Spain's banking sector could be facing a death blow

Sometimes it's the most innocuous-looking headlines that spell the most trouble.

With most papers leading on "here comes the recession"-type stories, it would be very easy to overlook the report on page five of yesterday's FT that the "ECB is to tackle abuse of liquidity aid". And no wonder. The story sounds either a) very technical or b) something about the financial equivalent of binge drinking.

But there's a bombshell being delivered here - the European Central Bank is about to stop bailing out eurozone commercial banks. And that could mean another big lender going 'bust'. Time to reach for your tin hat again…

The ECB is about to stop bailing out eurozone commercial banks

The European Central Bank has said nothing official as yet about its plans to take a closer look at its support for European banks. In true eurozone style, the ECB's thoughts are being carefully leaked in a dull bureaucrat-ese that's easily ignored and designed not to prompt a panic.

ECB policymakers have agreed a "certain amount" of refinement to the central bank's rules," said the governor of Luxembourg's central bank, Yves Mersch, at the weekend. The changes under consideration weren't "a broad-based revolution", he added. However, as markets evolved, "we have to adjust our framework regularly to market practices" which would "concern some instruments".

Hardly a "stop the press!" moment. But fortunately, Not Wellink, the Dutch central bank chief and a major figure on the ECB council, has been a bit more specific. He said that banks were becoming addicted to the Frankfurt 'liquidity window'. That's where the ECB has been providing cheap funding for eurozone banks by lending against the collateral of a whole range of so-called asset-backed securities (ABS).

Let me explain. A number of European banks weren't able to borrow enough cash to keep their balance sheets balanced because other investors weren't prepared to lend them the money. The only way they've managed to keep their heads above water recently has been to shovel the dodgy loans they have made onto the ECB – a sort of financial pass-the-parcel. Without it, those banks would have gone bust, a la Northern Rock.

But the bad news for these lenders is that it looks like the party's over. "If we see banks dependent on central banks, then we must push them to tap other sources of funding", Mr Wellink told Dutch financial daily Het Finacieele Dagblad. "There's a limit how long you can do this. There is a point where you take over the market".

Exactly. I can't think why it's taken the ECB so long to work out that it's storing up problems for the future. After all, it was prepared to hike interest rates two months ago when worried about too much inflation. Perhaps it was because the Bank of England and the US Federal Reserve had to put in place their own panic measures – sorry, emergency funding arrangements - while the ECB already had something suitable in place.

But this is where the second part of the problem arises. Though its policy buys time, the ECB ends up with a shed-load of assets whose value is highly debatable at best. That's bad enough in itself, but there could be much more fallout. The Maastricht Treaty – one of the EU foundation stones - formally prohibits long-term taxpayer support of this kind for the EMU banking system.

"The ECB is in an unenviable situation", says Paul McCulley of Pacific Investment Management. "The lender of last resort should be just that, not a permanent provider of funds."

Spanish banking sector could be facing collapse

So it's starting to look like the game could be up for a large chunk of the Spanish banking system. We've written before about the parlous state of the Spanish property market and, as a result, the hole into which the country's banks have dug themselves. The latest Bank of Spain data shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). "A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt", says Ambrose Evans-Pritchard in The Telegraph. "These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed".

But the ECB will have to end this bailing-out soon. Now it's possible - just – that the central bank can deal its way out of this mess, and somehow avoid the carnage that a Spanish bank bust would cause. But as the world's banking glitterati gather in Jackson Hole, they've got plenty of hard thinking to do. After all, if Spain's banking sector collapses, it would result in even tighter credit, less lending and less spending.

One – admittedly unorthodox solution – could be for the ECB to simply pretend that Spain doesn't exist. If that sounds silly, that's because it is. Yet, that hasn't prevented British buy-to-let lender Paragon from trying to disown an entire sector of amateur landlords who have fallen on hard times.

According to The Guardian, Paragon now says that investors in the kind of overpriced city-centre apartments which are now virtually unlettable and unsellable should not be classed as buy-to-let investors. "These properties were targeted by speculative purchasers who thought they could make a quick buck by flipping them. That is not the buy-to-let market. Buy-to-let investors do not own a property unless they can demonstrate that there is tenant demand".

