At the start of this week it seemed that the Easter break had done stockmarket investors a world of good. The FTSE 100 jumped nearly 4% on Tuesday. Buyers piled into banking stocks, as the Financial Services Authority swore to track down those who had sparked a bear run on HBoS shares, and JP Morgan upped its bid for Bear Stearns (see Bear rescue won’t end the credit crisis for more).
But I’m not sure that this new wave of optimism will last. The experts at our recent Roundtable meeting certainly aren’t in a hurry to buy banking stocks. You can read more about why here, but suffice to say banks’ problems aren’t going to go away soon. The central banks of the world can do what they like to interest rates, but it doesn’t change the fact that banks have lost a huge amount of money by lending to the wrong people.
A number of readers have written to ask what the difference is between a solvency crisis (which this is) and a liquidity crisis (which is what everybody is still trying to pretend it is). My colleague Tim Bennett sums it up rather well. “If you have a £100 bill to pay and no cash, you have a short-term liquidity crisis, which a pawn broker can solve by lending you £100 and taking your watch as collateral. A solvency crisis is when you can’t get more than £50 for the watch, but you still have a £100 bill to pay.”
The big question is, of course, who then loses the £50? If you’re an average person or business, you do. But if you’re a bank, it seems the taxpayer is the one left on the hook – although this will have consequences for banks’ future freedoms, as Simon Nixon points out.
Of course, just because banks are likely to be kept afloat, that doesn’t mean their share prices will. Investors in Northern Rock and Bear Stearns have found this out to their cost. So we won’t be recommending banks for now. Indeed, with the outlook for the global economy looking extremely shaky, there’s not much to be bullish about.
Even the commodities bull looks vulnerable to a short- to-medium-term correction. James Ferguson will be looking in more detail at the outlook for commodities in a forthcoming issue. Meanwhile, perhaps the best general investment advice for now is to pay down your mortgage – see page 40 for why.
PS. Earlier this year, Stephen Bland outlined his view that the best investing strategy is just to buy high-yielding blue chips and sit on them. He is launching a newsletter detailing the stocks he would buy now – see The Dividend Letter for more details.
Merryn Somerset Webb is away