By Martin Skinner

I’d been building up to my blog last week on the assumption that more Quantitative Easing would be implemented and support for the banks would be effectively unlimited.  With these now in place it seems to me unlikely that we will suffer the severe double-dip that many are worrying about.  As last weeks’ comments show this isn’t a view shared by all – and it shouldn’t be expected to be; it is just my opinion based on information currently available and forecasting can be a mugs game these days.

Regardless, the news in the financial press is undeniably better now than it was 9 months ago and either my finding out I’m going to be a dad has given me rose tinted spectacles or optimism is returning to the City.

Looking back
Anatole Kaletsky used the example of the irresistible force and the immoveable object at the height of the crisis and argued that the willingness of governments and central bankers to use unlimited guarantees and in theory at least inject unlimited capital (£200bn so far) into the economy was the only way to reverse a classic run on the banks.  This was necessary because banks will rarely have enough money to pay all of their depositors out if confidence goes completely and they all want their money at the same time.

My argument now is that this tactic has succeeded – however it takes a while for markets to shift from ‘batten down the hatches’ to risking capital reserves on growth.  Understandable when you consider just how close we came to utter economic collapse.

Bosses optimism
In the Sunday Times last week John Waples reported on three top chief execs calling an end to the recession in the last week or so – Sir Stuart Rose at Marks & Spencer, Stephen Hester at RBS and Eric Daniels of Lloyds.

Tonight I went to a presentation by St James’s Place Wealth Management and the theme was very much that the returns offered by ‘riskier’ assets like equities, corporate bonds and property greatly outweighed the minimal returns offered by cash at 0.5% – and the expectation was that economic growth was likely to outperform expectations.  I agree.

What do you think is going to happen next year? And what do you think will be the 2010′s top performing asset classes?

In Other News
Some other great articles from the weekend press included:

• David Smith – Are the central banks blowing new bubbles?
• Irwin Stelzer – Barack Obama’s policy errors will stymie the US recovery

Ratings agency Fitch released a depressing forecast for house prices this week and it has significant negative consequences (at least in the short term) for wholesale mortgage finance (RMBS’s or Residential Mortgage Backed Securities).  It got a lot of coverage in the press and has got a lot of discussion going.  My view (shared by a number of very rational economists) is that house prices will not suffer another big drop next year – why would they if the economy continues to recover as forecast?  A tapering off or rises and continued instability in the market (presenting great buying opportunities) is a much more likely scenario.  Central bankers eventually responded well to the banking shock and they’re extremely unlikely to allow a similar financial earthquake to occur again so soon (and that’s what it would take to send house prices down by a further 17%).  Clearly this is an important subject so a lot of this weeks news review will be centered on it and related matters.

Inflation & Interest Rates
The Centre for Economic and Business Research (CEBR) is about to release some research backing up the view that the inevitable fiscal squeeze will mean that inflation and interest rates will remain very low until well into 2014 (0.5% into 2011 & less than 2% into 2014).  David Smith notes firmly (and fairly) that ‘world recessions are not followed by galloping inflation’.  Click here for more information.

House Prices
Halifax of course reported a rise of 1.6% in September.  This is likely to be as a result of thin trading (much as it was on the way down) and part of the rebound after financial Armageddon thankfully failed to materialize.  Expectations are of a positive result for 2009 as a whole and a slow year in 2010 with most commentators (Fitch aside) expecting a modest rise or a modest fall before above trend growth (due to undersupply) sets in for at least a few years and that’s a view I share.  Click here for more info.  Additionally The Sunday Times featured a two page spread with a number of commentators views on the market – generally quite negative on the market as a whole but sensibly backing London as set to perform well regardless of the wider market.  Click here for the full article.  I disagree with Seema Shah in particular – Capital Economics forecast a 25% fall this year and couldn’t have been much wider of the mark.  They were also incorrecly predicted a crash every year from around 2000 onwards.  The market has of course risen by more than 100% in that time.  The fact she mentions in the article considering becoming a first time buyer says it all (she has no experience of residential property investment).  Long-term structural supply/demand imbalance will continue to give the market upward encouragement.  Additionally “with prices stabilising and recently increasing we expect mortgage availability to increase as lenders see diminishing lending risks and competition returns to the UK mortgage market” (Carl Gough, Cazenove).

