Steve Moyer gives a pretty clear (occasionally a bit aerated) potted history of the woeful train of events, over the ten years from the start of the technology stock boom to the popping (and it's only just started) of the real estate bubble.
Nobody had to invest in tech stocks, but we all have to live somewhere. A bubble in housing is really pernicious, because it has implications for almost everyone.
Low interest rates inflated property prices, which led to much larger mortgages. Deflating valuations by raising interest rates would trap many mortgage-holders who have taken on big loans and kept up a good credit history so far.
Therefore, unless the government is willing to deal with the political pain of accelerated mortage defaults, interest rates must now stay low-ish for a long time. So I guess that credit risk will be adjusted not by price, but by access: it will simply get harder to find a willing lender. If there is less lending, then that (it seems to me) is deflationary.
I don't believe that the burden of the monster mortgage will be reduced by rapid general inflation of both wages and prices as in the 70s and 80s. Increased world demand for food and energy will inflate prices, but globalisation means that for many - especially the poorer sort - wages won't keep up. The cost of housing will be a generation-long millstone around the neck.
Inflating the currency won't help. It will reduce the wealth of savers, but if we are importing not only luxuries but (increasingly) necessities, inflated wages will be gobbled up by inflated import prices.
Some may argue that currency debasement will make our exports more competitive. But for a long time now, manufacturing industry has been disappearing like snow in midsummer. Even if our export prices should become more competitive because of foreign exchange rates, domestic productive capacity has shrivelled: whole factories and shipyards have gone abroad, and the related human resources have withered, too. You can't reconstruct the proletariat and their workplaces overnight. Gone are the days when the Midlands engineering worker tinkered with metal in his garden shed, showing his son how to use the tools. Half a mile from where I live, one of the big engineering plants set up by the Birmingham-based Lucas family was taken over first by the Italian Magneti Marelli, then by the Japanese super-corp Denso, and now it's been stripped of its machines and will be demolished to make way for... housing. Goodness know how the mortgages on them will be paid.
I think Karl Denninger is right: the banks must be made to eat some of the debt they fed us. Either they will be ruined, or we shall be.
Thursday, March 06, 2008
They knew it was coming
Karl Denninger looks at the cash-rich balance sheets of non-financial companies, many of which could now pay off all their bank debts from the kitty. Whatever they may have been telling you, it looks as though they've been voting with their wallets.
Tuesday, March 04, 2008
Eat what you cooked
Karl Denninger comments on the proposals to make banks write down some outstanding capital on loans, to secure what's left of the banking system. Painful, but it might save the day.
I wouldn't say it's impossible. America has more resilience and capacity to renew than its envious enemies wish to believe.
Good luck.
I wouldn't say it's impossible. America has more resilience and capacity to renew than its envious enemies wish to believe.
Good luck.
Sunday, March 02, 2008
Subprime hitting GSEs
Karl Denninger comments trenchantly on a new scheme by "Fannie Mae", the government-sponsored mortgage lender: "Homesaver Advance" takes the borrower's missed mortgage payments and puts them into an unsecured loan, thus "healing" the credit history so that home lending can continue as if (as if!) everything were normal. Denninger sees this as a signal to "short" Fannie Mae.
But over a period, Denninger has moved on from trying to exploit such market weaknesses, to urging his fellow citizens to protest about the corruption of the financial system. His tone is now getting darker - like Jeffrey Nyquist, he's beginning to worry about international relations, for example the way that China's population pressure may threaten Russia's land. Lhasa 1950, Khabarovsk and Irkutsk when?
But over a period, Denninger has moved on from trying to exploit such market weaknesses, to urging his fellow citizens to protest about the corruption of the financial system. His tone is now getting darker - like Jeffrey Nyquist, he's beginning to worry about international relations, for example the way that China's population pressure may threaten Russia's land. Lhasa 1950, Khabarovsk and Irkutsk when?
Which crank are you?
In turbulent times, we get an increase in prophets, astrologers, clairvoyants, magicians and mountebanks. Perhaps we can place more reliance on the significance of their appearing, than on the things they have to say.
