Dear all,

Thanks for everyone's contributions. I love this site - it's funny, I've learned a lot about marcoeconomics and the world outside my own existence, and found empathy from other FTBers. This is my 500th post (I'm a regular, hurrah!), so wanted to make it a gem.

It's seems to me that we are in a bit of a phoney war situation. The scene is set for a HPC, but no has as yet shouted "action!" We are still coasting along on good psychology; all is still good in the world, my job is secure, I have lots of equity, Gordon Brown is a great chancellor, etc etc. The vast majority of people are unaware of the economic dangers that face us; record debt, a trade deficit, pensions crisis, loss of jobs to overseas, and of course, a huge house price bubble.

I have decided to appraise our current situation from a behavioural finance perspective, following an outline of cognitive biases suggested by Ritter (2003, Pacific-Basin Finance Journal, Vol. 11). Ritter suggests eight cognitive processes that motivate financial decisions.

1) Heuristics, i.e. rules of thumb. There has been a move by the VIs to encourage people to look at proportions of earnings spent on mortgages, rather than price to earnings ratios (which are now historically high). Of course, either heuristic has its limitations for examining whether property is fair value, but proportions of earnings is a particularly weak method, e.g. what if inflation goes up a moderate amount.

2) Overconfidence. Speaks for itself really, but many people are still clearly full of it. Overconfidence that is. People have not diversified into other assets/commodities. Apparently men are more overconfident than women, and are more likely to hang onto poorly performing investments; the "nesting" impulse could quickly turn to a "get me out of here" approach.

3) Mental accounting. People tend not to make all their financial decisions as an overall package. In the case of property investment, people are too ready to see the capital gains, but not necessarily the cost in time and stress, over other less 'hands-on' investments.

4) Framing. How a product/issue is presented biases how people respond. Well, the question being posed is still "how will we help FTBers get on the property ladder?" - the assumptions being that property always goes up in price (it's a ladder), and that FTbers are the only one who might need help (the reality being that plenty of people are quite unable to afford to buy a better/bigger home than their present abode).

5) Representativeness. People think of recent anecdotes when making decisions. Joe Bloggs down the street has made x thousand pounds down the street, so why shouldn't I? Fred Smith has made a fortune on BTL, so why shouldn't I? Small numbers of cases can become the norm.

6) Conservatism. Obviously with a small 'c'. People stick with what they know, and what has worked in the past. Property has always held its value over the long-term. (This tendency opposes the 'representativeness' tendency.) Historically property has done well. From the perspective of demographics (i.e. as the baby-boomers retire), this situation might not continue. The tax regime for owner occupiers/BTL might not persist. Interest rates might not stay as low as they have over the past 5 years.

7) The disposition effect. People seek to avoid realising paper losses, while seeking to realise paper gains. Even if something has lost value, they will wait for it to regain this loss before selling. Essentially people can end up hanging onto losing assets.

These processes explain (in part) why people were content for prices to go up so high, regardless of fundamentals, and why the market is sticking at the present time and has not yet gone into free fall.

It strikes me as a jobbing psychologist, however, that our understanding of the psychology of illiquid assets such as property is still immature. In general, behavioural finance is still a young science/art. With liquid assets, e.g. equities, people can gain/lose confidence very quickly, following the availability of new information, and buy/sell accordingly. As people cannot sell/buy property so easily, they have to disregard new information, and rely on their 'intuition', which is of course notoriously dodgy, and possibly leaves them even more prone to the above cognitive biases.

It is worth noting that in the last house price crash, interest rate rises received the blame. Thus, people's own (incorrect) logic about the 'new paradigm', and the distorting impact of their own cognitive biases, was not properly disproven - in their eyes it was the fault of factors beyond their control. There will be no great IR spike today, it seems, only a creep up towards 5.5%, maybe 6% if we bears are lucky.

As the property market fails in the absence of an IR hike (or is failing - we await further data from the ODPM), this will not so much be the result of outside pressures (i.e. the BoE, chancellor), but the market simply running its course and houses being too expensive. This would in my opinion be more psychologically shocking than IR rises - people's own logic would have been shown to be false. As it dawns on them how wrong they are, the resultant panic will be more jolting because the precarious market situation will be seen to be their own fault.

