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With the Bank of England base rate being cut last week to 1.5%, meaning the base rate is at it’s lowest level ever, I think it’s worth having a think about some predictions of where the base rate may head in the coming year.

The first thing that I think is worth noting is the state of the economy, as I believe this is driving the interest rate decisions by the Monetary Policy Committee. As is stated on the Bank of England website, the job of the Monetary Policy Committe is to set interest rates such that the inflation targets can be met.

However, the inflation target on the Bank of England homepage is 2%, and the current inflation rate is 4.1%, so clearly at the moment it’s not just the inflation rates that are influencing their decisions. With a new inflation report due out in six days time, which may provide evidence of falling inflation, it could be a little quick to judge the decisions made so far.

The second thing that I think is worth noting is the state of the credit markets. The banks are still not lending to each other, as they are still worried about the levels of exposure to “toxic debt” that each may be concealing. In light of this, the libor rates are still very high compared to the base rate. Will we see new mortgage lending rates coming down in line with the base rate? Will the banks start lending money again, such that the economy may make a swift recovery?

Base Rate Predictions 2009

My predictions for this year are that the base rate will in the first half of 2009 fall down to 1%. This may be in 0.25% steps spread over the following five announcements. We’ll then see at least three to six months of base rate at 1%. In the final quarter of 2009, we may see a 0.25% rise, if indicators about the economy are positive.

Base Rate Predictions 2010

For 2010, I think the base rate will slowly rise in the first six months, probably to about 1.5%, gently increasing the cost of borrowing, to try and slowly halt any inflationary pressure that may build up in 2009. Assuming we’ve had one and a half years of unprecedented low interest rates, in the second half of 2010, I think we may see some big jumps (half point / three quarter point) to bring the base rate back up to 2% 2.5%. Bearing in mind that as recently as November 2007 the base rate was at 5.75%, this is still unusually low.

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In one of his latest speeches on our current economic ills, David Cameron had two very concrete proposals regarding savers and pensioners.

One was that basic rate taxpayers should not incur any tax liability on the interest paid on their savings.

Now that would get my vote every time. For many a long year now I have railed (quietly) against what I saw as the unjustified fiscal theft of interest from small savers and in particular, in times of high inflation.

Why do I say some taxation of interest is unjustified?

Historically most, if not all, of interest paid on deposits has simply acted to restore the real value of the sum deposited against the effects of inflation. My contention has always been that this restorative element should not be taxed as income, in principle it is more akin to the payout of an insurance policy.

Some time back, the government themselves acknowledged this by their way of taxing Capital Gains.

Before Gordon Brown saw a way to increase the tax take - or maybe it really was to simplify the taxation of capital gains - capital gains tax was applied only to the real gain made upon the disposal of a taxable asset. In calculating the gain, the original cost of the asset was increased in line with retail price inflation from the month of acquisition to the month of disposal.

In effect that part of gain caused by inflation was ignored and not taxed.

David Cameron’s proposal maybe goes further than that, but how long will it last if real interest rates reappear?

Given today’s seemingly ever plummeting base rate it looks as if we are now back in the days where the rate of interest is less than the rate of retail price inflation. That’s why I only give David Cameron two and a bit cheers for his proposal – I’ll leave the rest of the accolade for the day when we see a return to positive real interest on savings.

In the meantime we should encourage our political leaders to adopt this proposal as a fair method of treating small retail savers. Be assured, as I am, that those with deeper pockets have always found ways to redress this iniquity.

Punish savers and make them spend money was published in the Opinion columns of The Times on Thursday 8th January by Anatole Kaletsky exhorting us to ignore the advice of David Cameron and as individuals to spend our way out of this current recession.

Whilst admitting that this sounds paradoxical Mr Kaletsky nevertheless “explains away the paradox” by claiming that weak debtors should be replaced with strong ones – presumably meaning those prudent individuals who are capable of living within their means and have not buried themselves in a welter of unnecessary debt during the last decade or so in spite of the unrelenting sales pressure on the part of the banks to do so.

My own humble opinion is that this is complete and arrant nonsense.

There are institutions within our economic system whose primary function used to be to match retail savers with good sound long term borrowers who were ideally investors in the productive economy. The expectation being that the vast majority of these long term investors would meet their interest and capital repayments from the return on their investment.

These institutions used to take an interest in the probability that the borrowers would be able to fulfil that expectation and would generally be reluctant to advance funds to those they deemed unlikely to meet that goal.

