The Business News Source

Anyone who can remember the Thatcher era, will remember that the great mantra at the time was that we were moving to a service sector economy. With steel works and mines closing we witnessed great swathes of devastation cut across many parts of the country. Indeed with steel works, mines and ship builders the closure would render entire communities with 90 percent unemployment.

Over time many of these local economies recovered as incentives to open service based businesses were introduced. Ten years later the economy boomed on the back of ‘being the means to service’ rather than ‘being the means to produce’.

Theories abounded that the ‘new economy’ would mean that the UK would be insulated from any future economic shocks. Indeed the UK seemed to have found secret of economic immunity - small business became the ‘new black’ and we all got on with our lives raking in cash.

Except for one thing, it was really a mirage. The service sector economy was based on a house of cards. People weren’t really getting that much richer, they just had access to more debt. As markets were flooded with easy credit, sewn with reckless abandonment by a new generation of banks and money lenders of all kinds, people just borrowed and spent more, convinced that their primary asset, their house would keep increasing in value forever, and anyway the cost of repayment was marginal with interest rates so low, so who cared?

So now, as the financial world and hence the economy starts to unwind we’re seeing the service sector economy start to collapse like a house of cards - caught in yet another ‘perfect storm’.

With a rash of banks announcing halved profits over the next ten days we’ll see them being picked off one by one as the results roll in. Over on the house price front we’ve seen yet another report of the tenth consecutive drop in prices with the number of sales reaching 1930’s proportions.

This has far reaching consequences; with estate agents closing at a rate faster than 40 offices a week across the country, they are increasing fees to sell stagnant housing - so with your house in free fall you’re now going to have to pay more for the pleasure of losing money. Of course this won’t save the estate agents and so there’ll be a lot of ex-estate agents looking for jobs - somewhere.

The restaurant trade is suffering badly, as people splash out on a takeway rather than splash out on a more expensive restaurant meal. Pubs are suffering massive decline - blaming the smoking ban - but in reality admitting that they can’t compete with low cost supermarkets.

The city of London is off course going through a massive hemorrhage at the moment with as many as 100,00 high earners being thrown onto the job market. Many of these jobless will not ‘sign on’ as unemployed, either because of stigma, or because the payments they’ll receive aren’t going to even begin to cover their exposure.

As these individuals cut back it will be the service sector economy that suffers most - ironically the precipitated demise of the service sector economy will fueled by the demise of the service sector itself. It’s happening already and it’s happening faster than we realize - when the steel works closes, it creates headlines, when your local bank cuts back on staff or your restaurant cuts staff who notices? As with all things there will be a point where it becomes apparent .. so we suggest you look for the signs now. Check out the empty shops on your high street … and be very scared.

All eyes at the bourses in Europe will be on Santander on Monday morning. With confidence in the banking sector at all time low it seems that the Spanish bank has slipped up badly by allowing its British owned Abbey to offer an insane portfolio of mortgage offerings.

 Sometimes you just know that there’s going to be trouble, sometimes you wake up, read the papers and think ‘are they serious?’. Sunday morning, the British public woke up to headlines with lunacy, unbelievable and crazy in them. Yes, despite images of middle class brits lining up to withdraw their savings from Northern Rock, despite the melt down in sub-prime lending in the USA - Abbey has announced that it will start to offer 125% loans to mortgage borrowers.

There - we thought we’d mis-read, we thought it was a typo - but no - in these times of concern worry and crisis - Santander actually believes that offering 125% mortgage loans is a good idea.

 The Abbey was one of the UK’s original big four building societies, until it demutualised and was eventually snapped up by Santander in 2004. Since the original fuss about Abbey going to a Spanish company and being quoted on the Spanish exchange, not the British there has been some, though not too much, disquiet about what protection the Spanish would offer British savers.

 Well - it seems that the time has come - on Monday morning we expect a trickle of withdrawals from the bank as people start to worry that Abbey has lost it sense of reality. By Tuesday the papers will have picked up on the story and by Wednesday Abbey will start seeing the same lines outside its branches as Northern Rock, all at the time that the Spanish government is drawn into assuring savers that their money is safe.

Our advise to to Santander shareholders (and many are British pensioners) is to very carefully consider your positions with Santander and be very aware of what happened to Northern Rocks share price.

According to Investment news …

During the point of maximummarket turmoil earlier this month, the Daily Mail reassured us all. TheUK property market is not like the US market: there has been no boom inbuilding and so there will be no UK property market crisis, itsuggested.

And yet many, including the IMF, ABN Amro and Fitch, have warnedthat the UK is more vulnerable to a property market slowdown than theUS.

The Nationwide now predicts house price rises of 2 to 4 per centthis year, Home track is forecasting 1 to 2 per cent, and Rightmovepinpointed a 0.1 per cent fall in house prices in London.

