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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the... More
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  • Stock Market Forecast 2010
    This analysis is part of the New Inflation Mega-trend Ebook, the analysis for which has been compiled during the past 3 months which concluded in trend forecasts for inflation, economy and interest rates for 2010 and beyond. The implications of which have been applied towards finance and investment markets for 2010 and beyond. To receive the ebook for FREE as it is rolled out over the coming week(s) as well as updates throughout the year, subscribe to my always free newsletter if you have not already done so.

     

    The Inflation Mega-trendThis article shares the inflation mega-trend analysis implications for the Dow Jones Industrial Averages stock market index, with the conclusions also applied to the FTSE 100 index. The reason why my analysis is focused on the Dow and not the FTSE is because the Dow has been my primary trading vehicle for some 25 years, as at the start of my trading career back in 1986 the FTSE was the new kid on the block with little price history behind it, whereas the DJIA had relatively easily obtainable data dating back over a hundred years (via bulletins boards, a precursor for the internet).

    Whilst this analysis attempts to accurately project a road map trend for the Dow for the whole of 2010, however readers should ensure that they read my regular in depth updates on the Dow trend (approximately every 2 months) with are emailed out and also at walayatstreet.com

    2009 The Year of the Stocks Stealth Bull Market

    For stock market Investors and traders there were two key events during the year.

    1. The Stocks Bear Market Bottom of early March 2009 (Dow 6470).

    2. The birth of the Stocks Stealth Bull Market that saw many indices soar by more than 60% over the next 9 months.

    The primary purpose of analysis is to generate market scenario's that have a high probability of success for the primary purpose of monetizing on these trends that are usually contrary to the consensus view.

    In this regard the stock market bottom of early March fulfills this as the whole subsequent rally has been called by the vast majority of analysts across the board a bear market rally to SELL into, virtually every correction has been followed by calls that the market has topped and the resumption of bear market lows as imminent. The most notable crescendo of the crash is coming calls was during the October correction when widespread commentary spread forth of an imminent crash that AGAIN FAILED to materialise.

    Dow Jones Stock Market Forecast 2009 - 20th Jan 2009

    Dow Jones Mid 2009 Low 6600 - 70% Confidence; End 2009 at 8,600 (During December 2009) - 65% Confidence

    Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470 - 14th March 2009

    Now watch ! How this STEALTH bull market will consistently be recognised as just a bear market rally to sell into and NOT to accumulate into. All the way from 6,600 to 7,600 to 8,600 and even beyond, the move will be missed by most as consistently bearish rhetoric and data will ensure only the smart money accumulates, for the small investor has now become Conditioned to the Bear Market Rallies of 20% and subsequently plunges to fresh lows. Many, many months from now, with stocks up 30%, investors will then WAIT for THE BIG CORRECTION, THE RE-TEST to buy into the apparent BULL Market , Well these investors will still be waiting as stocks pass the 50% advance mark, AGAIN only those that will have profited are the hedge funds and fund investors (Smart Money) WHO HAVE BEEN ACCUMULATING , as I elaborate upon next.

    In Summary - We have in all probability seen THE stocks bear market bottom at 6470, which is evident in the fact that few are taking the current rally seriously instead viewing it as an opportunity to SELL INTO , Which is exactly what the market manipulators and smart money desires. They do not want the small investors carrying heavy losses of the past 18 months to accumulate here, No they want the not so smart money to SELL into the rally so that more can accumulated at near rock bottom prices! Therefore watch for much more continuous commentary of HOW this is BEAR MARKET RALLY THAT IS TO BE SOLD INTO as the Stealth Bull Market gathers steam.

    Stealth Stocks Bull Market, Sell in May and Go Away? - 26th April 2009

    Conclusion - Immediate term conflicting analysis, will there be a continuing rally into early May or not ? Clearly early week will be weak and a lot now depends on whether the support of 7,800 holds, the 280 point gap between the last close and support should give the market plenty of swine flu room to breath, it is a tough call but after that early week wobble, I would go with a continuation into early May to set up for the main move which is for the significant correction that targets a decline of about 14% or Dow 7,500 from 8750. If 7800 fails early week that implies Dow 7,100. So just as the herd is starting to pile in the smart money will be positioning for a significant correction and importantly the move will be TRADEABLE, none of these 1 or 2 day falls that have suckered the bears in during the rally, but for a sustained down trend though swine flu may bring this forward to the start of the week. Note this is an interim update, my in depth analysis will attempt to more accurately map out the Dow swings of several months so make sure your subscribed to my always FREE newsletter to get this on the day of publication.

    Vicious Stocks Stealth Bull Market Eats the Bears Alive!, What's Next? - 23rd July 2009

    CONCLUSION - My earlier fears about a bull trap appear to be unfounded, the stock chart is talking that we are in a stocks bull market, and is suggestive of a trend higher towards a 2009 target of between 9750 and 10,000, with a high probability that we may get there before the end of October!. Key danger areas for this scenario are a. for the trend line to contain corrections, and b. that 8080, MUST HOLD.

    The Crumbliest Flakiest Stocks Bull Market Never Tasted Before - 7th Sept 09

    The target for the termination of the current phase of the bull market rally was between 9750 and 10,000. As mentioned above, I am not expecting an easy ride for the fifth wave as clearly it is an obvious pattern to interpret following waves 1,2,3,4. What does this mean ? Well wave 3 is screaming weakness, so that suggests a weak push higher rather than something that resembles wave 1.

    Stocks Bull Market Correction Continues, U.S. Dollar Bears Running Out of Time? - 4th Oct 09

    Stocks Bull Market Forecast Update Into Year End - 2nd Nov 09

    There is nothing to suggest at this point in time that the stocks bull market is over which means that that corrections are for accumulating into, the overall trend is for stocks is to continue climbing a wall of worry whilst investors are scared by the vocal crash is coming crowd that will continue to re-write history to always be right in hindsight to again come out with more crash calls over the next few months as the Dow chart of the 1930's gets it's start / end date manipulated again so as to fit fresh crash calls.

    The stocks bull market that has raged since the March low has fulfilled the original objective for a 50% advance, therefore upside for the next two months looks limited with greater risk of downside in the coming weeks though pending a break of the major support trendline which implies a rally in the immediate future. All in all this is suggestive of a downtrend towards 9,400 into Mid November with a year end rally to back above 10,000 targeting a rally high in the region of 10,350 to 10,500 during December.

    Stock Market Santa Rally and Election Weapons of Mass Deception - 13th Dec 09

    My concluding thought, we get the santa rally to a new 2009 high for the Dow into the last few days of December and then the market starts the significant correction.

    Economy, Inflation and Interest Rate Forecasts Conclusions Applied to the Stock Market

    The in depth economic analysis of the past 2-3 months (inflation, economy, interest rates) has resolved towards the conclusion for a strong above trend economic recovery and rising inflation (UK early spike higher) during 2010 with a relatively mild up tick in interest rates during the second half of the year which will allow governments the opportunity to get a grip with the deficits under the momentum of economic growth and the return of consumer / investor confidence. However, I also do expect both the Bank of England and U.S. Fed to continue quantitative easing aka money printing to monetize the huge budget deficits, without which market interest rates would be significantly higher.

    The analysis conclusions are highly supportive for the stock market during 2010 and probably beyond as corporate earnings continue to play catch up to the stock market price trends with institutions and large speculative funds continuing to dump cheap money into the stock market and other speculative assets having been driven out of low yield assets, therefore driving prices higher whilst the small investors are left to follow the perma bear crowd that are perpetually expecting a break of the March 2010 lows as though it is a done deal.

    Stock Market Mega-Inflationary Trend

    The Above graph illustrates the stock market inflationary mega-trend or growth spiral which basically implies that the further a general stock market index such as the Dow, S&P or FTSE deviates from its peak in terms of price and time, then the greater the long-term potential it presents for investors. Which highlights why the early 2009 stock market plunge into the March lows was literally a once in a life time buying opportunity, as I warned investors to prepare towards in October 2008 - Stocks Bear Market Long-term Investing Strategy

    Whilst I don't like to transpose past price action onto the present as it is not reliable, however I do recall at the time of the rally off of the 1991 decline everyone had their eyeballs fixated on the 1987 crash lows as though they would be revisited, when in fact it was another great buying opportunity of a lifetime as the subsequent price action illustrated. All you folks may not realise this now but the period from 1991 to 1996 was ALL followed by perpetual extremely bearish commentary of the end is nigh. Few BOUGHT This rally ! Even Greenspan appeared to play the bearish card at about Dow 6,000 with his famous Irrational exuberance speech at the end of 2006 to frighten and keep weak small investors out of the market that would only return towards the end of the dot com boom. The Dow doubled from 1996 to 2000.

    Where do we stand today ? Well we have not even reached the stage that demands another Irrational Exuberance speech. We are in the overwhelming bearish commentary phase that frightens and keeps all but the smartest money out of the market much as the occurred following the 1987 crash rally, much as occurred from 1991 to 2006. Presently this commentary appears as an avalanche of bearishness on EVERY correction, the consequences of which is reflected in the volume data that shows most people are NOT buying the rally but SELLING, which is why I termed this a stealth stocks bull market back in March 2009.

    What we are witnessing today is pretty much similar behaviour that I suspect will persist for many years! whilst the bull market rages on!

    Yes, for 2010 the best of the gains in terms of price / time are behind us, however the Dow is a long way from reaching an overbought / expensive state, therefore still presents a good long-term accumulating level.

    Market Manipulation

    I came to the conclusion a couple some time a couple of decades ago that the markets were manipulated, therefore taking account of market manipulation in terms of what direction will the dark pools of capital deployed by the worlds investment banks and speculative funds take the markets next as part of its psychological make up i.e. Mr Market, is a very important component of the tripartite of analysis in addition to technical & inter-market analysis and the sum of all fundamental analysis. Put all three together and one has a higher probability of profiting from today's investment decisions. Apart from working within a dark pool institution such as Goldman Sachs, the only way to get an insight into their behaviour is to evaluate which trend would the dark pools most profit from at any particular point in time i.e. market psychology which usually means the opposite action to the consensus view.

