A Courageous Decision on Market Turmoil

A Courageous Decision on Market Turmoil

Trading Features / Strategies from Simon Denham of Capital Spreads.

Just when you thought it was safe to go back into the water the Dow Jones drops 680 points in a session.

The more you watch the various twists and turns of our great leaders the more you begin to believe that they have as much clue as I do as to how to put a stop to the turmoil. The underlying reality is that the falls of the last year have been caused by too much money supply operating for far too long. Money has been too easy to get and to spend.

In the UK money supply has been running at over 10% for years with growth of around 2% (here or there) and inflation of around 2% (here or there) as well. All this money had to go somewhere and in the main it went into assets (houses being the main one). This was not helped by a government that continued to add stimulus packages even though the economy was trundling along quite nicely anyway. That meant that even in the best of times there was still a PSBR instead of a surplus.

The result is that the elastic band eventually snapped back. The banks have suddenly had to operate in a world of shrinking liquidity. Not surprisingly they have decided that they want to start restricting their exposure by cutting back on lending.

In response, over the horizon rides the Lone Ranger in the guise of the Fed, the BOE, the EBC, Bank of China etc to save the world economy. Their reaction has been, and continues to be, ‘print more money’ keep the ride going for one more round and something might turn up. A redundant man applying for one more credit card on the basis that a job ‘is sure to turn up soon’.

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Unfortunately this time the spending impulse is unlikely to have much impact in the short to medium term as the down turn has not really been allowed to run its course yet. We might believe that the worst is over…and it might be, you never know…but unfortunately this will not stop the continued destruction of loss making companies.

The huge injections of liquidity will keep the edifice lurching on a bit longer but the more we try to prop it up the bigger will be the eventual fall. It will be many, many months before growth starts to be positive. If a business is only surviving on overdrafts and borrowings now, what chance in 12 or 18 months?

Gordon Brown’s accusation that the Tories were the ‘do nothing party’ should become the Conservatives slogan. We have tried the pump-prime method, now what is needed is harsh reality. Get the country’s (and individuals’) finances back in order.

This will take many years and will be unpopular...it is what Sir Humphrey in Yes Minister used to call ‘a courageous decision’. However that does not mean that it is wrong.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'A Courageous Decision on Market Turmoil' edited by DB, updated 02-Dec-08

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