The latest Nationwide Consumer Confidence Index was released today. Highlights from the seasonally-adjusted index, include:

• Consumer confidence rose by two points to 63 in August This is the fifth consecutive monthly rise and well off January 2009 low of 46.
• The Expectations Index increased thee points to 94. The index reflects sentiment about the economy, labour market and household income over the next six months. It is well off low of 53 hit in August 2008.
• The Spending Index was up one point to 97. , which reflects sentiment about spending on household goods and major purchases, increased by one point to 97, considerably above the August 2008 low of 51.
• The Present Situation Index, which reflects sentiment about the current economic and employment situation, increased by one point to 17 from July’s all-time low of 16.
• The number of consumers who believe there are now fewer jobs available fell from 74% in July to 71% in August.

As can be seen from the chart, the disconnect between indices began after July 2008. Up until then all the indices had pretty much copied each other in direction, up or down. Once the reality of economic contraction and credit revulsion took hold, the indices went their separate ways. Which is why we currently have the Expectations Index at 94 and the Present Situations Index at 17.

One possible reason for the increasing gap between the Expectations Index and Present Situation Index is that more people where right six months ago when they thought that there situations would get worse over the forthcoming six months time.

However, now that the future is in the present and it is as bad as they expected, they are now of the view that things will be better for them in six months time.

On the other hand, it could simply be that the longer things don’t improve, the greater the number of people who come to believe that things will definitely improve in six months time.

Either way, the public mindset still seems to be that what has happened in the last two years was a normal inventory-reducing recession, albeit extra severe courtesy of the evaporation of credit. The concept that a structural change took place and that opposing, demographically-induced, secular trends may now be in charge has yet to register.

The 4-in-1 interactive chart has been updated: Nationwide Consumer Confidence Indices.

Data: Nationwide Consumer Confidence Index August 2009 [PDF].

Dr. Marc Faber being interviewed on Lateline Business on 26 August, 2009.

5:14

Question: You have no faith in the administration’s ability to wind back stimulus and start dealing with that programme?

Marc: Are you joking (while laughing). Having faith in the US administration? I wonder ‘who’ on Earth would have faith in the US administration. Certainly, not someone who thinks.

7:00

Question: Last time we spoke 5 months ago, you said I should buy a farm and a gun . . .

Marc: (laughing) Now you need a machine gun.

8:13

Question: Is there anything that? you can tell me that could possibly derail your incredibly pessimistic scenario.

Marc: Uhhh . . . No.

To which I would add these words from General Dwight D. Eisehower’s speech to the Texas A&M, 9 November 1950.

But one thing we must fear is decay of our freedoms through our own neglect. A Mussolini, Hitler or Lenin would not tolerate freedom of the ballot, yet half our people do not choose to exercise it . . . . Despotism, whatever its guise, develops when men, losing faith in themselves, surrender bit by bit their own responsibilities to a central authority.

By every flight from our citizenship responsibilities, by that much we endanger the sum of our privileges as citizens. By every act of allegiance to a group whose purpose is its own vicious self-interest and profit, by that much we despoil America of the allegiance which is its life-blood. By every step we take toward making the state the caretaker of our lives, by that much we move toward making the state our master.

The latest Markit/YouGov Household Finance Index (HFI), which tracks month-on-month changes in household finances, was released earlier today.

• The HFI fell slightly to 38.2 in August, from 38.5 in July.
• Households with deteriorating finance outnumbered those with improving finances 5-to-1. Around 30% of respondents saw their household financial situation deteriorate, just 6% reported an improvement.
• Household finances deteriorated across all twelve UK regions. The largest rate of decline was in Northern Ireland. London suffered the smallest rate of decline.
• There was a slight reduction of actual household spending in August, despite a sharp drop in cash available to spend. 30% of respondents reported a reduction in household savings compared to 10% who indicated a rise.
• The outlook for household finances in 12 months’ time improved further in August. The index rose to 45.0 from 42.0 in the previous month, its highest level since the survey began in February.
• Confidence in the government’s management of the economy plummeted. Around 49% of households had become less confident, since July, in the government’s handling of the economy. Less than 6% indicated they had become more confident. All age ranges, income groups and UK regions reported reduced confidence.

Source: Markit Economics [PDF]

Note: The HFI is a ‘diffusion index’. It is calculated by adding together the percentage of respondents that reported an improvement plus half of the percentage that reported no change. Results will vary around the 50.0 “no-change” level. Readings above 50.0 indicate an improvement, readings below 50.0 indicate a deterioration.

