to suggest that it will be easy to get a new dispensation right. Market capitalism has delivered amazing prosperity to the west. Curbing its excesses without destroying the conditions for future wealth-generation will be tough. The bankers, market makers and hedge fund overlords have been insufferably arrogant in their decades of triumph, and nemesis is their just reward. But it will be flagellatory if, in our desire to punish the architects of systemic failure, governments introduce measures that stifle growth.

Rather as we must keep wanting to see Iraq stabilised, even if this might seem to vindicate George Bush, so we have to continue reminding ourselves that we need Wall Street and the City of London and some of their admittedly horrible people. There Is No Alternative, as Margaret Thatcher liked to say, sometimes rightly. There may be an important lesson in the experience of Goldman Sachs, the big house least tarnished by recent events. Commentators suggest that one reason for this is that Goldman's traders rely more heavily on their own funds, and less on other people's, to place big bets.

To keep our children in work and our society relatively prosperous in the decades ahead, amid the huge transfer of wealth from old to new economies, the financial services industry will be indispensable to Britain. The next generation of money moguls will probably prove as hubristic as this one has done; arrogance is seldom separable from riches. The highest aspiration, I suspect, will be to ensure that next time around, on the Goldman Sachs model, Masters of the Universe gamble with less of our money and more of their own.

[simon gordon] 02/9/2008 20:29

Telegraph - 31/8/08:

Pencil in 2010 as the start of recovery from the recession
By Charles Goodhart

The UK is currently entering a recession. When, and how, will it end? The Bank of England, for the time being, is in no position to help. It must be able to demonstrate convincingly that the present upsurge of inflation is temporary, and that inflation is clearly on a sustained downwards path back towards target, before it can lower interest rates. It will probably be able to do so this winter.

The global slowdown, approaching recession in much of the developed world, is having the effect of reducing oil and commodity prices. But the recent sharp increases in gas and electricity prices will ensure horrific inflation numbers for the next two months at least.

Moreover the recent sharp drop in sterling against the dollar, welcome though it may be for rebalancing the UK economy (towards exports and manufacturing, away from consumption and services), will add further upwards inflationary pressures.

If there are no further shocks, especially no political disturbances in oil-producing areas, and everything goes reasonably well, inflation may peak in October or November, and be seen to be falling back, hopefully quite rapidly, by December or January. That could allow the Monetary Policy Committee to start on a sustained series of interest rate cuts in January or February next year.

But it takes quite a long time for monetary expansion to take hold. Write in Q3 2009 as being perhaps the bottom of the recession, and 2010 as the start of the recovery.

By then, Q3 2009, the UK is quite likely to have seen four quarters of declines. How bad could it get? The honest answer is that no one knows since credit crunches of the scale of the present one are very rare, and its combination with an energy and commodity price upsurge even more rare. 1973-75 was similar but much worse, because the inflationary surge then did become engrained in domestic wages and prices. Thanks to the MPC, that will not happen this time.

That said, the UK and the US economies have remained stronger so far this year than I would have previously expected, primarily because consumption has remained buoyant under the circumstances. Given the shocks to real incomes, for example from energy prices, the sharply applied restrictions on access to new credit, and the travails of the housing market, one might have expected people, especially having become so heavily indebted, to cut back more sharply on their consumption outlays.

But this has not happened. Yet? Since consumption is such a high proportion of total expenditure, an upwards shift in the savings ratio, for example to help with the new, higher down payment required on a house, would have a seriously depressing effect on the economy.

So, absent cuts in interest rates until next winter, what else can be done in these "challenging times", the officially sanctioned euphemism for recession? Perhaps the least cost response would be prayers for a warm winter in the Northern Hemisphere, especially here. That has a 50-50 chance of success. In the same vein, there will be some headline-catching, but macro-economically insignificant, measures, such as extending and increasing the hand-outs around Christmas time to those in potential fuel poverty.

The reality is that the fiscal deficit is already large, and is likely to blow out much further over the next year or two, especially as tax revenues from the golden geese in the City dry up. While energy companies present an obviously inviting target, we need them to invest much more, and higher taxation is not the best incentive for that.

So any extra fiscal expenditure, beyond the automatic stabilisers such as unemployment benefit, must be very tightly targeted.