It's an interesting solution to the housing bubble implosion – just stick your fingers in your ears and pretend it's not happening. But somehow we don't think it'll catch on.

Turning to the wider markets…

UK shares rallied strongly on Friday, as the FTSE 100 index climbed 135 points, 2.5%, to 5,506. Property stocks soared, with Liberty International - surrounded by bid rumours – jumping 8%, while British Land added 6% and Hammerson 5%. Banks also fared well with Royal Bank of Scotland and Barclays both gaining 5% while Lloyds TSB put on 7%. BT climbed 3.4% on vague bid talk. But Michael Page lost 4.4% having rejected Adecco's advances. The London market was closed yesterday for the August bank holiday.

Shares in Europe dropped yesterday, with the German Xetra Dax losing 0.7% to 6,297 and the French CAC 40 shedding 1% to 4,356.

US stocks fell sharply last night, with the Dow Jones Industrial Average dropping 242 points, or 2.1%, to end at 11,386 and the wider S&P 500 and the tech-heavy Nasdaq Composite both shedding 2% to 1,267 and 2,366 respectively.

Overnight the Japanese market shed 100 points, 0.8%, to 12,779, while in Hong Kong, the Hang Seng was almost flat, down 0.1% to 21,088.

This morning Brent spot was trading at $113, spot gold was at $821, silver at $13.52 and platinum at $1,443.

In the forex markets this morning, sterling was trading against the dollar at 1.8441 and against the euro at 1.2547. The dollar was trading at 0.6803 against the euro and 109.72 against the Japanese yen.

Also this morning, Bovis Homes said first-half profit plunged 83% after banks granted fewer mortgages. Sales dropped 43%.
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Northern Rock: yet more of your cash down the drain

Turns out – would you believe – that the Newcastle-based lender, a pioneer of 125% mortgages and one of the most dominant lenders right at the peak of the market in early 2007, is getting clobbered by much higher-than-average default rates. Surprise, surprise!

Sarcasm aside, the Rock is just the tip of the iceberg, if you'll forgive the slightly mangled metaphor. The rest of the UK banking system, or certainly the bit that isn't effectively bust already, is getting set to slam down the loan window shutters as it runs shorter and shorter of money.

It all promises to be a very unhappy 2009 for borrowers…

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Northern Rock is suffering much higher-than-average default rates

There've been probably more column inches within the last year devoted to the sorry Northern Rock nationalization saga than to any other company in the country, so I'm not going to add to them by talking about the right and wrongs of what the financial authorities did or didn't do.

We're stuck with it. But if anyone's looking for any further evidence that offering 125% mortgages is a completely brainless idea, particularly if the lenders responsible proceed to scatter their cash around like confetti, the latest news serves that up on a plate.

It turns out that from what The Telegraph calls "previously unseen documents" that Granite, the £40bn so-called 'off-balance sheet securitisation vehicle' which holds many of the mortgages issued by the Crock, is anything but rock-solid.

Payment arrears of 90 days or more on mortgages on Granite's books rocketed by two-thirds between this year's first and second quarters, according to the credit monitors at Standard & Poor's. That adds up to £508m-worth of dodgy home loans, even though rival banks saw relatively small increases in delinquencies. What's more, repossessions soared by 163% between the first and second quarters, again much worse than virtually every other lender.

The loan-to-value (LTV) ratio is another potential disaster. Average LTVs were 77% for Granite compared with 60% typically elsewhere, with almost 30% of Granite's loans at LTVs of 90%. That means a large chunk of borrowers will soon be dropping into negative equity territory as the housing market gets worse.

Today's Nationwide survey said that UK home values have already plunged 10.5% over the last year after a further 1.9% fall in August, while the Bank of England's governor Mervyn King this month forecast "a significant adjustment" downwards in house prices.

How much will this cost British taxpayers?

Here's the bad news for the public coffers: any financial pain of a major blowout in defaults would be shared between Granite bondholders and the Rock. Andrew South, S&P's senior structured finance director, tells The Times that "the deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost". And if that's not enough, you'll be less than glad to hear that on top of the £40bn Granite loan book, the Rock holds £37bn worth – on paper at least - of mortgages on its own balance sheet, which it says are of similar quality. Thanks, guys!