We usually refer to this type of institution as a Bank. Somewhere along the way both Mr Kaletsky and many of our banks seem to have lost the plot.

It is about time that these institutions recognised their prime function and got on with it, if necessary with a few digs from David Cameron. (Probably the worst thing about this whole mess is that I find myself agreeing with a politician!)

Until recently we were told that Consumers’ Credit was already too high, how is now sensible to increase it even further?

I don’t object in the slightest to the idea that government should bring forward spending on infrastructure that will better equip us as a nation to take full advantage of the next upswing of the economy, all credit to them if they can.

I do not see how the idea that weak debtors can be replaced with strong debtors will help us at all, they are both bad types of debt, and as such, it is a recipe for compounding the present disastrous situation and should be dismissed out of court.

So there we are Carry On Saving! If you can!

Maybe in years to come we will have the comedy version of current events featuring the good old British film industry and those stalwarts of the Ealing and Pinewood Studios to help us forget how bad the good old days of the early 21st century really were!

No prizes for suggesting who would play wicked Gordon!

I’ve just spent about half an hour reading a very interesting landing page on the Elite Option Trader website which explains how they are able to pick winners almost every time and make huge profits by trading options.

I enjoyed reading the webpage, found it very interesting, and almost believeable, however, I don’t think I’ll be signing up. You see, the sorts of profits they talk about are very good, which makes me wonder “Why on earth would they be willing to share this with others?”.

They state that you can turn $2,000 into $91,771 in just seven weeks time. That’s fine, if it’s true, then I’m absolutely jealous of anyone that does have the ability to get a 4589% return on investment in just seven weeks!

The only problem with it is that they go on to show how they’ve come to this conclusion, and it is in showing you their calculations that I cannot help but think that this is just another “easy money scheme”, whereby the website owners make “easy money” by “scheming” to dupe unfortunate suckers out of a hefty yearly subscription fee. Incidentaly, the subscription fee for this is $1,500 normally, but is currently being offered with a 47% discount, yours for only $795 per year.

So what makes me so sceptical about the system? It’s the blatant sales techniques used on the landing page. Let me give you an example, they show you a list of trades done in a particular month that made the following returns:

• 168%
• 41%
• 360%
• 164%

What’s more, they say that if you started with $2,000, and multiplied it by the gains, and then repeated for all four plays, you would eventually have ended up with $91,771. Surely this is not a wise strategy? Even bums that spend their days in the local betting shop know that when they’ve won some money on a game or a race, then only spend the winnings, or if they need to gamble more, they only gamble with their winnings.

If I were to follow their plays and assuming I’d started with the same $2,000 as they suggest, I would have made the following, slightly less risky plays:

• $2,000 investment, returns 168% profit of $3,360
• $3,360 investment, returns 41% profit of $1,378
• $1,378 investment, returns 360% profit of $4,961
• $4,961 investment, returns 164% profit of $8,136

By following this strategy, you would have made a far safer $17,835 profit, and what’s more, the original $2,000 stake would have been returned, meaning from then on you were only speculating with the winnings. And what’s more, from the 2nd trade on, you had returned your original investment of $2,000 and crystalised the profit of $3,360 on the first trade, by only using the profit that was generated on the 2nd trade, which was staked by the profit of the first trade.

If their advert (as I guess that’s the only use of their Google landing page) had been a bit less bullish about the returns, and demonstrated a more conservative approach, I might have been hooked. As it was, I felt that this was simply a get rich quick style scheme, designed to entice unsuspecting readers into signing up for their subscription.

I watched the news this lunchtime, which was all about the Bank of England base rate cut, and how it is the lowest interest rate since the Bank of England was founded in 1694. This is therefore an unprecedented period in the history of the UK economy.

Most of the focus during the bulletins about the base rate cut seemed to focus on the negatives, which seem to be that the banks are still not lending to each other, they’re not attracting any foreign investment funds because the returns are too low now thanks to the cuts in the base rate, and the perennial moan about the banks not lending to businesses and consumers.

Typical of the media not to focus on any of the positive news that comes from this announcement today, such as the fact that around half of UK properties that are mortgaged are on tracker rates. As such this vast number of homeowners and landlords will find themselves with more disposable income, which is good news for the UK economy (assuming that some of that money trickles back into the economy in the form of increased consumer spending).