One useful application of public sector funds would be to encourage local authorities to enter as bidders in foreclosure sales, which is, I believe, already Liberal Democrat Party policy. That would, first, dampen the foreclosure, housing price decline, more foreclosure spiral; second, rebuild social housing, (which the unemployed/foreclosed will need); and, third, balance the expenditure by purchase of an asset that should, eventually, rise in price again.

The prospective blow-out in the fiscal deficit will put a lot of pressure on debt management. Such debt management ought to be a subsidiary, but not unimportant, adjunct of monetary policy. It has not been used as such since Gordon Brown, as a little-noticed sideline to the major reforms to the Bank of England and FSA in 1997, switched debt management from the responsibility of the Bank to a subsidiary of the Treasury in the guise of the Debt Management Office (DMO).

Ever since, the DMO has been cautious, unadventurous and operating almost by rote, in a fashion that can protect itself from blame. Debt management should be switched back to the Bank. Let me explain why.

A fiscal deficit will have a much more expansionary effect if it is financed by money creation rather than by issuing longer-term, and less liquid, debt. But so long as the Bank wants to hold interest rates above zero, the country cannot have a money-financed deficit, since that would reduce short-term interest rates below the target level.

So the excess money has to be mopped up by debt sales. But such debt sales can be paper that is more or less liquid. Treasury bills are nearly money and very liquid. Suppose that debt sales were limited to TBs, plus a few long-term (indexed) gilts to allow the pension funds/life insurance companies to do their job. That would forcibly liquefy the UK's financial system. At a time of fear and restrictions in our financial system, indeed in the economy more widely, more liquidity would be good. But to do so needs gumption, and the DMO has not so far shown any signs of that.

How will the forthcoming recession compare with that of the early 1990s? The collapse in the housing market is likely to be just as bad, but for the rest there are pluses and minuses. On the plus side, we are getting some relief from a decline in the exchange rate at an earlier stage in the cycle than in the 1990s when we were hooked into the ERM, and both interest rates and inflation will (soon) be considerably less.

On the minus side, the credit crunch, and probably the world economy more widely, will be worse this time. The worst depressions result from financial collapses, so there remains a serious downside risk, but the most likely outcome is perhaps slightly less bad now than then.

Charles Goodhart is Professor Emeritus of Banking and Finance at the London School of Economics, and a former member of the Monetary Policy Committee

[simon gordon] 02/9/2008 20:21

Scotsman - 2/9/08:

As astonishing was the Chancellor's admission of how he first discovered the extent of the credit crunch – when he read about it in a newspaper last summer. "I remember I picked up the Financial Times in the supermarket, as you do, and it had the European Central Bank starting to pour money into the economy. I phoned the office to ask why they were doing quite so much... it was the sheer scale of it."

You might well have thought that the "sheer scale of it" (sic) might have prompted Treasury officials to have rung the Chancellor when markets started to slump, or perhaps the Bank of England could have rung him, or even the screen-watcher at the Financial Services Authority. But no vignette better illustrates how the government was so out of touch in a crisis that was to culminate in the collapse of Northern Rock. Quite frankly, if you're the Chancellor in the middle of the worst financial crisis for 60 years you should surely be a little more plugged-in than simply buying a newspaper....

The blunt truth – one that neither Brown nor the Chancellor are likely to admit – is that real household incomes are going to fall, mortgages will continue to be scarce and that, in Charles Goodhart's reckoning, there will be little recovery before 2010....

The credibility of the government is shot to pieces. Little wonder Alex Salmond could not resist poking fun at a Chancellor who has moved in short order from being Corporal Jones to doom-monger Private Frazer....

[simon gordon] 27/8/2008 19:56

Telegraph - 27/8/08:

Britain faces 18 months of negative growth, warns top fund manager Peter Hargreaves

The UK economy is staring down the barrel at eighteen months of negative growth, as a recession grips the nation and pushes the FTSE 100 below the 5,000 mark, one of Britain's most respected fund managers has warned.

Peter Hargreaves, one half of the Bristol-based investment management group Hargreaves Lansdown, said the torrid time ahead may see another small UK bank being rescued by a larger rival.

The banks reporting season in March could be the catalyst for further falls in London's leading share index, he added.

Co-founder and chief executive of the group, Mr Hargreaves said: "I think there will be a '4' on the front of the FTSE 100 - by the time all the gremlins have been discovered."