The cost to the taxpayer? "At the time of the nationalization, the Government was advised by Goldman Sachs that the loss could be between £450m and £1.28bn", says Patrick Hosking in The Times. And now? I dread to think. But I bet it'll be a long way north of even that higher figure, particularly as the economy gets worse. It doesn't take Einstein to work out why high-risk home loans have virtually disappeared off the radar screen. What's happening to over-indebted mortgage borrowers is, in a rather painful way, a microcosm of what's happening in the wider world.

Britain is heading for a major slump

The recent bank reporting season has already showed us that the balance sheets of UK lenders are looking fragile as both personal and corporate bad debts have started to stack up. In other words, demand for credit is dropping as bank customers' ability to make interest payments on their loans is getting worse by the day. And the other side of the coin is that the banks are toughening up their loan criteria.

"When lending standards go up, corporate defaults rise. And that's only just started", says James Fairweather, chief investment officer at fund manager Martin Currie. "This is the sharpest-ever rise in lending standards we have ever seen and it has continued to sky rocket."

But now, says Capital Economics, it's even looking unlikely that banks will be able to raise all the capital they need to keep expanding their balance sheets as fast as they have been. So they'll have to ration the supply of credit even more.

Lending growth won't just slow, it could actually fall outright: "if banks fail to raise any more capital than the £20bn raised so far, lending could contract by 7% - and reducing lending to UK households and firms could have dire implications".

It's all pretty desperate news for the UK economy, which "may already be in recession and is now expected to contract in 2009 as a whole", says Capital Economic's Vicki Redwood. She concludes: "A full-blown slump is a growing possibility".

There's not a lot more to add to that.

UK shares closed strongly, with the FTSE 100 index advancing 57 points, 1.16%, to 5,528, though the FTSE 250 was flat. Housebuilder Taylor Wimpey reversed much of the previous day's gain, shedding 7% after reporting a £1.54bn loss. Other stocks in the sector also suffered, with Persimmon and Barratt Developments both 2% down and Bovis losing 3%. In contrast, miners generally did well, with Antofagasta and Vedanta both up 4% and Kazakhyms adding 2%. BSkyB rose 1% on a bullish Goldman Sachs note but Johnston Press slid 7% after announcing an 18% pre-tax profit drop and a scrapped interim dividend.

Shares in Europe were mixed yesterday, with the German Xetra Dax easing 0.3% to 6,321 but the French CAC 40 nudging up 0.1% to 4,373.

US stocks were firmer, with the Dow Jones Industrial Average adding 90 points, or 0.8%, to end at 11,503 and the wider S&P 500 gaining a similar percentage to 1,282. The tech-heavy Nasdaq Composite added 0.9% to 2,382.

Overnight the Japanese market was again almost flat, adding 15 points, 0.1%, to 12,768, though in Hong Kong the Hang Seng slid 551 points, 2.6% to 20,914.

This morning Brent spot was trading at $115, spot gold was at $834, silver at $13.74 and platinum at $1,443.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8370 and against the euro at 1.2447. The dollar was trading at 0.6776 against the euro and 109.03 against the Japanese yen.

And in London, French bank Credit Agricole reported that second quarter profit had slid by 94% to €76m, after writedowns related to troubled US bond insurers. However, its Tier 1 capital ratio remained steady, reports Bloomberg.

The second-most expensive four words in the English language

The late great Sir John Templeton warned that the four most expensive words in the English language are “it’s different this time.”

He was absolutely right. You usually hear those words at the frenzy stage of an investment bubble, when there’s no conceivable sensible reason for prices to go any higher, and vested interests have to clutch at straws to promote their arguments. Just ask anyone who bought property stocks a year ago, or tech stocks in 2000.

But in the wake of a bubble popping, you often hear another phrase, which may well qualify as the second-most expensive four words in the English language. And we’re hearing it more and more from the property pundits, politicians and City hotshots who stand to lose most from the looming recession.

It’s that whiney little mantra, “something must be done!”