    This is one one of the key contributory reasons why I called the birth of the stocks stealth bull market of March 2009 that has since consistently been called a bear market rally despite the fact it has seen a phenomenal 65% gain in 10 months. I mean that is a DREAM return for investors, one cannot hope for or expect anything better, but instead of enjoying a hugely profitable bull run, most small investors have been convinced to WAIT for evidence of economic and corporate earnings recovery by which time as occurs it will be TOO LATE as the market will have already moved, precisely as I warned of in Mid March 2009.

    So what does my interpretation of the dark pools or market psychology telling me today ?

    It is telling me for the stock market as a whole that the dark pools are still engaged in accumulating into a stock market multi-year mega-trend which at present is in the motion of shaking out the temporary weak longs along. Which means we are STILL in a stealth bull market where the vocal media-sphere view it as a BEAR MARKET RALLY that has ENDED, consistently WRONG market calls by popular perma-bears are a god send for the market manipulating dark pools of capital as they continue to accumulate and profit from the stealth mega-trend.

    Stock Market Crash Again?

    Forget swine flu, the pandemic that has been doing the rounds for the past 6months is that of another Crash with the 1930's chart dusted down and presented as near fact of what is to transpire on every correction. However the markets response has so far always been to eventually push to a new high for the move.

    What happens to the crash calls ? They get amended and rolled out again on the NEXT correction! Don't believe me go check out what I wrote on 2nd November.

    However the damage has been done as short stops are hit and losses accrued that no broker will refund for the next crash call.

    Stock Market Crash Calls

    1. You CANNOT know with any reliability that the stock market is going to crash until AFTER it has actually peaked and entered a downtrend. Anyone that tells you a bull market pushing to new highs is going to crash is going to lose you all your money, as the market rallying significantly from the crash call NEGATES THAT CALL where trading is concerned, because any short positions enacted upon the call are stopped out!

    2. You can only enter a Crash TRADE barely a day or hours before the crash event. Crash calls made weeks, months or years in advance are WORTHLESS where trading is concerned, and where investing is concerned, all investors should have stops on their positions based on technical considerations of where they would admit their analysis is wrong on a particular stock.

    Crash calls are dangerous in that bring emotions into play which instead of staying focused on reacting to price action, adrenaline gets traders to commit to positions that will soon most probably bust their accounts where EVEN if the market eventually does CRASH, they will have been wiped out by the intervening rally SINCE the crash call! It is this fact that that is always forgotten.

    Don't believe me ? Go check ALL of the hyped stock and other market crash calls that in actual fact WERE FOLLOWED by moves that would have wiped out REAL trades had those calls been acted up on.

    During 2009 I have shared some of my trading ideas that may go towards a future ebook-

    Economic Depression, What Depression ? - US GDP soared in the fourth quarter at an annualised 5.7%, yes, the rate of accent is probably NOT sustainable, but the debt fuelled bounce will continue a while before it peter's out into. The key point is as I pointed out in the analysis of October 2008. That we are NOT heading for another 1930's GREAT DEPRESSION, and therefore readers should scrub the notion of following the 1930's chart pattern towards anything like a 90% stocks crash. So far the analysis is proving correct.

    Corporate Earnings - Corporate earnings have FOLLOWED the stock market higher, despite continuous doom orientated commentary of the past 10 months that has repeatedly stated that corporate earnings forecasts implied stocks could NOT rally.

    ELLIOTT WAVE THEORY - The elliott wave pattern resolves to an easily recognisable wave 4 correction which implies a further 5th impulse wave higher will follow that could take the Dow significantly higher. Clearly the alternative more bearish count is that Wave 3 was a Wave C of an ABC move which would imply that the rally to date corrected the preceding bear market from the 2007 high. My interpretation is that we get something in the middle, i.e. that BOTH interpretations are now FAR TOO EASILY discernable from the price charts which suggests to me we get a volatile 5th wave higher, rather than a strong wave similar to Wave 1 and Wave 3. On a shorter term basis the immediate trend should resemble an ABC correction of which we are presently in the wave A decline that should shortly resolve towards a B wave rally before a C wave decline to end the correction.

    TREND ANALYSIS - The Dow is falling towards major support at 10k. Given the strength of the downtrend to date, the probability favours a break of 10k that would target approx 9,600. The bull market trendline has been breached which suggests that the stock market has entered a new character of behaviour that will be significantly different to that which followed the March 2009 low. I.e. greater volatility, which suggests it will take the market some time to break the 10,729 high, which will probably now not occur until the second half of 2010.

    SUPPORT / RESISTANCE - There is a series of strong support in the region of 10,000 to 9,800. and then 9,500. Should 9,500 break then the Dow could tumble all the way to 50% of the rally at 8,600. Overhead resistance lies at 10,300, then 10,400. With strong resistance in the region of the 10,600 to the high of 10,726. It will probably take some time for this resistance to be overcome. Next resistance above is at 11,250 that may mark a pause in the uptrend if it breaks higher enroute towards the target for 2010.

    PRICE TARGETS - Downside price targets resolve into the 9,500 to 9,800 zone, therefore this should contain the current correction, a failure here would negate this analysis and probably mark the end of the bull market which initially targets a decline to 8,600. Upside projections show difficulty in breaking above the 10,729 high, though once overcome the Dow would target a level north of 12k.

    MACD - The MACD confirms both the significant correction currently underway and the expectation of difficulty for the Dow to overcome its recent high for some time i.e. until it has been able to work out the overbought state. This suggests that it may take the Dow several attempts to break above 10,729 during 2010, with the eventual break out higher probably not taking place until the third quarter of 2010.

    VOLUME - Volume has been WEAK throughout the rally, which has been one of the main reasons why so much commentary has been bearish during the rally. However it is perfectly inline with that of a stealth bull market and also implies that this rally has NOT been bought into. So all of the talk of hyper bullishness investor sentiment is basically rubbish as there is no sign of such sentiment in the volume, which remains heavier on the declines than the rallies and thus suggestive of SELLING rather than buying into the rally.

    SEASONAL TREND - There is a strong seasonal tendency for stocks to rally into Summer then correct in October followed by a sharp rally into December. This is contrary to my growing expectations of a tough first half of 2010. In fact we may see in large part the opposite trend during 2010.

    PRESIDENT CYCLE YEAR 2- The impact of the 2nd year of the presidential cycle on the stock market is for a weak trend into September, and a rally in the fourth quarter into the end of the year for a small average gain for the year. This much more closely resembles my growing expectations for 2010 then the seasonal trend.

    Stock Market Conclusion

    Whilst the bull market is undergoing a significant correction that targets 9,500 to 9,800, nothing in this analysis has changed my long-term conclusion as of March 2009 that we are in a strong multi-year stocks bull market. Therefore I will leave it to others to still debate on whether or not to invest or playing around with transposing of charts form the 1930's whilst one of the greatest bull markets in history continues to pass them by as the further the stock market deviates from its bull market peak the greater will be the buying opportunity presented.

    Where the forecast is concerned, Ironically I am finding the first half of 2010 much more difficult to conclude towards than the second half, as I do expect a strong rally in the second half of 2010 to a new high for the bull market with the Dow breaking above 12,000 during late 2010 and may hold onto the 12k level into year end. The first half of 2010 will probably resemble a wide sideways trend with an upward bias after the current low is in, the Dow will repeatedly attempt to break above 10,729, how many times ? well there lies the volatility question, however turning towards utilisation of elliott wave theory, I am going to conclude the analysis towards 2 failed attempts before the final break higher, but it could be 1 or 3.

    Dow (DJIA) 2010 Stock Market Trend Forecast Conclusion

    Dow 10,067 - Stocks Multi-year Bull Market that bottomed in March 2009 will trend Sideways during first half of 2010 attempting to break higher. The second half will see a strong rally to above 12,000 targeting 12,500 during late 2010.

    DOW Stock Market Forecast 2010

    Ensure you subscribe to my free newsletter and visit walayatstreet.com for regular updates and reappraisals of the trend in light of subsequent price action during 2010 and beyond.

    Risks to the Forecast

    Technically we have had a major sell signal on break of the main uptrend line which means the current correction has YET to bottom, my target is eventually a bottom at 9,500 to 9,800 after a corrective B wave rally towards 10,300, the C wave decline should hold at this, however if 9,500 goes then this at least implies a bear market that initially targets 8,600.

    The primary risk for the end to the bull market is that the central banks pull the plug on easy money as a consequence of a series of sovereign debt crisis. I.e. forced to push interest rates much higher than forecast to prevent a bond market / monetary collapse. In reality the governments have a window of opportunity to benefit form the strong economic recovery currently underway to CUT the budget deficits and get a grip on debt to GDP ratios. If they waste this opportunity then this forecast could fail as it resolves towards a bear market trend back towards the March 2009 lows.

    However I put this risk at this point in time at about 25%, small but significant. It really depends on the economic bounce being as strong as I forecast it to be which will carry the markets AHEAD of it, and inflation and consumer confidence along with it therefore allowing deficits to be cut along side economic growth.

    FTSE 100 Forecast 2010

    I expect the FTSE to follow a similar trend to the Dow in terms of price pattern which resolves towards a target for FTSE 6,250 to 6,600 by late 2010, with similar downside risks.

    Again ensure you are subscribed to my FREE newsletter to receive both future updates as well as the inflation mega-trends ebook which includes many economic and market trend forecasts for 2010 and beyond, to be emailed out within a week.

