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Pricking the profits bubble

Robert Peston | 10:18 UK time, Friday, 24 October 2008

The noted British investor, Anthony Bolton, recently announced that he had started buying shares again, on the basis that we probably weren't too far from the bottom of the market.

Part of his logic was that the average ratio of share prices to corporate earnings - what's known as the Price-Earnings Multiple - never reached particularly high and stretched levels in the bull market that immediately preceded the current stock-market slumps.

Unlike the late 1990s, when those price-earnings multiples went into the stratosphere because of mad expectations of the future profits to be generated by dotcom and tech businesses, the rise in stock markets from 2002 to 2007 was driven primarily by sharp rises in corporate profits, rather than a massive and unsustainable rise in investors' optimism about prospective growth rates for those profits.

Anthony BoltonOn Bolton's logic, stock markets ought not to fall too much from where we are now, because average price-earnings multiples shouldn't need to be squeezed too much as an adjustment to the more challenging economic circumstances that companies (and all of us) face.

That's the logic.

But it only works if the earnings bit of the Price Earnings Ratios doesn't collapse.

And that's been worrying me for some time.

Because arguably the debt binge - the credit bubble that was pricked in August 2007 - was artificially inflating the sales, profits and per-share earnings of companies.

How so?

Well consumers and businesses famously bought and invested on credit that seemed cheap.

And companies also reconstructed their balance sheets to take on more debt, again because debt seemed much cheaper than equity, so by borrowing more in this way - what's known as gearing up - there was an automatic enhancement of earnings per share.

To recap, in the upturn the boom in corporate sales, profits and earnings per share were all magnified by the borrowing binge.

So here's why there may be no comfort to be had from the apparent reasonableness of bull-market corporate valuations, the relative narrowness of price-earnings multiples.

The earnings bit of that ratio may have been significantly and unsustainably inflated by the borrowing binge: the debt bubble may have precipitated an earnings bubble.

Now, as you all know, banks and other creditors want their money back, in a vicious process known as "deleveraging".

Companies that borrowed a great deal are now ruing the day - because the cost of their credit, if they're perceived to be vulnerable to the economic downturn, has soared.

And few consumers or business want to borrow to spend any more.

shares fallingProfits are now being mullered in the vice of high and rising interest costs and falling sales.

In just the past few hours - as we've had official confirmation that the British economy contracted by a bigger-than-expected 0.5% in the three months to 30 September - we've had profits warning after profits warning from huge manufacturers coping with horrible trading conditions.

At the world's second largest motor manufacturer, Toyota, there's been a drop in quarterly sales for the first time in seven years.

Sony has cut its earnings forecast.

The number two car maker in Europe, Peugeot, has reduced its targets for full-years sales and profits. And Volvo AB reduced its forecast for growth in the heavy truck industry this year.

What we're experiencing is a global economic downturn caused by a massive contraction of the availability of credit.

It may shortly be confirmed as a global recession, and - because it's global and because it's origins are in the withdrawal of credit - it's unlike anything we've experienced since the 1930s.

Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression, so it's fair to assume we're in for years of poor economic performance but not serious impoverishment.

That said, I'm not sure many quoted companies can be confident they know quite how far their profits will fall before the inevitable bounce.


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  • Comment number 1.

    Truly dire. So much for Britain being so well placed to meet the downturn. Tittle tattle about who said what to whom on boats off Corfu seems like a different world already.

  • Comment number 2.

    'noted British investor.....

    Noted by who?

  • Comment number 3.

    I am astonished that the BBC continues to play the same old broken record aout the global economy.

    The record that uregntly needs attention is that this country as a debtor country going into this crisis does not have anyone left to turn to.

    It is pointless discussing the return of the wholesale credit market; this is the root cause of our problems.

    The wholesale credit markets funded a spending more than you earned culture for eleven years and now tht they are gone we have no-one to borrow from.

    What is the BBC saying about this? Absolutely nothing.

    This is the most serious financial crisis for a century and you are busy passing on profit warnings about Peugeot.

    The banks in the UK have no-one to fund them. The bakstop provided by the bank of England is not big enough compared to their balance sheets.

    Can't you see what is happening to sterling? Everyone is selling so no-one will lend to us anymore.

    Pleaase get your act together and start to cover this important issue.

  • Comment number 4.

    Not the deepest analysis ever to leave your desk, but at least it is clear and precise. The upside of course is that the correction is still underway and is being funded by chancers.

  • Comment number 5.

    ...Maybe a bit academic, but are there any existing models that can account for the huge number of variables economists need to balance to be able to make even a 1/2 accurate guess where the economy is going?

  • Comment number 6.

    Dear Mr Preston

    It is clear no matter what you say you are causing controversy and damage.

    I have a 'cunning plan' - please shut up!

  • Comment number 7.

    The government had the tools and knowledge to stave off depression in 1930 - but chose wrong. Humans always make the assumption that because it is "now" we are somehow more intelligent and better eqipped to make rational decisions.

    Having had The Great War we would never let another World War occur... Having had one Great Depression we would never let another World Depression occur...Humanity is as bright as it ever was.

    The world authorities are taking a not dissimilar approach that japan took in the 1990s - underwrite the failing businesses and slash interest rates. If that applies to us it is hello to 2 decades of falling stocks and 0% interest rates.

    We can either have a short sharp jolt or a long drawn out one. Who can honestly see the UK government u-turning on its banks rescue package? This is a depression and new deals and keynesianism will not pull us out of it -they didn't the last time.

  • Comment number 8.


    You wrote:

    Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression

    Quite obviously Alan Greenspan does not (see yesterday's news) so on what basis do you make the assertion that "governments have both the tools and the knowledge to stave off depression"?

    I believe that the group social psychology of 'the good and the great' who run things are incapable of doing the 'right thing' just as they were in the 1930's. Recessions and slumps were not new than (in the 1930's) they are a long term cyclical phenomenon of the capitalist system.

    I have relations well over 90 and they recall similar sentiments being expressed about the 1930's at the time. One of them started work as a teacher in 1932 and the first thing that happened was that her pay was cut.

