UK Economy: The Dream is Over

Rob Mackrill - Fri 21 Dec, 2007

No more two-to-one The British pound is down at $1.98 to the US dollar. Which way next? Down some more is our guess. The 2-to-1 level always looked more a weak dollar story than a strong pound one. It flattered to deceive. Particularly now as the news deteriorates in our mini-US style economy as the economist Roger Bootle called it recently...

No more two-to-one…

The British pound is down at $1.98 to the US dollar. Which way next? Down some more is our guess. The 2-to-1 level always looked more a weak dollar story than a strong pound one. It flattered to deceive. Particularly now as the news deteriorates in our ‘mini-US’ style economy as the economist Roger Bootle, called it recently.

As you well know, distinguishing characters in this mini-US economy includes, centre stage, a multi-year house price boom so long in the tooth that most participants have only ever witnessed a one-way ticket to riches. That sort of ring of confidence has encouraged debt. And the good news here was that the money was so cheap. You could borrow three times as much in the early noughties as you could in the ‘80s for the same cost…new lenders popped up and competition got so intense they were virtually kicking your door down to give it to you.

Now the plot line in this long-running pantomime has taken a darker course. Goldilocks and her economy have been rudely kicked offstage as the ugly sisters re-establish their careers. The virtuous circle of rising house prices and cheap money is being upstaged by the hoary cackles of a credit squeeze, falling house prices, flickering inflation from rising food and fuel prices – amongst others - and £1.3trn in consumer debt…pre-Christmas.

Now we’re all watching anxiously as the fairy godfather Mervyn King waves his wand and tries to put the magic back into money. Meanwhile, we’re watching anxiously and wondering if this is one panto without a happy ending. Cue audience: “Oh, yes it is - oh no it isn’t...” ad nauseam.

The news on deteriorating public finances isn’t increasing our confidence...

Yesterday the BBC reported the UK current account deficit is almost reaching the levels – in relation to GDP at least – seen in the US. In the past three months it has hit 5.7% of GDP In monetary terms an increase from £13.7bn to £20bn. This compares with an average of 2% for the past 20 years.

And a cash-strapped Exchequer might overshoot its budget forecast by £5bn as the public sector borrowing hits a record £11.2bn in November. Jonathan Loynes of Capital Economics is not impressed:

“Overall, a pretty ugly picture, supporting our view that the coming economic slowdown will be a prolonged period of adjustment rather than a short pause for breath like that seen in 2005."

A “prolonged adjustment”. Two words with a distinct lack of magic…and not the quick fix an instant gratification tilted society is looking for. We’re thinking the first half of 2008 is indeed going to look more ugly than blond…

*** More bad news for the Bear…a fourth quarter loss of $854m and a $1.9bn writedown in subprime mortgages for Bear Stearns. The loss was almost four times what analysts had been expecting, according to a Bloomberg survey. Well, if the analysts can’t get a handle on it…

Damage from subprime is now opened up on another front. The insurers. MBIA Inc. insures bonds. A lot of them. It’s the world’s biggest in this business, says Bloomberg, and guarantees $8.1bn in collateralised debt obligations and related subprime-linked securities. The company, having kept shtum, was bounced into disclosing this interest after a downgrade in its own rating from Standard and Poors. S&P also placed another four insurers on a “negative outlook”.

Investors have seen the stock crash from near $70 in early October to under $20 today. Ken Zerbe, an analyst with Morgan Stanley: 

“We are shocked management withheld this information for as long as it did. MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.'' 

Not that Mr Zerbe’s own firm is smelling of roses. Morgan Stanley announced a $9.4bn subprime mortgage writedown too…and a cash injection of $5bn from China Investment Corp. Another of Wall Street’s finest turns to new money nations for funds.

*** Finally, please note with Bill enjoying a Argentinean summer and your UK editor a Canadian winter, this is our last issue for 2007. We will return again for a new year of reckonings on January 4, 2008.

Merry Christmas! 

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