1. flashman said...

We will all benefit from a growing economy because we will keep our jobs. However unlike in previous recoveries house prices will fall instead of rise. This may seem like a counter intuitive comment but there is logic behind it. Once the recovery has been established, the QE balance sheet operation will be reversed (liquidity will be drained from the system) and interest rates will have to be put up to a level that reflects the legacy debt. However mortgages will continue to be slightly rationed and the lending criteria will be stricter because of the new capital adequacy laws

There is no way that wages can increase beyond inflation because we are, more than ever, competing with overseas workers (for example, the Land Rover workers wont dare put a foot wrong in case their jobs go overseas). The property market will therefore be faced with the lethal combination of static wages, spiralling mortgage payments and rationed mortgages. I keep saying it, but we should welcome the recovery with open arms because we will keep our jobs while we watch house prices fall (a good combo). Too many people have fallen for the doomed economy/currency shtick. The true HPC god is recovery

3. str 2007 said...

Certainly the Chinese see UK products as aspirational which is a good thing. If they all bought Land Rovers instead of Jags it could save the Chinese government a fortune in tarmac.

Maybe though it would be better if they were all aspiring to really cool mountain bikes to get around on instead of their traditional 'happy shopper' bikes.

Glad to see you're still an HPCer at heart though flash.

Your comments though suggest you're moving away from your 'unemployment trigger' though.

Seeing quite a lot of houses sticking down here now and a couple reduced. But at prices over 2007 peak, so there's along way to go.

5. flashman said...

will: The 1000 new jobs quoted in the article are being created in the UK.

Jaguar Land Rover will always have to keep a base in the UK because the ‘Britishness’ of the product is vital to its' marketing. If the Indians were unwise enough to entirely design and produce the product in China, they would collapse the brand and leave the door open for competing 'real' British product.

7. p. doff said...

You could, of course, selectively choose statements if you want to look on the gloomy side:-

''The new jobs that are being created will be temporary''
''Last year, Jaguar Land Rover's workforce in the UK was reduced by about 2,500 people''
''But although the company is hoping to grow, it is still planning to go ahead with its plan to close either its factory at Castle Bromwich or its Solihull factory''

9. flashman said...

p.doff:
You could indeed but the 2500 jobs were lost in the recession and 1000 of them are now being replaced. They also said that it took a while for the temporary jobs to become permanent, which strongly implies that they expect them to become permanent jobs. Consolidating operations into one efficient plant is a sensible thing to do and they expect to eventually increase their work force. The company is now profitable again and on the growth path. Miserable sod :)

11. icarus said...

World passenger car production

2007 - 54.9 million
2008 - 52.9 million
2009 - 51.9 million

Much depends on Chinese demand. China's economy went from dependence on exports to dependence on a credit - property - infrastructure bubble which is currently being deflated by credit rationing.

13. quiet guy said...

Flashman,

I'm surprised that you have linked this story to house prices. In the long run, Land Rover should be concerned about their designs being copied by new Chinese competitors. Some of us will benefit from a growing economy more than others ...

http://www.inc.com/magazine/20060601/ip-theft.html
http://www.industryweek.com/articles/u-s-_calls_level_of_china_copyright_theft_unacceptable_21728.aspx

15. flashman said...

hpwatcher: I mostly explained my comment "as soon as the recovery gains traction, house prices will fall in earnest" @ comment 1.

Just to add a bit more: The government has three ways of stimulating the economy

1. They directly employ people/spend money
2. QE or similar
3. Interest rates

All three of these methods have the indirect effect of supporting house prices and all three of these methods will be removed or reversed in the short to medium term. The recovery will actually force the government to put QE into reverse (drain liquidity) and to rapidly increase interest rates. House prices would be unlikely to survive the removal of its three main supports but it is actually more than a straight removal of support. QE and interest rate policies will be put into reverse thrust which will effectively turn support into a crushing weight on the housing market (government employment might arguably be replaced by some private employment, so that policy could just turn from support to neutral). If government unemployment is not replaced by private employment, the housing market is in for an even rougher ride

Your comment: “I would have expected an increase in house prices as people will start to borrow more and the banks will be only too happy to lend”

As I said @1, the new capital adequaecy laws will cause mortgages to be slightly rationed for the forseable future. Stricter underwriting standards will also be enforced for the forseable future, so no more liar loans and hardly any self certs. Liar loans and self certs could easily be called the ‘fourth support leg’ of the housing market and that has already been swept away.