    Source and Add Comments Here: http://www.marketoracle.co.uk/Article16948.html

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

    Nadeem Walayat Archive


    Disclosure: none
    Feb 03 2:05 PM | Link | Comment!
  • UK Interest Rates Forecast 2010
    The British Economy as with other developed economies entered 2009 in recession and on the brink of Depression which triggered a series of panic interest rate cuts all the way to 0.5% by March 2009 and they have stayed there right into the start of 2010. This in-depth analysis is third in a series of analysis that seeks to generate accurate forecasts for UK Inflation, GDP Growth and Interest Rates for 2010 and beyond. The whole analysis and implications of which will be published as an ebook that I will make available for FREE, ensure you are subscribed to my always free newsletter to get the completed scenario in your email in-box.

     

    UK Interest Rates Forecast 2009 Recap

    The analysis of December 2008 forecast (UK interest rate forecast of early December 2008) for 2009 that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009.

    The UK base interest rate was cut to 0.5% in March 2009, following which the Bank of England has continued to pursue an artificial banking system by keeping interest rates at an extreme historic low of just 0.5% into the end of 2009 so as to flood the bankrupt banks with liquidity to enable them to rebuild their balance sheets by overcharging customers against the base interest rate and manipulated interbank market rate of 0.66% against rising real market interest rates which have been in a steady climb since March 2009 which increasingly has meant that during 2009 the base interest rate had become irrelevant to the retail market place.

    The forecast for most of 2009 showed a positive bias of 0.5%, rising to 1% by year end against the actual UK base rate.

    UK CPI Inflation Analysis and Forecast for 2010

    The in-depth analysis and forecast conclusion for UK inflation for 2010 (http://www.marketoracle.co.uk/Article16085.html) included the following analysis points and conclusion that built towards the forecast for UK GDP Growth and Interest rates for 2010 and beyond, therefore these analysis points are not being repeated in this article.

    • Inflation Forecast 2009
    • The Inflation Mega-trend
    • UK Retail Sales Signal Debt Fuelled Election Consumer Boom
    • M4 Money Supply Adjusted for the Velocity of Money
    • UK Unemployment
    • Debt Fuelled Economic Recovery Heading for Double Dip Recession?
    • Debt and Liabilities
    • UK Interest Rate Being Kept Artificially Low For Bank Profiteering
    • UK House Prices Continue 2010 Government Debt Fuelled Election Bounce
    • UK Producer Prices
    • Stocks Bull Market Signaling Strong Economy
    • British Pound to Wobble Lower During 2010

    Conclusion and UK CPI Inflation Forecast 2010

    The sum of the above and recent analysis is for UK inflation to spike higher in the coming months during early 2010. This is inline with my view that the Labour government has succeeded in sparking a strong debt fuelled economic recovery that will become clearly visible during the first quarter of 2010. I expect UK inflation as measured by CPI to break above the Bank of England's upper CPI target of 3% very early in the year, and stay above 3% for most of the year only coming back below 3% late 2010 as a consequence of the next governments attempts to bring the unsustainable budget deficit under control.

    Higher inflation implies higher interest rates, especially as the CPI rate is expected to break above 3% early 2010, which means market interest rates will continue to trend higher even if the Bank of England continues to keep the the base interest rate fixed at 0.5% at least into the General Election. However the 0.5% interest rate policy is not sustainable under the weight of persistently high inflation (above the BoE's 3% upper limit) and therefore the pressure for the base interest rate to rise will become intense during 2010.

    UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom

    The in-depth analysis and forecast conclusion for UK Economic Growth for 2010 and beyond(http://www.marketoracle.co.uk/Article16167.html) included the following analysis points and conclusion that build towards the forecast for UK Interest rates for 2010, therefore these analysis points are not being repeated in this article.

    • Labour's 10 Year Economic Boom Evaporated into an Even Bigger Bust
    • Stock Market the Key Indicator of Economic Strength of 2009
    • Budget Deficit Cutting Solutions to Britain's Debt Crisis
    • Bank of England Quantitative Easing Gilts Market Smoke and Mirrors Dangerous Game
    • China Leads the Way for Strong Global Growth 2010 and Beyond
    • UK General Election Implications
    • Mainstream Press and Think Tank Current UK Growth Forecasts for 2010

    UK GDP Growth Forecast Conclusion

    The sum of the above analysis is for a strong economic recovery into the end of 2010 which given the pessimism today I term as the Stealth Election Boom that followed the Stealth Bull Market of 2009, the economic 'boom' will continue in to a peak in Q1 2011, which will be followed by weakness during 2012 and 2013 and strong recovery for 2014, and into a 2015 summer general election, breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and taking account of the election cycle preliminary GDP projections for 2012 of +1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015.

    Therefore I just cannot see this double dip recession that the mainstream press and so called think tanks are obsessing over at this point in time, no year on year economic contraction or even a quarter on quarter dip is visible.

    The following graph illustrates my trend forecast for quarterly GDP growth over the next 2 years 2010 and 2011.

    UK Strong Economic Recovery 2010 +2.8%, Q1 2011 peak of +3.4% (year on year), 2011 End +2.3%. Q4 2009 +0.6%, Q1 2010 +1.1%. Q2 2010 + 1.3% Election Boom. Q3 2010 +0.9% Q4 2010 +0.6%, NO Double Dip Recession, NO Negative Quarters for 2010 or 2011..

    If the anticipated strong economic recovery starts to materialise during 2010, then the Bank of England will view its continuing policy of keeping interest rates at 0.5% as erroneous and should start to lift interest rates rapidly to levels far above today's consensus view emanating out of the mainstream press that UK interest rates will be kept at 0.5% for not just 2010 but possible several more years beyond. Above trend growth of 2.8% by the end of 2010 does NOT imply an interest rate of 0.5%. This suggests a series of rises during the year, so whilst the first half of 2010 my appear benign in interest terms the second half could prove a rate shocker, which is suggestive of a a rate in the region of at least 3%.

    LIBOR / Base Interest Rate Spread Analysis

    The below graph shows the spread between 3 Month LIBOR and the UK Base Interest rate.

    The above graph illustrates that the credit crisis did not just appear out of the blue in September / October 2008 but began over a year earlier in August 2007 when the interbank money markets froze as a consequence of the fictitious mark to market valuations on sliced and diced collaterised debt obligations that the banks had accumulated. Whilst the central banks attempted to unfreeze the credit markets through a number of increasingly desperate actions during the subsequent 12 months however all of these measures failed which resulted in a series of credit crisis earthquakes culminating in the September 08 Lehman's bust which galvanised governments and central banks to literally throw everything they had to bring the inter bank interest rates down, which in the UK included cutting the base interest rate to virtually zero and pressing the monetary nuclear button of printing money and forcing the tax payers to guarantee more than £1 trillion of bad bank debt which has resulted in bringing the base rate / LIBOR spread down to within historic norms, but at huge cost to bank customers including borrowers and savers as the following illustrates.

    Banks Profiteering From Artificial Banking System

    The artificial banking system means that the bill for rebuilding the bank balance sheets (and bonuses) is being paid by Borrowers and Savers who along with all tax payers are being forced to pay for the bankster's crimes as tax payer bailed out banks such as HBOS pay a pittance on instant access savings accounts of as little as 0.1% against a requirement of 2.3% just to cover CPI inflation of 1.9% plus the 20% tax charged on interest whilst at the same time upping the rate on borrowers far beyond the illusion of low interest rates as presented by a base rate of 0.5% as the following graph illustrates the spread between the mortgage standard variable rate and interbank market rate resulting in a huge profit margin for the banks.

    Money is being sucked out of the pockets of borrowers and savers and being deposited onto the balance sheet of bailed out banks that have no incentive to pay a decent rate of interest on savings when they can borrow at 0.5% from the Bank of England and marginally higher from other banks. The artificial banking system is resulting in unprecedented huge profits margins for the banks as market interest rates charged to retail borrowers continues to rise regardless of the base rate being held at 0.5% into 2010.

    The big question is when will the Bank of England start to reduce this unprecedented artificial support for the UK banks. The marginal up tick in the LIBOR spread suggests that this is now underway to a small degree. However we are talking about a minute movement. The key indicator for a series of increases in interest rates will be when the spread rises to above 0.3 from the current 0.13, which considering the first graph suggests that this is not on the immediate horizon and therefore implies that we are still some months away from the first rate rise i.e. the trend is suggestive of no rate rise during the first half of 2010.

    Do UK Interest Rates Lead or Lag CPI Inflation?

    One of the Bank of England's primary objectives is to target UK inflation at CPI 2% in 2 years time and stay within a range of 1% and 3% through the use of monetary policy with the primary tool being interest rates. The consensus view is that when inflation is expected to rise then the Bank of England raises interest rates, and where the Bank of England expects inflation to fall towards its lower band then it lowers interest rates so as to boost economic activity and hence inflation. Therefore the purpose of this analysis is to confirm the role inflation plays in determining the Bank of England's primary objective of managing inflation and what it suggests for interest rates during 2010.

    The below graph includes the Inflation forecast for 2010 as of December 2009 which projects towards a sustained trend to above 3% which on face value would imply the Bank of England should start raising interest rates.

    The above graph implies that the Bank of England tends to react late to changing inflation and then continues the interest rate trend too far in the opposite direction which implies ever increasing volatility in the series. Given the already completed inflation forecast this implies that the Bank of England will respond much later than expected to rising inflation, though when it does respond it will continue raising interest rates even after inflation turns lower, which is suggestive of interest rates rising from mid 2010 and continuing into mid 2011,with smaller initial steps of 0.25%, throughout the proposed 12 month forecast cycle.

    UK interest Rates and M4 Money Supply Relationship

    The below graph shows UK M4 Money Supply and Money Supply adjusted for the velocity of money that takes into account the state of the UK economy i.e. an booming economy has a higher velocity of money and hence money supply has a more inflationary impact than an economy in recession where high headline money supply in reality is masking deflation rather than inflation as we saw during 2009.

