All I want for Christmas

Just a small government hand out would do nicely. After all the banks have had largesse pored on them one way or another and now car manufacturers and even hedge funds are getting into the line up. But is this benefiting the average “Joe”? Well some mortgage rates have come down but as with the falling crude oil price what you pay at the pump hasn’t quite matched up. In January crude was $110 a barrel so at $2 to the pound as it was then that’s the equivalent of £55. Today with crude at $40 and sterling at $1.50 that makes it £30 a barrel a fall of 45% in sterling terms. Back in January the average pump price for petrol was 110p; today 90p, a fall of 18%. I am sure there is a logical explanation…please let me know unless you work for an oil company.

In fairness to the banks (not a phrase you hear often these days) mortgage rates for those lucky enough to be on trackers have tracked Bank of England rates reasonably well. For those on fixed our sympathies, but in future remember that it is never safe to make assumptions particularly about interest rates. The “top” in government bonds has been called every month since the middle of last year and yields are still falling. The UK 10 year gilt yield is getting preciously close to 3% and with spreads on investment grade corporate paper looking increasingly attractive the whole world is talking about the only trade in town. Sell governments and buy corporate bonds.

Well it hasn’t worked yet but as fund managers are wont to remind us they are never wrong just early! Long Term Capital Management (LTCM) believed they could never be wrong betting against interest rate spreads but proved spectacularly that in some cases timing is everything. With deflation the number one enemy at the Federal Reserve government yields could continue to fall. No one is quite sure whether or how the huge “support” operation is going to work. In fact neither it would seem does the government. The TARP pool has had at least three changes of direction; the latest being to fund the loans to General Motors and Chrysler. In this environment safety is still at a premium and government paper is still in much demand.

The purveyors of corporate bonds say that the Treasury and Gilt markets will be swamped with new issuance but given where cash rates are, government bonds are still attractive to those of a nervous disposition, i.e. those who used to believe that bank deposits and money market funds were safe. So 10 year yields at 2% (or below if you have a suspicion we are following the Japanese example) would give a mighty attractive return. But Economics 101 says that a “great inflation” is coming as the Fed’s printing presses glow hot; quite possibly but not for a while yet. Unemployment is rising rapidly around the globe, GDP is falling and retail spending would have ground to a halt had it not been for Christmas. Even so, to get people in the shops, and parting with cash, has meant the New Year sales starting early and with Woolies and MFI closing down the prospects for 2009 look bleak. House prices continue to fall and motor dealers are “giving cars away”. Inflation? Show me!