Property pundits are calling for government intervention

We have to do something to save the property market. Or so everyone who makes money from the property market is saying.

David Ritchie, chief executive of house builder Bovis, was among the latest to call for government intervention this week. “People need to be able to access finance to buy property and anything we can do to assist people getting on the housing ladder must be good.”

The Government agrees it seems, even if it can’t quite work out a plan yet. After all, nothing screams “get rid of this bunch of incompetents!” to a British voter louder than collapsing house prices. There’s the vague rumours about stamp duty, which no one has stamped on yet, so they must be getting ready to announce something. And The Times reports this morning that the Government is also considering helping councils to buy “repossessed and unsold properties.”

It seems that “something is being done.”

But let’s rewind a moment. Let’s just examine that statement from the Bovis boss, particularly the second half. “Anything we can do to assist people getting on the housing ladder must be good.”

Here’s an idea. Why don’t you give away your homes for free, Mr Ritchie? They’re not selling anyway. That would get people onto the housing ladder. And that must be good, right?

Oh, wait, I forgot – that would cost you money. In fact, it would bankrupt you. Why should you be expected to subsidise housing for the rest of the nation at your own expense?

Taxpayers shouldn't have to prop up the housing market

It’s a ridiculous notion, of course. And yet, when it’s taxpayers’ money that’s meant to fund other people’s property purchases, it’s apparently just fine.

Well, I’m a taxpayer, and I don't think it’s fine at all.

Let me explain why. The Government takes money from your pocket and mine in the form of tax. The justification for this is that it spends that money on public goods, things that can’t be provided more efficiently by the private sector. You can argue the point on what these things are, but we generally accept (in this country at least) that this includes the army, the police, universal health care, and some form of welfare safety net.

I don’t see anything on that list about propping up the housing market. A cut in stamp duty is simply taking money from people who don’t intend to buy a house, and giving it to those who do. That’s completely unfair. If the Government can afford to cut taxes at all, then it should be giving us all some of our money back.

How to make the recession less painful – cut taxes

And this takes us to the bigger point. If we want to get out of this recession in one piece, what really needs to be done?

Interest rate cuts won’t work. They haven’t worked in the US, they didn’t work in Japan. That’s because as a nation, we’re up to our eyeballs in debt. Banks can’t afford to lend money; we can’t afford to borrow it. All of us need to pay off our debts and build up our savings. So it doesn’t matter how cheap money gets, we’ve snapped out of spending mode and strapped on our tin hats.

So the quickest route out of recession is to help people pay down debt and build up their savings. Inflation is one way to reduce the value of debt, but it generally comes with a hefty price tag – currency collapse and economic meltdown. Higher interest rates might help build up savings, but they’d also make debt more expensive to service.

How can we help people save more without fuelling inflation or making our debt burden even worse? Simple. Cut taxes.

If you cut taxes, you almost automatically increase productivity, because you take money from a wasteful, inefficient organisation – the government – and reallocate it to someone who actually gives a damn about how effectively it’s spent – the individual. And rather than squander the money on property (as the Government is proposing), individuals would use it sensibly, saving it, or using it to pay down debt.

This isn’t a magic bullet. It won’t stop the recession – nothing can. The looming bust is nature’s way of telling us that we spent too much money on unproductive garbage during the good times.

Look at it this way. If we’d taken all the money we spent as a nation on property in the past ten years, and had pumped it into – let’s say – our energy infrastructure, then maybe we’d have lower gas bills, and a nice, productive industry providing highly paid, specialist jobs that would be tough to outsource. Instead, all we’ve got is big debts, an unwanted pile of jerry-built buy-to-let flats which are already turning into slums, thousands of unemployed estate agents, and a national energy crisis.

It’s depressing, yes. But what we can do now is put an end to the rot and the waste. The quicker those savings build up, the faster balance sheets are repaired and the quicker we can get out of this downturn.

Will this happen? I doubt it. The Government still believes the great lie, that you can spend yourself rich. It still believes that “something must be done.”

Better get ready for a long, drawn-out, painful recession.

