Friday, Mar 16, 2007
Pyramid is beginning to look a bit top-heavy
The Economist: Is the financial system a confidence trick?
Financial-sector debt has risen from virtually zero 50 years ago to 100% of American GDP today, and Europe's financial corporations have helped to accelerate the money supply. The big worry is of a contraction in credit supply. As lending standards tighten, consumer demand could suffer, possibly prompting a recession in the United States. No one knows when the credit cycle will end. But the pyramid is beginning to look a bit top-heavy.
Posted by sold 2 rent 1 @ 10:21 AM (223 views) Add Comment
11 Comments
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1. japanese uncle said...
The American housing market seems to be suffering from the unravelling of a Ponzi-type system. Subprime loans were offered on generous terms that, implicitly or explicitly, depended on rising house prices.
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'American housing market' should read 'British housing market'. What's the difference? This is an insult to the readers' intelligence.
2. paul said...
Steady on JU.
I know The Economist is not your favourite publication. Personally, I rather like it - this article is trying to expose the Ponzi-type scheme that is the US subprime housing market. The Economist (incorrectly) warned about the housing market collapsing a few years ago - they are firmly in the bear camp and are extremely cautious in their outlook.
I think the cartoon from a previous post sums up the condition of the US housing market much better.
3. japanese uncle said...
Yes, this cartoon is funny enough, but again it directly applies to the UK property market, doesn't it. It's There may not exist sub-prime borrowers as such in the UK, but in reality, significant minority of FTBs for the past five years ie since mortgage lenders drastically relaxed its lending guidelines, are in reality equivalent to sub-prime, sub-standard or whatever. The matter is just normenclatorial.
4. nearly30 said...
With you on that one JU. This whole borrowing, credit and housing boom is symptomatic of a change in society - a mxture of spectulation and reactionary economics to changing fortunes/wealth/expectations/reality - the 'hour-glass' principle.
Jobs are also changing, contracts are changing, wealth distribution is changing - with the Baby Boomers (BBs) IMHO being an additional catalyst for pain!
For example - it was expected that in the US, some 76 million BBs would in 2052 have passed on near $40trillion to 'heirs' - however - could it be that their current SKINs (Spend Kids Inheritence Now) approach is releasing the 'wealth' earlier - inflating the bubble?
I will reiterate what I put fown for the 'Eat your words Mr Economics?' blog - earlier this week - would welcome your interpretation:
"JP - indeed we are currently in a state where the jobs market looks more like a bottom-heavy 'hour-glass' - most people are being pushed into lower paid jobs and with a contraction of middle income jobs. Conversely - the wealth of the economy becomes more of a top-heavy 'hour-glass' - with higher concentrations of the wealth going to the top.
The current credit boom IMHO is a symptom of people being pushed into one particular direction. Those with wealth find credit can afford such things as 'buy-to-let', where-as those with decreasing wealth find credit as a transitory-to-perminent measure to 'afford' the costs of living - factored against a lowering of income and increased costs of living.
It begs the question - when does the 'hour-glass' finally pinch into 2 distinctive camps?"
5. Royston said...
Look at what they are doing to shore up demand in UK residential housing!!!!!
http://www.ft.com/cms/s/a5484c7a-ce3b-11db-b5c8-000b5df10621.html
6. dohousescrashinthewoods said...
I thought that cartoon was brilliant. Really sums it up.
JU, I think you are quite right - what is the difference between the US and UK? I see people trying the positive spin now to alay fears, but I think it is just that - spin.
Consider this:
- Yesterday there was a post suggesting that (sub-prime + BTL) in the UK is proportionally greater than in the US.
- Stats suggest that BTL has low delinquency, supporting the case for not counting them.
- For global players, delinquencies here are *in addition* to those they are suffering in the US.
- BTL looks good in profitable territory, but may be a dead weight when the balance shifts.
If BTL profits turn to losses (or people get spooked), BTLs will sell to get out. First blow: prices drop. Instant negative equity for those who didn't make it out on time. They are trapped.
Once trapped, the orange-mercedes-driver/lemming/man-down-the-pub brigade are locked in "steerage" at the mercy of the good ship HPI. Second blow: BTL delinquencies mathematically mushroom as she fonders. (Ironic that lenders are upping BTL exposure because of the current low delinquency rates)
Cruel fate means that sub-primers riding the same credit-fuelled Titanic will also be in negative equity when the first blow hits. Result: all of UK sub-prime, plus a significant percentage (majority?) of BTL are loced in on a one-way ticket to ruin. (Could bring us to the same overall proportion as in the US)
What am I saying? That sub-prime will go the same way in the UK and much of BTL will be a dead weight with it.
7. waitingfor hpc said...
ok guys now i am really depressed - where or what do we do with our cash? i have 250K in govt bonds and Uk sterling savings accounts?
8. Royston said...
waitingfor hpc,
Hang on to your cash. When the credit lines dry up, cash really be king and your will literally be spoiled for choice.
Distressed sellers, with no cash and no other buyers are the very best kind!
9. dohousescrashinthewoods said...
I'm no expert, but if the pound and dollar are toast, maybe Swiss franks and Gold? Anything not denominated in "dead currency". Maybe some Yen would be a good idea. If the carry trade disappears, presumably it will rocket. I guess Japanese stocks could be a good bet.
Try this:
http://www.everyinvestor.co.uk/editorial.asp?catid=161&ediid=967
Or maybe http://fool.co.uk.
10. layers said...
dohousescrashinthewoods - Mate, spot on in your analysis. Timing though is so important, and I wonder if i the next couple of weeks the Fed lowers IRs, which although the BoE will probably raise next month, are likely to follow suit. In the interim a meltdown is intervened through the additional acitivities of the 'crash protection team', or the mafia of the stockmarket, put up some supports in the mine (to refer to the cartoon I posted), allowing us all to go back to sleep until the time is optimal....
We shouldn't forget either what 'Stockmarket' actually refers to: a market where cattle (read sheeple) are there to be bought and sold by those doing the bidding, faceless or not.
11. layers said...
waitingfor hpc
IMHO I would hedge with Euros and buy a significant portion of physical gold - any dips now are a chance to buy. Although I wish I could take my own advice....