    There is a financial determinism about what happens during a depression and it seems simply to take time for the capitalist system to fix it. Alan Greenspan talks, for example, of increasing regulation - however that will itself depress the markets. Governments need to retain the support of the people fro bailing out the banks when the poor are suffering and there is little sign that the poor accept or understand then need to keep bankers in the style that have become accustomed to when the poor are going without.

    I am sorry but I disagree with you and cannot be as sanguine about the ability of governments to do anything constructive. Time and the imperatives of the market will prevail even if protectionism rises and currencies are no longer freely exchangeable.

  • Comment number 9.

    "Global recession"

    "Governments have the tools" i.e. through excessive spending & ergo public debt

    Good to see you toeing the party line.

    One of the experts in the main BBC article says he thinks the UK recession will last two years - it'll be interesting to see if Gordon Brown is still trying to convince us he's the man to fix things in 2010 whilst still being in a downturn.

    If so, a change of Prime Minister will be welcome, as it would be dangerous to continue having somebody so delusional in charge.

  • Comment number 10.

    I thought this was going to be a positive blog for a minute there when I first started readin.

    Should have known better. Shares are clearly undervalued right now. There's no doubt that you're right that earnings have been inflated but some of the valuations right now are crazy - a result of sheer panic selling from people who really should have cooler heads. Herd mentality means markets drive too far forward in a bull market and contract too much in a bear, we've definitely over contracted now and worst case scenario is already priced in.

    Please can you stop with the doom and gloom. You aren't helping.

  • Comment number 11.

    There is a bottom somewhere

    Riches await the person who calls it right and bets the farm.

    This madness means that prices will undershoot on the way down the same as they did on the way up

  • Comment number 12.

    -0.5% GDP is appalling.

    We are heading off the edge of cliff. If this is the early recessional marker, I can't see how it's going to bottom out any time soon.

    This is going to be a truly nasty recession.

    Spending has stopped, why?

    Because it's been either financed off credit or savings.

    Credit is simply too expensive and existing personal credit exposure is far too high.

    The current savings rate is negative, showing that what spending there is, it's being taken from savings.

    And they won't last forever.

    Add to the mix that real disposable incomes have been in decline for several years and consumers ability to spend their way out of this is doubtful.

    The government risk serious long-term damage to our currency and global competitiveness if they think they can spend their way out of it.

    Credit is like crack cocaine to an economy and the UK has been binging on it for over a decade.

    It inflates earnings, asset prices and growth well beyond any sense of true value or real wealth.

    Take it out of the system suddenly and the economy really doesn't like it.

    It's increasingly looking like the economic medicine to shorten this recession is to cut public spending and cut taxes combined with monetary stimulus of lower interest rates.

    Money has to be placed to seek the maximum value or utility it can achieve.

    And that is not in the public sector.

    Any interest rate cut will take 18 months to kick in.

    The fiscal stimulus of tax cuts would be instantaneous.

  • Comment number 13.

    robert is HSBC safe , its shares are taking abeating today. is this the next bank that will need bailing out ?

  • Comment number 14.

    I remember reading that philosopher American Francis Fukuoka, or whatever his name is, criticising Marx and saying that the collapse of the Soviet Union marked the 'end of history'.

    It seems to reflect the arrogance and over confidence of Capitalism in recent years.

    It's nice to see Marx's concept of alienation is alive and well. We've become slaves to our own creations! I'm off to buy a Morning Star!

  • Comment number 15.

    If things are really that disastrous how come the one really ubiquitous worldwide compnay that doesn't deal in oil or gas is doing so well?

    Robert I assume you haven't seen Microsoft's results this AM?

  • Comment number 16.


    I am glad that you have returned to serious journalism after a few days of silly tittle tattle. I thought that you had been abducted and replaced by Peter Machiavelli Mandellson.

    I think the BBC should be seriously questioning the government here. It wasn't long a go that we were told that we were well placed to weather this downturn. Hwoever, as each day goes by the news gets worse and worse and this lie is more and more exposed.

    The figures are worse than expected so surely you should be asking the government to tell us all their grand plan to get us through this. How much extra do they intend to spend? Which major projects are they going to bring forward? What will the effects of this be?

    Now I suggest the BBC stop hounding those MPs who have committed no crime. Start asking questions that are of concern to the man on the street, who is fearful of losing his job, keeping up with he bills and keeping a roof over his head. Afterall, we are the ones who pay your generous salary. Enough tittle tatte. OK?

  • Comment number 17.

    Dear Prudence,

    …..but you promised an end to ‘Boom and Bust’ (on more than one occasion)

    A simple ‘sorry’ would suffice

  • Comment number 18.

    Is there a point at which the markets have to be closed, in order to avert a melt down? In the past few weeks there have greater one day falls than at present, but overall the share prices were higher. The HBOS share price in particular is very low and does not look as if it has bottomed out yet.

    Is it too much to assume that the regulators are keeping a close watch on this?

  • Comment number 19.

    Run on Britain here we come. Will we go to Eurozone hat in hand?

  • Comment number 20.

    Time to stop messing about and send in the helicopters to drop wads of cash on everyone's doorsteps? I'm not sure anything else is going to stave off a severe recession. Bringing forward infrastructure investment projects is also fine, but will take time to get underway.

    The deleveraging process is rapid and hugely deflationary. Government borrowing needs to increase equally rapidly to balance things - and then we'll need to spend several years to slowly reduce the resulting National Debt.

  • Comment number 21.

    Can't believe the stock market has fallen again. How much price correction does there have to be?

    When are these doom and gloom stories going to stop, I haven't watched the news for weeks because it is so depressing. After 16 years of economic growth surely there had to come a time when the growth would slow so why has there been such a bad reaction?

    Share prices look really cheap at the moment but I’m just not tempted to buy.

  • Comment number 22.

    There has been far too little attention to the problem of sterling. There was a discussion on Newsnight last night in which everyone agreed that interest rates must be cut and sterling, likely to fall further as a consequence, was not even mentioned. The fall of sterling this morning has horrible Harold Wilson overtones. On the other hand I can't see why the dollar is so strong, since the American economy has been mismanaged and its government has spent so unstintingly.