    The above graph shows some relationship between interest rates and the money supply adjusted for the velocity of money (red) in that when the M4 Adjusted is below 10% the Bank of England cuts interest rates and when it is above 10% the Bank of England raises interest rates.

    The graph shows the consequences of extreme deflation into early 2009 which was followed by the unprecedented near panic interest rate cuts to 0.5%. The subsequent trend is resulting in a fast M4 recovery though which at this point remains negative, however the projected trend can be seen reaching the 10% level by mid 2010 and therefore implies UK interest rates may be held at 0.5% until mid 2010 before interest rates are gradually raised as long as M4 Adjusted remains above 10%. This also suggests should Adjusted M4 continue to accelerate well above 10% then the pace of rate rises could escalate further i.e. in 0.5% jumps.

    UK Interest Rates and GDP Growth Trend Relationship

    The below graph shows UK Interest rates against annual GDP as well as the spread between the two. Also included is the current forecast trend for UK GDP growth for 2010 and 2011.

    The above graph shows an average interest rate spread against annual GDP of 2%, with a wider range of 4% to 1% i.e. UK interest rates are normally expected to be 2% above GDP. The current spread as of Q4 estimate of -4.73% is at 5.25% which illustrates why the Bank of England embarked upon Quantitative Easing aka money printing in March 2009 as interest rates of 0.5% had little impact on the actual economy at the time due to the degree of economic contraction under way.

    However taking the strong forecast GDP growth into account that projects to +2.8% for 2010 and +2.3% for 2011, then the current base interest rate of 0.5% will result in a swift plunge in the real economic interest rate to far below the trend of 2% and the low of 1%, which therefore suggests that the UK interest rate by the end of 2010 would be targeting 4% to stay within this range and rise to 4.5% by mid 2011. Off course this is dependant upon the strong GDP forecast growth of +2.8% actually transpiring, nevertheless this analysis does suggest that even a mild recovery of below trend to +1.5% would still target an interest rate of at least 2%, therefore this analysis is suggestive of an end 2010 interest rate range of between 2% and 4%.

    UK Quantitative Easing Money Printing to Hit £275 Billion 2010

    The Bank of England cut UK interest to a historic low of 0.5% in March 2009 for the objective of boosting the economy so as to enable it to SELL government bonds, however this did not work as bond auctions started to FAIL in March, which therefore triggered the Bank of England to hit the panic button, igniting Quantitative Easing or Quantitative Inflation, having received the green light from the Government a few months earlier.

    The initial print run was for £75 billion which has been steadily extended to £200 billion to date. Nine months on the phrase Quantitative Easing is bandied about in the press as though it is normal, however I cannot emphasis enough how big an event Quantitative Easing aka Money Printing is, QE is the biggest monetary event in the Bank of England's 315 year history, as once ignited it is difficult to wean an economy off of QE as Governments fail to control the budget deficits that become endemic which demands a continuance of Q.E. and therefore risks igniting Quantitative Inflation and currency / market panics.

    QE Huge Boost to GDP

    I have received a few emails critical of my strong UK growth forecast for 2010 of +2.8%, mostly from those that expect / hope for a double dip recession that would allow them a second opportunity to buy into the stocks bull market at near the bear market lows having missed the birth of the stocks stealth bull market last March, in that light the following may enlighten readers on the huge boost to GDP during the past 9 months:

    Whilst approx £190 billion of the £200 billion of QE authorised to date has been deployed over the past 9 months. However the true implication of QE on the economy can be better appreciated when setting it against the recession that has seen a contraction of some 6.2%, as QE of £180 to £200 billion is equivalent to GDP of 14% to 16% i.e. far greater than the loss of GDP during the 15 month recession, and not forgetting that QE is just one part of the programme of huge Government deficit spending (14% of GDP) and near ZERO interest rates (Savers subsidised bailouts) and the over £1 trillion of bailed out banks bad debt liabilities, then direct capital injections of over £80 billion (6% of GDP) illustrates the extreme lengths to which the authorities have gone to, to bring the recession to a halt, which sows the seeds for above trend growth during 2010.

    The Bank of England's Route towards £200 billion QE

    The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

    Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

    This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

    I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the actual total of £200 billion of money printed as a direct consequence of the Labour Government's objective of both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Therefore the Labour Government also wins because it gets to hide this Quantitative Easing debt as theoretically purchases and sales cancel each other out in the fantasy land of central banking accounting and feeble government auditing. I.e. by magic approx £200 billion of new government debt has vanished into thin air, for if had not been hidden under the carpet then UK Gilt interest rates would be much higher due to the increase in supply of approx 33%.

    Asset Price Implications of the Potential End of Q.E.

    Quantitative Easing being brought to an halt / unwinding of purchases would hit asset prices hard, i.e. we would see the Gilt bond market impacted as instead of purchasing 'most' of the government bonds the Bank of England would become its biggest seller with a lot of supply overhanging the market this would send the bond market into a tailspin which would follow into the stock market that has soared in good part as a consequence of Q.E., similarly the bounce in UK house prices would soon evaporate. This suggests whilst the BoE talks of ending Q.E. I just don't see it happening whilst the Government runs a budget deficit anywhere near as large as 15% even half of this would not be enough to end Q.E. So it looks like Q.E. will be here for many years as I originally voiced before Q.E. began. However as the asset markets stabilise at higher levels, the Bank of England rather than printing new money may entice banks and financial institutions to purchase bonds rather than further drive up stocks which is therefore suggestive of a tough year for other asset prices.

    Bank of England Forcing Banks to Buy Gilts

    The official line of QE was to boost bank lending, however Q.E. is apparently having the opposite effect at the commercial banks as the Bank of England's twin objectives of monetizing government debt and for the the bankrupt banks to improve their balance sheets is in effect forcing the banks to BUY government bonds as Gilts are seen as the safest asset class and therefore boosts the Banking sectors credit worthiness in terms of capital ratios so instead of lending tax payer money loaned to the banks, the banks are using tax payer money to buy government bonds and on short-term deposit at the Bank of England.

    Surely this must be by design as the Bank of England's primary purpose is for the orderly management of the Government debt market hence this is ensuring the maximum demand for a huge amount of debt issuance estimated at £225 billion for the current financial year, which includes new debt and maturing debt rolled over.

    Continuing Budget Deficits for Several Years

    Even if the next government manages to implement significant policy measures to cut the annual deficit by £80 billion year to approx £100 billion by means of tax rises, spending cuts and revenue from growth, against the Labour governments target of £162 billion. A deficit of £100 billion would still equate to about 8% of GDP, so would still require more money printing to monetize government debt of which approx £60-£70 billion would need to be monetized.

    Bank of England Blaming Government, Seeking Greater Powers From Conservative Government

    Governor of the Bank of England has been ever more vocal during 2009 in his criticism of the governments policy of only cutting the huge deficit over the next 5 years by half as clearly this is not a sustainable policy. However whilst Mervyn King is busy blaming others he needs to take a long hard look in the mirror at his own failure both before the crisis broke and right into the present day. The Bank of England has consistently shown itself to be an incompetent institution that tends to act too late to respond to both inflation and economic concerns which has directly contributed to the depth of the 2009 crisis. The truth of the matter is that had the Bank of England sat twiddling its thumbs during 2008 by keeping interest rates at 5% for far too long whilst the economy burned which pushed the economy over the edge of the cliff. The MPC committee is generally populated by clueless academics that collectively usually result in an overly cautious wait and see attitude, by which time it is generally too late!

    Also I should remind readers that interest rates were only cut in early October 08 when the Prime Minister effectively seized control of monetary policy by forcing the Bank of England to start cutting rates as illustrated by the first cut of 0.5% which was announced on October 8th 2008 by Gordon Brown himself from the Prime Ministers dispatch box in the House of Commons rather than by the Bank of England.

    Mervyn Kings continuing criticism is even more outrageous in the run up to General Election as clearly his party political outbursts electorally favour the Conservatives, probably helped by George Osbourne's recent comments that he would transfer even more powers to the Bank of England despite the fact that it consistently fails in its primary government set objective of keeping Inflation at 2%, as we will again repeatedly witness during 2010. Though the FSA charged with regulating the banks has been even less competent which despite knowing as a fact that banks such as Northern Rock and HBOS were lending 100% mortgages financed from short-term money market borrowings which resulted in an extremely high risk institutions, but the FSA FAILED to regulate the banks for several years in the run up to the August 2007 credit crisis and beyond.

    QE is Just More Bankster Fraud

    Were told by the politicians and the Bank of England that money printing is to boost the UK economy, NO the primary purpose of money printing is to enable the banks to generate huge profits to rebuild their balance sheets, which they are doing. If the government wanted to boost the economy rather than banks profits then the government should have taken the £200 billion printed and given it to the 29 million or so of tax payers which would have resulted in a huge cash for consumption windfall of nearly £7000 per tax payer ! Now that WOULD have immediately boosted the economy ! Imagine 29 million people receiving a cheque for £7,000 each, imagine the resulting consumption boom that would take place. So the FACTS are that the £200 billion is for the purpose of bankster's to profit from then to boost the economy, which is what one would expect the BANK of England to do ! i.e. to support its brethren bankster's then to consider the debt slave tax payers that are being forced to bail the bankster's out.

    QE Money Printing 2010 Conclusion

    QE will continue during 2010 until the Bank of England is sure that a. their brethren bailed out banks no longer risk financial armageddon, and b. That government debt issuance does not risk a Gilt bond market collapse.

    My original estimate was for QE to rise to £450 billion over the next 5 years (from 2009), therefore I expect we will pass the half way point during 2010 as I expect the Bank of England keep printing printing money for several more years.

