The precipitous fall eases as we drift gently ever lower

The UK Sunday business pages are all studiously upbeat about the outlook for equities . Where once the analysis was all doom and gloom now its sunshine and roses. It can't be the weather that's making all the financial pundits happy so it must be the sight of Britain's venal politicians getting their come uppance over fraudulent expense claims.

I mused some time ago that the rise in equities might be down to the huge wave of liquidity that just about all governments are injecting into the system. After all, those billions of taxpayers dollars have got to find a useful home somewhere . Where after the post-Lehman collapse in prices could be better than the equity market ? Just about everyone apart from the shorts benefits. Banking shares soar reducing their huge capital raising requirement . At the same time long only investment houses and pension funds see the damage wrought to their portfolios in 2008 being rapidly repaired. Retail investors are happy that their portfolios are turning to the upside. Indeed, for long only houses taking a five year view equities with low debt levels and strong cash flows probably provide some form of inflation hedge even if the economy is zero growth . Having said that quite why banking and retail is leading the charge escapes me as the latest data still shows weakness:.

April US credit card defaults rose to record highs - Citibanks delinquency rate in April was 10.2%

• US industrial production fell 0.5% in April after the 1.7% fall in March. Shockingly capacity utilization is now 69.1% implying that any investment in facility expansion will be sometime acoming.When factories are producing too many goods pricing power disappears - FIAT take note.
  
• Hotel occupancy levels in the US are approaching levels last seen in 1981 and stand at 53.6% on an average room rate of $97.58 down 14% and 10% respectively from year ago levels.
  
  Taking the above into account it seems to me that :

1) it's too early to get steamed up about inflation with factory utilization running below 70% and stockpiles in steel and other commodities rising . Europe seems to be heading towards deflation with a 2.5% fall in eurozone GDP in Q1 with Germany tumbling 3.5% a worse number than the debt ridden UK's 1.9%. You can criticise the Brits for being overleveraged but it was the Germans and French who sold to them and who are now discovering just how important the anglo-saxon markets were.

2) savings rates are on the rise with the UK lvel going from -1.2% to nearly 5% today. History teaches that these levels will probably come close to doubling over the next two years further weakening consumer demand .

3) Banks and governments are hoping that they will be allowed to repair their balance sheets over a five year period as consumer loans are sliced back and personal savings rates move towards a 10% level in the anglo-saxon world.

4) the world is entering a period of slower and lower growth. In this new world there will be fewer airlines,car makers,banks,insurance companies,and small retail chains.

I'll buy selectively when we get a good setback towards 4000 on the FTSE .

Not the time to start a new airline

The 'revamped' Alitalia that was launched with much fanfare and bravado a month ago is finding it hard going.In the first month of operation of the new carrier the load factor on the Milan-New York flight has sunk to 26% from 65%. Capacity to Turin has been cut by 22% but traffic has fallen by 43%.

Markets seem to be in denial about the state of the banking industry. In H1 2008 nearly a third of UK short term corporate debt was provided by foreign, largely EU based banks. They are now retrenching as fast as possible to deal with their own domestic liquidity problems. Add to this the near 30% mortgage market share of Bradford and Bingley and Northern Rock and the chance of boosting domestic lending in the UK is absolutely zero. To replace these two gaps in the lending market would require the remaining loan books to grow at double the rate seen in the bubble years! This is before the defaults on corporate and credit card loans start to kick in. Lending will contract across Europe this year and banks, all banks, will need to raise their capital base again.

Fear of hyper-inflation has been a factor in the surge in gold prices. This last week has shown that it is an overblown fear. We are witnessing an economic downturn the like of which hasn't been seen since the early 30's but this time at a faster rate and with a more widespread reach.LDV, Volvo, SAAB are just a few of the companies that teeter on the brink. A large number of Euroland and US companies that have been relying on China, Russia and other emerging markets to bail them out will shortly join this list. Widespread corporate consolidation and the erasure of the weaker players will leave those still standing in a much stronger position - there will come a time when investors flee the corporate debt market and rush back into equities - that time simply isn't here yet.

Bank nationalisation - finding a politically acceptable term for it.

Markets took a pummeling this last week as investors digested the US governments plans for a 'stress test' of the solvency of leading banks. There had been a widespread assumption that Tim Geithner would come up with a plan that would keep the banking system going with a combination of loan guarantee programmes, capital hikes through preferred share issues to the Fed, and purchases of toxic assets at 'attractive' prices.Markets have now woken up to the realisation that by inviting the private sector in to co-invest in the purchase of toxic assets the government has taken a huge step in ensuring that they wont overpay. The proposed 'stress tests' are likely to show that at market valuations many of America's major financial institutions are to all intents insolvent. Yesterday, the administration had to reassure markets that they had no plans for nationalising the banks but the reality is that the government will be calling the shots in the near term and the shareholders and unsecured creditors will be paying the price. Pre-privatisation really is the stage that they are at.

Heard a marvellous phrase in Zurich yesterday. A fund manager said he had a portfolio fitted with ABS. ABS , I asked. Anything but Sterling came the reply.

UK car production was down nearly 58% in January. There are rumours that a major producer is set to announce closure of its manufacturing ( Ford,Honda,Toyota ?) in the UK. With collapsing output, rising unemployment, and tumbling tax receipts the tax burden of the British taxpayer is going to rise and remain high for sometime to come. What's the betting that this government won't take any of the necessary steps to curb government spending, or cap public sector wages and pensions? Much better to leave the harsh and needed political and budgetary decisions to someone else. Meanwhile as Nero fiddles....