  • Comment number 23.

    Has the BBC gone completely mad!

    "Downturn Day" ???

    It's like you're enjoying all this. I know the web is a rapid media, but it still takes a bit of time to put this stuff together... people really have been working on making a splash about it for a while!!! Do you actually want soup kitchens and dole queues? It seems like you do. Perhaps having cosy licence payer safe jobs has insulated you too much from the realities the rest of us have to face!

  • Comment number 24.

    Footsie now down by 8%

    Capitulation is nigh!

  • Comment number 25.

    What- back to discussing Business Bobby P?

    Not entirely sure why we should single our Mr Bolton and take him seriously out of all the other 'noted' investors out there.


  • Comment number 26.

    RobinJD's comments at last point out the vacuousness of some of the reporting on this crisis. The real issues are not the future profit forecasts of large corporations. The potential catastrophe that the world faces now is unlike anything we have faced before. I believe it is far more significant than the 1930's as so many more people around the world will be affected by it. Poverty and starvation will become major issues for developing and third world countries and the risk of conflict over resources will grow rapidly.
    This is a turning point for everything that we have taken for granted in the developed world for too long. The holy mantra of "Economic growth" being the solution to all our problems is discredited. The USA is morally, ethically and ideologically in decline, as well as economically. The world has been fiddling while Rome burns.
    It is time for us to raise our consciousness to a new and higher level of understanding and embrace a fundamental change in the way we exist in this world. The party is OVER.

    As for Anthony Bolton. up or down, he won't suffer. His clients might though.

  • Comment number 27.

    Could it be that companies will cut their costs in order to preserve profits by sacking workers and cutting investment, and just run the product lines the have for a year or two, and that shares will go up because the dividend is projected to rise. I have never seen that before.

  • Comment number 28.


    The Dollar is strong because Bush (the big idiot) has instituted massive tax cuts and sent every US household a sizable rebate.

    No-one is expecting any recession in the US to be long-lasting nor severe. Growth is the US is slowing but it's not anywhere close to sub 1% annual.

    Also, their economy is not so heavily biased to services; unlike ours.

    Conversely, the £ is taking a beating because the City can see this country having to fight deflation with sub 2% interest rates, mired in a deficit it will struggle to manage and taking a Keynesian approach to tackling it.

    No tax cuts, no public spending cuts have been even mentioned and they should be.

    The UK will have to use ever economic weapon in its arsenal to fight this one.

    Government surplus led recovery? No, record deficit.

    Export-driven recovery? No, only 20% of the economy.

    Consumer-led? No. Record lows in savings, record highs in credit debt.

    Government Public-works? Limited in reach, proven not to work (see 1970s), relies on borrowed money.

    So where's the recovery going to come from?

    Tax cuts and cuts in public spending...

    Fat chance.

  • Comment number 29.

    #8 and others

    We have already been hours or days away from a global systemic banking failure. Governments around the world fortunately acted then. I think we will be lucky if we get through this without catastrophic failure of the monetary system somewhere and we can only imagine what happens then. How many more Zimbabwes? It is not going to be comfortable!

  • Comment number 30.

    I could only see shares fall and I would say they have a long way to fall.
    It is obvious that the majority of companies will be unable to make a profit. The reasons being:
    1) sales down, yet overheads the same
    2) cost of borrowing from banks up
    3) finance available for working capital down
    4) there will be a hole in the pension fund which needs to be filled from profit.

    Investment funds with regard to income bonds need to receive income and if they believe a company is not going to pay a dividend then have to sell the share and invest in something else that pays an income. hence more shares being sold, leading to supply and demand leading to fall in share price.

  • Comment number 31.

    #13 lionsomebody

    Never mind HSBC....just look at Barclays' share price....I think they're done for!

  • Comment number 32.

    Now that we are entering BROWNS BIG BUST (a more honest tag that 'downturn') all bets must be off.

    There is a global downturn, but the impact of this on the bristish people is entirely down to what brown has been doing for the past decade -- the globe may be experiencing a down turn but the british people are experiencing BROWNS BIG BUST.

    His new (old) team did a good job of keeping details of BROWNS BIG BUST off the front pages for a short while with the nonsence you chased at the begining of the week.

    However they must be disapointed (and maybe surprised) the that speed of news nowdays (particularly on blogs) means such stories are over in hours - not weeks.

    Whereas real stories such as BROWNS BIG BUST will run and run.

    It will run untill the people responsible for the UK being in a VERY POOR position to get through the global downturn, so giving us BROWNS BIG BUST are gone.

  • Comment number 33.

    #2 - Boulton is a bit of a legend, he's probably the closest thing Britain has to Warren Buffett. Do a bit of research on him.

    Robert - I hope you and your colleagues won't be parroting the "oil price is going down" line - the crashing exchange rate means that oil prices have been going up as far as Britain is concerned. Who cares what the oil price is in dollars or yen or kroner - we only care about the price in sterling. The collapse in cable has been spectacular.

  • Comment number 34.

    What does a 'recession' actually mean? Does it mean that people only buy the things that they need instead of constantly buying commodities for their own sake-e.g. buying a new pair of trousers not because a pair has worn out, but because they are no longer fashionable? Does it mean growing more of our own food, shopping for seasonal produce, cooking our own food instead of buying overpriced highly processed food? Does it mean walking more instead of using a car? Does it mean enjoying the simple pleasures of life? I am sure there are plenty of you out there who think this view of a more simple society is niave and somewhat idealistic-the old sitcom 'The Good Life' springs to mind, but a society which knows'the price of everything and the value of nothing', is not one to which I want to return. A recession might give us the OPPORTUNITY to reassess our values and create a society where the concepts of Marx's alienation and Weber's anomie, can be overcome by a real sense of belonging and reward from life itself.

  • Comment number 35.

    How come when this particular blog entry first appeared on the site it was attributed to Charles Pamment ? Have you employed a ghost writer Robert ?

