This week has seen better signs of recovery in the US, modest recovery in UK industrial output in the latest figures, and clear indications from the UK authorities that they are not rushing to end special measures. The world is still awash with easy money, low interest rates and excess savings. As a result asset prices have risen sharply from their lows, there is plenty of speculative interest in commodities, and the Asian economies are making good progress.
We remain concerned about the state of the UK banks and the public finances. This week saw the announcement of another £25 billion of quantitative easing from the Bank of England. Their approach seems to be to reduce the rate of money printing gradually. That means adding more to the substantial stock of government debt the Bank owns. It will allow another three months of government borrowing at artificially low rates. Anyone with gilts should take this continued opportunity to sell, in order to reinvest in better value instruments.
In addition the government announced over £30 billion of new capital for RBS and its share of the Lloyds rights issue, along with provision to convert another £8 billion of RBS obligations into share capital should need arise. This underlines how the first large packages did not prove to be sufficient, and reminds us of the weak position of RBS. RBS is a bank with assets and liabilities larger than the National Income. All the time it remains on the government's balance sheet it is a risk to the public finances. They are taking a very long time to do the necessary work of deciding what needs to be written off, what can be worked through, and which businesses should be sold on to new owners.
Insufficient progress has been made in tackling the large imbalances in the world economy between the borrower economies and the savers, between the importers and the exporters. The ending of special measures to boost car demand may see some relapse in auto manufacturing next year. The German economy is carrying a lot of surplus labour, kept off the unemployment registers by government schemes. The US economy still has a substantial real estate overhang, and poor consumer sentiment after the shocks of the Credit Crunch. The UK still has its main adjustment to come, as it has adopted so many measures to delay the full impact of its over-borrowing in all sectors.
We remain invested in a mixture of Asian equity for growth, world property for recovery, and corporate bonds for income. The higher the western markets rise the more nervous we become about prospects.