The City suffers from financial turmoil. According to Challenger,Gray and Christmas – a consultancy firm – there have been 90,000 jobloses in financial services this year. We all know how reliant the UKis on business services these days, in fact the latest data from theOffice of National Statistics says this sector now makes up a third ofthe economy.

Recently the FT headlined that US sub prime problems could hit London property.

And then there’s buy to let. The FT has calculated that the averagegross on a property is now 5 per cent, but after costs such asmaintenance and voids, net yields are just 3.5 per cent.

This is significant for more than one reason. First it highlightsthe danger of buy to let landlords selling property and secondly themodest level of rent suggests the massive demand from immigrants forour homes is not as great as had been warned. Demand outstrippingsupply is supposed to mean house prices will carry on rising, but ifthis is so, why is rental inflation so modest?

The most telling data came from the Council of Mortgage Lenders.

Re-mortgaging lending has reached a new record for June - at £34.4bn it was 13 per cent up on a year earlier. And yet according to theBuilding Societies Association, mortgage approvals fell in July.

In other words, people are still using value tied up in theirproperty to fund their expenditure - maybe even their debt repayments.

This means the danger that demand will continue to be greater thansupply remains, inflation pressures remain, and the Bank of England maynot be able to lower rates after all.

But sooner or later, and sooner especially if the credit crunchspreads, people won’t be able to just keep on using high asset pricesas a way to prop up their spending.

Right now, the UK property market is in a great deal of danger, and as of now, this danger has been largely ignored.

By the end of last week HMV was being touted as the most shorted stock on the London Stock Market. The weekend news was full of gloom about the company. It seemed that HMV was, just like Superman, trapped and doomed - then we switch to the next week and suddenly - just like Superman the company bounds free in an instance. Whilst we may not fully be seeing the creation of a new superhero stock, certainly HMV seems to have bounded free in an instant.

Check the reports:

HMV Group has now sold its considerable interests in Japan, a move that pulls the retailer from an incredibly important music market.  According to deal terms revealed Tuesday, HMV is selling its 62-store footprint to Daiwa Securities Group and Sumitomo Mitsui Financial Group for ¥17 billion (£71 million, $144 million, €106 million).  The all-cash deal is expected to close by September, and will allow the beleaguered HMV to pay down debt and focus on core markets.   "The sale enables the group to focus on the markets where it has market-leading positions,” chief executive Simon Fox said.  "The proceeds will be used to pay down the group’s debt, which is an important step towards meeting our medium-term leverage targets."

and then

LONDON  - Music retailer HMV was on song Tuesday, helped by buoyant equity markets and company bosses picking up shares not far from all-time lows. Chief executive Simon Fox paid £198,000 for 183,233 shares at 108.23p each, taking his stake in the group to 249,194.  Meanwhile, non executive chairman Carl Symon forked out almost £27,000 for 25,000 at 107.5p a pop. He now owns 101,392 shares in total.

Execs investing in companies is always seen as a positive move by the markets - so perhaps there is more to Simon Fox’s turn around plan than the market initially thought.

and then …

An outlet of music and book retailer Fopp is set to reopen in the city after the chain was bought by HMV. The high street giant vowed to maintain Fopp’s "unique identity and trading culture" after it struck a deal to buy six stores, including one in Edinburgh.

Next we’ll be hearing that HMV are removing DRM from their download site. [they are].

The retail market is a tough place at the moment, even more so for record stores - let’s hope that Harry Potter sales can sprinkle some magic into HMV’s performance.

The likelihood of a further interest rate rise next week were raised significantly this Tuesday when the deputy governor of the Bank of England said current rates were too low to curb credit and demand growth.

In explaining his decision to vote for a rate rise this month, Sir John Gieve, the bank’s deputy governor for financial stability, said the danger of a loss of economic growth was preferable to taking a risk with inflation and the Bank of England’s credibility.

According to the London Financial Times -

The risks were that “we may increase interest rates too fast or push them up too far, with an unnecessary loss of growth, and second, that we may raise rates too slowly with a cost in higher inflation and potentially higher interest rates and a sharper slowdown in the end”.

In a speech at the University of Surrey, Sir John said: “I felt that the impact of moving too slowly on the credibility of the regime and thus the future prospects for the economy was of greater concern, given the robust rate of growth, than an unnecessary slowdown in activity.”

A recent poll by reuters of 64 economists indicated that 66% expected rates to rise from its current rate to 5.75 percent next week. The financial markets have been generally more bearish and have priced in further rates, with many commentators talking about potential ’shock and awe’ 0.5 percent increase being on the cards.

With the British now owing 164 percent more than they earn the interest rate hikes may help to slow the runaway housing market. It’s ironic that the British obsession  with housing, most encouraged by the government, may end up being the reason the next prime minister’s reign will be viewed as one mired in seventies like depression.