The company, which floated on the London Stock Exchange last May, expects the FTSE to stumble as traders return to the market in the autumn, falling in the run up to Christmas, by which time Mr Hargreaves said there should be a "platform on which to build".

More pessimistic than most, Mr Hargreaves expects the UK economy to suffer six quarters of negative growth - a recession is typically defined as two quarters of negative growth.

He said: "There's no money in the kitty to prime the pump. The bank's haven't got any. Neither has the Government.

"And people are repairing their own balance sheets - negative equity and other debts are scaring them into paying off debts and saving money. They are not paying money into the stock market or into the retail sector."

Mr Hargreaves named the commercial property sector as one for private investors to avoid. He warned that the sector has further to fall, as offices face periods of languishing empty - with public and private sector employers alike hold back on hiring.

For the riskier investor there are a few silver linings amid the misery. Mr Hargreaves said Russia is a "screaming buy". With all the bad news priced in, he said Russian stocks were "very, very cheap and speculative". Gold, the traditional safe haven for private investors, has also come off its recent highs and would be worth picking up, he said.

Mr Hargreaves added: "Equity income funds are looking very cheap - they've bombed out of the market now, but they are paying 4pc dividends which is not bad."

The past 18 months have reminded people of the danger of profligacy, he said, which has helped boost the savings and pensions divisions at Hargreaves.

[kiwi2007] 27/8/2008 10:54

Quarterly Dividend of £2.20 today - accounting for the fall...

[simon gordon] 27/8/2008 08:45

Bloomberg - 26/8/08:

``The gears of capitalism are grinding to a halt,'' said Mirko Mikelic, senior bond fund manager at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees $21 billion in assets. ``There is a tremendous concern over the banking sector and a scramble right now for capital.''

The Federal Reserve's quarterly lending survey released Aug. 11 said that more banks tightened credit for consumers and business borrowers. About 65 percent indicated they tightened standards on credit card loans over the previous three months, up ``notably'' from about 30 percent in the April survey.

Rising Rates

Investors on average demand yields of 4.14 percentage points more than what they can get on Treasuries to purchase bank bonds, up from the low last year of 0.76 percentage point in January, according to Merrill Lynch index data. Spreads on investment- grade rated bonds overall average about 3.14 percentage points.

``The credit crunch is only now beginning because bank capital is so constricted by losses to date, that they will have to begin shutting off credit to households and corporations and that's when we get the defaults,'' David Goldman, the former head of fixed-income research at Bank of America Corp.'s securities unit in New York, said in a Bloomberg Radio interview.

Goldman, who is now an investor, said he shut down a fund he ran because the markets are likely to become ``brutal.''

Interest-rate derivatives imply that banks are even becoming hesitant to lend to each other amid the flood of maturing debt.

[kiwi2007] 18/8/2008 13:35

Positive mentions in the FT for corporate bonds recently with expections of rate cuts to come .. there's potential for a total of a 14% gain this next year they say.

[simon gordon] 18/8/2008 07:45

Telegraph - 18/8/08:

Dollar surge will not stop America feeling the effects of a global crunch
By Ambrose Evans-Pritchard

Two alerts landed on my desk this weekend from the elite markets team at Goldman Sachs. One was entitled "The Dollar Has Bottomed!". Those betting on an imminent disintegration of American economic and political power may have to wait another cycle. Rival hegemons are falling like ninepins.

The US dollar index hit an all-time low in March. It crept slowly upwards in the early summer before smashing through layers of resistance over the past month.

The surge against sterling, the euro, the Swiss franc and the Australian dollar is one of the most spectacular currency shifts in half a century. "Something fundamental has changed," said the bank. Indeed.

US industry is now super-competitive, if small. Mid East funds are drawing up shopping lists of Wall Street takeover targets. Airbus and Volkswagen are shifting plant to America to escape crushing labour costs.

US exports have risen 22pc over the past year, outstripping Chinese growth. The US non-oil trade deficit has shrunk by two fifths since 2002. It is now running at $300bn a year. This is 2.1pc of GDP.

The other note advised clients to "Take Profit on Globalization Basket", especially on Eastern Europe currencies. Goldman Sachs has quietly dropped its talk of $200 oil. Even Russia's petro-rouble is now deemed suspect.