The Federal Reserve announced that it would spend an extra $1 trillion buying, amongst other things, Treasuries as, like the Bank of England, it energetically pursues a policy of Quantitative Easing.

Has anyone else noticed that if you rearrange the phrase ‘Quantitative Easing’ you get:

i.e. tit an’ vagina quest

Just me?

Though it does beg another question. Which central banker is the tit and which is the . . . Never mind.

That was the question asked a few days ago by Abdullah Dyer on LinkedIn.

The following is my contribution, pretty much verbatim,  to the various opinions offered up.

In the U.S. I expect a ‘W’ with a another ‘V’ after that. Based on what I wrote in 2007, the current recession would end early 2010 with another recession around 2013 and a final one before that decade is out.

The middle recession could be pushed out if the current problems take longer to filter through. Given my expectation of another oil price spike some time in the third quarter of the 2010s, i.e. 2015-2017, that could be the case. Recessions always follow price spikes. However, the Kondratiev winter, which began 2008, has always suggested to me that things end with a recession and then another recession occurs a few years in to the next Kondratiev wave. The Gen-Bs in K-waves always battle to build the growth.

Keep in mind that, as well as the secular bear for stocks on a P/E ratio, residential and commercial property is also in a secular bear on a P/E ratio basis. Price inflation is still in a secular bull, so is unemployment. The massive Wave 4 wedge for commodities continues as that secular bull remains in tact.

The massive fiat fraud being perpetrated by politicians and central bankers will not be ‘managed’ well. Politicians, being the populist headline whores that they are, will undoubtedly leave it too late to contain the price inflation which will eventually be unleashed when the current printing frenzy finally filters down to Joe Ordinary. Look at the previous secular bull in price inflation and the current one. The numbers may be slightly different but the end result will be the same, though price inflation this time will peak much higher than it did in the 1970s.

When the current Wave 3 for stocks is over I expect a decent sized Wave 4 wedge formation to begin. Given the nature of wedge formations, fluctuating profits and moods as the economy meanders either side of the flatline would make the perfect backdrop to that. As would the vacillations in price inflation and interest rates as the ‘risk’ the general public are willing to take with discretionary spending, in housing or in investing for example, is capped. We are also in secular bulls for saving, a secular bear for personal debt on a percentage basis and, I believe, a secular bear for homeownership and a secular bull for household size.

None of this, in the great scheme of things, is necessarily bad. But they are the natural consequence of what has gone before. A lot of what Governments are doing will protract problems and even make some worse. Trying to keep insolvent banks and businesses afloat is not the solution. Diverting limited resources away from productive areas to destructive ones is just plain wrong.

Asian countries will reassert themselves first, with something more akin to a ‘V’ than a ‘U’ as they focus this time on internal markets. Because of 1998 and the Asia crisis Asian countries changed how they did things.  Because of 2008 and the subsequent collapse of export-driven demand, they will adapt again.

Adapting to the new environment is what is important. Opportunities are a plenty. Asia will undoubtedly adapt. The socialist countries of the West, such as the U.S., U.K. and continental Europe, are bogged down with a generation, or two, who have been raised to believe they are entitled to it all. Which is why in all those countries only the minority of households are net tax payers, the majority are tax consumers.

Any western country that is willing to remake itself, and the U.S. has an entrepreneurial spirit second to none, can take ground from the slower and more backward looking competition. Tax policy should be supportive. Protectionism must be avoided.

The future lies in moving forward, not endeavouring to return to the past. Should Government not realise this, should they pander to those who have their hands out, albeit because some were sold a Bill of Goods by other politicians, then the ‘L’ shape becomes much more likely.

3-month Sterling LIBOR has today been set at 4.49625pc. Before yesterday’s headline-shaking 150 basis point cut in the Base Rate 3-month LIBOR, the interbank lending rate most commonly used by banks, had been set at 5.56125pc. This means the rate is now 106.5 basis points lower than the pre-cut level yesterday.

Before the conclusion of yesterday’s two-day meeting of the Monetary Policy Committee LIBOR had already been drifting lower on the assumption of a minimum 50 basis point cut and had, in effect, priced in part of yesterday’s cut. Which makes any accusations of “not passing on the full cut” as nothing more than attempts to grab headlines. However,  Abbey and LTSB were quick yesterday to say they’d pass on the full cut to their Standard Variable Rate mortgagors, though that might be more about PR-induced protection.

Whilst the substantial drop in 3-month LIBOR is welcome, it is still just shy of 150bp more than the Base Rate. This compared to the 16bp before the Credit Crunch.

