The Pound Shrinks With the Economy

01/29/2009 10:55 am EST

Focus: GLOBAL

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

The British pound suffered a big blow last week, posting its worst decline since Black Wednesday in 1992, after commodities guru Jim Rogers said “the UK has nothing to sell.”
 
This week, Britain was hit with a double whammy. First, the latest report from the Institute for Fiscal Studies (IFS) predicted that debt won’t return to normal levels until 2029. It added that public debt—now more than 46.5% of the country’s gross domestic product (GDP)—will rise to 60%, without further intervention.

Then, the International Monetary Fund (IMF) forecast that the UK’s recession will be worse than that of any other western nation, as GDP contracts an estimated 2.8%. Its overall global growth forecasts have declined from 2.2% a couple of months ago to just 0.5% for 2009.

Following that cheerful news was an announcement from the International Labor Organization (ILO) that 2009 global unemployment could swell to 18 million to 30 million—perhaps even 50 million—people above and beyond the 2007 numbers. That would put total world unemployment at up to 230 million folks, about a 7.1% rate.

It surely looks plausible, especially in light of the staggering worldwide layoffs announced just this past week, including 20,000 at Caterpillar (NYSE: CAT), 6,000 at Philips (NYSE: PHG), 2,000 at General Motors (NYSE: GM), 8,000 at Sprint Nextel (NYSE: S); and 8,000 at Pfizer (NYSE: PFE).

But can you believe it? Some companies are actually hiring.

Fast food purveyor McDonald’s (NYSE: MCD), seeing two million extra visitors in its stores per month, has announced plans to hire 4,000 new workers and open 20 new restaurants in the UK in 2009. Reinforcing the trend to live more frugal, simple lives during this economic crisis, UK supermarket Asda, which is owned by Wal-Mart (NYSE: WMT),  is going to add 7,000 new jobs this year. And British Sky Broadcasting’s (NYSE: BSY) satellite TV company BskyB is creating 1,000 new jobs, as more folks opt for the “staycation” form of leisure.

Revelations of new Ponzi schemes are still popping up daily, as are stories about executives using their companies—even those on government life support—as personal piggy banks.

Here in the US, John Thain, former head of the New York Stock Exchange and recently ousted as chief of Merrill Lynch by Bank of America chief executive office Kenneth Lewis, admitted to spending $1.2 million to renovate his office while Merrill was losing money, and then handing out $3 to $4 billion in bonus payments after Merrill had to be rescued by Bank of America—and the US taxpayer!

Across the pond, British bank Lloyds (NYSE: LYG), after raking in £17 billion in taxpayer’s monies, tried to get big raises for its board members. Fortunately, wiser minds prevailed and the increases were rejected.

Where do these people think they’re from? Versailles? They sure don’t seem to inhabit the same planet as the rest of us do.

Meanwhile, Davos 2009 is in full swing, with a theme of “Shaping the Post-Crisis World,” and world markets did seem pretty happy at midweek.

The FTSE 100 index closed up almost 101 points on Wednesday, and the FTSEurofirst rose 3.2% on banking rallies. And Japan’s Nikkei gathered a little steam, up 0.6% on semiconductor stocks.

Global markets seem to be reacting well to the Obama stimulus plan, as well as news that his administration is considering throwing toxic financial assets into a “bad bank.” The Dow Jones Industrial Average rallied 200 points Wednesday.

Well, I guess regulators think it’s as good an idea as any, since none of their other measures have worked. But given the questionable use of the bailout monies so far, sweeping these assets off the books doesn’t “fix” the banks—it’s akin to wiping out your credit card balance without absorbing the lessons of how you accumulated it.

Fortunately, on our site, more rational heads prevailed. In our Q&A, Kristin Ceva of Payden & Rygel gave us her views about the global fixed income sector.

Andrew McHattie, editor of Investment Trust Newsletter, looked at what’s next in the income trust arena in the UK.

Tom Slee, contributing editor to The Canada Report, recommended a utility paying high dividends, while Carlton Delfeld, editor of Chartwell Global ETF Report, saw promise in an Austrian exchange traded fund.

As Winston Churchill said, “the pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty”. Although times are tough, I choose to be an optimist.

Nancy Zambell edits Global Investing for MoneyShow.com. Her opinions are her own and not necessarily the views of InterShow or MoneyShow.com.

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