"Deepcaster", who I think of as the Nostradamus of finance, often refers to a shadowy clique he calls The Cartel; if only one could identify them - or him! But there is some basis for the paranoid - for example, who owns the Federal Reserve does indeed seem to be a secret; though I doubt the chairman strokes a white cat. Here are some of Deepcaster's tips for economic survivalism:
Keep a significant portion of your wealth in tangible assets including Precious Monetary Metals (in amounts subject to timing considerations) and Strategic (e.g. Crude Oil) and select agricultural commodities which the public needs and regularly uses...
Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearing house guaranteed? And how strong is the clearing house?
“Go local” in banking, and commercial, and essential goods supply relationships. “Self reliance” and “local reliance” are key goals...
Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel-initiated takedowns...
Stay informed...
Since we're going back to the Seventies, here's Al Stewart's 1973 cult Nostradamus lyric (from Past, Present and Future). There's always a little frisson in old mortality. Speaking of which, Jeffrey Nyquist returns to his Cassandran theme of America as ancient Athens on the brink of the Peloponnesian catastrophe.
I shouldn't laugh too much at all this. The vibrations of the First World War were, I think, felt in the art and music of the years before it; and the millennarian gloom of Eliot's Waste Land (1922) was also only a few years ahead of economic, social and military turmoil. The current flock of seers and chanters may be like the restless sheep before the earthquake.
"Deepcaster", who I think of as the Nostradamus of finance, often refers to a shadowy clique he calls The Cartel; if only one could identify them - or him! But there is some basis for the paranoid - for example, who owns the Federal Reserve does indeed seem to be a secret; though I doubt the chairman strokes a white cat. Here are some of Deepcaster's tips for economic survivalism:
Keep a significant portion of your wealth in tangible assets including Precious Monetary Metals (in amounts subject to timing considerations) and Strategic (e.g. Crude Oil) and select agricultural commodities which the public needs and regularly uses...
Attempt to make, although it may be very difficult, an evaluation of counterparty strength. Regarding options, for example, are they clearing house guaranteed? And how strong is the clearing house?
“Go local” in banking, and commercial, and essential goods supply relationships. “Self reliance” and “local reliance” are key goals...
Develop an investing and trading regime for certain key tangible assets markets to minimize or avoid the impact of Cartel-initiated takedowns...
Stay informed...
Since we're going back to the Seventies, here's Al Stewart's 1973 cult Nostradamus lyric (from Past, Present and Future). There's always a little frisson in old mortality. Speaking of which, Jeffrey Nyquist returns to his Cassandran theme of America as ancient Athens on the brink of the Peloponnesian catastrophe.
I shouldn't laugh too much at all this. The vibrations of the First World War were, I think, felt in the art and music of the years before it; and the millennarian gloom of Eliot's Waste Land (1922) was also only a few years ahead of economic, social and military turmoil. The current flock of seers and chanters may be like the restless sheep before the earthquake.
A pound to a penny
Adrian Ash points out that against gold, the British pound is now less than 1% of its value in 1931.
Why there are no customers' yachts
Hedge fund and investment trust managers sit on a big pile of money and a small percentage creamed off still means a handsome living. But Daniel Amerman maintains that's not the biggest advantage they have over you. As he shows with worked examples, shrewd use of the rules of the game can turn a real investment loss into a substantial gain.
By borrowing money at preferential interest rates, and writing-off the interest as a business expense, they can multiply the amount invested, reduce taxation and massively boost the return on the original capital. All is well as long as prices go up, and Amerman sees this a huge incentive to continue the inflation in financial assets: the system demands it.
His conclusion, in general terms, is to ignore the usual fairytales told to the small investor, work out how the con really operates, and exploit it. He thinks you should be in tangible assets, and understand the implications of taxation and inflation for your portfolio .
Michael Kilbach echoes that with respect to commodities, though like me, he thinks there'll be a step back before the next jump:
In the long term we believe prices are heading much higher and we are therefore looking for pessimism in the precious metals market before adding to our positions. We sell into extreme optimism. We understand that we could miss out on an opportunity to have more invested for a short term move higher, and we are willing to risk losing that opportunity. Rather than trying to catch up to the current markets move we try to anticipate the next markets move.
