Charles Hugh Smith points out that in some areas, property values have already dropped by over 70% from their heady 2006 peak.
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Tuesday, March 30, 2010
Sunday, March 07, 2010
House prices - Wave 2
Karl Denninger looks at recently-failed US banks and by comparing their asset valuations with losses charged to the Federal Deposit Insurance Corporation discovers that they overvalued their properties - at the time of failure.
If you add up the nominal assets of the three banks - $903 million - and downgrade them to their real value as implied by the losses borne by FDIC - $602.3 million - you will find the collective assets were overvalued by 49.9%. In other words, current estimated real estate values should be cut by 33.3%.
These were banks operating in (now) economically distressed states - Florida, Illinois (both with official unemployment rates at or exceeding 11%), Maryland (over 7 % unemployment), so you can't necessarily apply that regrading to the whole of the USA.
Nevertheless, those states are relatively heavily populated, and so are the others now showing high rates of unemployment - see this US population map. So it may well be that the US housing market in general may need to be reassessed. If, as Denninger says, he is "generous" in estimating houses to be overvalued by 25%, that means we need to cut nominal prices by 20%.
This is borne out to some extent by reported house sale prices - see this real estate website - though the Northwest has shown a rise (why?).
And then we have to consider properties repossessed by lenders but not sold, and owners who are sitting on their properties and refusing to sell.
The UK, with its much more densely-populated land, maybe somewhat different; but I think that when all the recent financial stimuli stop and we get past the next General Election, we may see clearer evidence of declining valuations here, too.
ADDENDUM (10 March):
A counter-argument would be that the FDIC has applied a "forced-sale" valuation, as with individual or company insolvency. On the other hand, the FDIC must be in no hurry to overstate its obligations/losses - its own finances are already very shaky - and there are already many forced residential property sales actually ongoing, so the regrading of assets may to some extent reflect actual market conditions.
If you add up the nominal assets of the three banks - $903 million - and downgrade them to their real value as implied by the losses borne by FDIC - $602.3 million - you will find the collective assets were overvalued by 49.9%. In other words, current estimated real estate values should be cut by 33.3%.
These were banks operating in (now) economically distressed states - Florida, Illinois (both with official unemployment rates at or exceeding 11%), Maryland (over 7 % unemployment), so you can't necessarily apply that regrading to the whole of the USA.
Nevertheless, those states are relatively heavily populated, and so are the others now showing high rates of unemployment - see this US population map. So it may well be that the US housing market in general may need to be reassessed. If, as Denninger says, he is "generous" in estimating houses to be overvalued by 25%, that means we need to cut nominal prices by 20%.
This is borne out to some extent by reported house sale prices - see this real estate website - though the Northwest has shown a rise (why?).
And then we have to consider properties repossessed by lenders but not sold, and owners who are sitting on their properties and refusing to sell.
The UK, with its much more densely-populated land, maybe somewhat different; but I think that when all the recent financial stimuli stop and we get past the next General Election, we may see clearer evidence of declining valuations here, too.
ADDENDUM (10 March):
A counter-argument would be that the FDIC has applied a "forced-sale" valuation, as with individual or company insolvency. On the other hand, the FDIC must be in no hurry to overstate its obligations/losses - its own finances are already very shaky - and there are already many forced residential property sales actually ongoing, so the regrading of assets may to some extent reflect actual market conditions.
Wednesday, August 19, 2009
The long crisis, and the rediscovery of the family
Calculated Risk plots the actual and projected change in demographics from 1950 to 2050, adds the observation that over-65s cost 3 times as much in medical care as their juniors, and the rest is future history.
Meanwhile, Leo Kolivakis looks at the looming meltdown in US pension schemes, mirroring what's going on now in the UK.
Long term, it looks like down with house prices (since the younger generation will have much less free income to take on debt) and (thanks to the oldies' rising income need) down with stocks.
Nurture your young.
Meanwhile, Leo Kolivakis looks at the looming meltdown in US pension schemes, mirroring what's going on now in the UK.