Gold
Gold prices record levels of more than $1,050 an ounce this week and some expect it to keep rising.  This looks like an obvious bubble brewing and with speculators using it as a hedge against inflation, rather a silly one.

The Dollar & Oil
Discussion has picked up again around the Dollar being dropped as the worlds’ reserve currency for oil.  The report that sparked the speculation mentions a target date of 2018 however so whatever happens it won’t change for a long time.  The Dollar is likely to progressively weaken for some time however if trade imbalances between the US & China in particular are to continue correcting themselves.  Click here for more info.

London’s Financial Strength
Believe it or not the UK has just overtaken America to hit the top spot in a list of leading financial centres compiled by the World Economic Forum.  Wherever the big firms choose to domicile themselves it’s likely that much of the advisory work will continue to take place in London.  London’s liquidity and profile still sets it apart from the competition while Sarbanes-Oxley continues to detract from the US offering.  This is not guaranteed to last forever and the threat of companies moving abroad must be taken seriously.  It’s noteworthy however that 75% of Fortune 500 companies have London offices and 40% of the city workforce are employed by foreign firms – ‘the pools of capital are as deep as the pools of talent.’ (James Ashton, The Sunday Times).

General Business Highlights:
  -  John Waples once again picks out the 50% tax rate for high earners as a threat to the retaining UK’s top talent – why cause so much upset and risk losing so many great people abroad for a tax that will raise negligible sums.  I’m sure most if not all of the take will be lost in administrative costs anyway.
  -  After numerous strikes already this year workers at the Royal Mail are threatening a walkout in the run up to Christmas.  This will only encourage more customers to move to competitors and compound a vicious cycle.  Postal unions have got it horribly wrong and the statistic showing they account for almost half of all days lost to industrial action in Britain underlines this.
  -  Intel have commented on the consumer now taking the lead in setting the pace in the computing industry and a great quote is that “we are still at the Model-T [Ford] stage of computing, that really is true if you think how computing has impacted on our lives in the last 50 years verses the next 50.  It is going to be a lot more pervasive.”
An elite group of women in senior positions at hedge funds have just had a charity fundraising awards night.  Women are known to be less aggressive and be more suited to mitigating risk (surely what hedge funds are all about) than men so it makes a lot of sense to promote their benefits in a an industry they are heavily under-represented in (women control just £7.6 billion out of £166 billion in 800 London hedge funds). 

Environmental Breakthrough
Stephen Levitt and Stephen Dubner authors of the bestselling Freakonomics (a great book by the way) report on a team of world renowned scientists arguing that CO2 (dimming the sun) is far from our greatest threat.  In fact water vapour is the most threatening of greenhouse gases.  “transportation is just not that big a sector (Jeremy Clarkson will be ecstatic)”, “cap and trade agreements are too late” because the existing carbon dioxide will remain in the atmosphere for several generations, solar panels “contribute to global warming” because they’re black and create heat.  For $250 million Intellectual Ventures (IV) are confident that if necessary they could hose Sulphur Dioxide 18 miles straight up into the upper atmosphere and counteract global warming (if the worst climate predictions are correct).  More importantly the knowledge alone could save poorly thought out and expensive anti-carbon schemes from going ahead – billions of poor people could be brought into first-world standards of living instead. 

