Looking forward to 2009

In the run up to Xmas in the New Year the traditional press are full of articles either looking back or looking forward. When things have been particularly bad and we have no reason to fear the future the articles are predominantly ones reviewing how awful the year has been. When on the other hand we have every reason to still fear the future the articles ignore how awful it was in the past and concentrate on how terrible life will be in the forthcoming year. This is, of course, only human nature; the same human nature that drives markets, causes us to pursue excess in boom times and gloom in bad times.

There is probably no foolproof way of protecting ourselves against economic shocks. The best we can do is follow the old adages "don't put all your eggs in one basket" and "save for a rainy day", after all they have withstood the ravages of time and the increased complexity of the world we now have the privilege to life in. The other piece if homespun advice I would offer is "don't assume". Don't assume that the worst is over; don't assume that because the Governments have stepped in to support banks that your money will always be safe.

I believe that there are two really big shocks still in the system. The first is the unwinding if the uncertain position relating to credit default swaps and the second is further catastrophic collapse of the Hedge Funds. To avoid the effects of these we need the G20 conference scheduled in the New Year to tackle these problems and through some world type regulation create the conditions for an orderly retreat in these areas. Huge sell off of assets which these two problems may create, not only ensures volatility in the Market but it destroys negative correlations between the asset classes.

To avoid further financial disaster Government spending on non essentials needs to be reduced significantly. Banks need to be nationalised as it has always been clear that the bail outs already done merely prop up their balance sheets, they are not going to get any additional capital to lend from any other source than us the British Public – be it through tax or through savings. My next prescription would be to reduce taxes spent on non essential Government activity and introduce compulsory savings. Personal Retirement Accounts should be introduced early with no ability to opt out. Pension funds should be free of all taxes and further incentives should be designed for them to invest in renewal, green and infrastructure projects

Darlings Xmas Box

By the end of this coming week we will see what financial goodies are to be delivered in the Pre Budget Statement. I would guess this will be, perhaps, the most important budget statement this century, and nothing like the original intention of a pre - budget statement. The case, as I said in a previous blog, is quite strongly in favour of a robust stimulus package. Initial indications suggest that it needs to be up to 2% of GDP which would mean some £50bn.

There is, however, one big caveat. The Chancellor will have to admit that he is only buying some breathing space and that if he does not also introduce a plan for paying for it by increased taxes and cuts in Government spending in definitive time frames he risks further damage to the beleaguered pound. The breathing space, so created, will almost certainly last until the next election and it will look very much like our votes are being bought.

The most likely course that will be taken is a combination of "carrot and stick" and "buy now while you can." For instance taxes that directly impact on consumption like VAT and Stamp Duty may well be eased during a period of advance notification that they will be increased.

Tax credits could be used to address the 10% problem, although personally I think there would be a good case politically for just accepting that this was a mistake and bringing back the 10% band.

Tax cuts have also got to stem the tide of rising unemployment and so there may be some easing of National Insurance Contributions in certain circumstances. A far sighted policy would be to make pensions saving more attractive in the hope that encouraging higher inflows will help stimulate the equity market or at least increase the demand for gilts which will need to be issued to pay for all of this.

Whatever happens the need to plan your response and long term financial situation will have just become even more imperative!

A whacky week

At the end of last month I was predicting that interest rates could be as low as 1 or 2% by the middle of next year and many thought that this was rather draconian. Last weeks massive cut of 1.5%in base rate does make this seem more likely now. On its own I do not think that this will be enough to get the economy moving but it is a step in the right direction. The next step will be how the Chancellors pre-budget statement proclaims a package of real measures to stimulate the economy. If this is to be effective the only tool in his box is tax cuts, even though these will have to be funded by borrowing. Further relief on stamp duty would be welcome together with a stimulus package for small business.

The best news of the week, of course, is that Libor is steadily moving downwards. Markets at last stabilised although there was a minor setback midweek, however the trend was still positive.

The pound in your pocket, pension and property!

This week has seen us return to a degree of stability in the markets; gains made by and large have been held. The media circus has moved on leaving room for commentators like Newsnight's Paul Mason to dissect and try and draw lessons from what happened. If we have reached the bottom and I am not calling it so, but it looks like it may be so, where does that leave us? My sense is that protecting the value of cash has become much more of an issue, after all we have got used to the idea that equities can go down as well as up. We did not however believe that investments which traditionally had little or no volatility could be at risk. However due to the poor risk management within our banking industry that is exactly what happened. Cash deposits and money market accounts have in some cases suffered unprecedented losses. The amount guaranteed under the Financial Compensation Scheme has increased to a maximum of £50,000 but many will want to take advantage of getting higher returns for investing more. You could take the view that the Government would not let a high street bank but you would still be taking, in my view, an unacceptable risk particularly as interest rates come down as they surely will. Even if you spread your cash around a number of banks you still need to avoid situations where the authorised deposit taker covers more than one Brand. Cash deposits in separate accounts with Bank of Scotland, Halifax and Birmingham Midshires would only result in one protection of £50,000. Paying for advice on how to invest cash has now become more necessary and ever.

What about those who have had their pensions and savings diminished by the crisis? Should they flee the equity markets? Probably not, but it really depends on where you are now and what they were invested in. You should consider how your asset allocation performed during the crunch, did you have all your eggs in one basket? Now is the time to get advice on what you need to do for the future.

If all of this was not enough we are now told that houses prices are falling by more than we are earning. Not much you can do if you are heavily mortgaged but if you own your home outright and are over 55 this might be a good time to consider releasing equity from your home. Valuations are still not reflecting the true downturn in the house market and interest rates are lower than ever.

If there ever was a time to consider the protection of the pound in your pocket, the pound in your pension and the pound in your property now is the time to do so.

A new era for investment

 

It has been an interesting couple of weeks in the Markets. The volatility of the FTSE Index is pretty much unprecedented. For many the biggest problem may well be a loss of value in your Pension funds. As we come out of this crisis it is important that you evaluate how your portfolio has performed. If it was a well structured portfolio it should have lost considerably less than the FTSE. If you have lost as much as the FTSE it is probably time to have a look at the amount of risk you are carrying. You also need to ensure that you continue to invest cash safely. It would be prudent, even though we may think the Government is stood behind our savings, to keep your exposure to any one bank to less than £50,000. If you are in any doubt about how this credit crunch crisis has effected your finances, please give us a call. We may be able to help.

 

 

The deal must go ahead in the USA

This weekend we await the news that they have agreed a deal on the $700 million dollar bailout. Although these events are happening in the USA the world financial system is such that it inevitably has a large impact on us. If it does not go ahead then we will not only see more Banks go to the wall here, but all other business could be starved of cash.

My advice would be not to make any rash financial decisions this week

Where do we go from here?

Markets have edged there way back to near Melt down Monday levels. This was only to be expected, however the unease in the markets seem to be driving prices down further. The dithering that is going on in the US over the rescue plan is having a big impact. If this issue is not resolved happily by Monday trading, then I think we can expect next week to show more losses.