Turning to the wider markets…

UK shares had another good day as takeover speculation helped the prices of several rumoured targets. The FTSE 100 index advanced 73 points, 1.3%, to 5,601. J Sainsbury flipped up 8% on hopes that former suitor the Qatar Investment Authority might be prepared to re-open bid negotiations, while insurer RSA climbed 5.5% on talk that several rivals could be considering acquiring it. Legal & General put on 4%. Banks also did well, with Barclays up 6%, and HBOS and Royal Bank of Scotland both 4% higher. Wolseley recovered 6% on better US economic numbers.

Shares in Europe were also stronger yesterday, with the German Xetra Dax gaining 1.6% to 6,421 and the French CAC 40 advancing 2% to 4,461.

US stocks were again firmer, with the Dow Jones Industrial Average adding 213 points, or 1.85%, to end at 11,715 and the wider S&P 500 gaining 1.5% to 1,301. The tech-heavy Nasdaq Composite added 1.2% to 2,412.

Overnight the Japanese market joined in, adding 305 points, 2.4%, to 13,073 and in Hong Kong the Hang Seng improved 321 points, 1.5% to 21,293.

This morning Brent spot was trading at $113, spot gold was at $837, silver at $13.85 and platinum at $1,473.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8291 and against the euro at 1.2400. The dollar was trading at 0.6780 against the euro and 108.58 against the Japanese yen.

This morning also brought news that London luxury house prices have posted their first annual drop (-1.6%) since 2003, according to Knight Frank, after a 1.3% monthly fall, while UK consumer confidence remains around its record lows, said GfK.

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Why the credit crunch is good news for game birds

 

The grouse shooting business is feeling the crunch

Grouse shooting is big business. The industry is worth £1.6bn to the UK economy. It generates the equivalent of 70,000 full-time jobs, while ensuring the management of two-thirds of the UK's rural land.

But like almost every other British business, it’s under pressure. Costs are rising. Both fuel and ammunition are getting more expensive. What’s more, the weakness of the US dollar – even allowing for the recent bounce - has pushed the cost of a day's grouse shooting in Scotland to around $13,300. That’s enough to make even high-rolling American hunters think twice about whether they can afford another trans-Atlantic trip.

However, the real concerns in the grouse shooting world run rather deeper. Much of the demand for shooting comes from the City and corporate business. So if the Square Mile’s hot shots aren’t gunning for a day on the moors, that could be bad news for shoot organisers.

This year’s season will probably be OK, says Christopher Graffius, director of communications for the British Association for Shooting and Conservation. Most bookings were paid for at the beginning of the year, “before the credit crunch really hit.”

Yet a study by specialists Fox Harris has found “some signs of softness in the market”, says Martin Waller in The Times. One unnamed banker told him that “in today's climate, taking large numbers of clients to shoots costing as much as £30,000, was probably a non-starter on PR grounds”. Another agent spoke of a dearth of corporate customers, and warned that some who’ve paid deposits may walk away. “We're aware of shoots normally full and difficult to get into that are now offering days. There will be some days coming back on the market discounted.”

“It’s not going to make any difference for the guys that come in their own private jets, but certainly at the lower end of the market there seems to be a bit of a slow-down”, says Russell Hird, who runs grouse-shooting expeditions on the Isle of Lewis.

Other birds may find they have fewer bullets to dodge this season. John Bingham in The Telegraph reports that “pheasant shooting - which gets under way in October – [is] thought to be particularly vulnerable to the downturn,” with “the number of birds expected to outstrip the number of shooters”. Even clay pigeon shooting has become more expensive due to the rising cost of metals.

Now, you may not care that much about the troubles of the City’s amateur hunters. But what this all demonstrates is that the view that the ‘crunch’ won’t affect the ‘top end’ is complete nonsense. When economies turn down sharply very few people escape unscathed.

And investors in premium brands are starting to realise that.

Why now's the time to sell luxury goods stocks

The FT revealed last month that inflation in the luxury goods market has halved in the last year, “indicating that the wealthy are watching the pennies as much as anyone else”.

Even down in Saint-Tropez, retailers are reporting a “dramatic drop in takings as the number of yachts dropping anchor is down 50%”, reports AFP.

