The Week: 13 - 17 October

We need people to reduce their unsustainable debts. We need people to spend more. Discuss.

Rodney Hobson 17 October, 2008 | 11:06AM
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Rodney Hobson’s popular column, The Week , enjoyed by many Hemscott.com subscribers, is now available on Morningstar.co.uk. The Week provides commentary on the week’s biggest business stories. Rodney Hobson is an experienced financial journalist who has held senior editorial positions with publications in the UK and Asia.

Untying the Gordon knot

There, in a nutshell, is the Gordon knot that needs to be untied. Throughout the banking crisis, much has been made of the reckless lending and borrowing that brought the world to the brink. Much has been made, in the stabilisation of the banks, of the promise that such behaviour will not be tolerated by state controlled banks.

Yes, we need people to cut down credit card debts that they cannot afford and to reduce

their mortgages so consumer cash is pumped back into the banking system. And the best advice to anyone who is struggling is to tell them to stop spending and pay down their debts, especially expensive credit card debts.

Not everyone will be able to afford to do so, and not everyone who can will follow best advice. But either way, there will surely be less money for spending in the shops, while those who want to buy a house are restrained from doing so by the difficulty of getting a mortgage at any price.

Yet the economy needs people to go out and spend, which in most cases will mean spending money they have not got. It is hard to see how responsible borrowing can be restored without provoking a recession. We had tomorrow’s growth yesterday.

We had an alternative take on the dilemmas facing Gordon Brown this week. On the same day that the UK was trumpeting new targets for reducing carbon emissions, the prime minister was calling for cheaper petrol, which would reduce inflation and help the economy but would encourage the burning of more fossil fuel.

Despite Brown’s propensity for increasing the tax take on petrol and diesel while he was chancellor, this is an easier choice. Cutting the pump prices will bring immediate acclaim. Carbon targets are for future governments.

I do not think that the falling price of crude, now at half its $147 a barrel peak, will be enough to avert a recession although the subsequent reduction in pump prices is still feeding through. Incidentally, it is funny how we are all so mightily relieved that petrol is back to £1 a litre. We were equally outraged when it rose to that figure only a few months ago.

Investors are clearly taking a pessimistic view overall despite the one-day leap in share prices this week. As I have remarked before, the big difference between a bull and a bear market is that bad news is soon shrugged off by the bulls while good news is quickly discarded by the bears.

I had hoped on Monday, with the favourable reaction to the weekend bank bail out, that the stock market was starting to bottom out or that at least we would see an end to the volatility.

On the whole, the global banking rescue seems to have done the trick. Anything that can transform Gordon Brown from walking dead prime minister to global financial saviour has to be impressive.

The silly end of the press is campaigning for banks that take part in the UK rescue operation to be able to continue to pay dividends. If they have spare cash, why do they need rescuing? Imagine the outcry if taxpayers money is going in one door and out through another into shareholders’ pockets. It would be nearly as bad as paying excessive executive bonuses.

The government has a vested interest in seeing dividends restored in due course, and the sooner the better. Dividends would give the public purse some return for the investment and would make it easier for the government to dispose of its holdings as soon as it is safe to do so.

An awful lot of bad news has happened in the global economy but there again an awful lot of bad news is priced into the stock market. There have been some positive developments, or at least the removal of some negative ones. Property tycoon Robert Tchenguiz has managed to sell some chunky stakes in UK companies that he bought with the backing of Icelandic banks.

His 3% stake in Whitbread is the latest to be unwound following hefty chunks of Sainsbury and Mitchells & Butlers. These disposals have been achieved without destroying the share prices of these companies. Tchenguiz reckoned he had spotted value in the companies he bought into, and that was before stocks fell heavily. It is worth looking at these companies now to consider if he was right.

Another sign that we might have been near the bottom was news that Sir Philip Green, owner of retail groups BHS and Arcadia, is offering to take control of Baugur’s stake in several UK retailers including Moss Bros, French Connection and Debenhams.

However, subsequent events reinforce the view that these are markets to be treated with care. Just as the panic took falling markets outside the scope of reason, so euphoria is dangerous and it is wise not to follow the herd on the occasional good days and pile in before it all settles down.

This article originally appeared on Hemscott.com. Morningstar and Hemscott are now one company. You can see the original version of this article on the Hemscott web site.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.