17. flashman said...

quiet guy and C&C: It is too easy to dismiss all economic activity (and particularly design and engineering) in the UK as doomed. People have been doing it for decades or even hundreds of years. You might as well say that Pepsi is finished because anyone can make a Cola. Copying of product has been done for thousands of years. The Italians still manage to sell nice suits and the French Champagne market still survives despite the plagiaristic attentions of their competitors. The Chinese can try to screw a Bentley together or make some Scotch but even they don't actually want the end result. More than half the scientific breakthroughs on this planet have originated in the UK. We invented almost every major sport and our music has largely dominated the world for 50 years. Whatever it is that we have, cannot easily be copied by an undersized nerd with bad breath. Even if they did successful copy something, we will have moved on to the next development and their copy will have the stigma of a knockoff Rolex. Even the Japanese car industry has resigned themselves to making super high quality, soulless copies of Western products. The Lexus is a good example. It started off as a soulless copy of a Merc S class and now it is a soulless copy of a BMW 7. They just don’t seem to have what it takes to beat our products. A better example is the German Maybach. It was designed to beat Rolls Royce but it ended up staring in Rap videos.

We all have our national identities and strengths and they are not easily emulated

19. flashman said...

I'm sorry to hear that tc

21. rumble said...

"More than half the scientific breakthroughs on this planet have originated in the UK. We invented almost every major sport and our music has largely dominated the world for 50 years."

-- But that all happened in a very different world. (And ball games are for children.)

"concede new"

23. flashman said...

"And ball games are for children"

wallop benderdog slurp

25. mark wadsworth said...

Not much to add apart from I appreciate the way that Flash is patiently answering all the questions.

It all stacks up to me. The basic premise - improving economy = falling prices is plausible, i.e. because if economy picks up, then all things being equal interest rates pick up years before wages start rising again. And it will be a couple of years before all the millions of quangista that the Lib-Cons are going to sack (in my dreams, mainly) get themselves proper jobs, so this will depress wages in real economy for a while.

reCaptcha: bounders crisis

27. flashman said...

Hi icarus: my Bulldog moment was a mildly tongue in cheek, Harry Flashman, damn your eyes, style comment. Lots of our inventions are also claimed by others but you could arguably give us the computer and nuclear power in the 20th century (some say the Manhattan project was essentially traded for US war support). If I were being serious for a while, I’d say that we have definitely punched above our weight in science and engineering. In sports and modern music, we are arguably top dog. It only occurred to me, as I was writing an earlier comment, that we originated, football, cricket, rugby, tennis and golf (I’m sure someone will point out that an ancient tribe invented them all).

29. flashman said...

floble bloop

31. bellwether said...

A heartening call to optimism, particularly on here. Scotland for its size has an astonising pedigree in scientific discovery (even a Bellwether relative was a pretty significant albeit second string19th C scientist) , and played a sigificant role in the development of sport eg golf.

What is most apparent however is the extent to which the Scottish output has diminshed over the past 100 years both in terms of quantity and quality. Although we still lead in a great deal of current bio science which shows there is still substance,and we did pretty well with banking for a while.

The UK as a whole has created some astonishing things, what is not clear is whether our dimished powers continue to dimish.

What is also unclear to me is to what extent we are going to see Global growth out of the current malaise - excuse the prejorative phrase. Anthony Bolton is off in China with a new fund talking about the so called S curve (Flash's billion on stream middle class), but an equally compelling case can be made that this will place a further strain on finite resources and lead to a greater level of overall impoverishment or again that that China is a bubble which will collapse in a decade based on a population that is both too big and insufficiently regenerative.

There is no real way of working any of this out however, the best that can be done is to keep looking at the evidence, with something approximating an open mind

33. rumble said...

