My (hyperinflated) 2 cents on what will happen now

A brief chat with a good friend of mine who happens to work for a major financial istitution made me think about what's going on with this "Global Financial Armageddon" scenario, and I was particularly struck with his synthetic "It's all going to hell, cash, cash, cash", when I asked him about a punt (long) on what I thought was a cheap share.

I might sound naive, but I think that what will happen now is as follows:

• US Banks Bailout sails through,
• Markets jump on the news
• Banks Won't lend a cent of those $700bn, but repair the balance sheets and go at the throat of those at risk of foreclosure, now that they can.
• Markets to fall massively on the realisation that the Bailout was just a temporary fix.
• US discusses a bigger bailout
• Some other major player goes to the wall
• US nationalises the entire banking sector with the intention of kick-starting the markets and try to avoid a major collapse of the global Supply Chain
• European banks to do exactly the same

In this climate this is a very optimistic scenario, but it makes me wonder why the US Government does not intervene directly in the lending markets instead of pouring petrol on the fire...

Surely it's not about exposure or free markets anymore..

We'll see. What I am confident will NOT happen is that those responsible for this gigantic mess will ever face a trial or even sustain a financial loss.

Some scapegoats, sure. But not the fat cats. The big ones.

Cheers

Is it all about Supply and Demand? No, it isn't.

I was reading about mortgage approvals being 64% down year-on-year in September 2008 and UK property sales being at the lowest since 1959 this morning, when I realised that I never explained a theory which seems very fitting these days; the theory that the Laws of commerce are not only based on supply and demand, but on supply+demand+price. Here's the word. Price.

For months into this property crash we've been hearing about "pent-up demand", First-time buyers being ready to "get on the ladder", "green shoots of recovery" and so on, but no one seems to have grasped the basic idea that the law of supply and demand is, in this case, flawed.

Example: there is a lot of demand for Ferrari and Aston Martin supercars. Surely supply is not the problem. Nearly everybody would have one. So why are there only few of those around?

Price.

Not many people can afford a 120,000£ car. As in, not many people can afford a 168,000£ house. Simple as that.

Here's a few points:

-The market is not dead because of the lack of mortgages. There are plenty of banks ready to offer mortgages at the right conditions. Supply of mortgages in this case is not the issue. Perhaps, supply of liar-loans and unaffordable Ponzi schemes is dry, but that's another matter altogether.
Banks are re-pricing the risk of people defaulting on their loans.

-Supply of houses is certainly not the issue either. Despite what Kristy Allsopp wants you to believe, there has always been more than enough supply of houses in the UK. In some cases, take city centre rabbit cages, there is oversupply.

What is it then? Simple. The housing market is dead because prices are too high.

There are plenty of potential buyers ready to make a move, at the right price. Which, unfortunately for those still in denial, is still some way lower than what it is today.

Cheers

Beware of the commodities bubble. Think about house prices

I know, it's not automatic to make the connection between oil, food and energy prices and the housing bubble which is now bursting in the US, UK, Ireland and Spain. However, there are some strong indicators which suggest a pretty strong correlation.

Until a few months ago, housing, and related mortgage markets, were a huge market for investment banks, hedge funds, pension funds and small time investors (buy-to-let). When it started to collapse, all the liquidity created during the incredible race to the top of the bubble had to be shifted somewhere else. I'm talking about the "smart" money, the money of those who knew the bubble was about to burst and got out just in time. Of course massive losses have been widespread, we all know how bad it got with the sub-prime mortgages crisis, but at the same time, enormous profits were taken. So, where did this money go?

Oil, gold, commodities, food, energy.

Nothing other than speculation would justify such extreme increases as the one in oil price in such a short period of time. The same goes with food and commodities. Big players needed a new market. They found it.

This will keep getting worse until the big banks have fully restored their balance sheets. Which means guaranteed bubbles in commodities, oil and food. That, plus the premium put on risk when applying for credit for the general public, will squeeze every penny out of the consumers.I also expect the banks to ramp the above-mentioned markets and near the peak suck in small time investors and make the bubble burst, so that they totally screw them.The giant housing bubble is indeed bursting, but all the liquidity has been simply shifted somewhere else.

Just ensure you don't invest in oil too late.

Cheers

All you need to know about the UK Housing Market is in the BBA Lending Figures

-20% month on month
-56% year on year

These are the (not really) shocking figures published today by the BBA (The British Bankers Association). They reveal how many mortgages have been taken out in the month of May 2008. 28,000 in total, which is less than half the number in May 2007. We all know what happened during the last year, with the credit crunch, the run on Northern Rock and basically the realisation that the housing market was in a bubble.

