Nasty sting hints at trouble ahead for club investors

JUNE may be the turning point for the investment club's fortunes but its closing bell had a nasty sting in the tail for us.

With the bond bulls getting spooked due to scary European inflation of 4 per cent, the price of gilts fell from a high on the third last trading day, where the club would have been ahead, to a low on the final day that put us into negative territory. But for this egregious final day, the club's unit price would have held its ground. However, it closed down 2p at £1.36. So why am I optimistic about the club's future?

While the club is well placed to benefit from any economic downturn due to the subprime losses, there have been no real signs of one in the economy yet. Up to now any loss of capital, like Northern Rock's trouble in September 2007, has been countered by the Bank of England helping out with up to £100 billion of taxpayers' money. It followed this with other injections of capital into the UK banking system and one of up to £50bn that was actually nearer £100bn.

Against these injections of capital the losses even in the three worst-hit sectors – banks, builders and property – are minimal. For instance, huge falls suffered by shareholders – £32bn in Barclays, £4.2bn in Barratt and £5bn in Land Securities – added together still only translates into a tiny minority loss as opposed to a paper loss because very few investors will have bought at the top and sold at the bottom.

Therefore, the impact on the real economy is minimal, even if you add up all the losses on the stock market and property market. It takes a substantial fall in share prices to start affecting the economy. That is why in the past the amount of money being lost in the economy was closely matched by the amount of money being created in the economy.

Accordingly, while the financial media has been talking the economy into a recession since HSBC fired its head of US mortgage lending 16 months ago as losses reached $10.5bn, we really need to see the largest companies in the UK getting into difficulties and the stockmarket falling by up to 50 per cent before an economic slowdown is truly under way.

Now, though, the biggest companies are suffering. Southern Cross, Britain's largest care home operator, has failed to meet bank debt payments. Taylor Wimpey, Britain's largest builder, needs hundreds of millions to stay afloat. Pendragon, Britain's largest car dealer, is cutting about 500 jobs. John Charcol, Britain's largest mortgage broker, is shutting outlets and cutting jobs.

So non-paper-money losses are starting to mount and it's Britain's biggest companies that are suffering. Not only that but the FTSE100 is now starting to follow a path close to the one outlined by my paper and pencil analysis back in March. In due course things will get so bad that there will be no-one wanting to borrow money, interest rates will drop dramatically, maybe to 2 per cent and the club will prosper.

So, with the economy now actually going into recession, should the club be thinking about buying into bus companies, as I said I would last month when the FTSE reached current levels? Unfortunately my criteria were not met in June so the outcome will be in August's update. I hope you will tune in to find out.