By borrowing money at preferential interest rates, and writing-off the interest as a business expense, they can multiply the amount invested, reduce taxation and massively boost the return on the original capital. All is well as long as prices go up, and Amerman sees this a huge incentive to continue the inflation in financial assets: the system demands it.
His conclusion, in general terms, is to ignore the usual fairytales told to the small investor, work out how the con really operates, and exploit it. He thinks you should be in tangible assets, and understand the implications of taxation and inflation for your portfolio .
Michael Kilbach echoes that with respect to commodities, though like me, he thinks there'll be a step back before the next jump:
In the long term we believe prices are heading much higher and we are therefore looking for pessimism in the precious metals market before adding to our positions. We sell into extreme optimism. We understand that we could miss out on an opportunity to have more invested for a short term move higher, and we are willing to risk losing that opportunity. Rather than trying to catch up to the current markets move we try to anticipate the next markets move.
Don't take on gunslingers
A client raised an important point some weeks ago: when he decides to sell or switch his holdings in a collective investment (e.g. an insurance bond or pension), the company wants to receive the authorisation in writing, by which time it could be too late. The traders can act straight away, on the price they see on their screens.
Paul Lamont echoes this in SafeHaven:
The Wall Street Firms will know if the Ambac deal fails long before investors. We commented last April: "As the editor of The Commercial and Financial Chronicle in November of 1929 reported on the Great Crash, 'the crowd didn't sell, they got sold out.' The trading desks of the Wall Street Firms will cash out as the panic develops, the lady in Omaha will be stuck on the phone with a busy signal... To avoid this, investors should be moving now to financially healthy institutions and buying U.S. Treasury Bills."
You can't outdraw the fast hand, but you can get out of town when you hear he's coming.
Paul Lamont echoes this in SafeHaven:
The Wall Street Firms will know if the Ambac deal fails long before investors. We commented last April: "As the editor of The Commercial and Financial Chronicle in November of 1929 reported on the Great Crash, 'the crowd didn't sell, they got sold out.' The trading desks of the Wall Street Firms will cash out as the panic develops, the lady in Omaha will be stuck on the phone with a busy signal... To avoid this, investors should be moving now to financially healthy institutions and buying U.S. Treasury Bills."
You can't outdraw the fast hand, but you can get out of town when you hear he's coming.
Creak... squeak... pop!
This and more is in the latest ContraryInvestor piece on SafeHaven. Almost all of the above is concentrated in a mere five banks.The tone is not doomster:
The world is not about to come to an end. Through adversity is born opportunity for those prepared both emotionally and financially.
As with Northern Rock, I expect that when calamity strikes, the bank directors and financial regulators will still have good payoffs and pensions. What a tolerant society we live in.
Friday, February 29, 2008
What the rubber mat said
I sat in my clients' office yesterday afternoon, waiting for them to arrive. The office had lovely new desks; as it turned out, not new, but taken from another business that has recently closed.
The reason for the delay - at least for one of the directors - was a last-moment requirement for tico rubber, needed next morning for anti-vibration matting under a five-ton machine that was being re-sited. The usual supplier, a major international concern, has recently shut down the closest depot to Birmingham. Rationalisation. Outsourcing. Globalization.
So while waiting, I tried to help my client find the material somewhere else. Googling away, we found it in the far north of England, or Cornwall; too far. Maybe just possibly in Market Harborough or Leicester? On calling the nearer companies, specifications and stock levels were doubtful.
My clients' business is contrarian: they move machines, and although originally that meant from one UK site to another, more often now it involves sending them abroad. As the decline of British manufacturing industry has accelerated, they've been very busy recently. For obvious reasons, the bonanza will end sometime.
But back to the matting. Once, suppliers of components you needed would be close at hand. Now we could be looking at journeys to the ends of the country - meaning cost, delay and maybe, sometimes, a lost contract.
The Pearl River in China is now home to myriads of small manufacturers, and the synergy improves everyone's productive capacity. Like it used to in Birmingham, "city of a thousand trades". But now in the UK, we could be dropping below the threshold of economic viability for manufacturing industry.