There is a theory, that has some support, that serious responses to psychological trauma are in part the result of "shattered assumptions" (Janoff-Bulman, 1992). When prior expectations of a just and good world are disproved by some random calamity, people struggle to take on board the new information, and suffer enormous stress as a result. A study I know of that was published in a very good journal demonstrated that broadly negative views on the world didn't predict recurrence of depression, but extreme views (i.e. either the world is a perfect place, or the world is a an evil, evil place) did. Similarly, we might expect that people's shock will be immense when they realise that the property-based economy is in fact a dangerous illusion, and will result in very pessimistic financial behaviour, i.e. no more spending.

In short, I would therefore predict that this current "phoney war" will continue for some time to come. But when the music stops, this economy will experience serious problems, in a vein similar to that of Japan at the end of the 1980s.

Apologies for the long post, they are my musings on the situation. I am seriously contemplating the prospect of conducting research into the impact of financial/economic trauma; the forthcoming HPC could make for a great case study!

Great Post RichM! Like you i have learnt a lot about macro economics (not hard, i knew zilch before)

With regards to (Quote) " A study I know of that was published in a very good journal demonstrated that broadly negative views on the world didn't predict recurrence of depression, but extreme views (i.e. either the world is a perfect place, or the world is a an evil, evil place)" I would be very interested to get the actual reference if you have it. Fascinating stuff.

I hope the media picks up on the story soon -- let the panic commense!

bee bear

BTW i think you are onto a winner with the idea of doing research on the impact of financial/economic trauma. You could end up with a syndrome named after you.

That is fantastic, you have just solved what thousands of analysts from around the world have been trying to solve with just a few lectures in economics.

If you can now tell me that five years ago you purchased 100 houses, and offloaded them last year netting you 1M plus I will commend your efforts.

But if you dont have 1M in your account then I am afraid you will be consigned to the ranks of the many other thousands of people in this country that think they have the answers but have not staked their life savings on it.

It was an interesting post by the way.

RichM
I read your post with interest, looking to pick holes, but I found none. I like your chapter headings (3 and 7 in particular), it will make a good book/paper.

I fear this 'phoney war' will outlast many bears patience - but the outcome is inevitable. The question everyone has to ask themselves, "is it worth the wait?".

JY

Apologies RichM I couldn’t read all that (hate long posts!)

You theorise that this will be a long drawn-out house price correction/slide
but not a crash.
I think you’re right about people holding on to their properties if they can’t
get out of negative equity, That happened last time, I was among a small
number of people trying to sell at the bottom of the last crash and there
weren’t a lot of us about, (a buyers market so to say)
And even then I had some wan ker try to knock me down quite a few thousand
A lot of guzumping going on though

I don’t think it’s going to be a long war, public opinion/attitude has got the ’lets see what happens’
view, Only those that bought within 2-3-4 years will be in negative equity
All the rest I believe, will only be too happy that they can now afford to move up the ladder
if their property has come down then so will the next house they want to buy and if it’s more
expensive the % rate off will benefit them even more

I disagree with just about everything on this post
1) Risk assessment. Just about all my non-housing costs have dropped over thr past 20 years (as a proportionn of income). What do I do with the remainder?
2)I would call it optimism, without which we might all just as well commit suicide. We're all dead in the end anyway. The trick is to balance it with the realism that the external world imposes upon us.
3)Not as much in time & stress in living somewhere you hate.
4)Yes, the "when did you stop beating your wife" question is unsupportable, but why do MOST people want to own their own house? Remember, people are paying off mortgages ealier than ever.
5) "Experts" have a crap record in economics (& always will have). When ALL his friends have done well out of owning their own house then it is eminently sensible to follow suit.
6)NOBODY knows what tomorrow may bring; the past is the only pointer we have. And the supervolcano might erupt & bird flu might wipe us out. Again it's risk assessment. In the long term, we're all dead.
7)If you're living in the asset & can afford to do so there 's no problem. This is the position that the vast majority of people are in.
Interest rates are crucial. And yes, it's the % rise in the % that matters, so 0.25% now is like 1% in 1990. In the last crash several things happened at once.
I don't think people are as daft as you think. If their £300k house is now worth £200k & their £50k mortgage has ten years to run. they won't lose too much sleep. They'll just carry on with their lives.
Your whole point of view is predicated upon:

