England in the grip of deflation except for over-bought stock market

Now back in England for my summer vacation and I am shocked by the discounting and bargains available everywhere in shops, restaurants and even car rentals.

On arrival at Heathrow the car rental compound was full of executive models that nobody wants to hire, and after a brief haggle $100 in additional payment secured a small Merc. This premium used to be $3-500.

Price deflation

In the local shops there are deals on deals and offers on sale prices. It is incredible, and still sales volumes are down so the impact on total revenues must be huge. As for restaurants again voucher deals and two-for-one is the name of the game.

House prices appear to have stabilized over the past few months. But a survey from the Housebuilders Federation – not usually known for being negative on prices – says prices have another 20 per cent to fall over two years. The real teller is the volume of house sales – down 50 per cent on a year ago even in Central London where prices have been rising slightly.

So many businesses are clearly in trouble then you have to wonder why the UK stock market is currently so high. It is confounding the experts. The phrase ‘bear market rally’ comes to mind.

Money printing

It looks as though some of the liquidity created by printing money is finding its way into the stock market. But this is an obvious mini-bubble and could come to an end as soon as next week. The slightest bit of bad news would pop the bubble and even the most casual observer can see all is not well in UK plc right now.

If there is any sign of inflation and not deflation then it is in the commodities sector with things like oil and sugar expensive. But you have to wonder if that is not another bubble that could also quickly deflate in a renewed financial crisis.

In the 1930s the crisis came in several waves and we might have a third one to come now. Certainly markets seem set up for a crash rather than a further recovery. The final wave of the 30s was devastating because it was so unexpected.

This summer investors seem to have succumbed to premature over-optimism and that is highly dangerous. To cash out now and cash back in when there is blood on the streets this autumn sounds a solid strategy but how many will actually do it, let alone put in short positions? Buy and hold does not work in falling markets.