    The Bank of England's December 09 announcement that it would now buy and sell corporate paper to me suggests that the Bank is considering selling what little of corporate paper it has bought during the past 9 months in favour of supporting the Gilt bond market. Therefore I expect this coupled with further incentives for banks to buy gilts means much less QE during 2010 than 2009, which suggests a target total for 2010 of £275 billion, whilst at present academic economists and mainstream press suggest that there would be no further Q.E. beyond £200 billion and even that the Bank will seek to unwind QE during 2010 i.e.

    Bank set to close the £200bn printing press - Independant 8th Jan 10

    The Bank of England's £200bn quantitative easing (QE) experiment is set to come to an end next month, with the Monetary Policy Committee (NYSE:MPC) yesterday voting to leave the scale of the scheme on hold. The remaining money in the programme will be exhausted by the time of the MPC's February meeting and it is then expected – barring shocks – to take the economy off its life support system.

    Though the mainstream press said basically the same thing last July when Q.E. was at £125 billion, as mentioned earlier.

    Money Printing Theft of the Value From Holders of Existing Currency

    Quantitative Easing is not a free lunch, the price of which is being paid by savers as the supply of money increases so does it decrease the value of all currency, this is most clearly evident by two indices,

    1. Sterling exchange rate against other currencies, though all currencies are engaged in competitive devaluation so therefore probably something like gold is a better indicator in this case 2009 saw a devaluation of about 20% with more to come during 2010.

    2. The inflation indices of which the Consumer Price Index is the governments preferred measure. Throughout 2009 and into 2010 we have seen the base interest rate BELOW the rate of CPI inflation which means NEGATIVE real interest rates i.e. your rate of interest is below the rate of inflation. This means that the bill for low / negative interest rates is being paid by Savers who along with all tax payers are being forced to pay for the bankster's crimes as tax payer bailed out banks such as HBOS pay a pittance on instant access savings accounts of as little as 0.1% against a requirement of 2.3% just to cover CPI inflation of 1.9% plus the 20% tax charged on interest.

    Implications for Interest Rates

    The Bank of England is likely to be reluctant to raise interest rates whilst Q.E. continues. Which therefore suggests rates will only rise when the Bank of England is forced to raise rates by the markets as a consequence of risks of bond purchases. Which suggests 2010 is going to be a difficult year to forecast interest rates.

    Improving UK Mortgage Lending Feeding the House Prices Bounce

    The below graph shows UK Mortgage lending for House Purchases and Equity Withdrawals

    The Government and Bank of England have succeeded in their primary objective of increasing both the supply of mortgages and lowering the interest rate burden on borrowers so as to bring the UK house price crash to a halt, which suggests that in terms of supply, the credit markets are starting to return to a LOW NORMAL state.

    UK house prices have now risen by nearly 10% from the March lows as a consequence of unprecedented measures such as near zero base interest rate, mortgage banks arm twisting to limit repossessions and £200 billion of money printing. All of which leave the governments coffers empty and the Bank of England with little ammo to fire at future crisis which therefore suggests that the Bank of England should start to focus in the near term to tepidly begin to unwind the ultra loose monetary policy by starting to gradually raise interest rates though without wanting to unravel the work done so far in stabilising the banking system which therefore is suggestive of small steps spread out rate increases as the Bank of England adopts a cautious wait and watch attitude for any negative impact before each subsequent rate rise.

    British Pound Trends and Interest Rates

    The below graph shows the UK base rate and sterling trends against the U.S. Dollar and Euro to test the widely held hypothesis that Rising UK interest rates results in a rise in the exchange rate and conversely cuts in UK interest rates results in a fall in sterling.

    The Pound / Dollar trend suggests that GBP tends to lead UK interest rates i.e. sterling has a tendency to rise against the Dollar ahead of UK interest rate hikes and a tendency to fall against the Dollar ahead of UK interest rate cuts. The most recent price action has seen sterling rally from £/$1.40 in early 2009 to above £/$1.60 as of the present which therefore implies that the currency markets are discounting future interest rate hikes.

    The Pound / Euro trend suggests that the objective is aimed towards a stable exchange rate against the Euro i.e. less volatile hence interest rates are used in an attempt to limit fluctuations as we saw between 1999 and 2007, as when the £/Euro rate was high at 1.60, interest rates were cut, and when the £/Euro was below the floor of about 1.40 then interest rates had been steadily increased so as to maintain the 1.40 floor. This is part of the Bank of England's objective of ensuring price stability by tracking the Euro.

    However during 2008 and 2009 we saw a crash in sterling that traded below 1.10 to near parity with the Euro as the Bank of England abandoned everything in the interests of preventing financial and economic armageddon. However as the banking system has gradually stabilised it is highly likely that Bank of England focus will again shift towards price stability which means keeping sterling with an range against the Euro.

    The £/Euro has managed to trend higher from near parity 12 months ago to today stand at 1.10. This is suggestive of a higher range then seen over the past 12 months i.e. a probable wide target range of between 1.10 to 1.30 against the Euro, therefore the current rate is at the floor which suggests a rise towards the target mid range of 1.20 which on face value suggests further downside trend is limited and more than likely that the Pound will rise against the Euro towards 1.20, which therefore suggests UK interest rates should be relatively higher than the ECB interest rate to reinforce this trading range.

    In summary, the sterling trend is suggestive of the Bank of England targeting a £/Euro trading range of between 1.10 and 1.30, which is therefore suggestive of relatively higher UK interest rates against the Euro-zones which my next analysis will look at.

    UK, U.S. and Euro Interest Rate Trends Analysis

    The below graph shows the key interest rates for the U.K., U.S. and E.U. so as to determine any advance trend change signals for UK base interest rates during 2010.

    Fed Funds - The above graph clearly shows that the U.S. Fed Funds rate usually acts as a leading indicator for U.K. interest rates both in terms of timing and in terms of trend. The current trend shows no sign of an imminent increase in the Fed Funds rate and therefore implies a UK base interest rate increase is not imminent either.

    ECB - The European key interest rate trend shows a less volatile dataset then either that for the U.K. and U.S. which suggests a more cautious response to economic events, this is borne out by the tendency for European interest rate trend changes to lag both the U.S. and U.K. and therefore not particularly useful in signaling UK interest rate trend changes. However European interest rates are usually significantly below that of the UK interest rate due to less perceived risk, with a normal UK rate usually at least 1% above the European rate therefore at present would indicate a interest rate of 2% as a minimum.

    Summary, U.S. Rate changes tend to lead UK rate changes, with UK rates usually at least at a 1% premium to either European or U.S. rates which therefore illustrates the current state of an artificial heavily subsidised banking system with no sign visible that the central banks are willing to return to a normal market at this point in time and therefore implying that the first UK interest rate hike still remains some way off.

    UK Interest Rate Forecast 2010 - 2011 Conclusion

    The difficulty in arriving at an interest rate forecast conclusion for 2010 is that we have a heavily supported artificial banking system for the primary purpose of the near unlimited bailout of the banking sector. The problem in arriving at the forecast is that I need to look beyond economic indicators and put myself into the mindset of the scared officials at the helm of the Bank of England, who having tasted financial and economic armageddon are now so terrified by what they saw that they would rather continue to support the bankrupt banking sector for far too long and thereby allowing the bankster's to continue effectively stealing billions of tax payer cash as 'bonuses' and also allow price inflation to let rip as a consequence of printing money.

    But against this petrified Bank of England reluctant to do anything that may risk a return to financial armageddon we have the market in the wake of a flood of government debt issuance that despite ever increasing quantitative easing demands higher interest rates, otherwise the Bank of England risks Gilt Auction failures which could trigger a sterling crisis during 2010. So it is both a tough balancing act for the Bank of England and a tough call for anyone to attempt to forecast UK interest rates for 2010.

    So why forecast if it's so difficult this year ?

    Well, because finance and investing IS all about forecasting the future, perhaps if the bankster's had registered this fact then they would not have been caught up in generating short-term fictitious profit reports to bank huge bonuses, when at the end of the day today's decisions should boil down into what one thinks is a probable future outcome so as to allow investment decisions to be made in the present.

    The primary message from my accumulative analysis of inflation, economy and in this article is that the Bank of England WANTS to swim in the warm waters of Inflation after the deep freeze of Deflation, which strongly implies that the Bank of England will IGNORE soaring inflation early 2010 and instead DELAY raising interest rates until it sees actual evidence of a strong economic sustained recovery which my analysis suggests should transpire during the first half of 2010. Therefore the BoE will be focused on the quarterly GDP data, first Q1 to be released at the end of April 2010 and then Q2 to be released late July 2010. Which means that there is a high probability that the first rate rise may not materialise until August 2010. After which rates will be increased not in line with inflation but in line with improving GDP and other indicators of economic activity into the end of 2010.

    As a final conclusion, I expect a presently petrified Bank of England to be gradually forced by the market to start raising the UK Base interest rate in small steps of 0.25%, with the first rate rise probably coming just before release of Q2 GDP Data (July) in June 2010 i.e. after the next election deadline and then followed in August and September 2010 on further indicators of improving economic activity. My concluding target is 3% by mid 2011, the difficulty is in saying where rates will be at the end of 2010 as the range is 1.5% to 2%.

    UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%.

    Interest Rate Forecast Implication

    The full implications of all three in depth analysis and forecasts for UK inflation, economy and interest rates will follow in the inflation mega-trend ebook to be completed over the coming week which I am making available for free. Ensure you are subscribed to my always free newsletter get this in your email in-box.

    Election - The Deadline for the next election is June 3rd, therefore even if Gordon Brown decides to cling onto power until the very last minute then there will still be no rate rise in the lead up to the next election. The most probable date for the next election remains May 2010 as the economy 'should' be showing clear signs of a strong recovery by then, despite negative impact of tax hikes.