What will happen now? nothing, really. Dead calm. No one will buy or sell a house unless they really need to. I expect the mortgage approvals figure to fall even lower, as if pushed down by the weight of the immense bubble sitting on top of them.

These numbers tell you why house prices indexes are only showing small year-on-year falls, instead of the meltdown which is already underway. Let's wait until Christmas, when redundancies and repossessions will increase dramatically, and people will have no choice but to offload BTL portfolio or quick-sell, to determine whether the proverbial has hit the fan or not. I think by then we will see massive drop in asking prices, as high as 20-30%.

The real shocking thing is that, even then, it will only be just the beginning.

http://news.bbc.co.uk/1/hi/business/7470677.stm

Cheers

A quickie on Oil Price.

I'm back quickly from my intense studying of "bubblenomics", or economics of bubbles, to spend a few words on the astronomical price of oil and its root cause.

I link this excellent article, written by Mike Whitney . http://www.informationclearinghouse.info/article20011.htm

This is a must-read as it covers all the myths about the skyrocketing of the price of oil. In a nutshell, forget about Peak Oil, Chinese expansion, Supply, Iraq, Niger, Norway, BMW X6s and so on, and pay attention to one thing only: Speculation.

As Whitney correctly states, it's the big investment banks' speculation 0n the price of oil that drives it through the roof. The same banks that binged on subprime mortgages and now have about a trillion$ worth of writedowns in the pipeline.

To put it simply, they'll ramp oil until their balance sheets are repaired. Then, pop goes the bubble.

It is no secret that Iran is stockpiling oil in old tankers offshore, just to give you an idea of how manipulated this market is.

Just a word of warning. Don't believe the hype.

Cheers

The Media is turning

Over a year after the Pound has started to slide against the Euro, finally it seems that the media are becoming aware of the enormity of its implications. Of course the BBC would report
that "holidays in the sun" became some 20% more expensive compared to last year, and that would be enough to scare the average Daily Wail reader. However, this is a rather important turn in media sentiment.

On last night's Channel 4 news, the excellent Faisal Islam reported about how the much-awaited IR cut by the BofE (I don't even bother to comment on those anymore) failed to make any difference for borrowers. As things stand, the BofE can cut as much as they want, but the Banks won't pass it on to their borrowers. Make no mistake though, they will pass them on to savers.
The crucial point made during that report was that the claims of a beneficial situation for UK exporters thanks to a devalued currency are substantially untrue. Many seem to ignore how manufacturers need to buy raw materials and commodities outside the UK, mostly in the Euro zone and pay a lot more dearly for it. There goes the " competitive advantage " of a falling currency.
What still needs to change is the attitude towards the MPC decision: If interest rates make no difference to borrowerst, debase the currency, penalise exporters and undermine savers, why are the media "ramping" interest rates cuts as if they were the cure to all evil?
It's cold shower time for many who believed in Gordon Brown's Miracle Economy; the media is now paddling to ride the new wave, the DOOM one.

Cheers

Slump in house prices. You betcha!

I wonder what the Daily Mail will use as a headline after this piece of news. Something along the lines of "Homeowners Horror". Maybe they'll avoid the issue completely, waiting for some estate agent report which gives the vested interests a glimmer of hope and they'll keep on with the campaign. Who knows.

What is for sure is that now even the BBC has given up fighting the inevitable snowball effect of ever increasing amount of data which sustains that the party is over.

Here's the article http://news.bbc.co.uk/2/hi/business/7191012.stm

"House price fall 'at 1990s rates' " is the headline. At last. I, and many more competent people, have been saying this for over a year. There was no escape for this overvalued market. There is no escape for Gordon Brown's "miracle economy" (deliberately in lower capitals). The boom the UK has experienced in the last 10 years had nothing to do with structural improvements in the country's macroeconomics; it was all due to people getting into increasing amounts of debt following two of the most powerful human instincts: fear and greed.

Fear of not being able to "get on the ladder", fuelled by estate agents and irresponsible property TV rubbish such as "pay your mortgage in a year", and supercharged by the banks' silly lending criteria. Yes, I am talking about Northern Rock.

Greed and jealousy are even easier to explain: People started to wonder how the "Joneses" down the road could afford a 3 bed semi, 2 new cars, expensive gear and all the bling while he was a call centre operator and she was on the dole. When they realised that it was due to their house increasing in price, they wanted in, and the banks were there to help them.