"too much concensus"... easily fixed.

The problem with the reference to England and Scotland's great past is that it ignores the present and the past. The UK had a head start - parliament existed before Europeans started settling in America. More recently, some countries have had no chance with communism, which is now gone. Then there were advantages of colonization and associated trade routes. The world is a far more level playing field now. Considering the relatively tiny population, the UK is going to have to compete on quality, constantly eroded by "celeb" related sh!te. Other countries are still playing catch up, extrapolating their progress says that sooner or later they'll overtake, even if by chance due to the sheer numbers (infinite monkey theory).

"menial constituency"

35. hpwatcher said...

It's Monday, yet you came out swinging and spoiling the bears' picnic with a lot of bullish sentiment

Yes, I think sentiment is the important word there.

Though the next few months will be really interesting; especially with the public sector being dismantled somewhat - this may dent self confidence enough to ensure more consistent falls in house prices.

37. rumble said...

"It is worth noting that our relatively small size means any contribution we make to the world economy will get leveraged upwards in the face of a few billion new participants. Twenty years ago a British innovation, product or service would reach a market of hundreds of millions of customers. Now the same innovation, product or service has the potential to reach billions of customers. Our population used to be 50 odd million with worldwide customer base of about 500 million. Now we have a population of 60 odd million with a customer base of about 2 billion. Harry would swill some cheap Russian champagne if he heard about our new trade ratios"

-- Ignoring the worse competition ratios for potential innovators, service providers.

"its bricking"

39. icarus said...

Flashman - We could argue about the extent to which any recovery is fuelled by government stimulus and by inventory restocking (or cessation of inventory liquidation) but the consensus is that by any measure the climb out of recession (if that's what it is) is the weakest ever climb immediately after a recession. See yesterday's FT "America's jobless picture is alarmingly bleak". Where does the demand come from when the private sector (households and businesses is deleveraging) and government expenditure is under pressure?

41. flashman said...

icarus: “Where does the demand come from when the private sector (households and businesses is deleveraging) and government expenditure is under pressure?”

The demand will at first come from overseas where the economy never stopped growing (as per the Jaguar Land Rover story) . Not everyone will benefit because not everyone provides something that foreign markets want. Currency revaluations are under way that will help the rebalancing of trade. For example, the Chinese are only a small way through their currency appreciation. Many of the Western unemployed or future unemployed are involved in domestic only or local community businesses. Many will eventually find work in growth sectors but the dislocations will be painful and long lasting. Does it really matter how weak the growth is? Inventory restocking no longer works as an explanation because the recovery is almost a year old. I have seen similar weak growth before but it has to be remembered that some commentators (fame seekers mostly) were recently talking about depression. Don't you think the economy has shown remarkable resilience in the face if such gloom? It would be unwise to dismiss this resilience as insignificant.

43. rumble said...

You're still ignoring how economically, socially and technologically young those countries are and how quickly they're progressing. Japan want to start a robotic moon base in 2015, looking at helium 3 mining, along with the Chinese, Indians and Russians. Who's going to care about Jag-Landy when the superseding tech spin offs come from such projects? Seen many penny farthings recently? Then the brits will be copying the japs. This whole "but it's british" thing is going to gradually get diluted to irrelevance. Conversely, the "chinese tat" will get diluted as foreign educated and trained chinese return, and then you'll have 20 times as many innovators as the UK. The sun never sets on the british empire - what happened to that? It's still setting. You're clinging to the past, ignoring the present, predicting the future. Do you work in finance? Change happens. More energy input, more change. Awful lot of energy still in the process of coming online over east. Barriers? Ask Microsoft. Brand name? Ask Abbey.

"various succeeds"

45. flashman said...

"You're still ignoring how economically, socially and technologically young those countries are and how quickly they're progressing"

The more they progress the better we can do. Thats how world trade works. You have to get away from the economically naive idea that its us or them. You also have to get away from the blog world notion that new world orders are encroaching on us and that all we do is listen to Simon Cowell. This view in no way reflects reality. Britain bashing is a mass affectation that will pass. I actually think it is just a plain vanilla defense mechanism used by people who feel disconnected from society.

