Tuesday, October 7, 2008
When good news is no news, no news is good news!
We have got used to positive news about measures to resolve systemic problems being discounted by the markets and bad news items, however trivial when seen in wide-focus resulting in market panic reactions! Tonight, in another effort to soothe concerns about banking sector losses, about bank risk ratings downgrades, and because interbank rates remain stubbornly high, PM Gordon Brown, has ordered what in UK terms is a massive taxpayer-backed cash injection to rebuild the balance sheets of UK's clearing banks, effectively part-nationalising them at a cost of undisclosed tens of £ billions. He has sanctioned public funcing to recapitalise the leading banks, to restore confidence in the system and to encourage them to start lending to each other again and so that they can borrow at lower rates, domestically and internationally.
Following announcement of the UK Government's new funds for UK banks 3 month £ LIBOR should fall though not by a significant amount, maybe 50bp, but this may point to a trend turning point presaging a 50bp bank rate cut on Monday? It will take some time before interbank rates fall significantly. Financial firms have been said by some analysts to be hoarding money to cover potential losses. It may be equally true to say that many banks have cashflow shortages. In the current hyper-sensitive climate, any warnings about liquidity and solvency, or other bearish news and rumours, can become self-fulfilling!
This week, for example, UK banks' economists predicted recession next year and the CBI next weighed in saying recession is here now? I recall the OECD forecasting 10 months ago that UK GDP will slow to 2% in 2008 from 3.1% in 2007, largely because of a weaker housing market - case of further insight into the bleeding obvious, except the growth rates were absurd and took no account of financial risks? OECD, also at that time, predicted US GDP would slow at the start of 2009! As explained before I think none of these estimates can be reliable indicators - we do not yet have reliable GDP data. Merril Lynch and Citibank in January of 2007 predicted recession this year or next. The only good thing about all such estimates is that they can be all over the place. The bad happens when some economist egos should choose these turbulent days to come out with their miserable macro-guesstimates just because they know they'll get front page headlines!