Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
THEY DON'T RING THE BELL AT THE CRPTO MARKET TOP! - 20th Dec 24
CEREBUS IPO NVIDIA KILLER? - 18th Dec 24
Nvidia Stock 5X to 30X - 18th Dec 24
LRCX Stock Split - 18th Dec 24
Stock Market Expected Trend Forecast - 18th Dec 24
Silver’s Evolving Market: Bright Prospects and Lingering Challenges - 18th Dec 24
Extreme Levels of Work-for-Gold Ratio - 18th Dec 24
Tesla $460, Bitcoin $107k, S&P 6080 - The Pump Continues! - 16th Dec 24
Stock Market Risk to the Upside! S&P 7000 Forecast 2025 - 15th Dec 24
Stock Market 2025 Mid Decade Year - 15th Dec 24
Sheffield Christmas Market 2024 Is a Building Site - 15th Dec 24
Got Copper or Gold Miners? Watch Out - 15th Dec 24
Republican vs Democrat Presidents and the Stock Market - 13th Dec 24
Stock Market Up 8 Out of First 9 months - 13th Dec 24
What Does a Strong Sept Mean for the Stock Market? - 13th Dec 24
Is Trump the Most Pro-Stock Market President Ever? - 13th Dec 24
Interest Rates, Unemployment and the SPX - 13th Dec 24
Fed Balance Sheet Continues To Decline - 13th Dec 24
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

More Bank Bailouts to Come, So Keep Selling Sterling

Currencies / British Pound Jan 20, 2009 - 06:12 AM GMT

By: MoneyWeek

Currencies

Best Financial Markets Analysis ArticleHmm. I'm not sure that Gordon Brown got the result he hoped for yesterday.

After the first Great British banking bail-out, Mr Brown thought he had saved the global banking system – the "world", no less. And plenty of pundits were happy to indulge his fantasies.


But yesterday, the Great British Banking Bail-out (GBBBO) Mark II revealed that he hadn't even saved the UK 's banks. £37bn of real money (as opposed to promises or guarantees, we're talking cash that's been spent) later, and the economy's still in deep trouble and we're no closer to knowing just how bankrupt the banks actually are.

The markets now seem to expect that a GBBBO Mk III, involving large-scale nationalisation, is just around the corner. But can we afford it?

Uncertainty means investors will plan for meltdown

Royal Bank of Scotland 's share price demonstrated just how impressed the markets were with Gordon Brown's new bail-out plan. It dived by more than 60%. The bank's market capitalisation is now just £4.5bn, compared to £78bn a year and a half ago. Investors, realising that the Government is now on course to own 70% of the bank, are almost pricing in full-blown nationalisation.

The trouble with the new bail-out, with all its fiddling about with insurance and guarantee schemes, is that we're no nearer to knowing just how much dross is on banks' balance sheets. Until investors know what the worst-case scenario actually is, they'll plan for a meltdown, and rightly so. Barclays, for example, which is doing its very best to remain free of government control, saw its shares take another pasting yesterday. The bank says its profits for 2008 will be "well ahead" of forecasts but the trouble is, no one believes it.

There's a fear that it still has a lot of dodgy assets on its balance sheet, and that if it's forced to take a long, hard look at these by the Government, then we'll see hefty write downs.

The longer the uncertainty continues, the longer it'll be before markets can be sure that a floor has been reached. As CLSA's Christopher Wood points out in the FT this morning, "the ultimate endgame in countries such as the US and Britain is still likely to be full-scale nationalisation of the banking system," but it would be better done sooner rather than later, "since it would accelerate resolution of the financial crisis."

Bank of England to start printing money

The other big news was that the door has been opened wide for the Bank of England to embark on quantitative easing (that's Bank-speak for "printing money"). The Bank will get £50bn to buy assets such as corporate bonds. The idea is that by buying corporate debt, it will drive down yields (yields fall as prices rise) and so cut the cost of borrowing for companies.

It also means, of course, that the Bank is on the hook if its purchases go bad. But while an ordinary investor would lose money in that situation, all that will happen with the Bank is that the Treasury – ie the taxpayer – will cover it. Spending other people's money, with no comeback if you lose it, is not a great incentive to do proper due diligence – just ask anyone whose asset manager gave their money to Bernie Madoff.

For now, the Treasury will issue short-term gilts to give the cash to the Bank. That means that we're not quite at the full-blown money-printing stage – this is money coming from private investors, via the Treasury, to be invested by the Bank in assets which no one else on the market wants to buy. But it's easy enough to move to the money-printing phase (as the Federal Reserve has already done in the US) – rather than raising the money via the Treasury, the Bank just hits a computer key and creates it out of thin air.

Sterling took another beating yesterday

Given all that, it's small wonder that sterling took another beating on the foreign exchange markets yesterday. The pound fell by more than 2% against the dollar, and 3% against the yen. As Audrey Childe-Freeman of Brown Brothers Harriman told the FT: "The fact that the UK needs another banking package after £37bn was pledged only three months ago is very worrying… it's negative for sterling because investors start to think: can the British government really afford all these measures?"

There'll be plenty more worries ahead for sterling in that case – because we certainly haven't seen the end of the banking bail-outs.

By John Stepek for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in