A break in the clouds

They say that no news is good news and the Easter break has given us the chance to put world economic events out of our minds. It all looks a little brighter.

Even the Bank of England got into the no news act by leaving interest rates unchanged, though that was hardly a surprise. At 0.5% they cannot go much lower and it is far too early to reverse the downward trend. That is one non-event that we are stuck with for several months, possibly for the rest of the year.

What did happen was that the Footsie rallied above 4,000 points again this week and there are tentative signs that it could stay there. For investors, it really is time to think about selective buying.

I say selective because most of the optimism being bandied around is not so much about recovery as about things not getting worse, or not getting worse quite so quickly. There are shades of optimism.

Very much on the credit side have been some good company results and trading statements around the world. The outlook for mobile phone maker Nokia and for motorcycle manufacturer Harley-Davidson plus figures from Wall Street banker JPMorgan Chase gave the stock market a welcome boost this week.

Particularly encouraging is that Morgan is in a position to repay the $25 billion bailout it received from US taxpayers in October. All the talk so far has been about how much government money, here and abroad, is at risk in the bailouts. Here is the first tangible evidence that this cash will be returned even if most banks take rather longer.

Meanwhile, Bob Diamond at Barclays, the bank that successfully avoided a bailout, argued that the strong performance at the UK bank in the first quarter was not a one-off.

Further impetus has been given to the UK stock market by David Miles, the economist who joins the interest rate setting monetary policy committee in June. He thinks that measures already taken, such as cuts in interest rates, the reduction in VAT, government spending and quantitative easing are only just beginning to have an impact.

It is possible that Miles has been influenced by a desire to make a good impression on Bank of England Governor Mervyn King, who thinks that the effects of quantitative easing, to use the clumsy but less emotive term for artificially creating money, are mildly encouraging.

I hate to be a wet blanket but the markets in this shortened week seem to have been ignoring inconvenient downbeat pointers. For example, Nokia was merely saying that the mobile phone market was beginning to stabilise after heavy falls rather than actually picking up. Rival Sony Ericsson has followed up with a hefty loss and more sackings. JPMorgan warned that its better-than-expected first quarter figures were unlikely to be repeated in the second quarter.

The housing market here is still struggling. Given that nearly 1 million home owners are in negative equity and another million not far off, it will continue to do so, even if banks start lending again.

While President Obama sees glimmers of hope for US recovery and Federal Reserve Bank chairman Ben Bernanke is also trying to talk up the US economy, headline inflation slipped into negative territory for the first time in 54 years.

I do not fear inflation as many economists do. I do not believe, for a start, that consumers will hold off buying today what they believe they can buy more cheaply tomorrow. The certain knowledge that high tech goods would fall in price did not stop buyers over the past 20 years. Food and clothing have to be bought as required: the alternative is to starve in rags. We will not put off many journeys in the hope that petrol will cost less next week.

It is true that if prices started to fall rapidly then we might well hold off buying but the chances seem pretty slim. All the cash being pumped into developed economies spell inflation. Before you know it, interest rates will be ramped up to keep prices down and we shall be back on the merry-go-round.

So by all means go out and buy shares in companies that have genuine hopes of riding out the present difficulties. Just remember there is a long way to go yet.

On the wrong track

It would be funny if it were not so expensive. Highly paid Network Rail chief executive Iain Coucher defends hefty bonuses for himself and his fellow executives by arguing that these payments should not be compared with those at bailed out banks.

The banks have been bailed out once in a lifetime. Most years they have made a profit. Network Rail is bailed out by the taxpayer every year and never makes a profit.