  • Comment number 36.

    Judging by this morning's fall in the stock market I wouldn't be too optimistic about the market 'turning'. You say we have the tools to mitigate a full blown crisis. Well, let's see, don't forget we no longer seem to be able to rely on BOE interest rate changes to have a 'positive' affect on the wider domestic loan market. Maybe Keynes is the answer? A nice set of tools there hey? Well, everyone seems to be squealing for intervention, (we're all Keynesian now) but where's the money coming from? The spondoolies have already been spent on propping up the 'masters of the universe'. The pot is empty. So hold onto your hat Robert.

  • Comment number 37.

    So the R word is soon to become the D word.

  • Comment number 38.


    Head, meet Sand...

    Robert Peston is reporting the facts, if those facts are unpalatable then tough, do you honestly think that those who study their Bloomberg terminals are not coming to the same conclusions - hence why at the time of writing this the FTSE is down some 300 points.

  • Comment number 39.


    I really don't think you should fret so much. Not even (or especially) for effect.

    The current FTSE 100 p/e sits at about 8, the long-term historical UK average is about 15 and the FTSE 100 p/e as we emerged from the last recession was 24 (Dec 1993). In other words the market is currently discounting earnings by c.50%, if we assume a return to the average once earnings have bottomed. If we return to p/e ratios of 20+ as the recession ends (which it will) then the discounting of earnings is more like 60-70%. Personally I think that is way over-egging it. (And I am sure Mr. Bolton is alive to the earnings issue too).

    On the debt point, the net debt to post-tax earnings of the entire FTSE 100 is only just over 1. That is hardly over-leveraged. (Implies interest is covered at least 10 times by pre-interest and tax profits).

    Relax. Or maybe do some proper research before spreading more doom and gloom.

  • Comment number 40.

    What happened after the 1930's depression?

    Hitler rose to power with the help of bankers who had scammed the country, crashed all the stocks, bought them cheap and made obscene profits so they could finance both sides of a war to benefit themselves.

    The same is happening now.

    America is bracing itself for coming martial law and a fascist state.

    Do people know that George Bush's grandfather, Prescot Bush funded Hitler and the Nazi party as was a leading member of a group in trying to set up America as a Nazi state back then?

    Some people posting here should do a little research.

    The first thing detectives look at when a crime is perpretrated is who gains. There have been serious crimes committed here without doubt and at least a huge fraud.

    Maybe it's time to stop talking about who's lost what and asking WHO BENEFITS?

  • Comment number 41.

    We're still at the start of 'correction' here. The trouble is people refuse to accept the fact the growth over the last twenty years or so was an accounting mistake. First recession in 16 years? How about 4th - once you take out the fantasy accounting of the market.

    We must give up these desperate attempts to rebuild the illusion that gearing or leverage or any financial sleights of hand produced any wealth at all. It never has and never will.

    The market moved from wealth creation to wealth aquisition a long time ago and its time it was shown up as the parasite on the economy it has now become so clearly obvious it is.

  • Comment number 42.

    #16 Apart from being rude, some of us think Robert Peston is doing a great job and is, for a fact, spending long hours getting the right information to people. He is in a very difficult position - he could have posted this a month ago but then would be accused of market manipulation! Roughly about 1 million people read this blog so if Robert Peston says the market hasn't bottomed yet then there's going to be an impact - and then there'd be a chorus calling for his head.

    No mainstream journalist will touch some of the most sensitive issues until the time is right because it means a loss of contacts and then they enter into the political part of political economy. And it isn't too long before they become the issue themselves (something on this blog site people seem to insist on doing to Mr.Peston).

    I've heard that if you take away the credit fuelled binge, the UK economy has shrunk by double digit billion figures over the past 16 years. Now as the credit fuelled binge has stopped then it seems pretty apparent we are going to have to catch-up with all that recession that we missed out on! Bottom line - an economy is about material goods - services have their place but a broad base of people involved in manufacture is required to sustain an economy - it's like a pyramid. Due to credit we've increased the upper part of our economic pyramid while the base has shrunk (it's in Asia now) so logically there has to be a major re-adjustment.

    The craziness of the last few years can be characterised by Enron - who are not alone - BORROWING money and calling that borrowed money 'PROFITS'! While producing nothing! Unbelievable! Then using sycophantic stockbrokers to get clients (joe the plumbers) to invest in them to cover-up!

    Final point: do we really have the tools to stave off Depression? I'm not so sure. The tools seem to be in the order of applying brakes but fundamentally what can re-start credit once the retraction begins? It would need a confidence that the loan would come back while everybody else is withdrawing cash - the loans in such circumstances won't be paid back. 'What about the money in the bank?' What money? Money that gets paid back goes into the nothingness from whence it came. See Richard Feynman and what happens in a vacum.

  • Comment number 43.

    Anthony Bolton was the top investment manager during the 90's showing a phenominal return.

    However about 3 months ago he was saying he fancied buying into Banks.

    It wasn't his fault that he called it wrong as the market has been slash and burn over the past 3 to 6 months plus. He just misread the credit crunch severity.; as did one or two others.

    The current market worries are that we might not see a recovery for some time and the 'V' shaped footsie graph over the period 2000 to 2007 might actually be replaced by an 'L' shaped graph - once the bottom has been hit of course.

    So, what to do ?

    Well if company profits are to hold up, then sales have got to be maintained or raised.

    But descretionary spending is not taking place as ordinary people are suffering from high 'essential' costs ( tax, heating, fuel etc).
    Thus, Disposable Income is low (purchasing power or 'demand')

    So reducing interest rates is no quick fix for the average person; therefore tax reduction or even an American style £1000 tax handout is the way to give people temporary spending power once again, in the hope that this provides a kick-start.

    But no doubt he will continue to use the money on his usual agenda to put everyone into a deeper recession.

    Ah well, do it your own way Gordon, but it isn't working.

  • Comment number 44.

    Robert - very good slideshow of yours - keeps it simple but just as I was thinking "I must see the next slide" it finished...
    (crunch guide)

  • Comment number 45.

