Losing a bet


It is not often that I hope to lose a bet.  But this is an exception.

In July I had dinner with a friend and the inevitable discussion on the economy led to a £100 bet on the FTSE on 21st July 2010.  I bet that it would be below 5,000 and my friend wagered the opposite.  As matters stand I am losing the bet and I hope, for all our sakes, that this continues.

Read most newspapers and there are stories of recovery and optimism as we leave recession behind.  My fear is that wishful thinking is resulting in us ignoring a rather large elephant in the corner.  Trillions of pounds were lent by banks to consumers and businesses and much of this was secured on assets, such as homes, land and acquired companies.  The value of these assets has dropped by somewhere between 20% and 50%.  This means that at the very least there are hundreds of billions of pounds of wealth that have disappeared.  The government has borrowed tens of billions and printed money to swish cash through the economy and ensure that banks have the funds to continue operating.  Their survival has also been guaranteed by the government and this enables day to day business to continue without having to worry about whether the bank could go bust.  These actions prevented the global economy grinding to a halt.  However they have not replaced the lost hundreds of billions and the government now has borrowings that mean taxes have to rise and spending needs to be cut.

So the fire has been put out.  But none of us want to look too closely at the foundations and check that they are sound.

I do hope I’m wrong.  But I fear that there is still considerable pain to come.

8 comments on “Losing a bet

  1. James Lusher says:

    I’m with you in the ‘slightly scratching my head – cant see where the recovery has come from category’. More unemployment coming, more taxation coming, less public spending, more competition from emerging nations. Of course there was bound to be a bounce in the housing and stock markets, but the future doesn’t look too pretty.

    I’d hold your nerve on that bet. At 5100, my temptation is to be a seller not a buyer and see the markets drop to 4500 in Spring of next year*.

    *but then I do have a reputation as a pessimist.

    • Exactly. On the other hand there are clearly well-informed commentators who don’t see it this way. What do they know that we are missing?

      I was at a meeting this week where I asked the current CEO of a British bank about bank balance sheets and whether recent increases in liquidity were fixing the damage or simply masking it. His reply was about profitability and did not really answer my question. Interestingly a person who was until recently a non-exec at another major British bank approached me afterwards, said that they shared my concerns and observed that the speaker had ducked my question.

  2. Louis Busuttil says:

    I think the media have worn out the “ain’t it awful” story and are looking for “green shoots of recovery” stories to tell people what they want to hear and sell newspapers that way.
    The recession certainly feels very real to me (I still spend way too much time playing computer games and not nearly enough time training / consulting as I used to).
    My little heart leaps to hear about house prices rising and a plus 5,000 FTSE, but my head rules and reminds me that we are still in the economic doldrums.
    I don’t think you are being overly pessimistic. I think you are realistic.

  3. Aboodi Shabi says:

    I agree.

    It’s much easier for us to go back to ‘more of the same’, rather than acknowledge the mess we’re in, and take the tough road of facing it and doing something about it.

    I thought that as soon as Goldmans announced recorded profits and the ‘bonuses are back’ cheers spread through the City. Just like an alcoholic who, a few days after hitting rock bottom, starts to feel better again, and thinks he can, after all, get away with resuming drinking.

  4. Ron Eldridge says:

    Richard I think you are spot on – the underlying situation is a mess (I have seen some good comedy about people in Africa having concerts to raise money for us!). That said, I think the shift in language from “ we are doomed” (Which is all the media wanted to say since last October and wasn’t in the least bit useful), to a more upbeat and positive attitude is a good thing. We won’t be able to deal with the underlying financial liabilities until the world economy is trading and growing again… at least the fire is out!

  5. Tom Ball says:

    I agree!

    Emperor’s new clothes?

    My favourite summary comes from a friend’s 10 year old son (abridged!)

    “Dad, I’m confused – you said the recession was caused by lots of people spending lots of money they haven’t got. How can the solution be to spend lots more money we haven’t got?”

    We’ve all overspent for years – and have not yet started repaying it. This applies at home, work and government.

    How embarrassing will it be to explain in 20 years time that we “went bust” because we collectively bought cack in Argos that we didn’t need.

  6. Tom Ball says:

    PS I’m “enjoying” MoneyWeek’s daily emails. Well reasoned “essays” – about a third or which relate to the economy/recession/property


  7. […] I should be depressed; however I am not.  In addition to it looking like I will lose my bet, my company is soon likely to have to contend with a more challenging environment.  All the […]

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