Long term, it looks like down with house prices (since the younger generation will have much less free income to take on debt) and (thanks to the oldies' rising income need) down with stocks.
Nurture your young.
Sunday, August 09, 2009
Interpreting US LTV problems
"Almost one-third of all U.S. households have no mortgage. If you adjust for that, the 70-80 percent debt-to-equity ratio suddenly becomes a major challenge because it means that the two-thirds who do have a mortgage already face a debt-to-equity ratio in excess of 100%. Even worse, once the mean reversion has run its course, two-thirds of US households will be facing a debt-to-equity ratio of 120-125% on average. U.S. CONSUMERS ARE EFFECTIVELY BROKE."
New Deal (htp: Credit Writedowns)
Has he got this right?
And how about us in Britain? Can anyone make sense of it for me?
New Deal (htp: Credit Writedowns)
Has he got this right?
And how about us in Britain? Can anyone make sense of it for me?
Monday, August 03, 2009
What's happening to houses?
Mish gives us a few interesting graphs on the US housing market and asks whether it's hit bottom yet. I did leave a comment but it disappeared, so here's the gist:It looks as if most of the air has come out of the balloon - in the US. Houses doubled in 5 years, and in some cities have now halved again.
As the tide recedes, it uncovers evidence that the market is segmented - look for example at New York compared to the others. The "best" areas are holding up better, and I'll bet the best houses within those areas ditto.
I think this segmentation will continue to be important, because of growing inequalities of wealth. This has been going on over there since 1980, but also historically (as Fischer in "The Great Wave" points out) the rich get comparatively richer in times of crisis.
I also think that the not-the-best-but-better-than-average housing sector will enjoy support for some time, because I suspect that there are not a few people downshifting from the most sought-after areas. These will be aware that they could have got more if they'd sold in 2007 (when I was mooting a caravan to my dearest), but have still done okay and so will not haggle too hard to get that nice little place in the country, especially since many sellers are hanging on stubbornly, waiting for an upturn.
Here in the UK, we have much less land available for residential development, and nothing like the oversupply of housing that exists in the US, so quite possibly our house price bottom will not be so deep. Of course, if our government hadn't encouraged the (legal and illegal) import of masses of poor people who also need a roof over their heads, the picture might have been somewhat different.
In both countries, we still face long-term economic decline; lower real wages as we continue to lose our manufacturing sector, higher energy and food prices and so on. So I expect house prices to continue their decline in real terms over the next generation.
On average, that is. I think we can take the Blair's real estate coup in Connaught Square as not untypical of what will happen in the best end of the market. Speaking of whom, I note that Tony's practising the "sneer of cold command" these days. Pitiable, really.
Monday, July 20, 2009
House prices to sink further
Barry Ritholtz gives his reasons why house prices will continue to drop - 15% to the mean, probably more - say 20%? (htp: Michael Panzner)
But the market is segmented. Maybe it'd be more useful to discuss the projected impact on different regions and price brackets.
But the market is segmented. Maybe it'd be more useful to discuss the projected impact on different regions and price brackets.
Wednesday, July 15, 2009
We own you
The Big Picture selects several articles for us on US debt.
This one points out that to balance the US budget with borrowing, new bonds must be sold totalling 3 times the amount issued last year. Bearing in mind that there's less money around, and that people are getting nervous about America's credit rating, inflation and the value of the dollar on the international market, it seems very unlikely that this new debt auction would succeed; and if it did, it would have to be on the basis of higher interest rates, to factor-in the various increased risks.
Alternatively, it's time for the repo man - with a twist. Nassim Taleb and Mark Spitznagel suggest that banks could take part of homeowners' equity in exchange for lower interest rates. But if houses continue to decline in price? I bet the banks have thought of that, so if such a scheme were introduced, they'd want a bigger share than most homeowners would be willing to give them. My guess is that when houseowners realize that the market isn't going to turn soon, there'll be more voluntary bankruptcies and doorkeys in the post. That, plus rising and lengthening unemployment could set off the domino chain.