I am clever; everybody else, except my clever friends, is stupid

A great post Rich, may a layman pick one little whole though?

people will never blame themselves, people's ego's will not allow them to take the blame for buying in at the wrong time, the will blame some other factor (Bank of England, other people's debt, reccession etc) or at best they will consider themsevles unlucky. Anything but admit they made a mistake!

A very good post, interesting to see things from a psychological rather than just an economic perspective.

One masking factor that will no doubt affect the way the crash is perceived is that people don't like to boast to all and sundry about how much money they've lost or how stupid they've been, and as you say they seek external factors to blame for there losses.

i.e. asset rises in value: I'm a business genius
asset falls in value: It was IR, taxes, the War, The Gov, bad luck etc.

What you wont see is people down the pub boasting about how much the value of their house/ houses has fallen by.

City traders are notorious for it, when a trade is profitable they believe it was a result of their skill in calling the market and take credit. When a trade goes badly, it was a macro market thing or unforseeable event, anything but their own mistake/ bad judgement.

Once the media picks up on it all my psychobabble counts for nothing, it's game over.

The reference is:
Teasdale JD, Scott J, Moore RG, Hayhurst H, Pope M, Paykel ES. (2001). How does cognitive therapy prevent relapse in residual depression? Evidence from a controlled trial. Journal of Consulting and Clinical Psychology, 69(3), 347-357.

This is the abstract:

This study examined the cognitive mediation of relapse prevention by cognitive therapy (CT) in a trial of 158 patients with residual depression. Scores based on agreement with item content of 5 questionnaires of depression-related cognition provided no evidence for cognitive mediation. A measure of the form of response to those questionnaires, the number of times patients used extreme response categories ("totally agree" and "totally disagree"), showed significant and substantial prediction of relapse, differential response to CT. and conformity to mediational criteria. CT reduced relapse through reductions in absolutist, dichotomous thinking style. CT may prevent relapse by training patients to change the way that they process depression-related material rather than by changing belief in depressive thought content.

People did top themselves in 1929. The effect of a financial disaster on one's mental health can indeed be dire...

[quote=laurejon,Mar 11 2005, 02:14 AM]
That is fantastic, you have just solved what thousands of analysts from around the world have been trying to solve with just a few lectures in economics. [/quote]

Great! I'll make sure I get my application in for a Nobel prize in economics.

[QUOTE]If you can now tell me that five years ago you purchased 100 houses, and offloaded them last year netting you 1M plus I will commend your efforts.[/QUOTE]

Alas, I can't. Five years ago I was studying for finals. Had neither the time, the capital, or the inclination to build a property empire - and I still don't.

[/QUOTE]But if you dont have 1M in your account then I am afraid you will be consigned to the ranks of the many other thousands of people in this country that think they have the answers but have not staked their life savings on it.[/qoute]

I have 200 quid in my account - IN CREDIT. Superb fiscal management on my part. I am shorting property by renting, if that helps. I am risking my future prosperity by not buying now I know, but to buy now would be a greater risk, IMO.

[QUOTE]It was an interesting post by the way.

[/quote]

Thanks Laurejon.

Thanks, I should stress I was merely following the template of the Ritter paper, and applying his model to the present property bubble.

You are right, it might take a while. Fortunately the wife is on side!

Spend it all on housing? Seems a shame, why not more more fancy mod cons that give us more free time, or travel, or give some more cash to charity - why should it go to inflate housing more? Seems a like a thoroughly stupid new paradigm if we're being more productive just to compete for the same quality of housing at higher prices.

Yes, realism...

I love my flat and my landlady loves me and my wife. No danger of rent rises, we move on when we like at no cost, all reapirs done when we ask for them, and we like magnolia!


If they bought at the right time, e.g. 1984. Their has been inlfated significantly, and the IRs are now low so the more sensible 50-somethings can afford to clear the mortgage quicker. More people off their mortgages sooner is only one end of the spectrum...