47. rumble said...

"The more they progress the better we can do."
-- I think we'll need more than a pep talk.

"You have to get away from the economically naive idea that its us or them."
-- I thought you introduced the "britishness". As long as there are independent countries with their own economies there will be separate us' and thems. Sure, relationships of some form, but still separate.

"You also have to get away from the blog world notion that new world orders are encroaching on us"
-- Oh dear, you're trying to label me a conspiraloon. Last desperate grab? I see big change, due to big tech, econ, and political change, but if anything, as far as a single shadowy ruling group is concerned, I see no future for global central authority. Socialism fails nationally, and internationally, no agility.

"Britain bashing is a mass affectation that will pass."
-- No, Britain bashing is a way of testing the optimist's arguments, which seem to have faded away.

"I actually think it is just a plain vanilla defense mechanism used by people who feel disconnected from society."
-- Which sections of society?

"The more they progress the better we can do." -- I know, coda... but this is scraping the bottom!

"if jacobean"

49. flashman said...

rumble: You seem rattled. It's just a blog, you know. The new world order thing was actually used in the conventional sense of new civilizations and societies. It never occurred to me that you would think I was calling you a conspiracy nut

"The more they progress the better we can do."
You replied: "I think we'll need more than a pep talk".

I think this comment went over your head. Its all about the velocity of trade. When other societies perform well, it gives us more opportunities to trade. Its a simple and well accepted economic concept. I am an economist by training and I suppose I shouldn't have assumed that you would be familiar with the concept

Don't get too hung up on the futility of James Bond and ginger beer “Britishness”. I am sure you are well aware that we are also at the cutting edge of many new technologies and medicines (in addition to our already established world leading industries). When the new world economies grow, we can benefit from their custom and vice versa. Trade is good.

"Why is the rest of the world talking about contagion"

That's just it. They are not. Blog world and its favourite authors is not representative the real world.

rumble. I sense that you are becoming agitated so I won't go on but you should recognise that you are choosing to argue a subject that is not your area of expertise. It's not a coincidence that I was right and you were wrong in our respective economic forecasts (from a year ago, give or take)

51. alan_540 said...

It's good to hear someone being bullish about the economy/recovery, if that's the reality bring it on!

53. hpwatcher said...

They were completely wrong, so perhaps they should be less confident in their future predictions of recession or even depression?

They weren't completely wrong - it's simply too early to tell exactly what will happen.

In my view, this thing is just getting started - and I find your bullishness rather premature. The real cutbacks, which will extend across Europe are still to come.

55. flashman said...

Incidentally hpwatcher, being an analyst occasionally affords me some profitable insight. When I saw how keen the government were to indulge in QE and ever wilder spending, I realised with some degree of certainty that house prices would rise in the short term. I didn't see how they couldn't rise when the enormous government stimulation was combined with phenomenally low interest rates and low unemployment (in my neck of the woods). That is why I quickly bought several parcels of building land at fire sale prices. I honestly never minded being called a VI by you but I would have used the word ‘opportunist’. I intended to sell a few and build out a few. However I sensed a change in the wind and quickly sold them at a decent profit (I only paid 18% CGT which is risible). Let's hope I sensed the wind correctly

57. techieman said...

"The ability to admit error is essential to a person’s ability to make future projections"... well regardless of who is right and who is wrong the issue from my viewpoint is not being right or wrong but putting your money where your mouth is and maximising returns when you are right and minimising losses when you are wrong.

Since i am a simpleton, my view was always that they would reflate as much as they could and quite possibly over-inflate, causing a hangover. Hence the asset markets moves. Calling a top has been difficult (i am the first to admit i have been premature on that a couple of times) but markets always discount the underlying economy (or is it vice versa)? In any case a move down, if of significant size, calls into question the sustainability of a recovery because, as you say, the props have been removed.

Perhaps you can argue that such a move is indicative of the end of loosening, and that we will now get back on course and sail off into the sunset, catching a fast underlying current in the (near?) future. Personally i dont buy it. Eventually we are in for a rude awakening, however we might be able to eek out some more growth in the meantime, who knows?