Self Learners
The world’s best universities are putting their lectures online for free through iTunes U and You Tube EDU and they’ve ‘gone viral’ at light speed.  One example is a lecture from Marianne Talbot at Oxford called ‘A romp through the history of philosophy from the Pre-Socratics to the present day’ that’s attracting 5,000 downloads a week.  Open educational resources (OER) have been accessed by more than 845,000 people around the world in little more than a year of their existence.  In the past month downloads have averaged 400,000 per week.  One study from the University of Fredonia claims that downloading a lecture (by podcast) can be more effective than attending one in person.  Possibly because a podcast allows you to replay difficult parts as and when you want.

I in effect did this, without realizing, for the first time earlier today when I made notes on the ‘Here comes everybody lecture’.  In my opinion this is the crux of the benefit offered by social media – people can teach each other things and pass on new learning at an incredible pace and it will lead to a golden age of progress for humanity.  Just consider for a second how much faster problems can now be solved – no waiting for papers to be published (just watch it online) or to attend lectures (people will direct you to the best ones) and reduce time wasted duplicating work that’s already been done (just search for the latest breakthrough and take it from there).  Phenomenal stuff.  Click here for more info.

In other news
Weird but wonderful, The Sunday Times:
  -  Handbags at brawn.  Two late-night drunks attacked a pair of cross-dressing men, but got more than they bargained for when their victims turned out to be professional cage fighters on their way to a fancy dress party.  Daniel “Lionheart” Lerwell, 23, and James “Lights Out” Lilley, 22, were walking through Swansea late at night when they faced taunts of “Nice dress, gay boy!” from two men.  One then threw a punch at James, who was wearing a pink wig and hot pants.  James and Daniel, wearing a short black dress, suspenders and stockings, felled the attackers.  After retrieving their handbags, the cage fighters left the culprits dazed on the ground.  Daniel, 13 stone and a trained plumber, said he’d been particularly proud of his appearance as his mum had helped him put on his make-up.  “It is a sorry state of affairs when a guy can’t safely walk down the street in a mini-skirt and make-up without getting grief from some idiot”.
  -  Does Ronaldo need the magic sponge?  Two sorcerers claim they are fighting a black magic duel over Cristiano Ronaldo, the former Manchester United footballer.  One of the magicians, named Pepe, said he was paid 15,000Euros to end Ronaldo’s carrer by a “rich, foreign woman who was betrayed”.  Ronaldo who now plays for Real Madrid, has recently been suffering from an ankle injury.  Pepe, clutching a wax doll of the player, says he is responsible for the injury.  “She paid me to end Ronaldo’s career and I’m doing that,” he explained.  A second sorcerer, known as Fafe claimed he had been called in to defend Ronaldo against Pepe’s spells.  He dismissed his rival’s powers, but said he’d burnt candles next to a picture of Ronaldo just in case.  “I have nothing against Ronaldo personally, “ Pepe told Portugal’s Correio de Manha newspaper. “It’s a job.”
  -  How not to prevent leaks … A secret dossier of guidelines has been drawn up by the Ministry of Defence to help officials maintain security and prevent leaks.  The Joint Services Protocol 440 warns of the dangers of journalists, foreign intelligence services, criminals, terrorist groups and disaffected staff.  And the details were secret right up until last week, when they appeared on the WikiLeaks website.

“Individual economies grow and prosper as their inhabitants learn to specialize and engage in the division of labour.  So it is on a global scale.  Globalization – the deepening of specialization and the extension of the division of labour beyond national borders – is patently a key to understanding much of our recent economic history.  A growing capacity to conduct transactions and take risks throughout the world is creating a truly global economy.  Production has become more and more international.  Much of what is assembled in final salable form in one country increasingly consists of components from many continents.  Being able to seek out the most competitive sources of labor and material inputs worldwide rather than just nationwide not only reduces costs and price inflation but also raises the ratio of the value of outputs to inputs – the broadest measure of productivity and a useful proxy for standards of living.  On average, standards of living have risen markedly.  Hundreds of millions of people in developing countries have been elevated from subistence poverty.  Other hundreds of millions are now experiencing a level of affluence that people born in developed countries have experienced all their lives”. (Alan Greenspan, The Age of Turbulence)