The rich are having trouble paying their debts too. “The wide-ranging effects of the US housing downturn are highlighted by the worsening of credit quality in American Express’ affluent card member base,” wrote Oppenheimer analyst Meredith Whitney in a recent client note.

It all spells bad news for the luxury sector. In the year to July, the sector and luxury-brand dedicated funds fell between 15-20%, reports Funds Europe. Luxury goods makers are pinning their hopes on the newly wealthy in emerging markets. But decoupling has already been shown to be a myth, as China’s economy slows alongside America’s. Eastern millionaires will be no more inclined to keep spending than their counterparts in the West.

It’s yet another sector for investors to avoid – and if you do hold any luxury goods stocks, now would be a good time to sell them.

With the economic downturn picking up steam, prospects don’t look great for many sectors, in fact. But MoneyWeek contributor Stephen Bland reckons investors should take a longer-term view of things. To read his take on why you shouldn’t be worrying too much about the current volatility, see: Don't panic: the world isn't ending.

Turning to the wider markets…

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UK shares recovered, with the FTSE 100 index closing 49 points higher, or 0.9%, at 5,497. Miners led the rally, with Antofagasta, Anglo American and Kazakhyms all up 5%. But banks generally continued to suffer, with Barclays down 1.5% on fears that more credit write-downs will be needed, though Royal Bank of Scotland managed to hold its price level after a Goldman Sachs recommendation. Housebuilders dropped after Bellway’s downbeat trading update, which hit Taylor Wimpey 11%, Barratt Developments 8% and Persimmon 4%.

Shares in Europe also picked up as the German Xetra Dax nudged up 0.3% to 6,442 and the French CAC 40 improved 0.4% to 4,421.

US stocks bounced off early-session lows, with the Dow Jones Industrial Average adding 83 points, or 0.7%, to 11,616. The wider S&P 500 gained 0.6% to 1,293 and the tech-heavy Nasdaq Composite advanced 1% to 2,454.

Overnight the Japanese market recouped 66 points, 0.5%, to 13,019, though in Hong Kong the Hang Seng eased 321 points, 1.5%, to 21,072.

This morning Brent spot was trading at $112, spot gold at $788, silver at $13.10 and platinum at $1440.

In the forex markets this morning, sterling was still weak against the US dollar - falling for its eleventh successive day, its longest losing streak for 37 years, according to Bloomberg - trading at 1.8555 and against the euro at 1.2599. The dollar was trading at 0.6789 against the euro and 110.41 against the Japanese yen.

And this morning, recruitment company Michael Page has rejected a 400p-a-share (£1.3bn) bid from rival Adecco, saying it “materially undervalued” the company.

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How the cheap money era led to the war in Georgia