But returning to the Sprott analysis, note that late last year, 28% of US debt was foreign-owned. Look out for some form of debt-for-equity here - if not the sale of equities, then in the form of favours and concessions. He who pays the piper calls the tune.
This one points out that to balance the US budget with borrowing, new bonds must be sold totalling 3 times the amount issued last year. Bearing in mind that there's less money around, and that people are getting nervous about America's credit rating, inflation and the value of the dollar on the international market, it seems very unlikely that this new debt auction would succeed; and if it did, it would have to be on the basis of higher interest rates, to factor-in the various increased risks.
Alternatively, it's time for the repo man - with a twist. Nassim Taleb and Mark Spitznagel suggest that banks could take part of homeowners' equity in exchange for lower interest rates. But if houses continue to decline in price? I bet the banks have thought of that, so if such a scheme were introduced, they'd want a bigger share than most homeowners would be willing to give them. My guess is that when houseowners realize that the market isn't going to turn soon, there'll be more voluntary bankruptcies and doorkeys in the post. That, plus rising and lengthening unemployment could set off the domino chain.
But returning to the Sprott analysis, note that late last year, 28% of US debt was foreign-owned. Look out for some form of debt-for-equity here - if not the sale of equities, then in the form of favours and concessions. He who pays the piper calls the tune.
Thursday, June 25, 2009
Cash vs the stock market: an inconvenient truth
Friday, June 19, 2009
Commercial real estate to crash?
Giant retailer Tesco has just sold and leased back 12 stores, netting £430 million (£458m, according to another source). This comes on top of another such move 10 months ago, which brought in another £605 million from 13 properties.
There's various ways you could interpret this - e.g. it could be a way to deflect criticism of Tesco's powerful position in the retail commercial property market, which some say has been used to prevent competitors setting up near their own outlets. But there are cheaper ways to deal with critics.
I think this billion-pound bet may be a straw in the wind - or perhaps an uprooted tree in the mighty gale - portending a significant fall in commercial property values.
There's various ways you could interpret this - e.g. it could be a way to deflect criticism of Tesco's powerful position in the retail commercial property market, which some say has been used to prevent competitors setting up near their own outlets. But there are cheaper ways to deal with critics.
I think this billion-pound bet may be a straw in the wind - or perhaps an uprooted tree in the mighty gale - portending a significant fall in commercial property values.
Saturday, June 13, 2009
The housing market: qualifying my comments
Like many others, I'm in the habit of talking about "the housing market" in general terms. Surely this is no more helpful than talking about the average person's health, or the average temperature and climate of the Earth. In reality, there's a host of niches and scenarios - it's a sort of ecological system.
The London-based retiree looking for a bungalow in the South or South-West; the cereal packet family-of-four headed by a breadwinner; the pair of teachers deciding whether one can afford to go part-time; the buy-to-renter who sold out in time; the one who didn't; the rich guy dashing off a cheque for a Park Lane house to add to his international collection; the divorcee who bought out her ex-husband's share of the family home because she just can't let go; the car worker who's just lost his job; the Last Of England emigrant; the oldie looking for a sheltered housing apartment.
Houses sold by estate agent, by private treaty, by auction; houses sold, repossessed, swapped, abandoned, divided, combined, left as legacies, sold for care costs, seized by the law, occupied by squatters; flats, terraced houses, semis, detached dwellings. Brick and mortar, cruck, stone, straw bale, genuine and mock Tudor, eco.
Houses in central London, the London boroughs, the Home Counties, the provinces, Wales, Scotland and South-West; houses in thriving, decaying and recovering cities; in towns, villages, hamlets, lonely moors, islands; even a house on a pair of rocks on Newquay's beach.
How can one generalise meaningfully?