    My original projection as per the UK election forecast of June 2009 remains that projects the Conservatives on 343 seats, Labour 225 and Lib Dems on 40. Although the people of Britain got a window into who really owns and runs the country as the Government literally risked unlimited liabilities for the tax payers to bailout the bankster's who instead of being charged with the fraud of the century are again be rewarded with billions in bonuses which is in fact tax payers cash funneled into their back pockets. Labour has shown itself to be no different then the Conservatives when it comes to being in the back pockets of the bankster elite.

    Borrowers

    Firstly do not forget that the primary purpose of the banking sector is to turn everyone (including governments) into debt slaves. So the first objective is for people implement a plan to FREE themselves from DEBT SLAVERY. The artificial banking system is currently running on a huge profit margin which means borrowers are paying through the nose despite a 0.5% base interest rate and 0.63% interbank rate i.e. borrowers are paying many multiple of times in excess of the rates banks borrow at, from mortgages with SVR's hovering around 6%, to personal loans of 10% to 15% to credit cards of 20%+, which are generating huge profits for the tax payer bailed out banks supposedly for the purpose for the banks to rebuild their balance sheets but as we are again witnessing is in significant part being pocketed by bankster's as bonuses for profits that ONLY exist because of the tax payer cash.

    So given the fact that the banks are already running on huge profit margins, therefore I do not see much change for most borrowers rates during the year as the interest rates charged are already excessively high which effectively discount a much higher base interest rate north of 4%, which means there is plenty of scope for borrowing rates to actually fall during the year rather than to rise.

    Mortgages - Over 90% of people can only get on housing ladder with a mortgage, therefore the prime consideration for borrowers is in able to service the loan, in this regard the long standing but often broken rule of not borrowing more than X3.5 salaries should be at the forefront of ones mind. This rule is not to prevent you from buying a bigger house, but to prevent you LOSING your current house. That coupled with a minimum deposit of 25% should say one is able to buy. If someone only has a 5% deposit or not enough income then to be blunt you should NOT consider buying a house. I will cover the UK housing market in depth in my next ebook. I expect mortgage interest rates to be little changed for most borrowers. However those that are the most desirable customers in terms of credit risk are likely to see the rates on the best products rise marginally.

    Pay Day Loans - During the recession many pay day loan outfits have sprung up that offer to fill the gap between each pay cheque with near instant small loans of upto £1000 that borrowers are further enticed to roll over into the pay day. To be blunt, if you are considering these types of loans then you might as well put a gun to your head! for all of the distress they will eventually cause you. Whilst the base rate is at 0.5%, pay day loan outfits are charging over 2,000% APR. These types of loans should be illegal in Britain but they are not, which just goes to show either how inept the financial regulator is or culpable in allowing ordinary citizens to fall victim to 'legal' loan sharks. If the FSA had the best interests of the general public at heart then it would lobby the government to introduce legislation to CAP ALL interest rates at base rate plus 10%. Yes it would mean that the financially illiterate presently taking on extremely high a risk loans would usually be denied loans due to the risk / reward factor, but that is how it should be.

    Savers

    After the wipeout of 2009 when savers subsidised the bailout of the banking sector through ultra low interest rates of as low as 0.1%, 2010 should see some decent recovery in nominal rates and hopefully in real rates of interest as well (after inflation). The best variable rates are usually 1% to 1.5% above the base rate. Fixed rates demand a premium of approx 2 to 3% depending on the term fixed. So by the end of 2010, this is suggestive of a variable rate in the region of 2.75% to 3.5% and fixed rates of between 4% to 5%, which should BEFORE the first interest rate hike as market competition will move ahead of the curve to discount future interest rates mid year. This suggests savers are probably better off NOT fixing now in advance of rising market savings rates by the time of the first base rate hike.

    Foreign Banks Offering Higher Rates - Remember Iceland ? Stay with British institutions which is both good for Britain as well as depositors, because if a foreign institution goes bust and then the foreign government defaults on its obligation to pay (as Iceland has apparently done) then the British tax payer will be black mailed into stepping in to cover this money as the consequence of not doing so would result in a run on virtually all banks.

    Stock markets - My in-depth analysis for stocks will follow, but rising interest rates are not particularly good for stocks as higher yields will attract investors away from stocks, which is not conducive to anywhere near as strong a bull run during 2010, therefore suggestive more of sideways trend for the stock market during 2010.

    Commodities - Rising inflation is good for commodities but rising interest rates less so for zero yielding assets such as gold, still my forecast of November 2nd 08 still stands as of Gold $1042, in that target $1300 by March and higher still during the second half of 2010. I will again do an in depth analysis on gold this month as part of the Inflation Mega-trends ebook.

    Press and Economic Organisation Interest Rate Expectations

    Bank of England interest rates 'will not rise until late 2011' - Houseladder - 12th Jan 2010

    Alan Clarke, UK economist at BNP Paribas, says: "During 2011 GDP (gross domestic product) will be very sluggish, we will be in a soft patch and I think inflation will be very low."

    He argues that these factors will support the bank maintaining low interest rates for 2010 and much of the following year.

    According to the economist, the Bank of England will not change its mind and raise rates just because a positive GDP is seen.

    Roger Bootle, economic adviser to Deloitte, echoes Mr Clarke's comments predicting that interest rates will remain at below one per cent for the next five years.
     

    No UK rate hike seen until Q4 2010, QE capped -Reuters poll - Guradian - 22nd Dec 2009

    * Rates to rise to 1.0 percent in Q4 next year
    * Quantitative easing programme capped at 200 bln pounds
     
    LONDON, Dec 22 (Reuters) - The Bank of England won't raise interest rates from a record low until the fourth quarter of next year, according to a majority of 62 analysts polled by Reuters,

     

    No hike in sight for interest rates - Interactive Investor - 7th Jan 2010

    "Whilst inflation is certainly rising and there are signs of growth and improvement in the both the services and manufacturing sectors, talk of a recovery is, as yet, far too premature. Until the Bank of England sees consistent evidence that banks are lending more regularly, interest rates will continue to be held at 0.5% until the beginning of 2011 at least."

    The above implies a current consensus view that either UK interest rates will remain at 0.5% until early 2011 or a small rise in the fourth quarter 2010 to target 1%, against my target of trend of 2% on route 3% by mid 2011. Therefore watch how the press and academic economists busily revise interest forecasts higher mid 2010 AFTER the event, i.e. AFTER market interest rates have already risen to discount behind the curve Bank of England rate rises. Much as the press ran with the forecast by CEBR UK Interest Rate Forecasts 0.5% Until 2011, Below 2% until 2014 of October 12th 2008. Which I concluded at the time had a 90% probability of being wrong as a confluence of debt monetization of the 15% budget deficit that implied higher inflation and thus higher interest rates.

    Source and Add Comments Here: http://www.marketoracle.co.uk/Article16450.html

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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  • UK Economy Election Boom 2010
    The British Economy as with other developed economies entered 2009 in recession and on the brink of Depression, after unlimited bailouts , hitting the Quantitative Easing panic button and running a huge 15% of GDP budget deficit, the UK economy has managed to claw its way back out of recession as the Q4 data will show when released during late January 2010.

     

    This in depth analysis is second in a series of three that seeks to generate accurate forecasts for UK inflation, GDP growth and interest rates for 2010 and beyond.The whole analysis and implications of will be published as an ebook that I will make available for FREE, ensure you are subscribed to my always free newsletter to get the completed scenario in your email box and check current ongoing analysis at http://www.walayatstreet.com.

    UK GDP Forecast 2009 - Britain's Great Depression

    Britians Great depression is expected to end in the third quarter of 2009, the trend for which has been accurately mapped out in the in depth analysis and forecast of 17th February 2009 (UK Recession Watch- Britain's Great Depression?), that both called for severe peak to trough economic contraction of -6.3% for 2009 at a time when the likes of the UK Treasury were forecasting contraction of less than half at -3%. The analysis also concluded in a strong debt fuelled economic recovery for 2010 to coincide with a summer 2010 General Election. As of the revised ONS GDP data (ABMI Chain linked at Market Prices) total peak to trough contraction is now 6.23% virtually exactly inline with the forecast for -6.3%. Annualised contraction for the third quarter is at -4.56% with trend on target for -4.75% for the fourth quarter.

    UK Recession Projection / Forecast Conclusion

    In the final analysis, the projected course of the recession over the next 2 years is as illustrated by the below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009 (small quarterly gain on the 3rd quarter), which will be followed by a recovery as the rate of annualised GDP contraction improves as government stimulus measures announced to date and deep interest rate cuts as well as future stimulus during 2009 kick into gear. The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930's Great Depression.

    Therefore this analysis seeks to update the prospects for 2010 GDP growth forecast of 2.1%, as well as project the trend out for at least 2011 and possibly further out, which is in the face of over bearing mainstream press commentary that has jumped onto the double dip recession band wagon.

    Labour's 10 Year Economic Boom Evaporated into an Even Bigger Bust

    John Majors Conservative government handed the New Labour government a lean mean economic growth machine back in 1997, which during the first 2 years of the new government the Labour party managed to restrain its traditionally tendencies of wasting money by sticking to strict limits on government spending. However increasingly following these first two years, the Labour party let rip with out of control public sector spending with a vengeance on the back of North Sea Oil revenues and the Casino Banking Sector profits that ensured that Britain skipped the Dot Com / Sept 11th recession of 2001-2002 that hit many other countries including the United States.

    Unfortunately both Tony Blair and Gordon Brown took this as a sign that they had acquired the midas touch, thus further escalating spending on the public sector that despite booming revenues from fictitious profits from the mark to market banking sector (for the purpose of paying huge bonuses) the Labour Government repeatedly broke its own Golden rules of balancing the countries finances over an economic cycle. If Labour had stuck to its own rules during the good times as they had repeatedly promised the electorate at each election then Britain would not now be peering over the financial abyss of an hyper-inflationary debt spiral.