The twin missives more or less sum up the dramatic change in mood sweeping financial markets since it became evident that the entire bloc of rich OECD countries has succumbed to the delayed effects of the credit crisis.

Japan contracted by 0.6pc in the second quarter, Germany by 0.5pc, France and Italy by 0.3pc. Spain recalled the cabinet last week for an emergency summit. New Zealand and Denmark are in recession. Iceland contracted at a catastrophic 3.7pc in the second quarter.

"The whole decoupling thesis has started to come apart at the seams," said David Bloom, currency chief at HSBC. "Canada is frozen over. We have Arctic conditions in Sweden, and the UK is falling off the white cliffs of Dover."

The UK economy is not my brief, but I see that hedge funds are circulating a report from the US guru Jeremy Grantham predicting a very bad end to Gordon Brown's debt experiment.

"The UK housing event is probably second only to the Japanese 1990 land bubble in the Real Estate Bubble Hall of Fame. UK house prices could easily decline 50pc from the peak, and at that lower level they would still be higher than they were in 1997 as a multiple of income," he said.

"If prices go all the way back to trend, and history says that is extremely likely, then the UK financial system will need some serious bail-outs and the global ripples will be substantial."

For months the exchange markets ignored this impending train crash, just as they ignored the property bust in Europe's Latin Bloc, or the little detail that UBS alone had just lost the equivalent of 8pc of Switzerland's GDP. All they cared about in the currency pits was the interest rate gap: US low, Europe high.

Now the paradigm has flipped. The Fed may have been right after all to slash rates to 2pc. The European Central Bank may have panicked by tightening in July. Note that the elder Swiss National Bank did not do anything so rash.

Bulls now believe America is turning the corner. Financial stocks are up 20pc since early July. Some "monoline" bond insurers have risen 1,200pc in a month as fears of Götterdämmerung give way to sheer intoxicating relief, and a "short-squeeze". Such are bear-trap rallies.

Regrettably, I remain beset by gloom. The US fiscal stimulus package that kept spending afloat in the second quarter is running out fast. There is nothing yet to replace it. The export boom cannot keep adding juice as the global crunch hits. My fear is that the US will tip into a second, deeper leg of the downturn, setting off a wave of savage job cuts. This will start to feel more like a real depression.

The futures market is pricing a 33pc fall in US house prices from peak to trough, based on the Case-Shiller index. Banks have not come close to writing off implied losses on this scale.

Daniel Alpert from Westwood Capital predicts that a mere 28pc fall would alone lead to a $5.4 trillion haircut in US household wealth, and leave lenders nursing $1.25 trillion in losses. So far they have confessed to less than $500bn.

Meredith Whitney, the Oppenheimer's bank Cassandra, predicts a gruesome 40pc fall in prices. If so, expect prime borrowers facing negative equity to start throwing in the towel en masse. "I do not think we are near the end of writedowns. I continue to see capital levels going lower, and stocks going lower," she said.

So no, this painful ordeal is far from over. We are not witnessing a dollar rally so much as a collapse in European and commodity currencies. The race to the bottom has begun in earnest.

[kiwi2007] 17/8/2008 16:06

Moving up quite nicely now... positive mentions in the FT for corporate bonds recently .. potential for a total of a 14% gain this next year they said...

[simon gordon] 20/7/2008 13:18

Nouriel Roubini:

■ Hundreds of small banks with massive exposure to real estate (average small bank assets are 67% in real estate) will go bust.

■ Dozens of large regional/national banks are also bankrupt given their extreme exposure to real estate and will also go bust or be rescued at extreme cost.

■ The four remaining US big broker/dealers will either go bust or will have to be merged with traditional commercial banks. Most of the shadow banking system cannot survive without formal deposit insurance and formal permanent lender-of-last-resort support from the central bank.

■ The Federal Deposit Insurance Corporation has already depleted 10% of its funds and will require much more from Congress as its insurance premiums are woefully insufficient to cover the hole.

■ Fannie Mae and Freddie Mac are insolvent and the Treasury bail-out plan is socialism for the rich; it is the continuation of a corrupt system where profits are privatised and losses are socialised at a huge cost to US taxpayers.