The London-based retiree looking for a bungalow in the South or South-West; the cereal packet family-of-four headed by a breadwinner; the pair of teachers deciding whether one can afford to go part-time; the buy-to-renter who sold out in time; the one who didn't; the rich guy dashing off a cheque for a Park Lane house to add to his international collection; the divorcee who bought out her ex-husband's share of the family home because she just can't let go; the car worker who's just lost his job; the Last Of England emigrant; the oldie looking for a sheltered housing apartment.
Houses sold by estate agent, by private treaty, by auction; houses sold, repossessed, swapped, abandoned, divided, combined, left as legacies, sold for care costs, seized by the law, occupied by squatters; flats, terraced houses, semis, detached dwellings. Brick and mortar, cruck, stone, straw bale, genuine and mock Tudor, eco.
Houses in central London, the London boroughs, the Home Counties, the provinces, Wales, Scotland and South-West; houses in thriving, decaying and recovering cities; in towns, villages, hamlets, lonely moors, islands; even a house on a pair of rocks on Newquay's beach.
How can one generalise meaningfully?
Why I think house prices must continue to fall
The West doesn't save enough and has borrowed too much, so it's going to be a moneylender's market. So, either:
- Interest rates go up, to make it worthwhile for lenders to continue financing us. This will cut into take-home pay and make it more difficult to service large mortgages. House prices will drop, and so, eventually, will rents.
- The government will continue pumping cash into the system, one way or another. Our currency will depreciate further. Imports will become more expensive - and we import essentials like food and fuel. Since we have let our industries wither, we cannot quickly turn to providing for our own needs. So prices will soar and remain high for a long time. This will cut into take-home pay and make it more difficult to service large mortgages. House prices will drop, and so, eventually, will rents.
"Eventually" is happening now, as it happens. We were looking for a place to rent, found one on the Internet at £595/month, looked round it last week and the agent handed us a details sheet with the asking rent: £450.
Wednesday, May 06, 2009
Gold, and theft by inflation
A killer graph here from Charles Hugh Smith. Interestingly, the steady real decline of average incomes begins at almost exactly the same time as Nixon shut the "gold window".Smith's take is that "the speculative mania in housing was fundamentally a tragic last-gasp effort to make up lost ground via speculation in housing". And if housing reverts to mean, it has a long, long way to go yet.
Monday, April 13, 2009
Protecting against inflation
Before we start, please read my disclaimer above!
How do we protect our little wealth against inflation? The gold bugs still enthuse, and it's true that if you'd sold the Dow and bought gold at the start of 2000, and bought back into the Dow now, you'd have multiplied your investment by 5:
True, the Dow merely held its value over that time (though it also made some sharp gains and losses) - but gold disappointed. I think this may be because, when prices are roaring up, people start looking for a yield, which of course the inert metal cannot provide.
The massive rise in the price of gold anticipated the inflation of post-1974, and those who got in at the right moment were very well protected. It's also interesting to see what happened to the Dow in the '71 - '74 period - a fall, from which the Dow did not recover (in inflation terms).
Before we start blaming the "G-dd-mn A-rabs" for inflation, let's remember the inadequately-reported fact that monetary inflation was roaring for several years beforehand. The OPEC price rise was a reaction intended to protect the Saudis' (and others') main asset - and you'd have done the same. Yes, it happened suddenly, but like an earthquake, it merely released long-pent-up stresses. Instead, let's blame a goverment that failed to control its finances generally, and spent far too much on war - a retro theme back in vogue today, it seems.
Looking at it from an investor's point of view, once the preceding monetary trend was identifiable, going overweight in gold in the early 70s would have been a sensible precaution.
So I suggest that gold's value as an inflation hedge is for those who anticipate well in advance. And this may be the lesson to draw in relation to the present time:
The inflation protection has already been built-in, for those who bought gold at the right time. The rest of us should note that gold is now above the long-term post-1971 trend:
There may indeed be a spike, as in 1980 - but that's for speculators. For the average person, who wants a "fire-and-forget" longer-term investment, I can't say gold looks like a bargain now.