    Fundamentally, shouldn't the value of the stock market be determined by GDP and the contribution of Capital (as opposed to Labour) in generating that GDP?

    How much has our GDP actually increased since the 90s? Or indeed since the 70s? If you take into account the fact that much of the "growth" has been in the banking sector which was just generating funny money, and that our manufacturing sector has been shrinking, I'm not sure that it's really grown all that much.

    Perhaps what we've seen are two stock market bubbles, the larger .com bubble peaking in 1999 and a smaller bubble peaking in 2007, and the market is now returning to it's long term trend level (around 3500?), where maybe this time it will stay?

  • Comment number 46.

    Anthony Bolton ran a UK Equities Fund for Fidelity for about 20 years. Its returns were outstanding over the period. He is a bottom up fundamentals-based stock picker. RP has run, well, nothing. He has a good contact book, which allows him to pass off stories as his own that he's simply picked up from others (who want them leaked). 2-3 weeks ago, RP was lauding Warren Buffet for getting a great deal from Goldman Sachs for his investment there. has he now changed his view on WB's abilities, too?

    Equities are falling because there are still forced sellers in the hedge fund space. We have the same vicious cycle at work here as we had with sub-prime debt: a fall in price causes forced selling as holders breach their borrowing terms, which then forces prices lower, causing further breaches and so on. Add to that panic redemptions from retail mutual funds, and there's the reason why equities are tanking.

    Cheese Me (post 10 above) is right. Stocks are undervalued. There are loads of stocks on the London market trading at under 3x next year's earnings. Even if those earnings are overstated by 50%, that still puts them on no more than 6x next year's earnings: hardly demanding.

    I've no doubt that the recession is going to be painful, but people who sell equities now if they don't hac to will also suffer the pain of missing the inevitable bounce. When that happens, and it could be tomorrow or next week, or 6 months away, but when it happens it will be very sharp. You need to be in at the bottom to get most of the bounce. Evidence shows that most retail investors sell near the bottom and buy well after the bounce, ie miss a lot of the gains. Articles like this from RP don't help people like that.

  • Comment number 47.

    10 How can you say shares are clearly undervalued ?

    Based on what assumption ?

    The only clear future forecast is that some companies WILL go bust. Most companies WILL have to retract just to survive. Finance costs will go up if they can get finance at all.

    Then expect Credit Default Swap settlements - we are due on the Iceland banks around November the 5th.

    Expect further pushes downwards until the cycle of debt and bakrupcy ends.

    By all means if you think these companies have little debt and are solvant buy - I wont be buying until I see what happens after Christmas.

    BTW expect UK banks to be refinanced at least once during this period - all depends on how stupid they have been.

  • Comment number 48.


    re Barclays Bank

    How long before they are back knocking on the BoE door for a cut of that bailout fund?...

  • Comment number 49.


    CMS and/or server error?...

  • Comment number 50.

    Excellent report, but I do take issue with the following statement: "Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression". Surely (in Rumsfeld speak) there are far too many unknown unknowns to be able to make such an assertion...

  • Comment number 51.

    "Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression"

    Do they?

    The government doesn't know more or less than in the 1930s. Governments can by definition do whatever they like - so they had the same tools too.

  • Comment number 52.

    5. I agree with post 5. Show the models which help with economic forecasts. There is wave after wave of gloom which, if unchecked, will further clog up the works - more people will lose there jobs, and the elites (sitting finacially pretty) will just cast more and more confusion into the mix.
    Robert - how about creating a financial dashboard/scorecard which picks up on the top 20 or so key financial indicators. This should be easy to unbdertand - a bit like the BEEB's political "swingometer" . It should also allow for more serious analysis and gives a"helicopter view" which is much needed now. Politicians want to outpoint each other, economists bang on about their own niche minutae and the whole thing bamboozles the ordinary public - like me. I belive the BBC is there to inform, entertain and educate - bring on the financial swingometer and show the impact of public debt, private debt, falling house prices, increasing mortgage cost, falling/rising interest rates, energy prices, currency shifts, etc etc. It wil get rid of the emperor's new clothes - so when we are told of a 1% fall in interest rates I can see what that really means as it will impact on all of the above. Such a device can then be used to compare countries and we may all be able to learn something. It won't be "accurate" but it will give ageneral sense of direcion e.g what levers need to be pulled now to get us out of recession. Also, a similar dasboard can be used at sector level e.g Energy. For too long we have gone blindly on with oil - wake up - the energy crisis is now.

  • Comment number 53.

    #41 spot on.

  • Comment number 54.

    Correct me if I'm wrong fellow bloggers, but is there any connection between todays synchronised plunge in European stock markets (last night Asian ones too) and today being a settlement day for the next big tranche of Credit Default Swaps?

    Anyone with any evidence please speak up!

    Maybe its just all to do with massive deleveraging, rational panic or just plain old loss of confidence in our financial casino's!

    If recession is 2 quarters of negative growth, how do our wise economists define a depression? 4 quarters?

  • Comment number 55.

    I can't help thinking that ecomonics should be the study of the behaviour of groups of people - not the behaviour of companies and financial institutions.

    Personally I expect to be spending more in the next 12 months than I did in the last 12 - but I purchased my home 30 years ago, have no mortgage and no debt (nothing owing on overdraft, credit card, etc). So I will be looking to replace my car at a bargain price next year. I don't think I am typical.

    I am interested by the k-wave theory - and rather attracted by it.

    I do expect this recession / depression to be much more severe than the ones in the 1980s and 1990s, both in the UK and overseas.

    I have my doubts about the ability of governments to mitigate the effects.

    Whoever wins the US election this year will face severe economic problems over the next 4 years, in my view.

    Personally am I worried? No, myself and my family will be OK.

  • Comment number 56.

    I think that when the government initiatives and the like fail, we should not then blame it on Keynesian doctrine.

    In the Keynesian model, you save on the upturn and spend on the downturn. We are only going to spend on the downturn.

    What utter desperation! The goverment must think we have brains the size of politicians to accept this crap as any kind of valid solution.

