The great UK banking panic of January 2009 has plumbed new depths. But for those willing to take a punt, the cheap prices on offer just might be worth the risk.
What now for the beleaguered UK banks?
Based on yesterday's share price movements of Royal Bank of Scotland (LSE: RBS), down a mind boggling 67% on the day to just 11.6p, and the brand spanking new Lloyds Banking Group (LSE: LLOY), down a whopping 34% to 65p, the market is thinking it is only a matter of time before they too are nationalised.
The Financial Times' influential Lex column said bank investors should "brace for nationalisation". According to bbc.co.uk, Liberal Democrat treasury spokesman Vince Cable said "The government must bite the bullet on public ownership and control the banks…"
One thing is certain. It was certain prior to the latest banking bailout, and it is still certain today -- this is going to be a long and painful recession. For all of us, that means battening down the hatches, doing as much as we can to hang onto our jobs, and to just get through the next 12 to 24 months.
This May Take Some Time, Mr Brown
In his article What Today's Bailout Means For You And Me, my colleague Stuart Watson made several excellent points…
• "…my view is that this excessive debt is like an addiction. We need to wean ourselves off it slowly to mitigate the damage to the economy."
• "…it will some time before we know whether this package is working."
• "It would be nice to think that this second bailout can draw a line under this whole situation. But in reality, it’s just a small piece of the puzzle compared to what taxpayers are already on the hook for."
The bottom line is that no-one, from you, me, the bloke at the pub, the lady at the bingo, Gordon Brown, Alistair Darling, Mervyn King, Ben Bernanke, Andy Murray or even Barack Obama, although the latter can apparently walk on water, knows what will happen to the global economy over the next few years.
Recession, Depression, Inflation, Gold…
Some doomsters say we are headed for a depression, however you define a depression. (Hint: Recession is when your next door neighbour loses his job. Depression is when you lose yours). It won't be a 1930s type depression, with 25% unemployment, but it will be worse than your normal recession. I'm depressed even thinking about it.
Some people think we're headed for a bout of rampant inflation, perhaps as early as the latter part of this year. Frankly, I'd be happy with inflation as it feels like it will be a whole lot better than this deflation we've got now. Of course, if and when it happened, I'm sure I'll be pining for the deflationary days again. But I don't think we'll have to worry about inflation in 2009.
Some people reckon the gold price is going to be the ultimate beneficiary of this global financial crisis. Gold is a hedge against a falling US dollar and a hedge against inflation. The gold bugs say the dollar will fall under the weight of the massive US government deficit. If inflation soars, too, gold will soon shoot back above $1,000 an ounce on its way to $2,000 an ounce. I'll leave that debate to the gold bugs. They just love the stuff, as does my wife.
A Whiff Of 1974
And what about share prices, in particular banking share prices? Surely Royal Bank of Scotland at 11.6p is an absolute steal, isn't it? Or what about Barclays (LSE: BARC) at 88p? Less than a week ago Barclays traded at 180p.
If the great UK banking panic of January 2009 subsided as quickly as it began, and Barclays shares returned to 180p, that would be a double from today. Is it possible? Anything is possible in this economy and this stock market.
Prolific discussion board poster emptyend said…
"I think that parts of the market have a whiff of 1974 about them…the selling of the banks is now verging on the irrational."
"I think the market might be setting itself up for a major bear market rally (as per the institutional move in 1974)..... the fundamentals for the banks (and for others) are nowhere near as bad going forward as the market prices suggest......and once the write-downs are all done then the earnings will turn around incredibly sharply."
Lest you might be thinking there is quick money to be made by trading banking shares, popular discussion-board poster KingMcKong and his Diary of a swing trader suggest otherwise…
"19 January 09 (after coffee) - decide RBS ridiculously cheap and double up at 24p. Go to work (away from computer access).
19 January 09 - return from work. Note RBS now available at 11.5p"
Oops.
Taking A Punt On Banks
The bottom line is we're all just guessing. It's hard enough to guess what will happen to the economy let alone guess which way, and by how much, shares in UK banks will move, today, tomorrow or any day. If you've got the stomach for a 50% loss in the space of one trading day, as happened to KingMcKong, and you believe emptyend might be right, you might want to take a punt on RBS, Lloyds or Barclays.
There are two other options. One is to sell up, get out of the stock market, stick your money in a savings account, earning 1.5% interest, and wait out the storm. It's not very exciting, but safe.
The other option is to continue investing in the stock market through a cheap tracker, taking a long-term perspective, with money you don't need to access for at least 5 years. If you want to take a punt on a bank or three, make sure you have a sufficiently diversified portfolio, so that if one or more banks do get nationalised, and your shareholding is completely wiped out, the loss doesn't wipe out a large portion of your wealth.
Outside the banks, I'm looking at a mix of high yielding blue chips mixed with cash-rich smaller companies. The latter are particular favourites of our resident share tipster Maynard Paton over at Champion Shares -- check out his very latest recommendations for 30 days absolutely free.
Interesting times for a banker…
More: Greedy Bankers Are Bailed Out Yet Again | What Today's Bailout Means For You And Me
> Of the companies mentioned in this article, Bruce Jackson has what has now become a very very small beneficial holding in Lloyds Banking Group and Barclays. Double oops.