Nor would I be that keen to get into the stockmarket, unless you're a day-trader. Some may make a killing in the present turbulence, but many will get killed. I'm still looking for that Dow-4,000 moment, and as I explained above, even then it's possible I may lose 50% - 75% in the short-to-medium term.
What else?
Houses? Still too pricey, in relation to average income. Yes, some houses are now selling - it's a thriving auction business at the moment, I understand. But again, housing is above trend.
Bonds? No, indeed. Municipal bonds in the US are offering high yields, for a very good reason; and even national bonds are a worry. The debt has not been squeezed out of the system, since our cowardly politicians have absorbed it into the public finances instead.
Here in the UK, we have National Savings & Investments Index-Linked Savings Certificates (3- and 5-year terms). Between them, a couple could get £60,000 into that haven, and not many of us have that much. I'm not sure about the rules and limits for US equivalent (TIPS), but the general argument applies. Yes, there is the question of how the government will choose to define inflation, but I don't suppose the definition will get too Mickey-Mouse.
Besides, doubtless you'll keep some cash for emergencies (including sudden bank closures), and for bargains (e.g. looking for distressed sales).
And if you've got lots more cash than the rest of us, congratulations, since the rich will get substantially richer. There's no being wealthy like being wealthy in a poor country, or one that's getting poorer. Watch that Gini Index rise.
How do we protect our little wealth against inflation? The gold bugs still enthuse, and it's true that if you'd sold the Dow and bought gold at the start of 2000, and bought back into the Dow now, you'd have multiplied your investment by 5:
But looking at the historical relationship between the Dow and gold, it seems the Dow is already below par.
When Nixon closed the "gold window" (15 August 1971), gold ceased to be a currency backing and became just another thing you could choose to invest in, so let's compare these assets from a little before that turning-point, onwards:
The gold-priced Dow is now well below average. So what are we to make of (I think) Marc Faber's recently-expressed view that an ounce of gold will buy the Dow?
That depends on whether you read this as a statement about gold, or about the Dow. I looked at the Dow in inflation (CPI) terms a while back (December 2008):
If we are in a downwave, then the Dow's bottom is still a lot lower than where it stands now. Extrapolation is always risky, but my curve indicates maybe 4,000 points as its destination. Having said that, the highs of the years 2000 and 2007 are so much higher than might have been extrapolated, that maybe the low will be correspondingly lower. A real pessimist might argue that, adjusted for inflation, the Dow might test 1,000 or 2,000 points sometime in the next few years.
Back to gold-pricing: it's also notable that the Dow is currently still worth some 8 ounces of gold, but in previous lows (Feb. 1933, March 1980) fell below 2 ounces:
So should we still pile into gold, as a hedge against the further collapse of the Dow?
I think not. Firstly, the Dow may well have a rally, since it's fallen so sharply in such a short time. And secondly, this is missing the point, which is that we are looking to protect wealth against inflation, not against the Dow.
So another question is, how does gold hold its value during periods of price inflation? A period some readers may have lived through, is that after the oil price hike of October 1973. Here is what happened in the 5 years from 1974 to 1978:
True, the Dow merely held its value over that time (though it also made some sharp gains and losses) - but gold disappointed. I think this may be because, when prices are roaring up, people start looking for a yield, which of course the inert metal cannot provide.But let's wind the clock back just a little - let's go back to that closing of the gold window again, and see what happened between August 1971 and the end of 1978:
The massive rise in the price of gold anticipated the inflation of post-1974, and those who got in at the right moment were very well protected. It's also interesting to see what happened to the Dow in the '71 - '74 period - a fall, from which the Dow did not recover (in inflation terms).Before we start blaming the "G-dd-mn A-rabs" for inflation, let's remember the inadequately-reported fact that monetary inflation was roaring for several years beforehand. The OPEC price rise was a reaction intended to protect the Saudis' (and others') main asset - and you'd have done the same. Yes, it happened suddenly, but like an earthquake, it merely released long-pent-up stresses. Instead, let's blame a goverment that failed to control its finances generally, and spent far too much on war - a retro theme back in vogue today, it seems.