Friends in their 30s maybe, not my peer group, we're all shafted. I'm 25 remember.

Yup


I have two friends who have bought flats on the fringe of London for over 200K. They not being very bright IMO; one has an IO mortgage, god knows about the other but he has recently jacked his job in. The rest of my mates are priced out. I am not that clever, I haev just taken the time to my research - mortgages are a fairly hefty commitment afterall. People who bought over 5 years ago are fine, and shou;dn't be stung, unless they loaded up on MEW or BTL. I do fear for my friends who have bought, but they won't listen to me.

Yes, you're right, my suggestion was bold! Generally speaking you're right, but I wonder if the media will acknowledge that the BoE are following tight criteria, and ackowledeg the BTL speculation. Probably asking too much!

I am more concerned about the shock people will experience when they realise this house in built on sand. This generation hasn't really experienced a serious dropping off in living standards...

Which generation is this then? The one that went through the 1920s depression or the one which went through World War Two? How about the one which went through Thatcher's 1980's decimation?

I meant young adults, 20-30s, sorry I should have said my generation.

Nice Work, Rich

I agree with your overall idea, which is that Psychology drives markets even more than valuation. And it is the gymnastics that people perform with their own thinking that pushes up valuations to such an excessive level, and still enables people to find a "logic" reason for paying these HIGH prices.

This part:
Conservatism. Obviously with a small 'c'. People stick with what they know, and what has worked in the past. Property has always held its value over the long-term. (This tendency opposes the 'representativeness' tendency.) Historically property has done well. From the perspective of demographics (i.e. as the baby-boomers retire), this situation might not continue. The tax regime for owner occupiers/BTL might not persist. Interest rates might not stay as low as they have over the past 5 years.
...

Encourages my response:
How anyone can think it is "conservative" to buy the top often amazes me. Yet because we are all creatures of habit, and like to invest where we (and others we know) have made money in the past, is exactly why theese bubbles grow to such extremes.

CYCLES, and a study of them,
are a good way to get past this trap, and learn to think for oneself.

Your post will help people to learn they must make up their own minds,
and NOT FOLLOW THE CROWD

Thanks doc, much of the above was a reiteration of what is common knowledge to regulars here, just more meat on the bones of the "people go in herds" argument.

Yes, when you put it to people that they are breaking all the rules of investment by buying at the top, the penny might drop. Too much input encouraging more maladaptive ways of examining the problem.

Am I right in thinking you got your fud at Princeton, or is that my imagination?

"Am I right in thinking you got your fud at Princeton, or is that my imagination?"

Nope.
I have a BA in Psychology from Harvard,
and have a longstanding interest in market psychology & cycles

The "DrBubb" is just a poetic shortening of my website's name:
http://www.DebtBubble.com

and here's another website of mine:
http://www.Weimar.co.uk

STAY WARM

Well done you, were you there when Richard McNally was around?

To summarise this data. Long term rates were below 4% for 50 years until 1778 when they rose as high as 5.5% in 1784 before falling back below 4% by 1789. By 1794 they had started to rise again reaching 6% in 1798 and not falling below 4% again until 1822. There then followed a period of almost 100 years of low rates, below 2.5% in the 1890's, until they finally breached 4% again in 1916 rising as high as 5.5% before falling below 4% again in 1933. Rates were then consistently below 3% until 1952. After this rates started an inexorable rise, passing 5% in 1956, 6% in 1961, 7% in 1968, 9% in 1969, 10% in 1973, peaking at nearly 15% between 1974 and 1976, before gradually declining into single figures by 1985 and finally falling below 5% again in 2000.

This post form the FT forum today!.........sorry cut it short last time!

Owl states that the Government cannot be trusted to keep inflation low. It is a point, but a historically weak one.

All Governments preside over a debasement of the currency, to that extent I agreed with Owl. However, they are not actually in control of major structural events, for instance long term shifts in trading patterns, wars, cataclysms etc. These are the forces which are determining.

I have data on long and short term UK interest rates back as far as 1729. It is quite clear that since this date the norm has been low inflation, or even deflation, and that high inflation is uncommon and very high inflation a singular and recent phenomenon.

