FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVT VACUUM

FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVERNMENT VACUUM.

Remember Reagan’s famous quip about the nine most terrifying words in the English language? ‘Im from the Government and I’m here to help’ was the infamous line. What a wonderful phrase that was for yesterday’s events with both Lloyds Banking Group and HSBC moving to seek more assistance from taxpayer insurance schemes for bad debt in response to mounting funeral pyres of ‘toxic’ assets. Then the terror came. A huge equity sell-off saw the FTSE plunging down toward the 3500 mark in as the animal spirits of investors were whipped into frenzy over the clear damage of the public sector-led bailout to the future health of the economy. UK Financials in particular were hit very hard over worries that some Banks may be entirely nationalised, with the rest shrinking beyond recognition over coming years as the global financial crisis continues to swing its scythe.

GBP/EUR managed to finish the day around the 1.09 mark with GBP/USD barely recovering to 1.38 having tested the 1.37 levels. As commented on Monday, if any selling was going to be prompted on Monday, it was going to have potential for explosiveness with a lack of any other real data for market players to fight over. In such dark times though, it may provide some balm, for those on the front-line of the currency markets, to have a concerted consideration of the metaphysics of the situation. By this, we refer to what is really at stake beneath the whole hyperbole of frantic analysis of growth, economies, toxic-debt, value destruction etc.

The media, as a reflection of the hopes and fears of society in general, cannot stop bewailing the destruction of all of the above, but what do these categories really mean? As should be relatively clear, markets are made up of assets, although, in fact, the market is itself an asset, it is an ideological asset. Hyper-speed Capitalism, just like the myriad of products it has created is designed for growth. It was designed to offer an alternative to the boom and bust Keynesian markets of the early twentieth century, as well as to offer an opponent to the Socialist model of the same era. However, like the products it produces (i.e currency prices, equity prices, bond prices, house prices) it is first and foremost a system of the mind – it requires belief and co-operation to be sustained. The UK economy is actually quite unique in that it requires belief and co-operation of an explicitly financial nature to be sustained at past levels (bearing in mind the huge proportion of GDP for the UK in past years coming from the financial sector). What is being reflected in currency markets at the moment is therefore, truly special.

Investors are mulling over the very future of London and the UK in a potentially, completely different ideological and regulatory environment – whether or not anyone has real faith remains to be seen. The problem with falling currency prices is the same problem that began the whole economic slump in the very beginning – it is one of over-extension and over-consumption leading to loss of faith, which then leads to over-extension and over-caution. This system should normally, obviously, be self-correcting. However, in a current climate where the structure of the system is being shifted, in terms of private giving control over to public (which is currently most extreme in the UK) then there is little knowing how the situation may change.

Today will see GBP/USD and GBP/EUR holding at the 1.38-1.39 and 1.08-1.09 levels respectively before UK Manufacturing Production data this morning, which is likely to show further massive curtailment for UK Industry. However, considering the velocity of yesterday’s sell off on the Pound, the rest of the day will probably see some stabilisation and profit-taking with possible slow movements back upwards on both pairs.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

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