Looking at it from an investor's point of view, once the preceding monetary trend was identifiable, going overweight in gold in the early 70s would have been a sensible precaution.
So I suggest that gold's value as an inflation hedge is for those who anticipate well in advance. And this may be the lesson to draw in relation to the present time:
The inflation protection has already been built-in, for those who bought gold at the right time. The rest of us should note that gold is now above the long-term post-1971 trend:There may indeed be a spike, as in 1980 - but that's for speculators. For the average person, who wants a "fire-and-forget" longer-term investment, I can't say gold looks like a bargain now.Nor would I be that keen to get into the stockmarket, unless you're a day-trader. Some may make a killing in the present turbulence, but many will get killed. I'm still looking for that Dow-4,000 moment, and as I explained above, even then it's possible I may lose 50% - 75% in the short-to-medium term.
What else?
Houses? Still too pricey, in relation to average income. Yes, some houses are now selling - it's a thriving auction business at the moment, I understand. But again, housing is above trend.
Bonds? No, indeed. Municipal bonds in the US are offering high yields, for a very good reason; and even national bonds are a worry. The debt has not been squeezed out of the system, since our cowardly politicians have absorbed it into the public finances instead.
Here in the UK, we have National Savings & Investments Index-Linked Savings Certificates (3- and 5-year terms). Between them, a couple could get £60,000 into that haven, and not many of us have that much. I'm not sure about the rules and limits for US equivalent (TIPS), but the general argument applies. Yes, there is the question of how the government will choose to define inflation, but I don't suppose the definition will get too Mickey-Mouse.
Besides, doubtless you'll keep some cash for emergencies (including sudden bank closures), and for bargains (e.g. looking for distressed sales).
And if you've got lots more cash than the rest of us, congratulations, since the rich will get substantially richer. There's no being wealthy like being wealthy in a poor country, or one that's getting poorer. Watch that Gini Index rise.
Friday, March 06, 2009
Is now a good time to invest?
I've just been asked by a client whether he should switch from cash to equities. Here's my view, and it may explain why I haven't earned much from investments over the last few years:
It is not possible to predict the market with any accuracy, but I think I have done well in foretelling the current state of affairs as early as the late 1990s. The market has dropped to half its 1999 peak (again, as it did in 2003), but that is not to say we are now at the bottom. Some (and I am moderately persuaded to this view) think that there may be a "bear market rally" soon-ish - maybe a rise that recovers perhaps 50% of the losses so far - but it is perfectly possible that the underlying trend is still downwards, so there may then be a horrid lurch towards - what? Maybe, ultimately, 4,000 on the Dow and 2,000 on the FTSE.
We are in the middle of an exciting ride and I fear that entering the market at this stage may still be for the adventurous and nimble. Yes, had one invested in mid-2003 and got out, say, late 2007, it would have turned a nice profit; but much depends on the entry and exit points. So as ever, attitude to risk and corresponding watchfulness are key factors.
There is also the question of what asset class to choose. I think domestic and commercial property are still overvalued, relative to income; because of fears regarding other assets, and also because of central bank investment ("quantitative easing" etc) government bonds are very highly priced, which is why the yields are so low (and if interest rates rise, bond values could then drop sharply); equities are depressed, but as dividends decline in very testing economic conditions, they may ultimately be depressed still further. Commodities (e.g. gold, silver, oil) are the subject of some speculation, but owing to shortage of borrowed money to invest with, not quite so much institutional speculation as formerly; even so, gold (for instance) is a bit above its long-term inflation-adjusted average, as far as I can tell - though if inflation takes off, the price could indeed escalate.
And then there is the question of currencies. The pound has lost heavily against the dollar; but some say the dollar may catch us up again. The Euro may also not stay as strong as it is now - several countries within the Eurozone are suffering economic problems and are hampered by the common currency; I have even read speculation that the Euro system may fall apart within a decade, or some states may secede from it.