    NHS Spending Black Hole

    This out of control public sector spending is no better illustrated than the more than tripling of the NHS budget from £37 billion to more than £120 billion, which ignited a Gordon Gecko style greed is good ethos that gripped the NHS and wider public sector that sought to not only match the private sector in terms of pay but beat when pension entitlements are taken into account.

    GP Pay illustrates the greed factor more than anything else that contributed towards the 2009 MP Expenses Scandal. When New Labour came to power in 1997 average MP pay was £43,722 against average NHS GP pay of £44,000, so both were inline with one another at that time. However as the below graph clearly illustrates in 2003 something started to go seriously wrong with GP Pay which took off into the stratosphere as GP's decided to award themselves pay hikes of more than 30% per annum at tax payers expense that has lifted average GP pay to over £126,000 per annum against £64,000 for MP's.

    This was as a consequence of the now infamous GP contracts where basically devious greedy GP's hoodwinked a gullible incompetent Labour government health ministers into signing up to contracts which were meant to deliver greater value for money for the tax payer but were instead designed to do the opposite and resulted in GP's pay doubling whilst at the same time cutting back on hours worked. This was not only a total fiasco for the nations health and finances but also ignited jealousy amongst MP's that directly led to the adoption of the policy of claiming expenses to the maximum so as to fill the ever widening gap between MP's and NHS GP's, as MP's could NOT get away with awarding themselves pay hikes of 30% per annum without losing their seats at the next general election in response to voter outcry, therefore across the board systematic abuse of expenses started to take place which basically means real average MP pay is currently approx £98,000 per annum.

    This example illustrates why the Labour party appears destined to leave office with the economy left in the worst state since any time since the Second World War. No British Government since WW2 has ran an annual budget deficit of 15% of GDP and it is this deficit as a consequence of the public sector spending black hole that the next Government will have to come to grips with which implies deep spending cuts of as much as 10% or £60 billion.

    UK CPI Inflation Analysis and Forecast for 2010

    The in depth analysis forecast conclusion for UK inflation for 2010 (http://www.marketoracle.co.uk/Article16085.html) included the following analysis points and conclusion that build towards the forecast for UK GDP growth for 2010 and beyond, therefore these analysis points are not being repeated in this article.

    • Inflation Forecast 2009
    • The Inflation Mega-trend
    • UK Retail Sales Signal Debt Fuelled Election Consumer Boom
    • M4 Money Supply Adjusted for the Velocity of Money
    • UK Unemployment
    • Debt Fuelled Economic Recovery Heading for Double Dip Recession?
    • Debt and Liabilities
    • UK Interest Rate Being Kept Artificially Low For Bank Profiteering
    • UK House Prices Continue 2010 Government Debt Fuelled Election Bounce
    • UK Producer Prices
    • Stocks Bull Market Signaling Strong Economy
    • British Pound to Wobble Lower During 2010

    Conclusion and UK CPI Inflation Forecast 2010

    The sum of the above and recent analysis is for UK inflation to spike higher in the coming months during early 2010. This is inline with my view that the Labour government has succeeded in sparking a strong debt fuelled economic recovery that will become clearly visible during the first quarter of 2010. I expect UK inflation as measured by CPI to break above the Bank of England's upper CPI target of 3% very early in the year, and stay above 3% for most of the year only coming back below 3% late 2010 as a consequence of the next governments attempts to bring the unsustainable budget deficit under control.

    Stock Market the Key Indicator of Economic Strength of 2009

    Key conclusion of the inflation analysis projected to a strong bounce back in the economy which implies higher inflation, all of which was strongly indicated by the stock market that began a stealth stocks bull market back in March, that only now nearly 9 months and 60%+ later are most analysts looking in the rear view mirrors are starting to drop the bear market rally mantra and recognising the fact that the stock market is THE LEADING ECONOMIC INDICATOR . The article 2009 The Year of the Stocks Stealth Bull Market recaps my analysis that began with the birth of the Stocks Stealth Bull Market in March, all the way into a year end target of 10,500+ on the Dow. My analysis for the stock market for 2010 will follow in January.

    Budget Deficit Cutting Solutions to Britain's Debt Crisis

    The next government's primary objective will be to to get an urgent grip with Britain's out of control budget deficit that risks an out of control inflationary debt spiral due to ever escalating interest payments exacerbated by a depreciating currency as a consequence of continuing money printing (QE) to monetize the deficit.

    The Labour Governments most recent updated projection for the annual Public Sector Net annual deficit remains unchanged against Alistair Darlings April 09 targets, as well as my original estimate of November 2008 (Bankrupt Britain Trending Towards Hyper-Inflation? ).

    The target PSND of £1,300 trillion would approximately equate to 100% of GDP by 2013/14. This is against my original target as of November 2008 of £1.48 trillion by the end of 2003/14 at a projected 114% of GDP.

    The existing government deficit reduction targets as of the November 2009 budget is to reduce the deficit by £23 billion per year for the year 2010-11 onwards. However as I pointed out in the article Britain's Inflationary Debt Spiral as Bank of England Keeps Expanding Quantitative Easing, reducing the deficit by £23 billion per year does nothing to stop the deficit from expanding by a further £510 billion or 42% of GDP, i.e. there is NO DEBT REDUCTION, Instead DEBT Escalates by a further £510 Billion. Therefore the Labour governments deficit reduction targets are NOT sustainable, as the market will NOT allow £510 billion of new debt to be issued on top of the existing debt mountain of over £1 trillion. Which is leaving aside for the moment total liabilities that look set to expand to over £4.75 trillion.

    Solution to Britain's Debt Crisis

    The only solution to the path Britain is on is for a balanced budget, in that regard the best way to achieve a balanced budget is to grow ones way out of debt i.e. increase revenues, failing that the option available is to inflate ones way out of debt which is what the Labour government has enacted through its policies of Quantitative Easing, Zero Interest rates and increased public spending. However what a government should not do is to listen to the deflationists and trigger another recession.

    So it is going to be a tough balancing act for the next government as it will need to cut spending, increase taxes AND grow the economy so as to bring the deficit under real control, not the nonsense of cutting the deficit of £23 billion per year for the next four years which as I have illustrated means at least an extra £510 billion of debt.

    The current financial years deficit is projected to be £185 billion or 15% of GDP, this needs to be cut to below 5% of GDP or £60 billion, within a short period of time but WITHOUT triggering a Double Dip Recession, which would just bring Britain back to square one i.e. were we were 6 months ago.

    How to Really Cut the Deficit

    Spending Cuts

    Both Labour and the Conservatives have made loud noises of making severe cuts to public spending but when one looks at the actual figures pumped out they are non existant for the Conservatives and show INCREASED public spending for Labour. This is clearly electioneering therefore without any real contract figures before me I can only guesstimate that cuts of approx 4% will follow in the post election budget which is significantly less than the 10% that would be necessary, which is not going to happen when the mega spending departments of NHS, Education and Welfare have been ring fenced for growth, which means a 10% cut is impossible. Public sector spending cut by 4% would equate to about £24 billion.

    Economic Growth

    My existing forecast for the UK economy is on track for 2%+ growth for 2010, therefore this should like for like imply a 2% cut in the annual deficit or £24 billion by means of increased revenues due to economic growth.

    Tax rises

    Tax rises have already been scheduled by Labour party to start kicking in during 2010, with the first on 1st of Jan 2010 when VAT goes back up from 15% to 17.5% with NI scheduled to follow in April. Add to this the projected post election tax hikes of an increase in the basic rate of income tax to 24p and higher upper band increased from 40p to 45p.Though a further VAT hike to 20% may be overkill and could trigger the feared double dip recession that would be a disaster, so I doubt if 20% VAT will follow, but it is a tough call as it could raise a further £12 billion per year. In conclusion total tax revenues could increase by a sizeable £30 billion a year and contribute to a significant dent in the deficit.

    Cutting the Deficit

    There putting all of the probable spending cuts, tax rises and increased revenues from economic growth all together, then by the start of financial year 2011 the budget deficit could be cut by £78 billion to approx £100 billion instead of the Labour governments target of £162 billion. A deficit of £100 billion would still equate to about 8% of GDP, so would still require more money printing to monetize government debt, but the cuts would not be so severe as to trigger a double dip recession and therefore allow the government to both grow and inflate its way out of debt during the subsequent years i.e. the country will experience below trend growth coupled with higher inflation that would target a rate above the Bank of England's 3% limit, which suggests that the next UK Government may set a NEW Inflation band of 2% to 4%, which is inline with the outlook being painted by the inflation forecast.

    On this basis the deficit could be cut to about 4% of GDP by the end of the third year of the next government, so hope for saving Britain from the debt spiral is not lost, but it does require urgent action as the longer the country accrues budget deficits of approaching £200 billion the greater will be the price paid in terms of debt interest payments that are already at £44 billion per year and could easily pass £80 billion if the Labour party's current 5 year deficit reduction plan is followed.

    Learn the Lessons from the Financial Crisis

    I hope the next Government will have learned the primary lesson from last years Financial Crisis, which is that the longer you leave a crisis to fester the greater will be the eventual crash. With regards Britians Debt Spiral, that crash would be for UK Government Bonds and Sterling, which would trigger panic reactive measures. So it is infinitely better to grab the debt bull by the horn BEFORE the inevitable debt collapse occurs.

    The Election Cycle.

    The next government will have 5 years to prepare for the next general election of 2015. Therefore it has at its disposal the valuable asset of time to engineer an economic boom into 2015. This suggests two harsh years of economic activity i.e. below trend growth, followed by two years of above trend economic recovery into the 2015 election.

    Bank of England Quantitative Easing Gilts Market Smoke and Mirrors Dangerous Game

    The Bank of England's actions throughout 2008 and 2009 have shown that it's primary objective is to massage the UK Government Bond market. The evidence for this is in the fact that the vast majority of the £200 billion of Q,E, has been utilised for the purpose of monetizing government debt i.e. buying gilts to prevent Gilt auction failures and higher yields.