■ This financial crisis will imply credit losses of at least $US1 trillion ($A1.02 trillion) and more likely $US2 trillion and the corporate bond default rate will jump from close to zero to more than 10%. We are talking about credit default swaps where $US62 trillion of nominal protection sits on top of outstanding stock of only $US6 trillion of bonds and where counter-party risk - and the collapse of many counter-parties - will lead to a collapse of the market.

■ This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild, six-month, V-shaped recession that the delusional consensus expects.

■ The rest of the world will not decouple from the US recession and financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a recession. Given this sharp global slowdown, oil, energy and commodity prices will fall 20% to 30% from their recent bubbly peaks.

[simon gordon] 16/7/2008 14:45

Bloomberg - 16/7/08:

Britain Is in No Shape to Cope With a Recession: Matthew Lynn

There is no longer much dispute that the U.K. is heading for a recession later this year. The economic news gets gloomier by the day, and with prices still rising fast, there is little prospect of the Bank of England heading off the coming storm with reductions in interest rates.

Already the job losses are starting to mount. Homebuilders Redrow Plc and Bovis Homes Group Plc have announced they will cut 40 percent of their staff. Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, has a hiring freeze in place after firing 400 employees in the U.K. during the second half of last year. Plenty more workers will lose their jobs before a recovery takes place.

The real problem isn't the economic decline, which is part of a normal business cycle. Britain is in no shape to face a recession. Consumers and government are up to their eyes in debt, the economy is becoming less competitive, and the country has placed itself in the wrong industries. The underlying weakness of the U.K. economy is about to be cruelly exposed.

``The U.K. is a classic case of financial over-stretch,'' says Stuart Thomson, who manages 23 billion pounds ($46 billion) in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``We have been living on the edge with very little for a rainy day. We expect to see the economy come crashing back down to Earth.''

In the past 50 years, according to UBS AG research, the U.K. has had only three recessions. In 1991, output declined 2.5 percent from the peak to the trough. In 1980, it dropped 6.1 percent. And in 1975, it slipped 3.3 percent.

High Taxes

This time, the drop will be on the scale of the 1980s, not the 1990s. The reason is simple: The British economy has been building up problems for itself that have been conveniently masked by growth.

First, the U.K. has been rapidly throwing away its main competitive advantages. The government has been piling on more taxes and regulations while key competitors have been cutting theirs. Already companies are starting to leave: Shire Plc, England's third-largest drugmaker, said it was moving its base to Ireland to escape high taxes.

In good times, you can afford that. In harder times, it's a lot more painful. The trouble is, once the economy starts falling off a cliff, it's hard to reverse those policies.

Next, public finances are in a mess. The budget deficit widened to 11 billion pounds in May, the second-biggest monthly total since records began. It is one of the largest deficits in the European Union, a frightening statistic given that it comes at the end of 15 years of continuous growth.

Unrealistic Forecasts

Worse, the Treasury forecasts are still way too optimistic: Its budget projections are based on growth of more than 2 percent this year and next. It isn't going to happen. As the economy slumps, there will be no room for tax cuts to help it out. If international investors lose confidence, taxes might even have to rise. That would be catastrophic.

In the past decade, Britain has become a magnet for immigrants. In the past 16 years, 2.3 million people have moved to the U.K., according to Migrationwatch, an independent group in Guildford, England. One result has been that companies have become hooked on cheap labor. Migration feeds an economy. It's great on the way up, but deadly on the way down. Many migrants go home in an economic decline, taking their labor and purchasing power with them.

That may stop unemployment from rising as much as it otherwise would as sacked migrants prefer to leave the country rather than join the unemployment lines. Yet it also depresses demand.

Unaffordable Lifestyles

Savings have been run down to dangerous levels. The U.K.'s savings ratio dropped to 1.1 percent in the first three months of this year, the lowest level since the final quarter of 1959. There is no financial cushion for families to fall back on now that times are getting tougher.

The anecdotal evidence is that people have been using their houses as cash machines, endlessly re-mortgaging to support lifestyles they can't afford. As incomes fall, families won't be able to maintain their living standards by drawing down on savings. And as unemployment starts to rise, it will hit hard.

Lastly, the U.K. has been specializing in precisely the industries that have been the worst affected by the credit crunch. It has taxed the banking industry relatively lightly, but its oil industry heavily. One result has been that production of oil and gas from the North Sea has fallen by a third since peaking in 1999. That might have looked clever a year ago. It doesn't look so smart now. Through a mixture of policy and carelessness, the U.K. has allowed itself to become dependent on the finance industry, and as that suffers, so will the country.