In short, I still urge caution, and if you do decide to get in, be prepared to move quickly if the market should turn. Meantime, there are relatively safe options such as National Savings Certificates, including the index-linked ones that will at least keep the value of your savings roughly in line with RPI...
It is not possible to predict the market with any accuracy, but I think I have done well in foretelling the current state of affairs as early as the late 1990s. The market has dropped to half its 1999 peak (again, as it did in 2003), but that is not to say we are now at the bottom. Some (and I am moderately persuaded to this view) think that there may be a "bear market rally" soon-ish - maybe a rise that recovers perhaps 50% of the losses so far - but it is perfectly possible that the underlying trend is still downwards, so there may then be a horrid lurch towards - what? Maybe, ultimately, 4,000 on the Dow and 2,000 on the FTSE.
We are in the middle of an exciting ride and I fear that entering the market at this stage may still be for the adventurous and nimble. Yes, had one invested in mid-2003 and got out, say, late 2007, it would have turned a nice profit; but much depends on the entry and exit points. So as ever, attitude to risk and corresponding watchfulness are key factors.
There is also the question of what asset class to choose. I think domestic and commercial property are still overvalued, relative to income; because of fears regarding other assets, and also because of central bank investment ("quantitative easing" etc) government bonds are very highly priced, which is why the yields are so low (and if interest rates rise, bond values could then drop sharply); equities are depressed, but as dividends decline in very testing economic conditions, they may ultimately be depressed still further. Commodities (e.g. gold, silver, oil) are the subject of some speculation, but owing to shortage of borrowed money to invest with, not quite so much institutional speculation as formerly; even so, gold (for instance) is a bit above its long-term inflation-adjusted average, as far as I can tell - though if inflation takes off, the price could indeed escalate.
And then there is the question of currencies. The pound has lost heavily against the dollar; but some say the dollar may catch us up again. The Euro may also not stay as strong as it is now - several countries within the Eurozone are suffering economic problems and are hampered by the common currency; I have even read speculation that the Euro system may fall apart within a decade, or some states may secede from it.
In short, I still urge caution, and if you do decide to get in, be prepared to move quickly if the market should turn. Meantime, there are relatively safe options such as National Savings Certificates, including the index-linked ones that will at least keep the value of your savings roughly in line with RPI...
Thursday, February 26, 2009
Still a bear, for now
A letter to the Spectator (unpublished), posted here on 2nd November 2008. We seem to be edging towards the "unsurprising", though the market may give a leap of denial before then:
Sir:
Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.
A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.
But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.
Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.
In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.
Sir:
Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.
A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.
But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.
Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.
In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.
Monday, December 01, 2008
Cruising for a losing
Mish's graph suggests houses could lose another 40% or so over the next 7 years.
Sunday, November 02, 2008
Yet another letter to the Spectator
Sir:
Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.
A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.
But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.
Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.
In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.
Your leader (“Riders On The Storm”, 1 November) suggests that current investor sentiment is “excessively negative”. That depends upon one’s historical perspective, in both directions.
A reversion to the mean (over the last generation) for UK house prices would be some 3.5 times household income, which on 2007 figures would imply average valuations around £120,000. Turning to shares, the progress of the Dow over the past 80 years (adjusted for consumer prices) indicates that a return to 6,000 points should be unsurprising, and a low of 4,000 not impossible.
But in addition to the business cycle and recurrent bubbles, there are deep linear changes at work. While maintaining the Western consumer in his fantasy of idle wealth, the East has been building up its human and physical industrial resources. We are focussing on the present recession, but not what the world will look like afterwards. When Asia has sufficiently developed its domestic demand, it will lose its enthusiasm for US Treasury debt, and the credit markets will tear at our economies with higher interest rates. Already, the search is well under way for an alternative to the US dollar as a world trading currency; and foreign investors, sovereign wealth funds and oil-rich governments are building up holdings in our bellwether businesses (e.g. Barclays Bank), thus converting imbalance into equity and exporting our future dividends.
