A Creative Implosion
I’ve been remiss in my commentary however I always feel wary when markets tend to rely on governments handouts for a rally- Keynesian policies are capitalism’s kryptonist. The most important qtn is whether the British Isles (Britain & Ireland) are at risk of becoming another Iceland. I welcome the depreciation of the currency and I think for now GBP has bounced off its key support lvls (graph attached) making a run on the currency (my only great fear) less probable now.
Downward Sloping
At the moment two govt. issues; tap by HBOS (guaranteed by HM Treasury) and its indicative lvl is 110bps over govvies. The other is the very successful and well-received long end Denmark bonds, which is indicative that the Danish govt. is pricing their long-ends too cheap (at ~90bps over bunds). The expectation that UK unemployment is going to rise by 1.7mn to 3.3mn in 2010 means that unemployments could conceivably rise from their 3% (980k atm) to ~10%; inflation is now friend not foe. No wonder the BoE minutes released this morning reported the eagerness of the MPC (monetary policy committee- good reminder to write out initials) to reduce interest rates sub 2.5%.
The British economy will desperate need to offset the contraction of financial services (9.5% of GDP) and particularly the threat of regulation in the City of London (3% of GDP). What will be interesting is that emigration levels are going to spike up as so many foreign skilled and unskilled workers leave the contracting real estate and financial industry. Of the estimated 351,000 city jobs there could be around 50,000 (14%) cuts. I don’t want to be unnecessarily mellow or dramatic; in a flexible economy most of those made redundant will adapt (hopefully!). However this contraction is a Jack Welch type of weaning, whereby the bottom 10% of the corporate workforce is made redundant. I’m not agreeing with City culture; in fact I’ve never been a fan of dog eat dog but I always try and see the silver lining in the gloomy storm, its the way I was built.