Now the rotten core is starting to get exposed to the mass. It will turn ugly. No doubt about it.

Cheers

Bulium, a good initiative for sustainable wine making

When I went back to Italy for a brief Christmas break, between the wines I had the chance to drink there was a newcomer: Bulium.

I wrote about wines from valtellina before, and my passion for my birthplace wine is no secret. I thought I knew most of the local produce, but I was surprised to find out about this project.

Every year, hectares of precious terraced wineyards are lost to the pressure of modernity and globalisation; it makes no financial sense to work hard on impervious hills, look after the typical Nebbiolo grapes (Chiavennasca, of course) and see the results unsold, blended with other crap or worse, sold at fire-sale. Until a few decades ago, families would produce wine for their own consumption. Unfortunately it's not the case anymore, as people's lifestyles changed and whenever there is demand for wine, it generally means buying produce which is widely available and marketed under familiar brands. Even the locals would tend to buy a bottle of well known Inferno over something which they are not familiar with. This is partially due to the fact that in the recent and not so recent past, it was common practice to label wine for what it wasn't. You could fall for some very dodgy Valtellina wines which had very little grapes from Valtellina in it at all. People turned wary, and rightly so. Many of the smallest winemakers either died of old age, gave up their work or failed to transmit it to their children, with the inevitable result of the wineyards left to grow wild and ruin.

The concept behind Bulium is to merge the harvest of local producers from the area of Buglio, make the best possible wine from it with the help of local wine masters and sell it under one guaranteed label.

Not only this prevents dodgy vinegar sellers to ruin the name of the Valtellina "brand", it allows the smallest wineyards to stay alive and keep cultivating the terraces, which are a very important part of Valtellina's heritage and shape its landscape in a unique and magnificent way.

At the bottom of the label on every bottle of Bulium you can read "by purchasing this bottle of wine you saved one square meter of terraced land". It does make sense. The label itself has been designed by the local school pupils, chosen out of many drafts which show how the tradition of wine making in Valtellina is being now taught and preserved.

I take my hat off to the Buglio Town Council, in particular to Mr. Valter Sterlocchi, who decided to promote and sponsor this very important initiative. For once, this is not a political exercise or a way to milk money out of the EU or Regional funds. This is for real.

The wine itself then: You know what to expect from a Valtellina, and a Nebbiolo. However, this is different. There is no fancy marketing in the heart of this wine. No oak notes, nothing overly pretentious. It tastes honest, dry, as tannic as a Nebbiolo can be and absolutely good. It stands up to more established wines and beats hands down most wines sold at the same price.

Bulium is a new concept, and a very good one at that. Naturally, there's a lot more work to be done on the sales and marketing side. Nothing that the progressive and modern organisation behind this initiative cannot do.

Keep an eye open for this one. It deserves it.


Cheers


P.S. I will ad a link to the consortium that produces Bulium as soon as I have one.

IR cut by 0.25%

Like I said yesterday, the MPC, or the BOE, for all it's worth, has lost all what was left of its credibility with this rate cut. It does show that speculators are kept in higher consideration than those who work to produce, and ultimately, the core element of the UK economy is the housing market.

All this pressure from the media for just 3 month negative figures in house prices. Nothing else was considered at all.

• Screw inflation, which was supposed to be the MPC main target
• Screw savers, as the banks will be quick to pass on the rate cut to savers, but NOTHING apart from marketing will happen to mortgagors

Their choice, or more probably, Gordon's "diktat" from No.10, is to maks the real problem under a marketing decision.

The press went on to say that this cut will make the average £100k mortgage cheaper by 16£ per month. I doubt it. However, what I am absolutely sure is that fuel, food and energy costs will greatly offset this hypotetical saving, as inflation will now be tremendous and the Pound is basically condemned to die a horrible death. Watch for parity with the Euro by summer.

All this to try and save the housing market, which will crash anyways. They chose to give one last dose to the heroin addict, rather than cure him.

Well done.

IR decision tomorrow. Cut, unfortunately

What will happen tomorrow will be regarded as a crucial moment before the recession. What I foresee is a IR cut, totally political, in order to keep the crowd quiet for a little longer, while the Pound gets trashed and inflation takes off.

It's pretty much obvious that the remit of the MPC is NOT managing inflation, or say, fiddling the figures to show that Ipods are now cheaper and who really needs food, petrol, electricity and housing nowadays. What they do is pleasing the King, telling him that the Economy has "sound fundamentals" and so on.

This IR cut will not make the slightest dent in the crash machine that has already started running around house prices and all its parasites. Unfortunately, it will kill Sterling and pour a huge bucket of fuel on the inflationary fire.

