Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

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


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

© 2005-2019 - 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