A Precession rather than a Recession

Its a torrid day on the stock exchange with falls of 5% to 25% across the banking sector. This leaves the Royal Bank of Scotand (RBS), Halifax Bank of Scotland (HBOS) and Bradford & Bingley all trading below their deeply discounted rights issues. The banks, estate agents and house builders may all be in trouble but is there a recession? Technically no. The preferred definition of a recession is two consecutive quarters of declining GDP. At the moment the available data tells us the economy is still growing. However, there is litte good economic news and what we get seems to imply there's a recession on its way. My definition of this is a pre-cession. Its going to happen but its not here yet.

The bad economic news contrasts with my day to day feedback from clients. Most will admit trading conditions are tight. But they are far from declining. I have picked up two new clients in the past month. And one client has announced he is to treble his marketing budget. I get the distinct feeling that athough the financial and building sectors are in trouble, much of the rest of the economy remains largely unscathed.

John Charcol Fires 25% of Workforce

As the crisis in the UK homes market continues to intensify, leading independent mortgage broker John Charcol has announced that a quarter of its staff is to be made redundant. Charcol has a tremendous reputation and frequently quoted by the quality newspapers. If they're in trouble then the weaker players must be in a really bad way.

Reports are now flying on from all directions that the housing market has collapsed. Price and transaction levels are falling. Yet little has really been done by the UK government. Maybe it's time for a review of stamp duty.

LinkedIn Worth $1 Billion

According to a report on Telegraph.co.uk, social networking website LinkedIn is now worth $1 billion. The valuation is based on $53 million of new capital from Bain Capital. Some of the new money will be used to expand in Europe. LinkedIn already has more than 1 million members in Europe.

I am a member of LinkedIn and cannot see what the fuss is all about. I find the navigation system extremely hard to fathom out.

Willem Buiter Calls for Rate Rise

Meanwhile, with B&B entering the financial intensive care unit, former Monetary Policy Committee (MPC) member Willem Buiter is calling for a rise in base rates. Buiter, a professor at the London School of Economics (LSE), believes the threat of inflation is a real danger to the long term health of the economy. He doesn't go as far as me in suggesting that the attempts to alleviate the credit crunch are directly fuelling speculation in commidities, but he does suggest that governments are being dishonest in not owning up to the fact that there is an inevitable decline in living standards that governments are powerless to stop. As Gordon Brown is finding out, declining living standards don't play well with democracies.

Bradford & Bingley Raise £400m

Bradford and Bingley's shares fell 20% this morning as formal details emerged of a £400m+ refinancing plan. Stage 1 involves an injection of £179 from new investo Texas Pacific Group (TPG). TPG acquires 23% of B&B's equity. Stage 2 is a rights issue to existing shareholders priced at 55p per share.

Rumours have been circling for several week's regarding the problems at Britain's biggest "buy to let" (BTL ) lender. B&B has a 20% share of the BTL market and this segment of the mortgage market was perceived to be particularly vulnerable to the property downturn.

An immediate casualty of the bank's troubles is chief executive, Steven Crawshaw. Crawshaw is apparently on sick leave suffering from angina. A fairly serious health complaint. Crawshaw made the mistake of denying the need for a rights issue only 2 months ago. Now that the funding crisis is acute, he is an obvious candidate to join Northern Rock's Adam Applegarth on the banking career scrapheap.

UK House Prices Continue Fall

According to Britain's largest building society, The Nationwide, UK property prices fell 2.5% last month. This is the biggest monthly fall since records began 17 years ago.

Whilst some analysts expressed surprise at the rate of the decline it is obvious that the decline should be short and sharp. Housing is a non-perishable product. If everyone from the Council of Mortgage Lenders to the Government is predicting a 10% decline over 12 months, why would any purchaser not hold out for a reduction against asking prices set in a more buoyant environment? In essence these forecasts, particularly those from more credible sources, tend to be reflexive. That is self-fulfilling prophecies. As sellers, buyers and lenders lower their price expectations.

Bill Gates Buys into Carpetright

According to a report in today's TIMES, Microsoft founder Bill Gates has bought into UK furnishings retailer, Carpetright. The 3% investment has been made via the Cascade Investment LLC, the personal investment company of the billionaire. The investment is thought to be worth £15 million.

The UK furnishing market has been going through a tough time. The credit crunch and the consequent reduction in home moving activity has reduced underlying demand. The early May hot weather also saw demand for products such as beds drop as consumers directed their attention to outdoor activities. Gates' advisers have obviously spotted a European buying opportunity. The UK remains outside of the Euro, which has strengthened significantly against the US Dollar.

Carpetright is led by Lord Harris of Peckham, who founded the business in 1988. Carpetright has stores in Belgium, the Netherlands and Poland.

Denis MacShane MP Calls for Tax Cuts

In today's Telegraph, Labour MP Denis MacShane calls on Gordon Brown to cut taxes.

Here is a direct quote from MacShane's article.

Any prime minister in office today would feel the voters' anger as they see their cherished plans to spend their own money as they see fit destroyed by rising prices combined with the insatiable greed of the state in all its manifestations to take the people's money for its own, often incompetent and counter-productive ends.

I particularly like the reference to "insatiable greed". Denis MacShane, the MP for Rotherham is acutely aware that the real backlash against Brown is that he is obsessed with tax and spend. Brown is an unreconstructed socialist obsessed with destroying the middle classes ability to become independent of his client state. To problem now though, as MacShane observes, is the way the tax burden has risen for those on average incomes. It is these people that are deserting Labour in their droves.

Mortgage Lenders Predict House Price Decline

The Council of Mortgage Lenders have predicted a 7% fall in UK housing prices during 2008. This a 6% decline from existing prices, already down 1% on 2007. As I have mentioned before, such forecasts tend to be reflexive. Or in laymans terms, self-fulfilling. Once the people who control the vast majority of the finance markets for houses decide your house is worth 7% less than a year ago, they will lend proportionately less to fund its purchase. The prices therefore come down. A problem is the speed at which this happens. In previous downturns sellers failed to respond to the new, lower, price expectations and property remained unsold. If this happens, the market will ground to a halt, leaving estate agents, solicitors and DIY stores with much lower levels of business. This of course leads to more unemployment. Only this week, Economist Roger Bootle forecast that unemployment will rise by 750,000.

In my view the market will adjust more sharply. There will be a bigger price decline as buy to let landlords and those with highly leveraged borrowings bring a glut of property to a difficult market.

Oil Hits $130 per Barrel - before the fall

According to a report on Telegraph.co.uk, the price of crude oil has now reached $130 per barrel. Worse, the price of future oil is rising. With prices for deliveries next month rising $15, and prices for 2016 rising $25. The figures indicate that the market for oil speculation is taking on further momentum.

In my opinion, just when everyone climbs on the speculation bandwagon we should start looking for an oil price fall. Sophisticated economists may well talk about the decoupling of underlying GDP from oil prices, and vice versa. I suspect, however, that once all the liquidity pumped in to prevent the credit crunch destroying the housing market is used up oil prices will at first stabilise and then fall. As an asset, unlike shares, oil doesn't pay a dividend and is expensive to store. When the GDP downturn bites, speculators will move out of oil as quickly as they deserted sterling back in 1992.