News of John Sergeant's resignation from Strictly Come Dancing hit the markets hard last night and this morning. In the US the Dow Jones fell by more than 400 points, closing at its lowest level since March 2003. This morning, markets in Asia followed suit.

It is hard to believe a dance competition could have such a dramatic impact on the value of stocks.

But, now it is time to let you into a secret. It appears that the Come Dancing hero's shock departure wasn't the only event in the news yesterday. No doubt traders in Japan were distressed over the development; no doubt traders in New York were up in arms over comments made by the competition's judges; but it appears there were other, even more dramatic, events behind the latest financial panic.

You have probably got the message about deflation now. And if you are an avid reader of this newsletter, you probably saw it coming. But confirmation came in the form of the most dramatic data yet, this time from across the pond. US consumer prices fell faster than a tumbling dancer in October, dropping by a full percentage point. The annual headline figure for US inflation fell from 4.9 to 3.7 per cent. It seems certain the index tracking annual US inflation will fall some more in November, and may well go negative within weeks of that date when the victor of this year's Come Dancing competition is chosen.

You can't have it both ways of course. For months we have been told that it is not headline inflation that matters, rather it is underlying inflation with energy and food taken out. Well, even core prices fell in October, not by much it is true - they fell by 0.1 per cent - but, quite frankly, any fall in this index is a rare event indeed. It appears prices of vehicles fell by 0.7 per cent in the month, clothes by 1 per cent, while the cost of hotel rooms fell by a stunning 1.6 per cent.

For the organizers of Strictly Come Dancing, this news is mixed. Sure, it will be cheaper in terms of dollars to put their judges up in American hotels; sure, it will cost less to travel the country; and sure, the costumes may be a tad cheaper; but then since the pound has fallen even more sharply, the sterling cost will actually have risen.

Maybe, instead, they should consider buying a house, rather than renting a room in a hotel.

US housing starts reached their lowest level ever recorded in October. In all, the annual rate fell to just 791,000, from 820,000 in September. Capital Economics said: "The number of permits being issued fell to 708,000, suggesting that the slide in residential construction activity will continue over the coming months. At this rate activity will be down to zero soon."

Fears are also growing over the fate of the big US car makers. And here the markets provided yet more evidence to demonstrate how illogical they are. As you know, a share price is supposed to reflect all future dividend flow from a specific company, with future dividends discounted to provide a net current value. One of the reasons given for yesterday's fall relates to fears that the US government will not bail out the Detroit Three: GM, Ford and Chrysler. There is no doubt, if the three US car makers go under, the knock-on effect will be enormous. The short-term costs of the three companies going bust will be high indeed. Yet, there are good reasons to believe that in the long-term, corporate America will be better off if the companies go under. The vacuum which is left by the collapse of these companies will eventually be filled by new, dynamic businesses.

In the long-term, the collapse of the Detroit Three may be good, so why then are US and Asian shares, which are supposed to reflect long-term dividend flow, lower as a result of fears the US government may not rescue the three companies?

But here is the really worrying news. Both the X Factor and that celebrity programme in the jungle featuring famous and not so famous people eating live bugs, are due to come to an end soon. Just imagine the financial implications if one of the favourites is voted out early - what then?

According to research from Mintel, amongst wealthy Brits (those with at least £100k to invest) one in every four is planning to take a gamble and expand their investment portfolio in the very near future. This begs the question, of course, what are the three in four who are not planning to invest thinking. Maybe they are saying to themselves: "I am an investor, get me out of here."

©2008 Investment and Business News. All Rights Reserved.

Things are not like they used to be. Take as an example, code breaking. Sixty years ago, cracking the Enigma code involved a massive military operation.

More recently, Alan Greenspan was magnificent at it. He once said: "If I’ve made myself clear, you must have misunderstood me."

The European Central Bank was less subtle. It established a form of words, dropping a word here and there meant rates were either going up or down at the next meeting. Use of words like ‘accommodating’, could hint at future rate changes one or even two months ahead.

But the Bank of England didn't bother with code when last it sat. It dropped one huge warning to the government - and its plans for a massive Keynesian push.

This is what the minutes of the latest meeting said on the matter: "The Government had already announced its intention to bring forward some planned spending commitments. Moreover, the changing composition of output would lead to a fall in effective tax rates from those assumed in the projections. Consequently, it would make sense for the Committee to reassess the required scale of monetary easing after the Chancellor's Pre-Budget Report."

Or, to put it another way, if the government spends too much, then future interest rate cuts will be smaller than they would otherwise have been.

