What do we have to look forward to....unemployment!

This morning the CBI have today announced that the recession in the UK will be tougher and last longer than expected with the economy set to contract 1.7% in 2009 and unemployment to hit 9% in 2010 (3m people out of work).

Add that to the news last week that BT are cutting 10,000 jobs, RBS 3,000, Virgin Media 2,200 Yell 1,300, JCB 400, Friends Provident 280, Leyland 250. And expect the list to continue growing as firms look to scale back operations and cost cut - according to the Press Association, Next are planning to cut jobs next year. Figures released last Wednesday showed unemployment to be at an 11 year high of 1.82m in the 3 months to September as firms cut jobs to cope with the economic slowdown.

The good thing is that in the medium to long term the recession should (in theory) push firms to become more efficient which should result in lower prices.

However, that obviously is not the immediate concern. Job security is essential for confidence in everything from politics to the markets. If people feel their jobs are unsafe, they save money for a 'rainy day' - less consumer spending, negative impact on GDP, further recessionary pressure...more job cuts! Again, more evidence to suggest that we are still far away from the worst this era has to offer.

The Financial Service industry, which was the single largest contributor to the period of sustained growth in the lead up to the 'credit crunch' (and cynical people may argue they were also the cause - but not me!), has also been hit hard. This trend is set to continue says Mark Kleinman in the Telegraph:

"In recent weeks, investment banks including Citigroup, Goldman Sachs and the former ABN Amro operations owned by Royal Bank of Scotland have embarked on new waves of redundancies, at the likely cost of thousands of City posts. Both Citigroup and Goldman are letting about 10pc of their workforces go, a proportion which, if applied to JP Morgan, would result in more than 3,000 jobs being slashed around the world. "

This is major blow for the City and the British economy. Despite being criticised by many commentators for causing the crunch through excessive risk taking and accepting ludicrously high bonuses (and pretty much any other buzz phrase that I am sure most of them don't fully understand) it is ironic that developments and enterprise in the FS industry which led the London becoming the financial capital of the world also led to economic prosperity, near to full employment and a generally higher standard of living. Without it, the City is dead and the British economy would be soon to follow.

During the much documented, and historically significant, G20 summit, the 20 biggest economies in the world agreed a plan to stimulate economic growth with interest rate cuts and government spending. They also insisted that Financial Institutions (banks, insurers, hedge funds, private equity) should hold more capital which will means less business and lower profits. As Robert Preston puts it:

"The City of London will shrink. And what was for many years the engine of the British economy, generating a third of economic growth and a significant proportion of tax revenues, will be running at 30mph, not 90mph. There is a cost to making the world a safer place. And much of the bill is being picked up by the UK."

Last week Germany officially plunged into a technical recession following worse than expected economic activity and, as Ralph Atkings at the FT put it, "intensifying fears about the depth and duration of continental Europe's downturn." A technical recession is defined as 2 consecutive quarters of negative growth (GDP is the measure of growth). This was followed by similar announcements by the Euro Zone, Italy and today the world's second biggest economy, Japan, added to the woes. Growth in Japan has been hit by the global economic slowdown which has curbed demand for Japanese exports. The US is expected to follow suit in January.

The key question is - how long will it last? Following the dotcom bubble, the US went through 2 quarters of negative growth followed by a rapid recovery. The recession that began in 1980 lasted 5 quarters as did the one in 1990. The National Institute of Economic and Social Research expects four quarters of negative growth and then stagnant economic output for some time after that.

Hugh Pym, the BBC Economics Editor notes:

"Those two recent recessions saw big declines in manufacturing output which led to factory closures and sharp rises in unemployment among manual workers. But manufacturing now accounts for a much smaller share of GDP. What no-one knows is how an economy with a much bigger share taken by financial services will react in a downturn."

My guess would be 'not well.'

My solution - and this good - there isn't one! As any economic academic will tell you, we are following the classic business cycle model. Following every boom there is a bust. And this is no different. Government intervention through monetary and fiscal policy and initiatives to stimulate spending and employment, can help find the bottom sooner but there is no simple fix to the problem. We have to ride an endure the recession storm for at least the foreseeable future.

FTSE.....

The FTSE continued to react of the support and resistance points which I noted on my blog on the 7th November towards the end of the week.

There was an opportunity to go long @ 4075 following the double bounce off it on Thursday (against the trend, very risky).

This could then have been closed and reversed @ 4440 late Thursday evening into a short position. The short could have been doubled up @ 4335 and again @ 4200 late Friday/today. Look to close @ 4075 early this week.