When you consider that only as recently as November 2007 the base rate was up at 5.75% (BOE lowered to 5.5% in December 2007), means that in just fourteen months, we have seen a 4.25% reduction in the base rate, or in terms of the average UK mortgage of £150,000, a saving of £531.25 a month in interest. Surely this would have been a far more positive spin on todays Bank of England announcement, given the recession and numerous stories of businesses entering administration and laying off staff.

I’m quite different from most property investors, well most people for that matter, as I get excited when property prices fall, because, to me, falling property prices is great news. Many people find that odd, after all I own a few properties - surely I’ll be losing a lot of money? Well yes you could argue I’ve lost money when the property prices fall, but my personal financial philosophy is that a house is a business/asset (in that it is capable of producing a cash flow) and as such that I plan never to sell a house - at least not one that is capable of producing a positive cash flow, which should be all of them if I’ve done my due diligence before buying.

My “never sell a house” approach applies to my own homes too, when buying a house (as a home) I consider not just it’s suitability for my family, but also the potential to rent it out in future/when we move on. Again the reasons are relatively simple, if we sell the house we’ll almost certainly end up doing so through an agent (we don’t have time to sell privately) which will cost between 1% and 2% of the price achieved, we’ll also probably have to pay a fee to close the mortgage (probably a couple of hundred pounds). In return we’ll get a pot of capital (our equity) to invest elsewhere, or to use as a deposit on the next house.

If instead however we kept the house (assuming we’d brought with consideration to the rental possibilities) we could rent it out and receive an income from the property. Admittedly the income is likely to be relatively small initially, but it will grow over time as rents rise and in the long term property prices are also likely to rise, so any capital gain is likely to increase. In short if you don’t need the deposit for your next home, then I believe you should never sell your house. Instead rent it out.

I have always been fascinated by the share options, ever since I studied them during my degree in accountancy. As in most academic studies, we were taught the various methods for determining option pricing (Black Scholes springs to memory), the difference between put options and call options, and when each type should be used.

The part I never really understood, was if you buy an option to hedge your position, surely then someone else has to sell the other position, which implies they leave their position exposed. Now since then, I have gone onto do my own studying and learnt a bit more about this subject (but am by no means an expert). Principally, I was first introduced to the concept of writing options by Robert Kiyosaki’s Rich Dad’s Retire Young, Retire Rich book.

In his book, he explains how he is able to write options on stock that he does not hold, making a nice quarterly passive income. He also goes on to explain that this is not risky because the options he was writing, were for stock of a company he wanted to own anyway, and that the profit he makes from writing the options for the previous quarters would be used to acquire the stock in the event of the options excercised by the owner of the options.

I have come to learn that this strategy is called a buy-write, because the writer is obligated to buy the stock at the strike price, if the option is excercised. The opposite of this is a covered-call, whereby the writer of the option already owns the underlying stock, and is writing a call option to sell the stock at the strike price should the option be excercised.

So how could these strategies be used to make money, and what risks are attached to each strategy?

Buy Write Strategy and Risks

To make money using the buy-write strategy, it seems you have to agree to buy up shares of a company you want to own anyway, and then make money from selling your obligation to buy the shares at the strike price.

The risks with this strategy are that you could be obligated to buy shares in a company whose share value is taking a nose-dive. So for example, you may be obligated to buy 10,000 shares in a company that normally trades at £10, but your option is excercised when the share price hits £9, meaning you need to stump up £90,000 to meet your obligation under the contract. Now if the shares plummet to say £2 (as some UK bank shares did last year), you could be £70,000 down on the transaction (of course you could hang onto the shares and hope for them to recover).

Covered Call Strategy and Risks

This is where you agree to sell shares that you already own, at the strike price, to the owner of the call option you wrote. Sounds simple enough. If you own the shares already, and are happy with them, it may seem stupid to sell them, however, this is a strategy for increasing the returns on your existing shares, by making extra money by writing the call options.

For example, if you owned the same 10,000 shares that are currently worth £10 a share, and you were able to sell a call option for 10,000 shares at a cost of £5,000 each quarter, then you are making passive income (assuming the option is not excercised) of £20,000 a year. This is over and above any dividend income you may be receiving from the shares as well.

The risks with this strategy are that your shares my drop in value, but that is a risk with holding onto any shares, so is not confined to this strategy. The risk that is inherent in this strategy is the opportunity cost associated with being obligated to sell a share that is sky-rocketing.

