Panic Over?

It looks like the great panic is over, for now. The markets were in the green today after heavy losses last week, including a disastrous trading session on Friday. Being the Stock Market we can't say for certain whether this is the bottom, although I would imagine we are fairly close to it. What it has revealed, and will reveal further if there are any more heavy losses, however, is the knife-edge that the whole debt-based financial system lives on.

To a short-term bull and long-term bear like myself, it doesn’t really look like things have actually changed that much. Corporate profits are still good and they should be the main marker for the performance of stocks and shares. Moreover, that elusive recession seems to be somewhere on the horizon but is certainly not close enough to really worry about. So in all reality this is solely about debt, and central banks who give platitudes about Adam Smith and liberal markets but to whom John Maynard Keynes is still the role model. That is why I am calm about the near future; central banks will simply not allow the debt-based economy to collapse. At the first sight of any signs that the economy may be in difficulty, liquidity will be flooded in and interest rates slashed.

What about inflation, I hear people say, haven't the central banks said they are going to fight it? Well, yes, the central banks have talked about inflationary concerns over the last couple of years, and interest rates have been raised accordingly. But, in all reality, faced between the choice of the whole debt edifice collapsing around their heads and inflation being set loose, I think they will choose the easy option. Ergo, inflation will be set loose, and we all know what I believe is the remedy for this.

The Earth's Plentiful (?) Bounty

I'm not a fan of the crass headline, but I am pleased to see that the Daily Mail is interested in tackling the subject of oil reserve depletion:

According to David Strahan, a respected business journalist and author of the new book, the early warnings of an oil crisis were correct in every respect, save their timing.

In the next couple of decades or so, he argues, our civilisation will have crossed a point where the peak of oil discovery and production has been reached.

From then on, the story will be of dwindling supplies and rising prices.

Is he right? Well, he marshals some impressive arguments. The rate at which we discover oil has indeed been falling for 40 years.

In the Sixties, geologists found some 55 billion barrels a year. Today, the figure is down to just 9 billion barrels.

Most worryingly, we now consume three barrels for every new one discovered, and out of the 98 oilproducing nations, 60 (including the UK) are now in terminal decline.

Tax revenues here are dropping as North Sea oil production declines.

Indeed, Britain will become a permanent net importer of oil next year - according to The Oil Depletion Analysis Centre - and then our balance of payments and energy security will begin to deteriorate.

Strahan says: "It's the end of a gravy train for Britain."

Indeed. Our trade deficit is already dire and we haven't begun to the feel the pinch of being a net oil importer.

Let's remember that although it is difficult to fix a peak in the production of oil, - Strahan has predicited 2020 by the way - it doesn't change the basic fact that easy oil just isn't being discovered anymore. Tar sands may be numerous, but are far more difficult and expensive to extract than sweet light crude. And then there is demand, which shows no sign of abating. This all points towards oil trending higher and higher, at the very moment Britain is becoming a net oil importer.

So, all in all, I'm thinking Tony got his timing just right. As for you Gordon...oh dear.

That Escaped Rabbit

So, the result of mild weather has directly led to oil prices falling to a two-year low, stuck in the $50-55 barrel range. Natural Gas has suffered, too, with lower use of central heating.

But what goes around comes around. What the weather has given with one hand it has taken away with the other. Because of scorching drought in Australia, the grain harvest was severely affected. That has sent the grain price soaring, which will feed through into higher prices for all staple produces.

That is from post on this blog, in January of this year.

Let me turn to the reasons for the rise in CPI inflation to 3.1 % from 1.8% a year ago. As discussed in our February inflation report, part of that rise reflects an unexpectedly sharp increase in domestic energy prices during the second half of last year, more than offsetting a fall in petrol prices. Part reflects a rise in food prices cause by a weather-induced global reduction in supply.

That was Mervyn King's letter to Gordon Brown, explaining the reasons for the CPI surpassing 3% despite the recent interest rate rises. Glad to see he's caught up.

So, whilst we are on the subject, where will inflation go next? Well, I am not as easily convinced as many analysts that the bank are on top of the problem, and that we will see a reduction coming through very soon. The high energy prices from last year will fall out of the system, which will undoubtedly have some sort of an effect in reducing it. That's hoping, of course, that oil prices stay at their current level all summer. To achieve that we need to buck the trend for oil increasing during the summer months, and we would need to avoid anything which could lead to oil prices hitting $70+. So, no wars, Hurricanes, supply problems or sweltering heatwaves. Do you feel lucky, Mervyn?

Then there is dear old Gordon's taxes. Even if the oil price doesn't reach $77 dollars a barrel, and even with the fact that oil is cheaper for us now that the Pound is so 'strong' (actually it's the Dollar that is so weak), there is a very strong chance petrol will hit £1.00-a-litre.

I can see, therefore, inflation hanging around the upper 2% range, for the near future. Coupled with the UK's rising trade deficit and with unemployment rising again, the economic future is not looking particularly bright.

Some Late Thoughts on Budget

The annual Budget was delivered on Wednesday.

Reading the Newspapers after the event, I'm firmly of the opnion that the Conservatives and their supporters, are going down the wrong path in attempting to paint Gordon as an unreformed old-Labour socialist. If they are going down that path they will have to explain to the public how a supposed socialist reduced income tax twice, and has now reduced corporation tax.

Now, don’t get me wrong, the budget is all smoke and mirrors. The tax reductions were measly, and will be more than cancelled out by the other increases, especially the National Insurance increment. But this was classic New Labour: panem et circem, headline-grabbing, single-mum sponsoring and, most of all, a lot of hot air which will make little difference to the overall fiscal picture. The problem is, they have been doing this, succesfully, for ten years. The media, especially the Sun, are still lapping it up, as their front page focused extensively on the 'cuts', whilst ignoring the rises.

If the Conservatives want to beat Gordon Brown's New Labour they need to paint Brown as a hammerer of the non-pensioner, non single-mother poor. Surely, by painting him as an old style socialist, the Conservatives give him the chance to play the ‘man-of-the-people’ card, when, in fact, that's something he is definitely not.

As for the rest of the budget, well, the logic of it confused me somewhat. For instance, why was corporation tax reduced, whilst small businesses have seen a tax rise to 22%? Surely, the ‘enterprise culture’ Brown desires relies on the very same small businesses prospering. And, we’re in a situation where many large corporations have recorded record profits – which makes the need to help them hardly pressing.

Green and cigarette taxes are politically a winner. But I’d imagine that a lot of the Mums who have gained with the child-benefit increase, will be the big losers if they’ve recently purchased a gas-guzzling vehicle. If that isn’t the definition of giving with one hand and taking with the other, then I don’t know what is!

Then there’s the crux of the matter: how does this budget affect me? Well, I am, as a single childless-man earning less than £19,000 a year, in effect worse off. The Lib Dems said that people like myself will be ‘subsidising the rich’, more than likely, however, it will be child-benefit and tax credit receiving single-mothers, who will be the ones who gain from my pain. How I can - despite having that thought in my mind and after working a 45-hour week - contain myself from foaming at the mouth with anger, I’ll never know.

Finally, we have a 2p petrol increase, although it will be frozen for six months. So, to say that he has tried to keep ‘inflation and interest rates under control’ seems ludicrous. The price of oil is volatile, and if it increased to the mid-60s or even early-70s in the summer, coupled with this Increase would set the inflationary cat, already on the verge of escaping, free. If that happens then it wouldn’t just be the likes of me who are worse-off, because everyone feels the pain of stagflation.