To summarise this data. Long term rates were below 4% for 50 years until 1778 when they rose as high as 5.5% in 1784 before falling back below 4% by 1789. By 1794 they had started to rise again reaching 6% in 1798 and not falling below 4% again until 1822. There then followed a period of almost 100 years of low rates, below 2.5% in the 1890's, until they finally breached 4% again in 1916 rising as high as 5.5% before falling below 4% again in 1933. Rates were then consistently below 3% until 1952. After this rates started an inexorable rise, passing 5% in 1956, 6% in 1961, 7% in 1968, 9% in 1969, 10% in 1973, peaking at nearly 15% between 1974 and 1976, before gradually declining into single figures by 1985 and finally falling below 5% again in 2000.

Short term rates mirrored this pattern although were predictably more erratic.

Higher rates have arisen during major periods of instability. The War in the Colonies in the late 18th. century, the Napolionic Wars in the early 19th. century, the ruinous First World War in the early 20th. century and finally the unprecedented and catastrophic increase in oil prices in the early 1970's.

So Owl's ideas on future inflation are based on the experience of his lifetime, a brief period of abnormality. He cannot know that this will be repeated and history is against him.

Indeed the current situation is uncannily reminiscent of Dickens' times when trading patterns started to shift to the East due to the advent of steamships and the telegraph. A very long period of low rates during most of the 19th. century followed, although real returns were higher than actual rates, showing that this was a period of deflation. The British agricultural economy went through a complete restructuring and we all know what Dickens thought of debt Mr. Micawber, Sir!

Now we have rapid travel and the Internet, the shift again to the East and the relentless restructuring of British manufacturing. A return to high UK inflation is very unlikely in a global economy where wages are easily suppressed. Oliver Twist revisited!

The mid Victorians and the next two generations had an utter abhorrence of debt for good reason. To be in major debt in deflationary times is a death sentence, quite literally in those days.

We don't have debtor's prison now, but a £250K mortgage in a 21st. century of low inflation will be as good as. Hard times ahead I fear.

--------------------------------------------------------------------------------

Owl - To sell one to buy time!
by Mike Small

Well that is helpful to bear in mind. Was the increase in rates the result of dropping the gold standard? I don't really know enough about the history of credit, however - could it be that infaltion was left to run riot in previous generations?

Even if we are in for a period of lower interst rates, that doesn't really change matters - low interest rates means debt isn't being eroded so fast, so the debt stays with one for longer. People haven't woken up to this yet. People will end up being signifciantly worse off materially, just for the privilege of owning a home. Not really worth it, if you ask me.

Seeing as monetary policy around the world was until very recently run by governments (ie politicians), the answer is a resounding "yes".



Also, a lot of the past increases in nominal house prices were due to high inflation. We are no longer in a high (consumer price) inflation environment, ergo we will not see the huge increases in nominal house prices that we have seen in the last few years (mostly due to a large section of the population suffering from "money illusion").



I think you'll find that FTB's buying today will take exponentially longer to pay off their mortgages than their parents did.



No. If they bought at the beginning of the bubble, and he is buying at the peak, is that sensible? No.




Past results do not guarantee future performance (your home may be at risk if you do not keep up repayments on a mortgage or other loan secured on it, and other such disclaimers).



There's a specific name for this:

http://en.wikipedia.org/wiki/Self-serving_bias

So they could just inflate their way out of trouble? Scary...



Yes, I completely agree, I was merely highlighting the "man on the street's" way of thinking.




Very scary and not for me and my Mrs!!!



[url=http://en.wikipedia.org/wiki/Self-serving_bias]

The mental gymnastics have only just begun - if people distort things this much when life is "good", wait till they have it bad.

7) The disposition effect. People seek to avoid realising paper losses, while seeking to realise paper gains. Even if something has lost value, they will wait for it to regain this loss before selling. Essentially people can end up hanging onto losing assets.

Yes, I have seen this happen with three friends. In general, they are not stupid people. On this basis (only) I think that the crash wil take a little longer than I had originlally thought.