That's what the mat said to me.
The reason for the delay - at least for one of the directors - was a last-moment requirement for tico rubber, needed next morning for anti-vibration matting under a five-ton machine that was being re-sited. The usual supplier, a major international concern, has recently shut down the closest depot to Birmingham. Rationalisation. Outsourcing. Globalization.
So while waiting, I tried to help my client find the material somewhere else. Googling away, we found it in the far north of England, or Cornwall; too far. Maybe just possibly in Market Harborough or Leicester? On calling the nearer companies, specifications and stock levels were doubtful.
My clients' business is contrarian: they move machines, and although originally that meant from one UK site to another, more often now it involves sending them abroad. As the decline of British manufacturing industry has accelerated, they've been very busy recently. For obvious reasons, the bonanza will end sometime.
But back to the matting. Once, suppliers of components you needed would be close at hand. Now we could be looking at journeys to the ends of the country - meaning cost, delay and maybe, sometimes, a lost contract.
The Pearl River in China is now home to myriads of small manufacturers, and the synergy improves everyone's productive capacity. Like it used to in Birmingham, "city of a thousand trades". But now in the UK, we could be dropping below the threshold of economic viability for manufacturing industry.
That's what the mat said to me.
What's your house worth?
Home prices WILL contract so that the median house is 2.5-3x the median income
says Karl Denninger. Now do your sums.
Some interesting comments and suggestions (including my usual twopenn'orth) on this post at the Capitalists@work blog - people seriously discussing inflation hedging and survivalism, here in the UK. We're getting beyond ivory-tower discussion.
says Karl Denninger. Now do your sums.
Some interesting comments and suggestions (including my usual twopenn'orth) on this post at the Capitalists@work blog - people seriously discussing inflation hedging and survivalism, here in the UK. We're getting beyond ivory-tower discussion.
Tuesday, February 26, 2008
Beyond gold
This blog by Thomas H. Greco looks interesting. The author, an American, has taken the trouble to address a convention in Malaysia on currency issues,and you'll recall that they're trialling the gold dinar in the province of Kelantan.
Greco thinks that modern technology may let us keep accounts of exchanges without having to resort to traditional forms of currency. I suppose this could be similar to Local Exchange Trading Systems. It's also interesting that he's featured and commented on Ron Paul's proposal that currency systems should be allowed to compete. Greco even looks at Air Miles as one candidate!
Greco thinks that modern technology may let us keep accounts of exchanges without having to resort to traditional forms of currency. I suppose this could be similar to Local Exchange Trading Systems. It's also interesting that he's featured and commented on Ron Paul's proposal that currency systems should be allowed to compete. Greco even looks at Air Miles as one candidate!
Going down
Another grizzly, this time Captain Hook:
You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.
[...] Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market. Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. [...] It's a simple numbers game, where an aging population is less prone to take on debt.
He considers the possibility of a Japanese-style asset deflation, which gels with my earlier thoughts regarding a generation-long UK property slump.
You should know that when banks begin to fail in the States, and they will, things could spiral out of control to the extent controls will to need be placed on both digital and physical movement. Transfers between banks will cease up completely, debts will be called in (so pay them off now), systems from food distribution to medical care will break down, and Martial Law will be the result as the population retaliates. Life will change as you know it.
[...] Japan has never really escaped the credit crunch that gripped their economy back in the 90's after bubblizing the real estate market. That's the tell-tale-sign a bubble economy is on its last legs you know - when master planners need resort to bubblizing the real estate market. Generally it's all down hill after that on a secular (long-term) basis because this is a reflection of not just a turn in the larger credit cycle; but more, and the driver of credit growth in the end, this is the signal demographic constraints have turned negative. [...] It's a simple numbers game, where an aging population is less prone to take on debt.
He considers the possibility of a Japanese-style asset deflation, which gels with my earlier thoughts regarding a generation-long UK property slump.
Monday, February 25, 2008
Place your bets
Peter Navarro lays out three global economic scenarios and their effects on different asset classes. The grid looks a bit like the betting board for roulette, or possibly craps. At any rate, a good tool for helping you decide.
