Darshan's Blog

Darshan's Daily Market Ponderings

Tuesday 26th January, 2010

Gordon Brown's Fictional GDP Number?

Well, finally we have some juicy economic data to talk about. For now, the markets are doing exactly as predicted yesterday and I envisage one thrust down to 10100 or 10000 on the Dow and then a move up for a day or two (towards 10400), before we tank next week. Of course we already got our first move down to 10100 overnight in the futures , as the Asian markets fell hard - so that was a big clue, as to the plan mentioned yesterday. Although, if you listened to the news, then the falls were due to China (yet again) curbed bank lending.

Listen, I'm getting pretty fed up with these excuses - each time Asia falls - it is due to 'China curbing bank lending' and each time it rises the next day, miraculously the last headline is forgotten. Someone needs to take these financial news editors into a room and teach them to stop being so lazy. I don't care how they do it - just do it. Pure and simple, the big money is just working off a very overbought market and bringing it down to support in a controlled manner. China is always going to increase and then curb bank lending - it is irrelevant in the short term. (In the long term, just be aware that to me, China is just a huge bubble waiting for a pin to prick it).

So with that out of the way, let's get back to the UK. Today economists had forecast that the UK would leap out of recession. When I say economists, I actually mean Gordon Brown. They had expected a 4th quarter increase of 0.4% and what did we get? Yep, 0.1%. Amazing! The UK is out of recession - the BBC can go manic, Gordon Brown can hug Darling and we can all go and spend. If only - the fact is that it smacks of being a political number that will be revised down. We couldn't even manage a 0.4% increase in a quarter that includes Christmas! The lowest prediction was 0.2% for crying out loud. Everything about this says "Okay we have an election coming up, we need to say the UK is out a recession - what's the lowest number we can put together - which is just enough to get us that headline?" - "Ah 0.1% - brilliant, work out how to get that number, get it and call someone at the BBC and make sure I am seen to be a God!".

Sure a headline of "We are out of the recession" is great reading, a month before a possible election - but we've come off 6% in the last 6 quarters - so what exactly is a 0.1% increase in GDP? The reality is that the number is weak. We are a services economy (76% of the GDP) and yet services only expanded 0.1% on the quarter. Somehow, industrial production grew 0.1% too. Not exactly sparkling numbers hey? What is the Bank of England to do? It is due to decide when it can join the US, in withdrawing the liquidity pumped in from the QE efforts. What is it to do here? If it extends it, then how does the UK feel about the credit agencies bashing down the door? The BoE has already purchased #200bn in bonds - how much further can this madness go on? As can be seen with Sterling falling all morning - it seems the smart money feels that QE will be extended into at least June. Brown's in a bit of a mess here.

While his sidekick, Alistair Darling is going on about the GDP growing the next quarter by at least 1% due to exports - you only have to look at Japan for proof of what we have in store. (Oh I forgot, we are not an exporting nation like Japan! Darling you idiot). Japan has been where we are and yet they actually make physical goods, which other countries buy off them. We sell services - which other countries can do without. Yet 20 years later - Japan is still having issues with deflation. Only yesterday, ratings agency - Standard & Poors, cut Japan's outlook to negative but kept it at AAA. Why? It cited "diminishing economic policy flexibility" as the key concern. Ring a bell? We have exactly the same issue in the UK. The BoE has no choice but to keep buying bonds, pumping liquidity- which of course the banks pump the markets with instead of powering up the multiplier and on and on we go. At the same time, the government has no choice but to keep borrowing to keep the country going and cutting funds to what we actually need to work - schools, infrastructure, healthcare, services - to make up for the extra borrowing. What a bloody mess.

So how do we solve this? Well a political change is one thing to just lift the country from the negative energy that Brown and his merry circus of clowns impart upon us, every time they speak. What we also need is a very quick and utter reality check. It's not regulation we need but for the incoming government to let the banks function without support. Market forces need to be allowed to do their job - stop this Keynesian madness. Let the institutions that are in trouble, collapse*. We need this to happen, so we can focus energy and funds on the businesses that can actually work. Secondly, make the process of funding small to medium businesses far more efficient. Allow the creation of new banks that function entirely on this and that do not have investment banking divisions attached to them. Let a retail bank be a retail bank and an investment bank be an investment bank. Finally stop worrying about banks and bankers leaving London. They won't. Where are they going to go? Switzerland you say? Fine - let's see how many actually do this. I am willing to bet not many.

Anyway rant over (as you can see this all makes me very worried and very angry) - for today, focus on the markets finding support for a day or two, once we hit those lower levels. We should have a more worrying end of week I should think. For now enjoy the calm. I hope some of you took the AUD/USD trade I recommended yesterday? You should be over a 100 pips in profit already. If you did - trail your stop and lock in the gains.

Happy trading and Good luck!

Darshan

*By this I mean RBS. I can almost guarantee that RBS will be pumped up to above 52p, so that the Government can say "Look we made a profit on our investment" but ultimately, it is just a dead bank being propped up by clueless politicians...so in the long run it is heading to zero anyway.

*The information contained on this website and from any communication related to the author s blog is for information purposes only. The analysis and the market recap do not hold out as providing any financial, legal, investment, or other advice. In addition, no suggestion or advice is offered regarding the nature, profitability, suitability, sustainability of any particular trading practice or investment strategy. The materials on this website do not constitute offer or advice and you should not rely on the information here to make or refrain from making any decision or take or refrain from taking any action. It is up to the visitors to make their own decisions, or to consult with a registered professional financial advisor.