Because recessions are fairly rare events for the U.K., there isn't much historical data to draw upon. One thing is still clear: Last time there was a decline, the fundamental state of the economy was getting better. That isn't the case this time. Brace yourselves for a traumatic slowdown.

[kiwi2007] 11/7/2008 13:49

An historical dividend of £7.83 per unit giving a flat yield of 6.36% at today's buy price. To redemption about 7.2%... I don't think that's bad given the quality of the holdings?

[kiwi2007] 11/7/2008 12:45

A nearly 2% jump today ... have all gilts and bonds jumped so much?

[simon gordon] 06/7/2008 11:27

Observer - 6/7/08:

The US Standard & Poor's index is more or less where it was in 1998, and if inflation is factored in the loss is around 30 per cent.

The numbers are even worse in Britain: the FTSE 100 is below where it was a decade ago, while in real terms, the hit is 40 per cent.

[simon gordon] 14/6/2008 11:51

Peter Oborne in the Mail:

Unemployment, after 15 years of steady decline, is on the rise. According to figures released on Wednesday, it increased by 38,000 over the early months of the year and it looks as if a worrying trend has established itself. Meanwhile, oil prices surge forward by leaps and bounds - up by a spectacular $11 on Friday of last week alone.

Such dramatic rises have a paradoxical effect. On the one hand, stronger fuel and commodity prices suck demand out of western economies and are hugely deflationary and damaging to growth. On the other hand, they perversely cause the rate of inflation to rocket.

Next Tuesday may well see the official announcement that inflation has risen to more than three per cent - a frightening level at which the Bank of England governor, Mervyn King, will be obliged to write a statutory 'letter of explanation' to Chancellor Alistair Darling, in which he will have to account for why it has broken through the upper limit.

Of course, the effect of these new inflation fears is very dramatic. Until last week, markets were projecting that the Bank of England would try to head off the looming recession by cutting interest rates. But now, the City believes that the next move will be upwards - chilling news for millions who are already worrying how to pay their mortgages.

The property market is moribund, and many estate agents face bankruptcy. The building sector has collapsed, and there are even doubts in the City about whether even respected firms such as Barratt - currently struggling to finance a £400million debt - can survive.

Alistair Darling, by some distance the worst Chancellor of the past 50 years, is catastrophically out of his depth. On Thursday, he went to the Mansion House to meet two dozen very senior City figures. One of those present told me: 'There was a discussion about economics, but Darling had no clues how to get out of this mess.'

One famous financier also confirmed the lack of direction, saying: 'One day I get rung up by the Bank of England; the next by the Treasury and the next by the Financial Services Authority. None of them seems to know what the others are doing.'

However, it is clear Mr Darling, who had until very recently been in denial about the direness of the situation, is finally waking up to the scale of the crisis - which has been consistently spelt out to him privately by those who understand these issues.

The Chancellor's Budget statement in March - with its fatuously complacent projection of a modest dip in the growth rate this year followed by recovery in 2009 - looked fantastical even at the time and has since fallen to pieces.

It was finally destroyed last week in the most contemptuous fashion possible when the EU Commissioner for economic and monetary affairs, Joaquin Almunia, warned that Britain's public finances are out of control with a budget deficit that is set to reach a staggering 3.5 per cent of GDP this year.

Almunia will now set in motion the EU's so-called 'excessive deficit procedure' which was created to discipline profligate and wasteful member states. This was a moment of humiliation for Alistair Darling and Gordon Brown.

In practice, I predict that Britain's public borrowing will continue to rise well over that dire 3.5 per cent mark. This is because we are now locked in a vicious downward spiral.

While economic downturns cause a sharp fall in tax receipts - because of lost jobs, falling profits and corporate failure - they also cause a debilitating increase in welfare and benefit payments.

Indeed, I would not be surprised if the public sector deficit spiralled over £100billion - or seven per cent of national income - over the next two years, raising the spectre of national bankruptcy. This is exactly the position that Britain found itself in during the 1970s. The truth is that Gordon Brown's Government has acquired the rackety feel of Jim Callaghan's doomed administration of 30 years ago.