To me, decoupling seems the least likely at this stage; I don't feel the rest of the world has yet built up demand sufficient to be unaffected by the loss of the American consumer. But what do I know.
I'm guessing the first scenario for a while, followed by the third when governments panic.
To me, decoupling seems the least likely at this stage; I don't feel the rest of the world has yet built up demand sufficient to be unaffected by the loss of the American consumer. But what do I know.
I'm guessing the first scenario for a while, followed by the third when governments panic.
Sunday, February 24, 2008
... and I thought I was a bear!
The end of democracy
Simon Watkins and Helia Ebrahimi in The Mail on Sunday (p.58) give a graph showing that sovereign wealth funds (SWFs) purchased over £20 billion worth of British business in the last three years, and report a prediction that SWFs will own £6 trillion of world assets by 2015.
Wikipedia estimates the world's stockmarket capitalisation at $51 trillion and bonds at $45 trillion. Taken together, in sterling terms, that's about £49 trillion. So in seven years' time, sovereign funds are expected to control 12% of the market. This is significant: you'll recall that and EU countries require declarations of shareholdings at various levels between 2 and 5 per cent (3% in the UK), as seen in Appendix 5 of this document, and anyone owning over 1% of a company's shares has to declare dealings if the company is the subject of a takeover bid.
My hazy understanding of democracy is that it includes two crucial elements, namely, the vote, and the right to own personal property. We're losing both. What is our freedom worth when collectively, governments not only employ large numbers of people directly, but many more of them indirectly, through ownership of the businesses for which they work?
What does the vote matter? Here in the UK, we have had a coup by a small, tightly organised (and unscrupulous, even if and when principled) group who have realised that what matters is the swing voter in the swing seat, and nothing else. "What works is what matters" - a slogan that, superficially, seems simply pragmatic, but actually slithers away from identifying the principal objective: you can only tell if it works, when you know what you want it to do. And under our first-past-the-post system, with constituencies determined (how? and who is on the committee?) by the Boundary Commission, I could vote for the incumbent or the man in the moon, but I'm going to get a Labour Party apparatchik in my ward.
And I don't think the system will be reformed if "the other lot" get in, either: "Look with thine ears: See how yond Justice rails upon yond simple thief. Hark in thine ear: Change places, and handy-dandy, which is the Justice, which is the thief?" Structural issues matter: we are cursed by the psephologists, spin doctors and databases.
And as for property, when sovereign wealth funds go from being the tail that wags the dog, to becoming the dog, multinational businesses will be less concerned to satisfy the local shareholder, who may also be an employee. Big MD (or Big CEO) will have his arm around the shoulders of Big Brother.
We worry so much about wealth, and forget what it's for: not just survival, but independence, respect, liberty. Now, the peasants are fed, housed, medically treated, given pocket money, have their disabilities catered for, their children taught, and their legal cases expensively considered. So many of them are fat, enforcedly idle, addled with drink and drugs, chronically ill and disabled, negligent of their offspring and familiar to the point of contempt with the legal system. Despite (because of) their luxuries, they suffer, like the declawed, housebound cats in some American dwellings.
What matters is what works; these outcomes don't matter, except that they work for a class - which I think is becoming hereditary - that seeks, retains and services power. I have said to friends many times that we are seeing the reconstruction of a pan-European aristocracy, disguised as a political, managerial and media nexus.
The American Revolution was about liberty, not wealth, and it is one of the few major nations where the mice did, for a long time, succeed in belling the cat; there was a period here, too, when Parliament could call the King's men to a rigorous account. Now, even in America, the abstract networks of money and power are turning the voters into vassals of the machine that sustains them. As here, the political issues there will soon be welfare, pensions, Medicare and other elements of the badly-made pottage for which we sell our birthright.
As for Bombardier Yossarian in Catch-22, the first step back to our liberty is to stop believing in the benevolence of the system.
Wikipedia estimates the world's stockmarket capitalisation at $51 trillion and bonds at $45 trillion. Taken together, in sterling terms, that's about £49 trillion. So in seven years' time, sovereign funds are expected to control 12% of the market. This is significant: you'll recall that and EU countries require declarations of shareholdings at various levels between 2 and 5 per cent (3% in the UK), as seen in Appendix 5 of this document, and anyone owning over 1% of a company's shares has to declare dealings if the company is the subject of a takeover bid.
