The real reason why people lose confidence in markets

Whilst pundits like to blame media scaremongering, it is the sudden realisation of just how much of our pay we now spend on petrol - or the collapse of a Paragon or Northern Rock - that really rattles us.

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Regular readers will know that I'm not the most optimistic person when it comes to the general economic outlook. But it wasn't until this weekend, that a very small incident made me realise just how grim things could get.

I was filling my car up when I noticed something strange. For the first time ever, the dial measuring the price of the fuel was shooting up faster than the one showing how many litres I'd bought. Obviously that's because the petrol cost more than £1 a litre - but I hadn't thought about it until I saw it graphically illustrated in this way.

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I've been writing about the soaring price of oil for quite some time. But this really did pull me up short and make me think: "How much am I spending on petrol every month these days?" Which quickly lead to: "Should I be spending less on something else?"

And I can't be the only one thinking like that

Pundits - usually with vested interests - are always talking about how important confidence is in markets, whether that be the housing market or the stock markets.

That's why they get so shirty when people like us print stories expressing concerns about the sustainability of house price growth, for example. They like to pretend that as long as people keep believing that markets will rise, then they will keep buying.

But this is tripe. Confidence is important - but it doesn't exist in a vacuum, and contrary to what many would have you believe, it reflects the underlying fundamentals of an economy, it doesn't create them.

The petrol station epiphany I mentioned above is a good example. I've been reading and writing about $100 oil for months - in fact, years, now. But it's not until I actually realised just how much it was costing me to fill the car that I started to think about how that might impact on my spending.

So the dent to my confidence, if you like, was a result of high petrol prices - it didn't come out of nowhere, and certainly not from some scare-mongering news story.

And if anyone was still feeling confident about the state of the UK and the global economy in general, then events of this week should have put paid to that. It's hard to know where to begin, but the meltdown at buy-to-let lender Paragon (PAG)is as good a place as any.

The group's shares have collapsed after it warned that it may not be able to write any more business, and will probably have to issue further shares in February. Now many people are making the case that Paragon's shares are now a decent buy I can see their point, though I won't elaborate on it here (read this piece from The Telegraph if you want the gist: Paragon's cash flow makes it a target).

Having said that, I'd remind readers that catching a falling knife is always dangerous, and also remember that the first big shock to befall a stock is rarely the last.

But it's the impact on the housing market that should really concern people. Paragon is the third biggest buy-to-let mortgage lender in Britain. If it's not writing any more business, then that's a big chunk of competition removed from the market. Less competition usually means higher prices. With mortgage lenders now more focused on profits than market share anyway, that means that regardless of what happens to base rates, mortgages are going to become more costly.

Meanwhile, Northern Rock (NRK) has become Northern Pebble. As is pointed out in the markets section of The Telegraph this morning, its market cap has fallen so far that when it's ejected from the FTSE 100 it will be demoted straight to the FTSE SmallCap index a collapse not seen since the dotcom days.

But of course, if you want to find the biggest confidence rattlers of all, you have to go straight to the government. The loss of half the population's personal details, which are either lying in a drawer somewhere in the HMRC building, or more worryingly, in the hands of crooks, is not going to make people feel very secure, nor will they have much faith in our rulers. And when people feel insecure and have little faith in the government, their confidence and thus their spending takes a knock.

It all adds up. And with the stock markets plunging and the credit turmoil growing ever worse in the background, I'd say we're very close to a turning point if we've not already reached it.

Turning to the wider markets...

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An early slide on Wall Street worsened losses for London's blue-chip stocks yesterday. The FTSE 100 fell 155 points to close at 6,070, with property and financial stocks amongst the biggest losers. For a full market report, see: London market close

On the Continent, the Paris CAC-40 lost 125 points to end the day at 5,381. And in Frankfurt, the DAX-30 was 111 points lower, at 7,518.

Acrosss the Atlantic, US stocks closed sharply lower as further uncertainty in the financial sector - along with the oil price closing in on $100 - encouraged investors to take profits ahead of today's Thanksgiving holiday. The Dow Jones fell 211 points to close at 12,799. The tech-rich Nasdaq was down 34 points, at 2,562. And the S&P 500 had lost 22 points to end the day at 1,416.

In Asia, the Japanese Nikkei was 51 points higher, at 14,888, today. And in Hong Kong, the Hang Seng was 613 points lower, at 26,004.

Crude oil futures rose as high as $99.29 a barrel in New York yesterday but had fallen back to $97.45 this morning. And in London, Brent spot was at $95.08.

Spot gold gained over $6 yesterday on the weaker dollar and rising oil price yesterday and had extended its gains to $804.70 this morning. And silver was at $14.48.

In the currency markets, the pound was at 2.0642 against the dollar and 1.3901 against the euro. And the dollar was at 0.6738 against the euro and 108.73 against the Japanese yen.

And in London this morning, Kesa Electronics - owners of UK electrical retailers Comet - announced that sales growth slowed in the the third quarter as higher interest rates began to curb consumer spending. Growth was 3%, compared to 3.9% in the first half.

Finally, our recommended articles for today...

Why Greenspan blames Russia for the housing bubble

- Alan Greenspan, on Fox Business News promoting his new book has, once again, refused to admit that the housing bubble was down to his policy of interest rates cuts. This time, he's blaming the collapse of the Soviet Union... For more on how Greenspan is seeking to blame everyone but himself for the current mess - and why even he is suggesting that gold standards may be better than central banks, read: Why Greenspan blames Russia for the US housing bubble

Can the US avoid recession?

- There is no doubt that America's current account deficit of c6.5% needs to be reduced to a more sustainable level of around 2%. But will the process plunge the US into a recession? Jeremy Batstone looks at what the impact of previous adjustments has been: Can the US avoid recession?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.