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Humility Becomes The Bank Of England

By Andy Shaw | January 25, 2010

Originally posted 18th May 2009

The quarterly work of fiction has just come out from the Bank of England and as usual they have got some pretty big assumptions wrong. However, in this report as well as in the press conference, I saw a more reserved approach from Mervyn King.

I think he had been riding on a decade of success where whatever he said was pretty much ok and then after his TOTAL failure to recognise the recession/depression coming (the D word has not left my vocabulary, despite other commentators now believing we are actually through the storm and starting to recover) he now is less confident (wisely) of the accuracy of his predictions. As with anyone who has had life give them a smack in the mouth, he is treading much more cautiously now.

Well, here are the notes I made whilst reading and listening to the report:

King says it is worse in other countries than in the UK, and some of what he says is right. However, other countries are nowhere near as exposed as we are and that could and probably will prove very bad for us when the new money in the world actually figures out that the UK is one of the most over exposed of all the financial nations. Even though we will not end up like Iceland or Ireland, we are in a similar predicament only on a much bigger scale, but with big friends and big bargaining chips.

I think their GDP fan chart is wrong, as it shows on page 9 we in a ‘V’ shaped recession. We are not, we are in an ‘L’ shaped recession, so the assumptions for the remainder of this report will be wrong once again.

They said that they are favouring 2 years of stable bank rates to get inflation back on track. Now as their prediction of the economy GDP is wrong, this means we will see low rates for at least 2 years. In my opinion, as the GDP fails to deliver as I predict, then the 2 years won’t start for a fair while yet. If the ‘L’ shape happens as I predict, then we could see Japan style long term low rates. The first real signs of this will be in the November report and the February report will confirm it, although I expect they will try and dress it up somehow.

Again, he admitted that there has been more bad news than they foresaw in their February report. Well guess what, as I have said on every previous report I have commented on, he got this wrong then and he has done so again now. Is there any reason to believe his predictions after they have so got it so consistently wrong? The fact is his report now shows a ‘V’ shaped recession, yet when he speaks he is saying that this could be wrong. He knows damn full well that we are in an ‘L’ shaped recession/depression but he won’t say so…because the British people, the world and most importantly the markets can’t handle the truth.

He has said that the timing and the pace of recovery is very hard to judge. Finally, I agree with him and he is not joining the crowd of ‘goofballs’ that are saying we are coming out of the recession. Yet his report clearly shows that they think we are… why did none of the journalists push him on this point…talk about media control. However, over the next few months it may well be that I am wrong and the goofballs are right. As I have said before we will see over the next few months (exactly when I don’t know when) what looks to be an end to the recession. However, this will be driven by sentiment and not by real support, so of course it will fall back, but it will look like I am wrong.

The report is keen to show that the committee is voting unanimously. This is just marketing as they have got it wrong so often that when they all agree they have to shout about it.

Again King is keen to say we don’t know what is going to happen. Though as I have said, he thinks that this recovery is not real and is just a bear market rally.

King said that he has no idea of when the banks will feel comfortable enough to resume lending, as whilst they are private they will remain averse to risk for ‘quite a while’. I do not think we will see the cheaper deals returning to the market for at least the next 3 months and my prediction that ‘good’ish deals will re-appear in September is now be at risk of being incorrect. If this happens the way I think it will, then we will not see good rates until March 2010 at the earliest. Given that we will be going through a terrible winter and unemployment will be the key word on the news, then it could be much longer. In other words, the window of opportunity I spoke about a few months ago is not likely to open up.

He admitted elsewhere that it would take longer to restore bank lending than they had thought in February’s report.

According to King, there are 3 key factors why there ‘could be’ a recovery (more marketing – he’s trying to sell us snake oil):

1) Massive policy stimulus
2) A fall in the exchange rate
3) The turn around in stocks

…which when taken together, make a solid reason to expect a recovery.

Here is why this is wrong…firstly he is ‘talking’ it up as he thinks that could be enough, well not this time. The massive policy stimulus just won’t be placed selectively at pivotal points as we are seeing from the money spent with the banks. So what will happen is that the effectiveness of this will be massively reduced (it will of course cost us for the future). This is like giving a poor investor piles of cash, some of it will work but most of it they will lose.

The fall in the exchange rate will provide good results but they will not be as good as he thinks they will as the ‘new’ money will start to consider whether the UK could become a copycat Japan.

His last point is the turn around in stocks. This is a bear market rally, nothing more, and this bear market rally could look the same as the one in 1929 when the market rebounded 48% before crashing further still.

So his 3 main points are, in my opinion, just bravado. He is trying to sell us snake oil when he knows as I do that next winter we will start to feel the real pain of this recession, he is just talking it up!

King is now trying to say that he is just showing us where the risks lie and he is not saying that this will be the future. It is amazing the humility that can show in one who has gotten it so wrong. The question is, is there any reason to believe he has got it right now?

Averages of other forecasters see base rate at 0.7% in 2010 and 1.9% in 2011 and then rising to 3.4% in 2012. I am not in anyway convinced that these figures are correct. However, given the current climate, I can see them stupidly putting the rate up to 0.75% in Jun to August time next year. Then I can see them considering to reduce it again in October or November time when they start to see the cracks appearing.

The following year it is likely to rise to 1% at some point and maybe stupidly to 1.5%. However, 2012 will be the first year that we see any real growth in figures. So I broadly agree with these assessments. However, that does not mean I think they should do this. I think they will be completely wrong in raising rates until we have ‘normal’ bank lending and sustained economic growth. However, the likelihood of them thinking this way is nil, as it is in their interest to have higher rates than are here today.

I would say they will repeat the mistakes of the Great Depression again and raise rates too soon, which will lead to a few years of prolonged recession.

Ok, some of that makes for fairly depressing reading. However, forewarned is forearmed, there are going to be opportunities everywhere as the mass of investors will believe this work of fiction and we will be able to capitalise on their faulty assumptions. As different opportunities come up I will keep you informed of my thinking so that you can stay ahead of the herd. However, for the next few months I suggest you watch the media closely as they may well convince you that a recovery is going to happen. After all, some reports I have read recently nearly manage to convince me :-)

Best wishes

Andy

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