My hazy understanding of democracy is that it includes two crucial elements, namely, the vote, and the right to own personal property. We're losing both. What is our freedom worth when collectively, governments not only employ large numbers of people directly, but many more of them indirectly, through ownership of the businesses for which they work?
What does the vote matter? Here in the UK, we have had a coup by a small, tightly organised (and unscrupulous, even if and when principled) group who have realised that what matters is the swing voter in the swing seat, and nothing else. "What works is what matters" - a slogan that, superficially, seems simply pragmatic, but actually slithers away from identifying the principal objective: you can only tell if it works, when you know what you want it to do. And under our first-past-the-post system, with constituencies determined (how? and who is on the committee?) by the Boundary Commission, I could vote for the incumbent or the man in the moon, but I'm going to get a Labour Party apparatchik in my ward.
And I don't think the system will be reformed if "the other lot" get in, either: "Look with thine ears: See how yond Justice rails upon yond simple thief. Hark in thine ear: Change places, and handy-dandy, which is the Justice, which is the thief?" Structural issues matter: we are cursed by the psephologists, spin doctors and databases.
And as for property, when sovereign wealth funds go from being the tail that wags the dog, to becoming the dog, multinational businesses will be less concerned to satisfy the local shareholder, who may also be an employee. Big MD (or Big CEO) will have his arm around the shoulders of Big Brother.
We worry so much about wealth, and forget what it's for: not just survival, but independence, respect, liberty. Now, the peasants are fed, housed, medically treated, given pocket money, have their disabilities catered for, their children taught, and their legal cases expensively considered. So many of them are fat, enforcedly idle, addled with drink and drugs, chronically ill and disabled, negligent of their offspring and familiar to the point of contempt with the legal system. Despite (because of) their luxuries, they suffer, like the declawed, housebound cats in some American dwellings.
What matters is what works; these outcomes don't matter, except that they work for a class - which I think is becoming hereditary - that seeks, retains and services power. I have said to friends many times that we are seeing the reconstruction of a pan-European aristocracy, disguised as a political, managerial and media nexus.
The American Revolution was about liberty, not wealth, and it is one of the few major nations where the mice did, for a long time, succeed in belling the cat; there was a period here, too, when Parliament could call the King's men to a rigorous account. Now, even in America, the abstract networks of money and power are turning the voters into vassals of the machine that sustains them. As here, the political issues there will soon be welfare, pensions, Medicare and other elements of the badly-made pottage for which we sell our birthright.
As for Bombardier Yossarian in Catch-22, the first step back to our liberty is to stop believing in the benevolence of the system.
BTW: the man who wrote "The Anarchist Cookbook" later converted to Christianity. The one thing not to do with the system is to try to smash it - you'll only get something worse.
Saturday, February 23, 2008
Flat Broke and Berserk
Stagflation? Who can say?Paul Kasriel says no to seventies-style stagflation, for two reasons: oil supplies aren't being choked off, and unions are weak. He may be right.
But I understand that the Saudis are keeping oil production at an unsustainably high level, even though this is damaging the quality of the remaining underground reserves. In French wine-growing terms, this is known as "faire pisser les vignes". And given the Peak Oil issue, we're going to find that countries like Russia and Iran may use their energy supplies to further their own agendas.
As to union wage demands, yes, the brothers are no longer so united; but the voters may yet get together behind a politician who promises to maintain living standards. I predict this will be achieved by writing checks/cheques on the future, i.e. inflation. That's after the current bout of monetary deflation, of course.
Which brings us to currencies. It's a good week for readers of Julian Phillips: here he discusses how in rural India, the rupee is on a flexible gold standard to avoid the depredations of taxation and bribery; and here he looks at possible plans by G7 nations to place your money under house arrest, to prevent it fleeing the country.