Personally i think the stage is set for some moves back up in the Euro and a sell off in the $, and moves back up in the stock markets. The catalyst? Company profits, although here i think we will have some real divergencies, the market will concentrate on the goodies rather than baddies.

As for HPs - its seems that we are saying that either way HPs will be under pressure. If inflation has an impact on causing wages to grow then I think we might have some more bullish support, but i cant see that myself for at least some time.

However, my view is only predicated on experience and not on anything concrete. I am most interested in the GDP revisions as a lead indicator... Flash does that interest stack up in your experience.

59. bellwether said...

The only sort of guide we have to what might happen is history. If you were british or american alive in 1925 and trying to guess what would happen over the next 50 years, you could be both hugely pessimistic and wildly optimistic and be absolutely right depending on your timeframe.

My own take, is that when things have been good for a long period of time, and when we appear increasingly unable to deal with hardship we are proabably due a change. I also worry that if we bury problems/like say Bernanke think we have all the answers, there is a tendancy for reality to bite back.

The blogosphere is a dislocation and being full of misfits and macontents a disproportionate one, but it is still telling us that the main stream is still way too complacent.

61. flashman said...

Hi techie: The GDP numbers are always important, so it is more than valid to incorporate them into a bag of indicators. The way the first release is calculated means that the figures will nearly always be conservative. I'm not sure if any, well-anticipated, upward revisions could therefore be interpreted in a meaningful way. On the other hand, we must always look at trends, so if an upward revision was greater than expected, it might indicate that things are better than currently believed which could justify a nimble bit of buying (fast acting leading indicator). Conversely if the revision is far more negative than expected, it could be used as a prompt for some nimble short selling. I therefore agree that the revisions, in some circumstances, could be used as a leading indicator of the economy and the markets. You’d have to be quick but that’s not exactly news to you :)

63. techieman said...

Cheers Flash... god it looks like i am kinda agreeing with HPW! Quick let me change my view and reverse all my positions! :-).

65. techieman said...

oh and just to be clear

"Personally i think the stage is set for some moves back up in the Euro and a sell off in the $, and moves back up in the stock markets. The catalyst? Company profits, although here i think we will have some real divergencies, the market will concentrate on the goodies rather than baddies."

means not quite yet, although "soon". That means (probably) starting late this week or early next (i.e. in anticipation of the catalyst) and that it will be an opportunity to re-short i.e. as a retrace rather than a c-o-t. Anyway thats just my view. for what its worth.

67. This comment has been removed as it was found to be in breach of our Blog Policies.

69. rumble said...

Flash, I was sure I made at least one good point, and I'm not sure you countered whatever it might have been. This thread, was the one with life yesterday, you tend to type a fair bit, surely that increases the probability of response, shirly?
Bellwether makes the observation that we weren't working to an agreed timeframe, so not a great foundation.
And "The blogosphere is a dislocation and being full of misfits"... democracy.
So, what happened to the incalculable amount of financial complications of two years ago?

"people duelist"

71. rumble said...

The news was full of stories about bewilderingly far-reaching derivatives.... ?
I've just read an article on time being an illusion (SciAm, not blogland) - why do I think you're about to tell me something similar?

"society piggish"

73. rumble said...

The credit crunch was an illusion?

The Godot collapse?

"never goethe"

75. bellwether said...

Flash the growth figures over the past year seem consistent with measurement from a relatively low level, zirp, temporary currency devaluation advantages and various government stilmuli driven by a desire to stay in power. Only the next 12 - 18 months will tell us if there is more to the story than that.

There seems little genuine change to be optimistic about. In a post bubble economy (which seems to describe the past 10 years) , stimulus is needed to fight the effects of the residual debt but each succesive stimulus has increasingly little effect. It is beyond question that debt has outstripped productivity, and that despite our idea of what an economy should be running close to perfection from 2002 - 2007. We are running the same economy now (too much concentration of wealth with the few,with the many only mananging the stand still be taking on debt). Quite literally nothing has changed but we expect a different result.