Wait and see.

Cheers

Reality Dawns.

It appears that even the media are now accepting the idea of the crash; a couple of months ago, those who dared dispute the cast-in-stone assumption that "house prices only ever go up", would be derided and dismissed as jealous deluded doom-mongers. It seems different now, as even the "Vested Interests" themselves have to admit that the situation is far worse than they would like us to believe.

Here's some evidence, from the horse's mouth: Halifax house prices index down1.1% in November, with a fall of 32% in mortgage approvals. A third down, for you and me.

Link to the HSBO http://www.hbosplc.com/economy/includes/05...ndexNov2007.pdf

And the BBC too http://news.bbc.co.uk/1/hi/business/7128308.stm

Even the Sun kicks in, and this is, to me, the single biggest punch to the country's general belief that housing is a good investment, always.

These figures have been published the day before the MPC gets together to decide on Interest Rates. If you ask me, that is a desperate attempt to influence the decision. But make no mistake, whatever the MPC decides to do, it won't affect mortgage rates at all, as the Libor is through the roof and it will not make a difference in John Doe's mortgage reset, which is probably due in the next few months. He'd be in trouble anyways.

Cheers

Back on the blog with a patronising post

I told you so!

months ago I was suggesting an incoming crash in the housing market in the UK. Now it seems a done deal.

• the FT reports that houses are 30% overvalued
• Inflation picks up again (despite all the efforts to fiddle it)
• Banks are in serious trouble
• Jobs are lost in the financial sector
• Little bonuses for the city boys
• Oil price through the roof

I could go on, but I'll just sit back and enjoy the crash

Cheers

Trouble with the mortgage? Stick it on a credit card!

Big news this one. Apparently, people are using credit cards to hang on to their overvalued sheds. If that was for a one-off, I could understand, but here we're talking about those who cannot afford their mortgages, and can't re-mortgage, and have to find a way to pay the instalment. Any way.

This is a symptom of a cracked train of thought, as it is obvious that these people (in general)will not get better off financially and they will not be able to afford their payments in the foreseeable future. It shows how obsessed this country is with property speculation.

I'd really like to know how many of those desperate mortgagors are on interest-only mortgages, getting in more debt to service a debt that will never buy them the asset. Ridiculous. Their only hope, certainty and possibly aim in life is that the ex-council flat in a tower block bought a year ago for £170,000 will be worth £300,000 in a couple of years, so that they can suck up all the profit and keep living like there's no tomorrow. I pity the fools...

Anyway, here's the article from the Guardian. Enjoy the madness.

http://business.guardian.co.uk/story/0,,2192624,00.html

Cheers

Death of BTL?

A very short post today.

NuLab have basically stolen all the Tories' proposal for their pre-budget. It's a good thing, I suppose, since I really don't care who implements good policies as long as it gets done.

the CGT at 18% is, in my eyes, the straw that will kill the BTL camel's back.

Let's wait and see.

Cheers

Interest Rates decision today: Let's see how independent the BOE is.

My forecast for today is another hold. I hope for that. I hope that the BOE will not be influenced again by political spin and market forces.

On the one hand we have Josif Brown desperate to show that there will be "no bust" after the "boom", so cut the rates and let the debt mountain rise even higher.

On the other, Haliwide release their House prices report EARLIER because it's in negative territory, in a badly concealed attempt to influence the BOE.

Let's see if Merv can walk the walk other than talk the talk. After the Northern Rock shambles, where they basically killed the patient while trying to save it, the BOE has a test of fire.

If they fail, again, the banks and the markets will play their own game even more, regardless of what the BOE will do.

Cheers

MEW down, is the economy in trouble?

Mortgage Equity Withdrawal has, together with increasing private debt and the housing bubble, basically kept the UK economy out of a recession for a good 5 years. Now, the MEW figures are falling sharply, 3£ billion down from last month, here is the source http://news.bbc.co.uk/1/hi/business/7021599.stm

To me, this means two things:

• Those who could MEW, did it already and they are now mortgaged to the hilt in a stagnating market
• Less MEW money (which is largely spent on the high street), less spending.

People have been withdrawing money from their equity in their mortgaged houses to buy plasma screens, SUVs, holidays, whatever they couldn't afford with their normal income.

That was Gordon Brown's wet dream. Increasing peoples' spending without touching their salaries. Except, money has been spent, people are in ever more debt that before, and somehow, someday, that money needs to be repaid.

That's why I see trouble ahead.

Cheers