What is needed now is liquidity to ease up. In the short-term this may prove to be difficult given the continued global deleveraging and need to strengthen the balance sheets for the end of the year.

The continued contraction of the UK economy, per capita GDP has been contracting since Q2, will provide another stumbling block and increase the unwillingness to lend to consumers who have anything but pristine credit. Until the LTVs of mortgages are increased, the housing market will continue to struggle to find any volume.

For now the news on LIBOR is good and has the potential to provide a little pre-Christmas shot in the arm to the stockmarkets if nothing else. However, without the increased availability of credit yesterday’s Base Rate cut and today’s LIBOR fix are moot. After all, it doesn’t matter how low rates are if no one is lending.

The Bank of England’s Monetary Policy Committee concluded the monthly two-day meeting by surprising the market with a gargantuan 1.5 percentage point cut in the Base Rate, reducing it to 3.00% and storming through the previous multi-generational low hit in 2003 as the rate hit its lowest point in 54 years.

Media and economists had been debating all week whether the 50 basis point cut which had been baked in would be topped with something as inconceivably as large as a full percentage point. In the end the chatter was meaningless as 150 basis points sliced off the rate in one go, the biggest single meeting cut since 1981.

At midday the Base Rate was suddenly a third less than it was at 11:59.

Rationally speaking you can see why such a large cut, however belated many may consider it being. The difference between LIBOR, the London InterBank Offered Rate, and the Base Rate has widened tremendously since the Credit Crunch commenced. From a pre-Crunch premium of just 16bp for on the 3-month LIBOR rate, the rate banks most commonly borrow at, to a recent peak around 180bp, it is this rate which is impacting what consumers end up paying when they borrow.

It is hoped that such a substantial cut in the Base Rate will drag interbank rates down, both on a nominal and relative basis. providing some relief for borrowers whilst still allowing banks to gradually rebuild their balance sheets.

With the economy already in recession, per capita GDP contracted by 0.15% in the second quarter of the year, and house prices dropping like the proverbial stone, something was needed to try to make people feel better. No doubt the hope is that such a sizable rate cut will encourage lenders to lend and borrowers to borrow, reinvigorating the consumer and putting a floor under the housing market, though higher LTV mortgages will be needed for the latter.

As for the by-election in Glenrothes, I doubt any potential impact at on the outcome was high on the list when the MPC made its decision.

Earlier today the Danish Central Bank raised the key interest rate by 50 basis points to 5.50%. In a statement the bank said:

“As a result of continued intervention to support the Danish krone, Denmark’s Nationalbank increases the lending rate and the rate of interest for certificates and deposits from 5 percent to 5.5 percent”.

The move is designed to protect the currency, which is pegged to the Euro, in the face of recent foreign exchange outflows.

It is the second hike in the key interest rate in three weeks, the rate was hiked by 40bp on October 7th from 4.60% to 5.00%. However, today the discount rate and the current account rate were kept unchanged at 4.50%.

Denmark’s rate increase comes just a couple of days after the Hungarian Central Bank, Magyar Nemzeti Bank, raised their base rate by 300 bp from 8.50% to 11.50% , in an attempt to defend the Forint.

During a time when it would appear that Central Bankers are competing to see who can weaken their currency the fastest, such defensive hikes in interest rates may be a warning sign of even more severe problems ahead.

At one point today Sterling was down by over 10% on the day against the Yen, less than 140 Yen for your Pound. On Monday you could get close to 180. In August you could get 215. Last year the peak was 250. Against the US Dollar, things are less terrible. Five year lows only mean a slightly less than 25% drop in the number of Dollars-per-Pound from the year highs.

However, there is a point when the pursuit of devaluation by a bankrupt Government, interprate that how you will, goes too far and the world turns round and says it wants nothing to do with your currency. It is a fine line between the intentional devaluation of a currency and the unintentional collapse.

At that point, the Central Bank would have to dramatically raise rates or face a rout of the currency. The thought of ERM 2 must have reached the minds of some of those in Threadneedle Street today. How would the market react if, at the start of a recession, they suddenly do a 180 and ramp up interest rates?

This all begs a question. Which global player has the currency most likely to go in to crisis? And, just as importantly, when might that crisis be?

With all respect to Denmark, Hungary and Iceland, who have even more problems, these country’s currencies are not key players on the global stage. However, as history has shown, before any big blow up there will be warnings from the periphery.

Think the Bear Stearns hedge funds in February 2007 . . . Warning. Or closer to home, how new build flats signalled an impending turn in UK property prices in September 2006, when some were selling at 40% off . . . Warning. How UK GDP growth rates confirmed a very negative trend change in 2007 . . . Warning.