  • Comment number 57.

    Since every household will have to cut back, the government should do the same. If they advise us to go out and spend spend spend then it would be correct for them to do so.

    They must cut every wage of every single person who is paid by the government. Those who earns over £30k by 10%, those over £50k by 25% and every one "earning" over £100k by 40%.

  • Comment number 58.

    iirc the late Ian Rushbrook of the Personal Assets Investment trust felt that if the effects of the excess credit were removed from GDP, the UK has had zero growth since the turn of the century.

    Based on this, todays drop of 0.5% is nothing. The excess credit resulted in growth of 17%, so a drop of 15% is a realistic prospect.

  • Comment number 59.

    So we officially know what has been apparent for a very long time, shock horror, a recession is upon us.
    What surprised me more is that these highly paid bankers, investment managers and investors who are paid/earn their living to understand these things in far more detail and make decisions accordingly seem to have found this such a surprise.
    One can only assume they are spending all day bemoaning having to trade down to a porsche this year rather than actually doing what they are paid vast sums.
    If buying and selling shares in response to publication of information is what is driving the markets then I'll gladly dump my current job and for a six figure salary become a headless chicken.
    I can also do consultancy work - make 10% of your workforce redundant - blast , that £2million in fees down the drain.

  • Comment number 60.

  • Comment number 61.

    Fart Gas

    Maybe if we injected some of this in to the economy it would help?

  • Comment number 62.

    Mr. Peston,

    You say : "Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression..."

    Why don´t you really impress everyone and let us all in on the news as to what these "tools" are, and what this "knowledge" is.

    Maybe Alan Greenspan might be interested.

  • Comment number 63.

    Profits are going to remain low for some time - the recent boom was based on cheap debt, debt that both individuals and businesses are now having to service under less friendly conditions.

    Browns attempt to spend our way out of recession is going to go awry, as due to our reliance on service industries the majority of costs will be going offshore.

    What we need is massive reductions in public spending, to fund tax cuts, to get the economy in general running again. And there are plenty of cuts could be made without affecting services.

    Tranche 3 of the Eurofighter for example, bin that, most of the large-scale IT projects, bin them (I've worked on some of them, so I can say with confidence they're no big loss). They're just the start, we have the capacity to make cuts in the range of billions to fund cuts to help the poor, and to get the middle classes spending our way out of trouble.

    Massive public debt, effectively mortgaging our future, isn't the answer, and it'll lead to is another embarassing request to the IMF for help inside 5 years.

    We've a 100 billion pounds worth of PFI to service shortly, if we've got a massive amount of debt as well when that hits we will see cuts in services. Not quite the lasting legacy Labours supporters will be desiring.

  • Comment number 64.

    Down 7.75% before lunch, hardly the right time to go back into the market. There does however appear to be a dichotomy between the prices of shares and the number actually traded. Less than 1% of shares traded when the price falls by 5-10% doesn't seem quite logical. Perhaps the jolly old speculators are offloading their books again as its a Friday. If ever there was a warning on the pension scheme about the value of your investment can go down as well as up,bit has never been as appropriate as October 2008. I am still wondering if we will make it to November! Sorry to see the airlines that panicked and bought fuel long at a high price ($147.00) I am sure there were a lot of other speculators who bought oil long and are facing oblivion now that the world is in recession.

  • Comment number 65.


    I think not!!!!!!

    So we there fore after think un logic. haha
    this started somewhere so it as to finish somewhere? Agreed ,ha.

    and even though this is said to of started in the usa i think northern rock was the first one to fall. the weak link. so it has got to end at its stongest point. its a domino effect. was HSBC not necessarily the biggest but the best place bank to weather this crisis when it started? if so watch out

    HSBC is down by 108 pt today

  • Comment number 66.

    so stocks and shares are falling who realy cares, banks are low on reserves and the ecconomy is falling at a high rate of knotts, what can the normal every day human do about it?
    nothing thats right folks nothing, we elected these people to govern instead of us all having to do it and they have failed so its our own fault and there is nothing we can do about it, we cant even elect a new government to try becouse that power has been removed from us.
    so we may as well just be happy and watch as the world of finance crumbles under its own weight.
    if there was an easy fix our great government would have used it but there is none so thats it they wasted our money saving the banks at the cost of the whole country and we are happy.
    unemployment is up sales are down and we are happy.
    whats the worst that can happen?
    i dread to think,
    so in the words of an old musical " Stop the world i want to get off"

  • Comment number 67.

    Heres an idea.

    The country has a definite problem being able to afford genuine and deserving expenditure going forward.

    Take this opportunity to categorically state that there will be no state benefits for any child born after 8.5 months from todays date for any mother aged 17 or under.

    Just watch the teenage pregnancies fall.

    Can somebody tell me why this can't be done.

    When they are telling me why this can't be done, please also state who we should take the money off, or not pay, in order to pay these people.

  • Comment number 68.


    Isn't that what pumped up the credit bubble in the first place???

  • Comment number 69.

    If anyone was in any doubt about how qualified the market observers are to predict an end to the turmoil or a bottom to this market, take a look at this page and it should remove all doubt:

  • Comment number 70.

    #40 Newsreelsneil

    "Maybe it's time to stop talking about who's lost what and asking WHO BENEFITS?"


    But the problem with asking this question is that trying to answer it often leads to speculation about "conspiracies", which many people automatically find off-putting.

    There may *not* be a conspiracy per se, but I have to believe there are some individuals (do they form a group?) who will benefit a great deal from this worldwide crisis while most of us only suffer from its effects. (And I don't mean clever and nimble traders who manage to make short-term gains in a volatile market!)

    Who does benefit?

  • Comment number 71.

    As you say, "official confirmation that the British economy contracted by a bigger-than-expected 0.5% in the three months to 30 September"

    So all the so-called pessemists who were accused of 'talking us into recession' weren't so far off the mark after all.

    Perhaps some sensible debate can commence, now the pretence has been dropped.

  • Comment number 72.


    Why stocks are OVER VALUED, hence the sell off.