New points of note:

Support – 3830
Resistance – 3945 (previous resistance could provide support)

Tax Cuts and Falling House Prices - really bad news?

Gordon Brown and his rivals have come out this week with tax cut proposals ahead of the pre-budget report which is expected next week. One thing they all agree on, consistent with the announcement of such cuts in the US and Germany, are that tax cuts are a useful tool during an economic crisis to increase consumer spending. The theory is simple, people pay less tax, they have more disposable income so they spend more (interest rates are low so incentive is to spend rather than save). Sounds like good news right?

The problem arises when the question is asked "how will the tax cuts be funded?"

The government is currently 43% of the UK's GDP or approx £640bn. A lot of this debt was accrued during the economic expansion and was used to fund public ventures (health care, education, etc). One obvious issue is that by lowering taxes now the government are prolonging the time it will take to pay it back - hence future generations will be burdened by our debt for which they will see little benefit (lower taxes now mean higher taxes in the future).

This is not my main concern. And this is ties in closely to falling in house prices. A cut in taxes could lead to a deterioration in the standard of living. All forms of public services run the risk of suffering cutbacks, the NHS, emergency services, public transport, schools, just to name a few. In my opinion, the public sector is full of unnecessary bureaucratic paper pushers burdened by inefficient management who have no incentive to streamline practices like competitive private firms (my economist side rears it's head!). And I doubt tax cuts will make the system efficient, but could rather reduce further the (somewhat questionable) levels of service. As a nation, we enjoy a high standard of living supported by our public services despite the issues I have highlighted above, if all of a sudden we were to find things not up to the standard we have grown to expect, I think many people would be angry.

In this weeks Money Week magazine, in a discussion about the outlook post the Troubled Asset Relief Program (TARP) in the US, have noted:

"According to John Hardy at Saxo Bank, the “best case” outlook from here is that the housing market bottoms out in 2009 as Tarp limits further price falls to around 10%. Foreclosures fall sharply as mortgages are rewritten, allowing most people to stay in their homes, and by the end of 2010 much of the unsold housing stock is absorbed. The more likely “middle case” would be that house prices fall a further 20%, while a sharp recession forces unemployment above 8% by 2010, and consumption contracts faster than ever before. Glimmers of a recovery might appear by 2011. But in the worst-case scenario, America lurches into depression, with GDP collapsing at its fastest rate since the 1930s. This lasts well into 2010, with unemployment nearing 10% and ‘underemployment’ approaching 25%. The housing slump grinds on into 2011, with some suburbs turning into looted “squatters’ towns”. Public unrest and criminality become endemic."

It may seem a little extreme, but the last scenario is a definite possibility. One only needs to look through history to see the social issues that have accompanied economic instability. Add this to the insistence of Mr.Darling that government economic policy should be implemented in accordance with Keynesian economic theory and we have a potential disaster! The theory that governments should save public money when times are good and spend on public ventures when times are bad is itself a good one. When the economy is growing, cut public spending and jobs so that when things get bad and private employment levels fall (as we are seeing now - unemployment is at an 11 year high) the government spends more money on public ventures (building schools, hospitals etc) which itself creates public jobs. Sounds good...apart from the fact that during the 'good times' the government increased public spending (government debt increased) and public employment is over-inflated. Why is it that Darling cannot see such an obvious fundamental flaw to his proposal??!

Going back to house prices - as a first time buyer looking to get on the property ladder, falling house prices is great news. The fact that the bubble did not burst sooner is testament to how sub prime debt was packaged in such a complicated manner by so called financial geniuses. According to the HBOS UK House Price Index prices have fallen back to what they were in mid-2005. I'd be looking for prices to fall to levels at the end of 2003 which is a further 18% drop before we even consider to be looking at the bottom of the market.

FTSE....

I hope people took some notice to my FTSE chat on Friday...if anyone was tracking the markets you would have seen the support and resistance points I mentioned come to fruition this week. The announcement of China's $586bn stimulus package on Monday gave the markets confidence, but that feel good factor soon wore off.

As you can see the FTSE touched the 4545 level which as a major resistance shows a sell signal. Further shorting opportunities at the 4440 and 4335 can also be seen as it hovers around those levels (add to the existing short position). In total from the top to the current level, one could have bagged 310pts. At £2 a pt and increasing the stake at each level one could have made £1550 (not considering he cost of the spread)!

Who said trading was difficult?!!

UPDATE - by the time I finished writing this the FTSE hit 4200 which is a recognised support. Closing here would have caught 345 pts.