Could it be the same with what has happened over the last few days and weeks with the assorted European currencies? The foreshadowing of a bigger and badder currency crisis to come.

If it is, then it could mean that the toppling of Crisis Domino number 5 is closer than was thought. Though the declines in Sterling could be classed as a dramatic devaluation.

Whenever the Currency Crisis Domino topples, my guess is that it will be a G7 currency. Be it this year, next year or, which would have been my guess a few months ago, when all the monetary inflation recently created finally comes home to roost a few years from now.

For now, the battered currencies are due a breather. The overdue technical bounce in the stockmarkets should help many of those currencies beaten up in recent weeks to stage a partial recovery. However, the fundamentals haven’t changed.

The massive personal debt accumulated by consumers in Anglo-Saxon economies hasn’t gone away. The mountains of debts and unfunded liabilities created by profligate western governments is still there. The transition of power from the West to the East is continuing. The big picture stuff is still the same. The Yen and Yuan are still in secular bulls. Sterling and the US Dollar are still in secular bears.

The warning signs are there. Iceland, Hungary and Denmark are hinting at the dangers, and surprises, that might lay ahead. As the massive liquidations continue amidst the Great Deleveraging the only thing that seems to be certain is the uncertainty.

It has been on the cards for months, if not since the run on Northern Rock, the over-extended, securitisation-dependent lender cannot go on alone. The announcement of £26 million of losses by the buy-to-let lender on August 29 cemented the downward spiral for the once respected building society.

The solution, as reported across the full spectrum of media, comes in the form of banking, Government style. Nationalisation.

One thing the media isn’t mentioning, just as it didn’t bother to point it out when the run on Northern Rock occurred, is that these banks based their business models on the one which the Government was keen on Building Societies emulating.

On July 11th 2007 H. M. Treasury issued a press notice – http://www.hm-treasury.gov.uk/newsroom_and_speeches/press/2007/press_76_07.cfm – concerning mortgages.

Following on from statements made by Prime Minister Gordon Brown, Chancellor Alistair Darling, admittedly not long in the job, announced a number of initiatives to improve the way that the mortgage markets works.

Whilst still pushing the 20 and 25-year mortgage mantra, as well as some form of UK version of Fannie Mae, “yes really”, it was the content lower down which should have had media types calling for Government heads on spikes when Northern Rock happened, let alone with Bradford & Bingley today.

Whilst the real meat is in the “Notes to Editors”, particularly points 3 and 4, this part of the release should have been worth the sacrifice of at least one Government scapegoat.

There is a statutory requirement on building societies to raise at least 50 per cent of their funds in the form of shares held by individual members of building societies. The Government is supporting a Private Members Bill currently before Parliament, which proposes to increase the proportion of funds which may be raised from sources other than individual’s shares up to 75 per cent. This will give building societies greater flexibility to raise funds in wholesale markets, if they wish to do so.

That actually means reducing the level of deposits from 50% to 25%. Put that another way, debt:deposits goes from 1:1 to 3:1.

So, it would appear they wanted Building Societies to:

• Treble their debt
• Rely on the wholesale money markets
• Borrow short and lend long

Instead of a 50% loss on bad debts wiping out savers, the Government proposals of 11th July 2007 would have only required a 25% loss to leave all those depositor-owners of the mutual building society with nothing, except for the £35,000 the Government guarantees. Though at the time the old 100% of the first £2,000 and 90% of the next £33,000 applied.

Just focus on the key proposals the Government was making to the boring, and not-heavily-indebted, Building Societies . . .

• Borrowings to Deposits of 3-to-1 . . . Like Northern Rock
• Rely on the money markets and not deposits for funding . . . Like Northern Rock
• Borrow short and lend long . . . Like Northern Rock

Which begs the question, how many more Northern Rocks are there?

After all, here we are about a year on from the run on Northern Rock and Bradford & BIngley is apparently being nationalised. Cheshire and Derbyshire building societies announced a couple of weeks ago that they were being subsumed into Nationwide. Then we have the headline grabbing takeover of HBoS by LTSB, which is still subject to wrangling.

Are there building societies out there who did what Alistair and Gordon wanted? Who borrowed heavily in the wholesale money markets? Who borrowed short and lent long? Who are now in possible trouble as a result? Who will end up being swallowed up by a competitor or the State?

Which brings me back to the title of this post and the ‘Government Style Banking’ bit. Is Nationalisation the Government’s style of banking? Or, is a highly indebted, securitising, borrow-short-lend-long approach the Government style?