    From Alphaville Market Live Transcript:

    NH: time to lighten the mood
    NH: a quiz
    PM: Excellent
    NH: Volvo
    PM: yes
    NH: net order intake in the past quarter for trucks in Western Europe
    NH: how many
    NH: last year’s figures was 41,000
    PM: Of I dont know — can I ask the audience
    PM: 30k?
    NH: lower
    PM: 28K
    NH: lower
    PM: 20k
    NH: lower
    PM: al righ all right — 1000???
    NH: lower, come on
    PM: No way — some put a few hundred below
    NH: lower than that
    NH: 115
    PM: no way
    PM: 115 trucks — from Volvo
    PM: across Euorpe?
    NH: they thought they had sold loads and then they got hit with massive cancellations
    NH: the resul 115
    NH: that is surely stat of the day and highlights the mess were are in

    Volvo stock down 21%

  • Comment number 73.

    Such a change to hear someone who feels so positive about his views on what's to come.

    I hope he's right for his own sake.

    All I have heard from everyone else this morning seems to end with the word HOPE.

    HOPE is not a positive word but somewhere someone must have the right answers. But who?

    Who would dare put their head above the parapet at this moment and argue that they have the solution?

    Guess we'll just have to wait to find out.

  • Comment number 74.

    at last the penny has dropped. surely this reality has been obvious for months,if not longer. Now, add to the fact that the increased amount of deposit required by new housebuyers is directly proportional to the length of time they will need to save this before they can buy their house, and you can see why we will be going nowhere fast for a few years.

    The main issue still must be, when will the government realise that transferring debt, or liability for debt, does not create more available credit.. and anyway more available credit would spell disaster.

    It looks like shares are going to settle at about 50% of their previous value..until house prices match this fall we are pretty stuffed just treading water.

  • Comment number 75.


    "Just watch the teenage pregnancies fall."

    Or just see the babies being found in plastic bags in the local toilets and parks etc. never mind many teenage girls either dieing of being admitted with complications brought on by unattended child-birth. Unless most are found dead the state and wider society will still have to pick up these costs one way of the other...

  • Comment number 76.

    All we need now is the Vogon's to turn up.

  • Comment number 77.


    There are conspiracy theories and there are conspiracy facts...

    Check out the Bilderberg Group

    They planned this in 2006 in Ottowa, Canada at their secretive annual meeting of the rich and powerful from across the globe.

    They had decided to collapse the global economy within 3 years so facilitate the consolidation of the world's banks, to dump the dollar, force more countries into joint currencies and form the North American Union uniting America, Canada and Mexico into ONE state with the new currency of the Amero.

    This currency is already being printed in Denver, Colorado and some of it has already been shipped to China!

    These are all conspiracy facts.

    Unfortunately the word "conspiracy" has been somewhat defined as a word used by cranks and theorists.

    Look into the Bilderberg Group, The Trilateral Commision, The North American Union etc... and you will be stunned at what is going on!

    The world is being controlled and manipulated by these groups to their liking with no thoughts or morality for the rest of us.

    This collapse of the global financial markets is the start of a deliberate plan to control us all through poverty and debt.

    Look into it, I beg you, get informed!

  • Comment number 78.

    Please explain to me why the bbc news 24 is not even reporting the run on the pound - worse than the one in 1992

  • Comment number 79.

    You say : "Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression..."

    In the 30s we had an Empire... large parts of the world were coloured pink on the map. In the 30s oil was more or less freely available and literally dirt cheap. In the 30s the UK had under half the present day population. In the 30s most things you bought worldwide, from train engines to biscuits had 'Made in Britain' stamped on them.

    How can you possibly state that this Depression will be easier on UK plc?

  • Comment number 80.

    #66 delminister

    so in the words of an old musical " Stop the world i want to get off"

    I rather prefer "Always look on the bright side of life" in these circumstances.

  • Comment number 81.

    People diving into the stock market over the last few weeks to pick up bargains have astonished me.

    Do they really think that all these bank collapses and bad debts would suddenly vanish overnight? Now we have entire countries starting to falter for god's sake.

    It's going to take years to unwind all these dodgy deals, bad debts, illusory accounts and home repossessions.

    I believe the pain will be felt far and wide for years to come. Hold on to your hats.

  • Comment number 82.

    I dont think I have read such a lot of gloomy comments on an economic situation for a long time. I have to run a textile business in the midlands. Yes things are difficult and will probably get more difficult but could the extra gloom this time have something to do with the fact that the people mainly likely to be affected are based in the southeast- that most sacred of places, where the economic sun always shines. Hardly a person seems to have a positive outlook. You re not going to die you know , you ll just have a difficult time economically speaking.
    I started work just before the 3 day week in the early 1970 s. Then there were powercuts, shorttime working and the price of oil rose at a rate far faster than we re seeing now. And I and my generation are still here.Could this lemming like panic everytime there s a piece of economic news have something to do with the fact that the kids have taken over the asylum ( at least in the City) and having no experience of business life outside of the Square Mile havent a clue how the majority of industry operates. Perhaps they should leave their dealing screens and concentrate on Bebo and Facebook like the rest of their compatriots of that age. Lets look for a bit of economic sanity please.

  • Comment number 83.

    surely we have to consider that this is not a disease that stems from our financial institutions but actually from capitalism itself. The seeds of boom and bust economics are sown in our very foundations.

  • Comment number 84.

    Warren Buffet is investing also. He has the same view. He says investing now is patriotic. So do the TV pundits like CNBC's Cramer who tell you to go out and buy the bargains while you can get them. But IMO this is not the time to be buying, it's the time to be selling. If you are lucky enough or prescient enough to be out of the market with cash, now is the time to sit on it. Looking at the way the stock market behaved from 1929 to 1932, there were at least 6 mini fake out rallies before it hit bottom. It's also an axiom on wall street, never try to catch a falling safe (or a falling knife) it's better to let it land and bounce around for awhile. Did anyone see this coming? Yes I did, at least for about a year. I knew about the sub prime mortgages that would default to the tune of trillions. What I didn't know was about the credit default swaps and the enormous leveraging of most financial institutuions. If this really is a re-run of the crash of 1929, there is plenty of time to wait before I think about getting back into the market. Perhaps even a year or more. When there are signs of an upturn in the economy, optomism, and an upswing in sales and earnings, there will be plenty of chances for good picks. Now the effort should be preservation of capital.