From John Stepek, across the river from the City   The end of the easy money era and the war in Georgia don’t, at first glance, seem to have an obvious connection. But they are linked. Bear with me, and I’ll explain why. Cheap money gave us many things, including a global property bubble, and a £1.4 trillion debt mountain for UK consumers. Another noticeable trend was a taste for exotic new investment classes, from Iraqi government bonds to obscure derivatives. All of these trends were the result of falling risk aversion. Investors believed that central bankers, lead by Alan Greenspan, now had complete control of the global economy. Globalisation would ensure economic growth went on forever. And if it didn’t, a soft landing could be engineered by judicious use of the emergency interest-rate cut button on Greenspan’s miraculous economic control panel. As investors became bolder, and focused entirely on returns, rather than risks, one brave new investment class, invented entirely by a man working at Goldman Sachs, benefited more than most. It was called the Brics… The Brics were a great investment, when risk didn’t matter The Brics – as you probably know by now - was a catchy acronym for Brazil, Russia, India and China. Jim O’Neill at Goldman Sachs coined the term in 2003, and predicted great things for these four countries. And he was right. They’ve all benefited from booming commodity prices (in the case of Brazil and Russia), or booming US consumption (China), or the outsourcing boom (India). But another point has also worked in their favour. Low interest rates pushed returns down too. As more and more money chased each new investment opportunity, yields fell on all major asset classes. That drove investors, particularly adventurous new players like hedge funds, into ever-more outlandish investment areas. Risk took a back seat – political risk in particular. No one batted an eyelid at putting money into once-frontier markets. “China? Sure, it’s a totalitarian regime. And yes, communists have never quite got to grips with the idea of privately-owned property. But this is a globalised economy now. The government won’t want to upset investors. Especially not ahead of the Olympics.” Why China and Russia have now become very risky for investors But free and easy money has vanished now. Now some of the best returns you can get are in good old-fashioned hard cash. And when your best returns come from risk-free assets, suddenly things like political risk matter again. That’s bad news for most emerging markets. And it’s a worry for the Brics too, all of which have seen their stock markets take a hit this year. But it’s worse for China and Russia. Brazil and India have their problems, and plenty of them. India in particular has a fractious democracy, terrible infrastructure and chronic corruption. But at their core, they believe in democracy as a model for society, so the chances of dangerous social upheaval are comparatively low. In China, the chances of a civil breakdown are higher. Economic problems tend to lead to unrest. The uprising in Tiananmen Square occurred at a time of high inflation, for example. We’ve more on China and the troubles it faces in the current issue of MoneyWeek. But Russia’s probably the most risky for investors. The country is a basket-case in many ways. It has appalling social problems including high levels of alcoholism, HIV infection and suicide. And while surveys suggest that the Chinese population seems largely comfortable with the idea of capitalism, ordinary Russians seem to pine for the good old days. Above all, Russia’s recovery from bankruptcy in the 1990s has been built on the soaring oil price. China makes things for US consumers; Brazil has a broad range of commodities for sale; and India has a bright, cheap white-collar workforce. All of those are under threat from the global slowdown, but none quite as much as the price of oil. All those petro-roubles pouring into the coffers have given Russia back its swagger. But as the deflating credit bubble leads to global economic downturn, the oil price is already falling. That’s why if Russia wants to press home its advantage, it needs to do it now. Hence the stepping up in state rhetoric and confiscation of assets, and its action in Georgia. What’s the US going to do after all? America doesn’t have any money – and all the funds it could borrow are being spent in Iraq. Who’s going to risk distracting the army’s attention from that over a minor satellite state? It’s time to take profits on Russia As for investors – well, Russia’s got what it needed from them. It doesn’t have to indulge them anymore. And that means that investors can no longer ignore political risk in the country. If I was you, I’d take any Russian profits you’ve made off the table. The time will come to get back in, but it’s not now. “We didn’t need this,” one Russian fund manager reportedly said at the weekend. “It’s not going to break the Russian economy, but war is bad for investor sentiment.” No kidding. UK shares picked up a further 1% with the FTSE 100 index gaining 53 points to 5,542. House builders were in demand, with Barratt Developments jumping 24% after Polaris Capital increased its stake to 6.2%, Bellway climbing 7%, Bovis 10%, Persimmon 11% and Taylor Wimpey 14%. But miners dropped again, with ENRC losing 6% despite Kazakhyms (down 1%), raising its stake to 25%. Rio Tinto shed 2% and Ferrexpo 6%. In contrast, ITV gained 6% on bid hopes while Wolseley rallied another 13% on disposal hopes. For a full market report, see: Shares in Europe were better again, as the German Xetra Dax advanced 0.7% to 6,610 and the French CAC 40 added 1% to 4,538. US stocks continued to improve, with the Dow Jones Industrial Average gaining 48 points, or 0.4%, to 11,782, while the wider S&P 500 added 0.7% to 1,305, its first close above 1,300 since late June. The tech-heavy Nasdaq Composite gained 1.1% to 2,440. Overnight, the Japanese market slid 127 points, 1%, to 13,304. But in Hong Kong, the Hang Seng tacked on 39 points, 0.2%, to 21,899. This morning, commodity prices were weaker with Brent spot trading at $111, spot gold at $808, silver at $14.24 and platinum at $1,488. In the forex markets this morning, sterling was trading against the US dollar at 1.9015 and against the euro at 1.2776. The dollar was trading at 0.6720 against the euro and 109.86 against the Japanese yen. This morning the latest RICS report showed UK house prices falling again in July as the credit squeeze brought the property market to a “virtual standstill, with first time buyers rapidly becoming an endangered species”.