For example, if you own 10,000 shares which are currently worth £1 a share. On the back of some good news about the company, the share price quadruples to £4 a share. If you weren’t obligated to sell the shares under the option contract, you could have hung on and sold for £3 a share profit, but instead, may have to sell at £1.50 (for example), thus the contract has an opportunity cost of £2.50 / share in this instance.

Hopefully this rudimentary explanation of how options trading from the point of view of writing the options, rather than simply buying and selling them offers an insight into how to make extra money from existing shares, and also how to earn money without even owning the shares. I don’t profess to be an expert in options trading, but found this option traders journal website to be very useful.

I read with interest in The Times over the weekend that the Chancellor is considering another bailout package for Britains Banks. When will the government learn, the banks in this country are taking their money and running with it!

The evidence is clear in the amount of lending being done during the last quarter of 2008 that despite the governments best efforts to get credit flowing freely again, the banks are simply not playing ball. I wonder why this is though?

Is this simply a case of banks trying to take the government for a ride? One minute saying

“yes, we’ll start lending money willy nilly as long as you (the govt) bail us out”

And then as soon as the deal is done, deciding to renege on their promises to the government, and simply stashing the money away and building up their capital reserves, at the expense of Jonny Taxpayer and a naive government no less.

Or is it simply that as a nation, there is now not enough “good credit risk” customers out there, only swathes of “poor credit risk” customers, whom the banks no longer wish to lend to anymore? I suspect it’s a bit of both, banks probably do want to stash money away, build up their reserves, and lend at higher margins than previously, whilst the government would like the banks to start lending freely (as this would potentially boost spending in the wider economy), the banks can’t comply if in doing so, they end up repeating the same mistakes which caused the credit crunch in the first place.

There has been talk of the government starting a new, nationalised bank, that would buy up all the other banks’ bad debt, thus cleansing the financial system of all the toxic debt that has been causing so many problems for the past eighteen months or so. Even this may not help the situation, if the real problem comes down to there being a lack of credit worthy individuals or businesses to lend to.

So perhaps the reality of 2009 is that we will all have to improve our credit ratings, which will allow the banks to lend to us again, thus resolving the current financial crisis. Doesn’t bode well for the government - who seem to think that bankrupting the country, by borrowing heavily to fund spending on public works and job creation schemes is the way to stave off a serious recession - if the banks will only lend to those with excellent credit records (who generally don’t need to borrow money).

Finding spare cash to save (and invest) is quite a challenge for many people, unfortunately. However for many there’s an easy way to find an extra £20-£50 or even more per month to invest - pay your bills on time!

Simply put, paying your bills on time will reduce the level of late payment fees you pay. Given such late payment fees range from £10 to £50, that alone could be a significant saving on each bill. On top of that, the easiest way to make sure you’re not going to be late paying is to switch to direct debit payments and many companies, especially the utility providers, offer a discount if you pay by direct debit, which could save you another £10-£50 per month.

Additionally if you pay by direct debit you’ll usually know what you will be paying and when. You can then schedule your payments to ensure you don’t go overdrawn and incur interest charges on your bank account, or if you’re already overdrawn don’t exceed your overdraft limit and incur additional over-limit charges.

With the new year well and truly here, I’m sure there are many of us who have made new years resolutions such as:

Quit smoking, detox, lose weight, blah blah blah

The usual resolutions that in most cases won’t last until the end of January. If you are to make any new years resolutions, this year especially, it should be to manage your monthly outgoings, reducing them where possible, to ensure you are not overspening. What with the credit crunch affecting the availability of credit (though you should really ask yourself, is that such a bad thing?), and the economy in a worse state than Gazza on a night out, this year is going to be a tough one!

Now if you have a fairly stable job or business that provides you with a predictable income each month, then there is no reason why you can’t get through it. Yes, you will have to tighten your belts and watch what you spend your money on, but with a bit of careful consideration to your spending habits, there is no reason why it has to be a real struggle.

I have a monthly budget spreadsheet which I use to keep a track of my monthly outgoings. I find this useful, as it enables me to see how much disposable income I have each month to spend on whatever I like. Without knowing how much money is earmarked for important outgoings like rent, bills, debts, groceries etc, you can easily get into a mess with your finances.

If you make one new years resolution to stick to this year, commit to sorting your finances out, by monitoring your monthly outgoings, reviewing them to reduce them where possible and set your household budget so that you don’t overspend. If you do overspend, you may find things very difficult this year, as lenders are less and less willing to dish out easy credit, especially where the credit is to be used as a way of living beyond your means and overspending.