  • Comment number 85.


    I must say thank you for your articles for the past few years.

    In HK, some people borrow money from banks to invest in shares because the bank interest rate (0.5 - 1%) is much much lower than the inflation.

    My dad is one of those. He borrowed roughly £400,000 ten years ago to invest in shares. I am so thank god that I had a massive argument with my dad to tell him to sell the shares to payback all the loans while he is still on profit. Luckily he listened and did it last year.

    Now, although he still lost some in his own portfolio but that's all his own money. Otherwise, he probably has to sell his house for the debt.

    I sincerely thank you that you had consistently warned us in the past. If I didn't respect your knowledge, we certainly will be one of those victims in HK ending in tears.

  • Comment number 86.

    It is no longer about returns in the years to come.... its about survival....

    I stand by my previous posts...

    FTSE100 - less than 1000
    DOWInd - less than 5000

    I expect the DOW to open almost 600 down today...

  • Comment number 87.

    No chance of starting the big plasma spinny thing under the Alps and putting us all out our misery I suppose.

  • Comment number 88.

    Can someone please tell me why the $ is doing so well against the £, € & other major currencies, please? I thought the USA were doing even worse than we were?

  • Comment number 89.

    Can someone explain to me why the share prices drop so sharply just because it has been confirmed that we are in a recession? This news won't come as a surprise to anyone - we've known this for weeks, so why the sudden drop now?

  • Comment number 90.

    Interesting slide show - but why no mention at all of FRB?

  • Comment number 91.


    Please contact your spies.. (sorry contacts)..

    Will the LloydsT - HBOS "merger" still go ahead?

    LloydsT at £1.62
    HBOS at £0.65

    (offer price equates to...£.098

    Surely it would be madness for LLOYDS to go ahead with this...
    no matter what Gordon says...
    no matter that he stakes his reputation on it...
    Some deal...
    Some reputation...

  • Comment number 92.

    "Unlike the 1930s, our governments have both the tools and the knowledge to stave off depression, so it's fair to assume we're in for years of poor economic performance but not serious impoverishment"

    Oh really, why are you putting a bit of gloss on Labours ability to get us out of the mess they got us into. Its was Browns manic spending that got us where we are, and IMHO he and Darling are the worst possible people to get us out of it.
    You should be asking if the IMF is going to be called in. The pound is tanking and there is a question whether the Govt will be able to borrow the money. Its looking very nasty indeed, , oh, and the word downturn is redundant, its a full blown recession thats coming.

  • Comment number 93.

    No 12 is absolutely right

    The last thing that we need in an economy where the money supply will be strangled and where nobody wants to spend cash, is half of it being dropped into the dead hand of Government.

    It should be kept in the hands of individuals who can then save more without cutting prersonal expenditure or spend it on things like bank shares, beer, cars and fags.

    Instead its being taken out of the economy and parked in the public sector which then tosses it away on servicing debt, bailing out banks, employing people to do things that are not needed - and takes ages to do it at that.

    The quickest and possibly only way to avoid a dire down turn now is to slash taxes, slash interest rates, slash public spending, slash benefits and wait for the tax take to rebound

    There might have been a time when a bit of gentlemanly Keynsian 'pump priming' would have avoided this - it is a time that has long since passed.

    The longer it takes for the fools in westminster to realise this (or for someone to make them do it - see my IMF post yesterday) - the worse things will get.

    Sobering thought or what ?

  • Comment number 94.


    The blog for sun readers is here:-

  • Comment number 95.

    Well, I don't know whether we've reached the bottom yet, but I'm sure it's a good time to buy shares if you're in it for the long term. Personally, I'm seriously considering making a big lump sum top up to my pension fund (mostly stock market based) sometime fairly soon.

    Even if we've got a little way to go before we reach the bottom, I'd be prepared to bet a considerable sum of money (literally) that money invested in the stock market now will be worth more in 10-20 years time.

  • Comment number 96.

    *67.forfuturessake wrote:

    "Heres an idea.

    The country has a definite problem being able to afford genuine and deserving expenditure going forward.

    Take this opportunity to categorically state that there will be no state benefits for any child born after 8.5 months from todays date for any mother aged 17 or under.

    Just watch the teenage pregnancies fall.

    Can somebody tell me why this can't be done.

    When they are telling me why this can't be done, please also state who we should take the money off, or not pay, in order to pay these people."

    What a splendid idea!
    But why stop with single mothers?
    After all.there are millions of welfare "parasites" who we could cut loose as well.
    The sight of all those people scrabbling around on landfill sites trying to feed themselves would be a powerful incentive for the rest of the low-paid to accept their lot as well!
    I`m all for reducing immigration to ease numbers on the state pay-roll,but treating our own people like disposable rubbish(some would say that we do that now) won`t solve anything.

  • Comment number 97.

    #67: I'll tell you why it can't be done.

    The extensive and complex benefits system creates huge amount of work and nice secure jobs for a huge army of civil servants.

    Who do you think politicians need to co-operate with them if they want to make radical changes to legislation? I'll give you a clue: did you ever watch "Yes Minister"?

  • Comment number 98.

    The IMF will not be bailing anyone out in a while. They will have nothing in the kitty.

    The IMF will not exist.

    It joined the club.

    Get ready to barter for your supper.

  • Comment number 99.

    No one should listen to Peston any more after he nailed his colours to the Labour flag. What can you expect from the Brown Broadcasting Corporation.

  • Comment number 100.

    When I did a degree in economics one of the major factors to determine buying/selling was 'expectations' - so this seems to suggest a degree of pessimism in the market right now ..
    Funnily enough nothing was mentioned about 'headless chicken mode' as it was presumed we would not do things like that any more having learnt from 1929 .. hmmm


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