"a lot of the past increases in nominal house prices were due to high inflation. We are no longer in a high (consumer price) inflation environment, ergo we will not see the huge increases in nominal house prices that we have seen in the last few years"

I DONT AGREE with this.
We had:
+ High inflation, which turned down
+ High rates, which drifted lower.

The period where Inflation was low, and rates were drifting lower was GREAT for House prices, since mortgage cost got cheaper while incomes rose. This was a golden time for House prices.

Those days are over, and inflation seems to be rising (in the US to start with, and from energy prices in particular). Rates look likely to rise. And the virtuous cycle of late, has turned into a vicious cycle.

BE CAREFUL

So you're asserting the necessity of HPC on the behaviour of a % of a % (ftbs)? Important though the disaffection of you & some of your friends may be, there are
a hell of a lot of other factors to consider - some of which do point to HPC, some do not.

****-eyed octopus, you may want to learn how to use the quote function.

Click the "quote" tab above the posting window which appears after you have clicked "Add Reply". Cut and paste the text you would like to quote after the quote bracket which will have appeared after you pressed the "quote" tab. Then press the "quote" tab again after you have pasted your text to close the brackets. Voila.

C-EO, you are implying that renting always mean living somewhere you hate and you'd be better off buying.

This is far from being true as rental supply has improved substancially and rent decreases can be negotiated (many posts here to prove it).

Now how about this:

FTB couple, late 20s, two decently paid jobs, find it difficult to get onto the ladder. The only way they can buy a place these days (as per suggested by some posters here) is if:
- They buy one of these new designed-for-the-BTL-market tiny shoe boxes
- Move to some derelict/dangerous estate
- Move miles away from the city they work in which means spending hours of their already short non-working time (remember: decent wages) commuting on our wonderful public transport system

-->BUYING NOW means living somewhere you hate.

Consider this too:
- If house prices crash, our nice couple find themselves in negative equity and won't be able to move to a better/bigger house (e.g. if they want to start a family) any time soon.
- If house prices continue to go up , our nice couple will find it increasingly difficult to "move up the ladder" as the gap with the next rung increases

-->BUYING NOW means living somewhere you hate - and for a long time.

Buying is a mug's game at this point in time and this is why there are so few buyers out there at the moment.

You are exactly right. At the moment renting is, in many parts of the country, the less stressful option. I suppose my reaction is coloured by my own experience - I've always felt insecure living in a house somebody else owns (yes, I know the bank owns "your" house, but at least there is the prospect of paying it off; &, yes, If there's no prospect of paying it off you're daft to take it on). Also I know a young couple who have a much better flat (on an IO mortgage) than their previous rented flat (same monthly payment) round the corner. Both flats in Islington, moved last summer. They're saving like mad & both seem less stressed than previously.




Yes, You'd need to be happy that the house you're buying won't drop below your equity, otherwise don't buy - but that must be down to the individual's judgement.
If HPs rise then you're in a better position than someone who'd been paying rent (if similar to your mortgage).

Thanks for the reference RichM -- pls keep us updated if you do follow this up with research.



Bee Bear

Octo.,
your:
"At the moment renting is, in many parts of the country, the less stressful option. I suppose my reaction is coloured by my own experience - I've always felt insecure living in a house somebody else owns (yes, I know the bank owns "your" house, but at least there is the prospect of paying it off"

hmmm...
Welll think about this:

You can pay-off a home two ways:
1/ Pay the mortgage on the home you own,
2/ Pay the mortgage on a home you buy later

Once you go into negative equity, no.2 is cheaper

Can you think of anyone who would buy a house if they thought they would go into negative equity? I would implore anyone contemplating buying a house to fully consider the implications of this predicament. But, ultimately, it MUST be the individual's choice.

"Both flats in Islington, moved last summer. They're saving like mad & both seem less stressed than previously."