Besides, the Dow and FTSE companies derive an increasing proportion of their income from abroad, so stock indices no longer reflect national prosperity. Real wages have stalled, and seem set to decline against a background of rising inflation and global competition; this, plus an interest rate correction, might strengthen the downward trend for house prices.
In short, successive governments have failed to repair our economic structure, and bear market rallies notwithstanding, I think we must eventually recalibrate our measures of normality.
Saturday, September 27, 2008
$700 billion: cui bono?
Hunter in the Daily Kos (HTP: my brother) says that the $700 billion rescue plan has no relation to the (much smaller) likely amount of mortgage defaults; instead, it's designed to prop up the derivatives scam that banks have been running for years.
I've thought recently that the bankers and traders are, in effect, being offered absolution without confession (1), restitution (2), doing penance (3) or a "firm purpose of amendment" (4).
1. Full disclosure of all liabilities and "assets"; admission of each person's part in the debacle. This should be Watergate Plus: there's a lot more than four burglars and the damage to third parties is incalculable.
2. Preferably, repayment of past bonuses awarded at a time when the recipient knew, or ought to have known, that the game was destabilising his own firm and the national economy.
3. Ideally, jail time, for some; at least, loss of office for those responsible.
4. Adoption of regulations designed to maintain the value of the currency and prevent future speculative bubbles.
From time to time we hear the defence that the consumer was at fault, too. Perhaps, if you're thinking about home equity withdrawals; but even the boll weevil is "just looking for a home" as Leadbelly sang, and when banks opened the money sluices house prices doubled. The buyer had no option to purchase a home at 2002 prices in 2007 (and I'm not sure what happened to the cost of rent in that time). The lenders should have known what they were doing; the poorest borrowers were not their equals in expertise. There was a duty of care.
What would houses cost, if it had always been illegal to use them as collateral for debt? What would the US and UK economies look like, if the vast sums sunk into housing had gone into small business enterprises? How much wealthier would we be?
I've thought recently that the bankers and traders are, in effect, being offered absolution without confession (1), restitution (2), doing penance (3) or a "firm purpose of amendment" (4).
1. Full disclosure of all liabilities and "assets"; admission of each person's part in the debacle. This should be Watergate Plus: there's a lot more than four burglars and the damage to third parties is incalculable.
2. Preferably, repayment of past bonuses awarded at a time when the recipient knew, or ought to have known, that the game was destabilising his own firm and the national economy.
3. Ideally, jail time, for some; at least, loss of office for those responsible.
4. Adoption of regulations designed to maintain the value of the currency and prevent future speculative bubbles.
From time to time we hear the defence that the consumer was at fault, too. Perhaps, if you're thinking about home equity withdrawals; but even the boll weevil is "just looking for a home" as Leadbelly sang, and when banks opened the money sluices house prices doubled. The buyer had no option to purchase a home at 2002 prices in 2007 (and I'm not sure what happened to the cost of rent in that time). The lenders should have known what they were doing; the poorest borrowers were not their equals in expertise. There was a duty of care.
What would houses cost, if it had always been illegal to use them as collateral for debt? What would the US and UK economies look like, if the vast sums sunk into housing had gone into small business enterprises? How much wealthier would we be?
Thursday, September 25, 2008
Sell your house now?
If Karl Denninger is right and the long-term trend for house prices is 3 times income, instead of 5 or 6 as it seems to be now, then houses remain overpriced in real terms.
So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?
So even though house sales are seizing up and prices dropping, shouldn't we go ahead and sell anyway?
Thursday, August 28, 2008
A snippet from Alice
Just a reminder from Alice's powerful Picasa presentation on house price trends (see also her Youtube version - top of sidebar).Advisers and analysts who haven't been in the game long enough to yellow their teeth, may be emotionally unprepared for severe and enduring reversals of fortune.
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