Is this back to the 70s, or the 60s? As Wikipedia reminds us, "In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. "
Pursuing my "sell up and get a (possibly horse-drawn) caravan" theme, I note it's a tradition of the Romanies to collect large pieces of Royal Crown Derby pottery - beautiful, thickly patinated with gold, easily identifiable in the event of theft, and impossible to melt down. Soon it'll be time to join the raggle taggle gypsies, O.
Until then, I have to have a replacement car (they tell me Fiat stands for "Fix It Again Tomorrow"), so I'm off to a second-hand auto supermarket today. Let's see if there is any real sign of recession hitting big-ticket items.
Friday, February 22, 2008
The low interest trap
The UK's residential housing stock is now worth an estimated £4 trillion. But this valuation is powered by £1.2 trillion in mortgages, an average first time buyer loan of £140,000, a loan/income multiple of 3.61 and the base interest rate at 5.5%.
In 1987, the average first-time buyer borrowed £25,000, with a loan/income multiple of 2.1 and the base interest rate at 10.5%.
So the modern housebuyer now takes on 72% more debt in relation to income. Interest rates (and house values) may go up and down, but the amount borrowed is a hard - and now heavy - number. All this for the same thing we had 20 years ago - a safe place to sleep.
One might think that the true value of our housing is the gross less debt, i.e. (4 - 1.2 =) £2.8 trillion. That approach would work, if each house had the same proportion of debt. But it must be far less than that, since most of the debt is on the shoulders of the young(ish) - if they halved their initial borrowing, there would have to be a severe impact on house prices generally.
What would houses be worth if no-one could borrow more than 2 years' income against them? What if there were no mortgages at all? What will happen - what will the multiplying effect be - when the housebuying generation finds itself so burdened with taxes and high food and energy costs, that it cannot afford to take on such large home loans?
In whose interest has all this money-lending operated?
In cartoon-caveman times, chasing the bear or sabre-toothed tiger out and seizing the cave would be a day's work. Now it takes 20-25 years (sometimes far more) to chase out the bank. Have we progressed?
In 1987, the average first-time buyer borrowed £25,000, with a loan/income multiple of 2.1 and the base interest rate at 10.5%.
So the modern housebuyer now takes on 72% more debt in relation to income. Interest rates (and house values) may go up and down, but the amount borrowed is a hard - and now heavy - number. All this for the same thing we had 20 years ago - a safe place to sleep.
One might think that the true value of our housing is the gross less debt, i.e. (4 - 1.2 =) £2.8 trillion. That approach would work, if each house had the same proportion of debt. But it must be far less than that, since most of the debt is on the shoulders of the young(ish) - if they halved their initial borrowing, there would have to be a severe impact on house prices generally.
What would houses be worth if no-one could borrow more than 2 years' income against them? What if there were no mortgages at all? What will happen - what will the multiplying effect be - when the housebuying generation finds itself so burdened with taxes and high food and energy costs, that it cannot afford to take on such large home loans?
In whose interest has all this money-lending operated?
In cartoon-caveman times, chasing the bear or sabre-toothed tiger out and seizing the cave would be a day's work. Now it takes 20-25 years (sometimes far more) to chase out the bank. Have we progressed?
Thursday, February 21, 2008
Will sovereign wealth funds support the market?
BBC Radio 4 broadcast an interesting programme on sovereign wealth funds tonight. Is it not possible the oil exporting and trading surplus nations will be looking for a home for their capital, at the same time as private investors and overborrowed institutional investors are trying to cash out?
If so, the real story is not yet another impending market crash, whose effects may in any case be softened by an influx of new money that has political motive and so is not so narrowly focussed on a fair market price; instead, the major issue may be that, just as the West's industrial base has been hollowed-out, so its equity base may be attenuated in the same way.
In other words, our countries are like a man who has lost his job and is just about to find out that his pension scheme has been raided.
If so, the real story is not yet another impending market crash, whose effects may in any case be softened by an influx of new money that has political motive and so is not so narrowly focussed on a fair market price; instead, the major issue may be that, just as the West's industrial base has been hollowed-out, so its equity base may be attenuated in the same way.
In other words, our countries are like a man who has lost his job and is just about to find out that his pension scheme has been raided.
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