How do you know their stress level? How can you quantify 'stress' in your own life nevermind presuming stress levels in other peoples lives. It's the old chestnut: YOU DONT KNOW WHAT YOU'VE GOT UNTIL IT'S GONE. Your friends may have been blissfully happy (and didn't know it) until they took the plunge into buying. "Welcome to the ratrace, friends"....hope you enjoy the ride

Sorry?
I can only " know" from what I observe & by comparison to my reactions when under stress. I cannot remember being under stress & not being aware of it; can you? Whether I SHOULD have been under stress or not is a different matter. One of the couple is my daughter & I have been able to observe her reactions to various situations over 20-odd years.

http://www.imf.org/external/pubs/ft/weo/20...df/chapter2.pdf


and from the IMF!

"Can you think of anyone who would buy a house if they thought they would go into negative equity?"

Well... Those that "Buy for the Long term" are admitting that property may be a lousy investment in the short term, and their confidence in long term trends continuing may prove misplaced - But they do it anyway

Commodities inflation is on the way. Look at where the CRB index has gone in the last few years.

However, commodities are booming because of remortgaging of the house price bubble in America: Americans remortgage their house and buy tat from China, which pushes up the price of the raw materials. I think we're probably going to see a long-term growth in many commodity prices, but I'm not convinced enough to bet on it right now... once the US house price bubble bursts, much of the demand will vanish.

It has very little to do with the US mortgage market. Commodities experience bull and bear markets just like equities, real estate and any other asset market. The fact is that commodities have been in a bear market with falling prices from about 1982 until 1999. That is a long time, and what happens is that investment in commodities dries up. Why mine copper or iron ore when the price you can sell at is going to be falling for the next 5 years? So supply dwindles until supply cannot meet demand, at which point commodities prices start rising again, and everyone jumps back into the market.

What's driving the commodities bull market, therefore, is the result of almost 2 decades of underinvestment which has suppressed supply, while the Chinese industrialise their economy and build their infrastructure, driving demand.

Commodities are very simple. It's all supply and demand that drives the cycle.

To build tat for Americans who are remortgaging their houses to pay for it.



Indeed. And demand will crash when the US housing bubble does.

In the long run, many commodities will go up: but there's likely to be a commodity crash before then.

There are more Millionaires in China than in the USA.

The internal market in China is growing rapidly, and at some point, the Chinese will be much less reliant on excessive consumption from the US. The momentum in China, building its economy, is huge. And this is fuelling the boom in commodities.

Has it occurred to you that the Chinese, and other holders of dollars, may prefer to exchange their dollar holdings for commodities rather than other currencies?

Here's a good interview, with an old friend (Jim Turk):
http://www.voiceswest.com/kor/0312-02.mp3

"Lots of strong opinions this week, as we start off in Segment 1 and Segment 2 with James Turk. James has a background in international economics and banking, and has just collaborated with John Rubino on a book titled, “The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets.” He gives us a taste of his commentary."

Source: http://www.kereport.com/

Certainly, but for the next few years they're still going to be largely reliant on selling tat to highly-indebted Americans. I don't think the US housing bubble can last that long.

Mark,

Dont ignore the HUGE SCALE of projects underway in China.

For example, the Three Gorges Dam is the largest engineering project in history, costing perhaps $40 billion. This will transform a huge part of China's landscape and give the internal part of China access to hydropower electricity.

There's nothing that big being built anywhere else, and the Chinese can easily finance it. Remember they are helping to finance the excesses in the US, so why not (more worthwhile?) projects in their own country?

The key here is that everyone having one or more extra home wanting to secure their profit all comes onto the market at the same time, making a small downturn into a big. The sales figures lie, because they measure price. In a downturning market, only the best stuff are sold, creating a rise in average prices, because less "trash" are sold, when in reality things are going down, the key here are low sales volume and high inventory. New built projects just finished, bought at inflated prices from one year ago, are finally coming into the numbers, creating a false boost to house prices. That have already happened for a while.when you can choose between tons of objects, and things bought yesterday clog the matter..Average price goes up, when prices in reality are going down, on that average ugly house...

The old saying is everyone needs a place to live. That is the difference from the 80..Back then speculation was not big, rather it was interest rates. This time it is different and worse.

Speculation in the housing market is not the biggest driving force. The most significant factor is that people want to buy a house to live in it. The majority of price rises are due to supply and demand

That's that, then. The supply and demand argument was officially laid to rest on 30th April 2008.