The minutes also revealed the bank's Monetary Policy Committee contemplated an unprecedented 2 per cent rate cut. It appears the factor which stayed its hand were fears that such a move would send the markets, especially the currency markets, into panic. Plus fears that the chancellor would go too far in his Pre-Budget.

So, it seems an odds-on cert that rates will fall again soon, and maybe by quite a bit. Whether rates will fall to 1 or even zero per cent does depend. There seems to be a real danger that the combination of massive government borrowing and falling interest rates could send sterling into a tailspin. This could make it impossible for the UK government to raise the money it needs to fund planned spending. This could in turn enforce hikes in the rate of interest.

For economic policy in the UK, this trade off between the need to kick start the economy and the danger of creating an unprecedented crash in sterling, will be the key factor underlying all major decisions.

©2008 Investment and Business News. All Rights Reserved.

And from waltzing markets, to interest rates doing a tango, and ballroom government spending, it is now time to foxtrot further to the east.

Well, in one case, not very far to the east, more down a bit - towards Spain, where the latest set of GDP data was revealed yesterday.

But from there we need to look a lot further to the east, to the land of the bear, and the incredibly-shrinking Russian reserves.

Spanish GDP contracted in the third quarter. It fell by minus 0.2 per cent, from a 0.1 per cent rise in the previous quarter. To put this in context, in the final quarter of last year it expanded by 0.6 per cent.

Household spending fell by 1 per cent, investment by 1.9 per cent and imports contracted by 0.8 per cent.

The only real surprise is this. The crisis in Spain has been on the cards for a very long time. Certainly there have been articles here for 18 months or longer warning as much. Yet until very recently, forecasters were talking about a slowdown, the most pessimistic said growth would still be positive.

It just goes to show, forecasting is only any good when things don’t change much. Sure, forecasters can predict a slowdown, an easing in pace, but economic models just can't begin to predict anything unusual. In other words, they are most unreliable in the areas where we need them the most.

As for Russia, that island of stability - as the country's prime minister recently described it - money is leaving its foreign reserves faster than you can say Vladimir Vladimirovich Putin.

Russia is stuck between a rock and a hard place.

On one hand, a strong ruble is seen as vital for maintaining confidence in the Russian economy - hence Vlad's comment about an island of stability.

But, in 1998 it made the mistake of trying to prop up the ruble and throwing foreign exchange at the problem until it was bankrupt.

Capital Economics has taken a look and concluded as follows: "If oil prices remain at $50pb and capital continues to flow out of the country apace, the ruble may need to fall by 50 per cent in order to balance Russia's external position."

And yet, says Capital Economics: "… despite the precipitous slide in the oil price, there is not yet a consensus amongst policymakers in favour of letting the currency fall at all."

Russia's problem really comes down to what economists call the Dutch disease, so named after oil exports pushed the Dutch guilder so high that other domestic export businesses in Holland suffered. Russia’s ruble is too strong for its indigenous manufacturers to be able to compete on the world stage. Its long-term stability requires a much cheaper currency.

©2008 Investment and Business News. All Rights Reserved.

Analysts had been holding their breath this morning. They were waiting for the release of the latest data on retail sales and, sure enough, the ONS duly obliged.

At first glance, it looked rather like something of a damp squib. Until, that is, you take a closer look, and all of a sudden the data looked more akin to a giant squid, sitting in the comer of the living room.

During October, retail sales fell by 0.1 per cent. Analysts had been expecting a 0.9 per cent fall.

As for annual growth, High Street spending rose by 1.9 per cent in the year to September, from 1.7 per cent in the year to October. So, all in all then, not a bad set of statistics.

Until, that is, you observe the giant squid in the living room.

Sales volume for non-food stores fell by 1.1 per cent.

The truth is, though, there has never been a Christmas like this one. Today, Marks and Spencer is having a special one-day sale - unprecedented for this time of they year. Woolworths is up for sale: price tag - £1.

It seems that this Christmas, pressies will be thin on the ground - but the real clincher will be what happens in the New Year.

It is clear the UK's retail scene is set to change. The falls we are seeing to date are small compared to what we will see. The UK had become over reliant on its High Street, and we are set to see a permanent adjustment.

But all those state of the art shopping centres across the land have one potential USP. Britain could yet become the shopping Mecca for Europe. If the High Street really wants to build itself a future, it needs to learn how to attract shoppers from across the seas.

©2008 Investment and Business News. All Rights Reserved.