Cash Cow - A prosperous New Year?

After a shocking 2008, the New Year is upon us. Anyone with stock market investments has already experienced the severe pain that the rest of the population is now about to feel as the UK economy contracts painfully.

So where to invest in 2009?

The Property Party is over and the market is in a death spiral. I reckon it will bottom at the end of the year and stagnate for the next five. It may be a decade or more before prices return to 2007 levels. The prospects are so poor that, ridiculously, Halifax and Nationwide, both of whom have a vested interest in rising house prices, have announced they won't be making any forecast for 2009. Ostriches, heads and sand come to mind.

Cash savings are equally a waste of time with interest rates almost non-existent. This is one aspect of the moral hazard ignored by the UK government in its clumsy, belated attempts to stave off the recession. Savers are being punished for the mistakes of the reckless. Consequently income-seekers will first head for corporate bonds and gilts, which will inflate and then fall back, and equity income, ie companies that pay good dividends.

In other words, anyone with cash to invest is, eventually, going to be forced into the stock market if they want a return on their money. This is highly unusual and could exacerbate the next cycle of boom and bust. The Credit Crunch hit markets worldwide, nobody escaped and some sectors, such as commodities, are ludicrously cheap. Therefore it makes sense to invest broadly across a range of countries and asset classes in order to catch the rebound. I'm leaving no base untouched.

In fact, an optimist could argue that the next bull market has already started. Since the low point of late November, stocks and shares have jumped about 15%.

Cash Cow - Wunundredaneiyyyyty (that's 270 in dollars)

In these dark days everything, it seems, is going down, including the pound, which now buys you only one euro and 1.5 dollars.

The former should present few difficulties when calculating exchange rates for those European shopping trips we're all now apparently being urged to embark on.

But for U.S. trips it's a bit trickier and this is where darts comes to the aid of the befuddled consumer. Yes, darts.

It's all about knowing your triples and doubles. Think of a darts board. Take the number 2. Double 2 is 4 and triple 2 is 6. So, £4 is $6. Simple.

Take another example. Double 19 is 38, triple 19 is 57. So £38 is $57. Double 9 is 18, triple 9 is 27. So £18 is $27.

It's neat, but sadly it won't guarantee you Bully's Star Prize.

Moral fudge

The government are about to announce a package of measures to get us all spending again. They want people on low incomes, in particular, to use money from tax breaks to help bump-start the economy.

This is bizarre. On the one hand, the government is berating banks, businesses and individuals for their irresponsible behaviour in lending and borrowing too much over the past decade.

On the other hand, they now want us all to go out spending as if the credit crunch never happened.

And of all the groups who need to batten down the hatches and put some money aside to get through 2009, surely those on low incomes are foremost?

Brown and Darling are also now criticising the banks for being unwilling to lend money to businesses.

This is after having pinned the blame for the financial crisis on the banks' willingness to lend money far too easily.

I'm very confused, and I'm not the only one.

Baby P row exposes cynical Brown

Politicians often appear to possess souls that have been vinegarised by years of cynicism but even so, it was pretty obvious how genuinely Conservative leader David Cameron felt about the shocking case of Baby P at Prime Ministers' Questions on Wednesday.

Gordon Brown, however, was apparently unable to spot this. Clumsily, instinctively it seemed, he accused Cameron of political point-scoring even though Cameron had made no mention of the fact that the council concerned was a Labour one.

In doing so, of course, Brown himself was political point-scoring.

This is one of the reasons the electorate finds it so hard to warm to him. Everything is tactical, everything is calculated. Always.

Brown and his baying party had been primed to rebuff the expected Tory assault on the sinking economy and the poignant interventions of the Speaker calling for calm while Cameron spoke were ample indication of how inappropriate their response was to the opposition leader's surprise choice of subject.

As the exchange degenerated Brown's obdurate refusal to look Cameron in the eye when he declined to apologise for the politicking barb was by far his most eloquent statement of the session.

It was unpleasant to watch. You sensed Brown knew he had made a mistake but could not bring himself to acknowledge it. In fact, if Cameron had suggested that the sky was blue, you got the impression Brown would doggedly have disputed that as well.

Cash Cow - Scary maths

Falling markets can be scary places. I know this as well as anyone, as history will show that, rather like a virgin stumbling into a whorehouse, I chose the insanity of 2007-08 Credit Crunch to educate myself about finance.

No doubt my child will be learning about this period at school in a decade or so, hopefully in the personal finance GCSE they need to introduce urgently.

One of the things I've learnt during my 'crash course' is the importance of maths. I've mentioned in previous posts the Rule of 72 as well as a trick for calculating percentages and soon I'll be posting on the usefulness of darts (yes darts) when converting your currency.

Right now, though, I want to point out one of the truly scary features of a falling market, and one that has enormous significance in particular for those with most their wealth eggs in the property basket. That'll be pretty well everyone, then.

I suggest those of a delicate constitution avert their eyes now.

The rule goes like this: however much an asset falls in price in percentage terms, it needs to rise by more than that amount in percentage terms to recover its original value.

Sounds harmless enough? Here's an example: I own a house worth £150,000. It falls in value by 20%, or £30,000. In order for it to be worth £150,000 again, it must grow in value by 25%. In other words, it needs to grow by 5% more than it fell by in order to recover.

Here's where the maths gets really scary though. If the house falls in value by 30%, and is therefore worth £100,000, it needs to grow in value by a staggering 50% in order to be worth the £150,000 that you paid for it.

If it falls by 40%, it needs to grow by 67%. If it falls by 50%, it needs to grow by 100%. Just to break even.

These are horrendous numbers and many would say their are unachievable, except over the very long term.

To make matters worse, these calculations don't even take into account inflation. Hard hat, anyone?

Cash Cow - Dithering BofE pushes panic button

After months of denial and dithering, the Bank of England has belatedly reacted to the prospect of recession with its drastic 1.5% interest rate cut.

It smacks of panic. If the MPC had been reducing rates by an orderly 0.25% per month since the start of the year, we would still have arrived at 3% and everyone would be admiring their calm touch and their prescience.

As it is, we in the UK are playing catch-up with the other developed economies and the Bank's reputation has taken a severe dent. Little wonder the markets weren't impressed.

Meanwhile, Gordon Brown goes from strength to strength in the polls. It's a strange world....