    The original story of Quantitative Easing or Money Printing in statements made by the Governor of the Bank of England during February 2009 was that QE would be utilised primarily for the purchase of corporate bonds to help companies that were unable to sell debt / bonds to the banks. This is NOT what has transpired as most of the QE to date of £200 billion has been utilised for the purchase of Gilts, where even what little corporate bonds that have been bought are expected to be sold in the coming months.

    This tells me that those analysts that look to the Bank of England for possible answers for the UK economic growth indicators are following a red herring, as that is NOT the BoE's primary administrative function, the number 1 priority is massaging the Gilt market, yes inflation and economy come 2nd and third but only in so far as they impact the Gilt market. So the Bank of England could be a problem during 2010 as it continues to adopt a blinkered attitude towards the economy much as it did during the Great Recession of 2008-2009, in that the Bank of England sat twiddling its thumbs whilst the economy burned and it was only after the Prime Minister took control of interest rates away from the Bank of England on 8th of October by announcing the first of a series of cuts in UK interest rates from the Prime Ministers Despatch box rather than by the Bank of England as I mentioned around the time.

    UK 1% Interest Rate Cut

    The MPC meeting is widely expected by the consensus to cut UK interest rates by 0.5% today, however as my recent articles (Credit Quake Persists Ahead of UK Interest Rate Cut of 1%?) have concluded that effectively Gordon Brown cracked the MPC round table in half when he stood up at the House of Commons despatch box on 8th October to announce the interest rate cut of 0.5%, which was followed by the Bank of England's announcement. This suggests that the Monetary Policy Committee is now no longer totally in the control of setting UK interest rates and therefore in many aspects control has been transferred back into the Governments hands.

    At the end of the day the Bank of England will first look after fellow bankers and then placate the government by giving lip service to the wider economy for were it the institution that many think it is then it would not have contributed in a big way towards pushing the UK economy over the edge of the cliff during 2008 by sitting on interest rates of 5% for a whole year AFTER the credit crisis broke and the UK housing market peaked. The Bank of England coupled with the FSA contributed to towards the creation of the financial crisis through means de-regulation of the banking sector that ensured that bank officers turned their banks into hollow husks for the purpose of maximising bonuses on the basis of fictitious profits, with the liabilities at the end of day being dumped onto the tax payers. Had the Bankers that run the Bank of England done what the people thought they were there to do then the banking crisis would not have happened! For we are not talking about a new institution on a learning curve that is just a few years old, but rather a 300 year institution that knows full well the ins and outs of the banking system that it created over the centuries that exists primarily to turn everyone, including the government into debt slaves. The mainstream press instead of holding the Bank of England to account is praising the bank for its actions in preventing an Economic Depression.

    The Bank of England whilst talking about halting QE several times throughout 2009 that the mainstream press lapped up in July, which at the time I mentioned was NOT possible, as the BoE will continue with QE to ensure Gilt Auctions do not fail. The BoE will also put increasing pressure on the government to cut the deficit asap so that the Gilt market is under less pressure, regardless of the impact of a too severe cut in the deficit i.e. triggering a double dip recession.

    The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

    Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

    This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

    I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the current tally now standing at £200 billion of money printed as a debt consequence of the Labour Government's objective of both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Therefore the Labour Government also wins because it gets to hide this Quantitative Easing debt as theoretically purchases and sales cancel each other out in the fantasy land of central banking accounting and feeble government auditing. I.e. by magic approx £200 billion of new government debt has vanished into thin air, for if had not been hidden under the carpet then UK Gilt interest rates would be much higher due to the increase in supply of approx 33%.

    The real damage of this game of smoke and mirrors is that the markets are not stupid and when they eventually do react to the progressive trend of QE it will be Earthquake style and that is to dump UK assets, bonds, stocks, cash and therefore hit sterling hard in a matter of hours let alone days or weeks which would send interest rates sky rocketing i.e. to discount the £200 billion of new hidden Q.E. debt.

    In the final analysis money printing as I have repeatedly pointed out over the past year is a scam perpetuated upon existing currency holders, i.e. savers. The Bank of England's actions of the past 12 months amount to alleged theft of the value of savings from savers by means of zero interest rates and the printing of money that seeks to destroy the value of capital / savings both gradually through the process of inflation AND at the point of time of a currency crisis.

    What this means for the UK Economy is that a. serious efforts will be implemented by the next Government to cut the deficit, and b. whilst the deficit is above £80 billion per year then Quantitative Easing will remain and continue to expand which suggests several more years of QE rather than several more months as the BoE officially continues to always allude to, which given its actual primary objective is not going to happen.

    China Leads the Way for Strong Global Growth 2010 and Beyond

    China is leading the way to the return of global growth with expectations for GDP growth for 2010 of as much as 10%, which further confirms expectations for the potential of a global growth story surprise to the upside for 2010. Whilst at the present time many analysts / commentators worry about China market bubbles, much as they worried about the "stocks bear market rally" that was always destined for an imminent demise during 2009 which instead was one of the greatest bull markets in history.

    I don't see why China is not going to keep growing strongly for 2010, 2011 and beyond especially as domestic consumption becomes an ever larger part of China's growth story with other emerging markets not far behind. Having originally called the China stock market as a Great Buy at SSEC 2,000, with the index now at 3,200 up 92% from its bear market low just continues to prove how wrong the China doom mongers have been found out to be as the continue harping on about how China has to at some point withdraw the huge economic stimulus of 2009, though without understanding that with growing reserves of $2 trillion they do not have to as I pointed out back in June 2009. China Mega-trend Stocks Stealth Bull Market Update, SSEC Up 47%. Many of the comments I made at the time of China boosting World trade and commerce is coming to pass and will increasingly do so during 2010.

    So regardless of volatility during 2010, China will continue to notch up a further gains during 2010 AND 2011, We could easily see the Chinese stock market end 2010 above SSEC 4,200 which 'should' help elevate all major stock markets higher, just as the Chinese economy helps elevate the major economies higher.

    China's thirst for resources and energy also sets the scene for the continuing commodities bull markets right across the board as part of the inflation mega-trend scenario, which ensures mineral producing countries such as Australia and Canada and oil exporting countries will see China lift their economies higher as prices are driven higher.

    UK GDP Growth Forecast Conclusion

    The sum of the above analysis is for a strong economic recovery into the end of 2010 which given the pessimism today I term as the Stealth Election Boom that followed the Stealth Bull Market of 2009, the economic 'boom' will continue in to a peak in Q1 2011, which will be followed by weakness during 2012 and 2013 and strong recovery for 2014, and into a 2015 summer general election, breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and taking account of the election cycle preliminary GDP projections for 2012 of +1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015.

    Therefore I just cannot see this double dip recession that the mainstream press and so called think tanks are obsessing over at this point in time, no year on year economic contraction or even a quarter on quarter dip is visible.

    The following graph illustrates my trend forecast for quarterly GDP growth over the next 2 years 2010 and 2011.

    UK Strong Economic Recovery 2010 +2.8%, Q1 2011 peak of +3.4% (year on year), 2011 End +2.3%. Q4 2009 +0.6%, Q1 2010 +1.1%. Q2 2010 + 1.3% Election Boom. Q3 2010 +0.9% Q4 2010 +0.6%, NO Double Dip Recession, NO Negative Quarters for 2010 or 2011..

    Implications for Savers and Investors will follow in my ebook which I will share for free on completion early January 2010, ensure you are subscribed to my always free newsletter to get this in you email in box. My next in depth analysis and forecast that builds on this analysis will be for UK interest rates for 2010.

    UK General Election

    This analysis further reinforces my expectation that the public and mainstream press will be surprised during the next few months as the UK economy bounces back strongly in the first quarter and continues for the whole of 2010. If only Gordon Brown had one more year how things could have turned out so differently than what seems like the inevitable defeat that Labour are heading for. For all of Gordon Browns many faults he has succeeded in delivering an Election Economic Bounce for the Labour party. Which means that I will now have revise my UK election forecast as of June 2009 during January that projected Conservatives on 343 seats, Labour 225 and Lib Dems on 40.

    Mainstream Press and Think Tank Current UK Growth Forecasts for 2010

    UK Economic Growth 2010 - LoveMoney - 30th Dec 2009

    ForecasterForecast
    European Commission+0.9%
    International Monetary Fund+0.9%
    David Kern, British Chambers of Commerce+1.1%
    Organisation for Economic Co-operation and Development (OECD)+1.2%
    Alistair Darling, Treasury+1% to +1.5%
    Bank of England+2.1%

    Considering the OECD recently had to double its growth forecast for 2010, it's clear forecasts are unreliable.

    CBI Predicts Fragile Economic Recovery - BBC 21st Dec 2009

    The CBI predicts that the UK will exit recession in the fourth quarter of 2009, helped by consumer spending ahead of the VAT rise in January. But the group says the economy is unlikely to have returned to pre-recession levels by the end of 2011.

    It says unemployment will peak at 2.8 million - lower than first forecast. Annual growth of 1.2% in 2010, followed by growth of 2.5% in 2011

    What will happen to the economy in 2010? - ThisisMoney 29th Dec 2009

    This growth should prove sustainable well into 2010, and the average prediction from leading UK's economist is for Gross Domestic Product (NYSE:GDP) to rise at a rate of 1.4% next year.

    As you can see there is a wide range from a cluster around 1% to the Bank of England at the upper end of 2.1% which is the most nearest to my own forecast for 2010 of growth of 2.8%.

    One thing that stands out to me is that academic economists and so called think tanks apparently do not understand the critical concepts of trend and momentum which has to be at the core for those that successfully trade the financial markets, some food for thought to end on.

    Source and Add Comments Here: http://www.marketoracle.co.uk/Article16167.html

    Wishing you all a happy and prosperous New Year!

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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