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Economy in Brief

UK Consumer Confidence At 3-Yr Low This Christmas
by Robert Brusca  December 22, 2011

So much for decking the halls with boughs of holly. There will be little fa-la-la-ing as well. UK consumer confidence has sunk to a near 3-yr low and the range and queue metrics we provide as gauges of how bad things really are tell a tale of Christmas woe. Moody’s goes it one further to warn of a tale of Christmas Whoa!

Confidence is in the bottom 13% of its 10-year queue (worse than this only 13% of the time) and unemployment fears are worse only about 1/3 of the time. Expectations for the general economic situation are in the bottom 8% of their queue looking out over the next 12-months. And then there is that rich-poor thing again as lower income people are worse off than this only 3.3% of the time while higher income people are worse off 19.7% of the time. Not so surprisingly it is better to be rich in the UK in 2011.

While one UK retail survey did surprise on the upside for December, we are seeing as more prevalent warnings that retail shops are under profit pressures. From my perch in Manhattan I can report that there is something very un-Christmas-like (even if rewarding to the consumer) about shopping at a going out of business sale in the Christmas season. There is no Christmas music playing in such places and the staff is dutiful at best as it is facing a harsh post-Christmas reality- with every sale they make. I have done some of that shopping this year and I find it unseasonably harsh. Whether financial fragility leads to pre-Christmas sales or not, it kills the spirit.

So Moody’s has taken this holiday season to warn that the UK could be at risk to a downgrade - could lose its AAA. I guess that all the French carping that the UK should be downgraded first has not fallen deaf ears after all. Whatever are the shortcomings of the credit rating agencies they are not deaf (dumb and blind, the jury is still out on ...). But the threat of downgrade owes to the UK's worsening economic outlook and health of its public finances. All that could lead to the country being stripped of its prized 'safe haven' status. A secondary threat comes from the potential from fall-out should things go bad in the Euro-Area itself. Therefore, one of the things threatening the UK is the French downgrade. Oh Briar Bear don’t let the eye-full tower fall on me.

Just to recap all this it was just last week, in a showing of real EU solidarity, that the head of France's central bank, Christian Noyer, said Britain should be stripped of its AAA rating. As the future of France's rating hung in the balance, Noyer said: 'A downgrade (of France's rating) doesn't strike me as justified based on economic fundamentals. Or, if it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, weaker growth and where bank lending is collapsing.'

So the Christmas spirit is alive and well in Europe with each country wishing ‘nothing but the best’ to its neighbors on whom its own fortunes depend.

But there is still a Santa, Virginia (or should I say Spain, Portugal Greece and Italy?). EMU having been unable to orchestrate the loop-de-loop lending program through the IMF, has orchestrated using the ECB, a three year loan program allowing banks to belly up to the trough and load up on cheap money that they in turn have invested in government bonds. Well, I feel better already. How about you?

The ECB can’t buy government bonds directly so instead it has lent to banks and has exposed itself to them while the banks secure assets by loading up on these little bundles of over-rated joy from struggling Euro-governments! Oh, don’t crowd, there is risk enough for everyone here, even Tiny Tim! Yes why lend directly to governments when you as the central bank can get the private banks involved and tie them up in a snit of bad lending as well! Europe, once again, is kicking the can down the road and the can is getting bigger and more dangerous and it is threatening not just the kicker. There is no remedy here for the borrowers just respite and false respite at that.

The relationship of this exchange: (capital ≠ funding ≠ liquidity) ≠ reality
ECB = European Comical Bank? Take my credit...please: What euro banks need is more capital. But they are not raising any. What they are getting so it is claimed is liquidity which is the central bank’s job when solvency is not at issue. But what is really and truly being delivered is funding. And it is not the central bank’s job to fund banks especially not when they in turn are funding over-stretched and overrated and struggling Euro-governments. But that is the euro reality show that rivals ‘Jersey Shore’ for bad taste. Note that when national banks buy their own government’s sovereign bonds they are less at risk than when they make cross-border investments of the same type in sovereign bonds. If there were to be a devaluation, the bank’s bonds could be turned into local currency assets but since the banks have local deposits such a transformation would insulate it...BUT NOT if it borrowed euros from the ECB were used to buy the bonds. So banks had better be careful how they use their new-found funding. or new-found liquidity, excuse my faux-pas.

So the UK economy is under pressure and the rating agencies are now picking on it as its own austerity program is mounting a nasty bite to the hand that fed it...well, to the hand that decided to feed it so much less. And Europe is in chaos but the markets reacted well to the ECB initiative, even the German markets where financial conservatism is supposed to hold sway applauded the ECB program with higher prices as the ECB perfumed its largesse with unexpected quantity.

But deodorant can only cover the stink for long before you have to take a bath and European investors seems headed for a bath whether they admit it or not. We can join in and bask in the warm glow of the ECB intervention for now but at our own risk. It’s a bit like being in a freezing winter and choosing to light the house on fire to warm you up. Hey, it works, but only for a while. Then things are even worse.

When will Europeans realize that they have problems that need solutions instead of applying palliatives to symptoms? Will they learn? Will they ever stop putting good wall paper over crumbling plaster walls? Right now the betting has to be that the Zone as structured will not see another Christmas. So enjoy this one while you can and make the best of things. If Santa puts a lump of coal in your stocking, burn it for heat.

GFK Consumer Survey
% of 2Yr
% of 10Yr
of 10Yr
Consumer Confidence -33 -31 -32 -30 0.0% 16.2% 13.1%
Household Fin Sit 14 14 16 13 16.7% 8.3% 8.2%
Major Purchases -31 -27 -32 -28 4.0% 22.6% 18.0%
Last 12 Months
Household Fin Sit -23 -23 -24 -24 15.4% 6.9% 9.8%
General Econ Sit -62 -61 -62 -58 0.0% 31.3% 27.9%
CPI 93 95 101 101 70.0% 67.3% 70.5%
Savings -12 -13 -10 -14 15.4% 19.4% 16.4%
Next 12-Months
Household Fin Sit -10 -10 -10 -10 20.0% 25.8% 26.2%
General Econ Sit -41 -33 -31 -27 0.0% 19.6% 8.2%
Unemployment 50 49 52 45 76.0% 46.9% 67.2%
Major Purchases -29 -31 -36 -31 70.0% 45.8% 54.1%
Savings -4 -1 1 -2 0.0% 0.0% 0.0%
CPI 66 67 75 74 29.4% 51.0% 32.8%
By Income
Lower -43 -37 -41 -36 0.0% 5.1% 3.3%
Upper -25 -23 -27 -21 8.3% 19.4% 19.7%
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