Merchant of Magadan

When things went wild in the Weimar Republic, it got reflected in the arts, as Inflation distorted reality. Thomas Mann's short story Unordnung und fruehes Leid (Disorder and Early Sorrow), his brother, Heinrich's, Kobes, Golems, hookers, paedophiles, gays, spivs, crooked buildings and cops, abound. Just how crooked (or wierdly Expressionist if you prefer) are Paulson's "investment" in financial sevices - a taxpayer bailout; Gordon Brown's "investment" in public services - a taxpayer subsidy; and Ruth Kelly's preposterous Road-to-Damascus experience that after 10 years she has seen the light of domestic life. Of course, imminent defeat in a marginal seat together with the slim possibility of being in the next government, do not make elevation to the Lords or the EU or an overpaid Quango, remotely attractive. oooooooooooooh noooooo! It's just pathetic for anyone to believe in Paulson's investment in the financial system, Brown's investment in the public system, or Kelly's investment in her private life. When property goes up, tinker, tailor soldier, spy, think they are Einstein. When it goes down, Paulson, Brown and Kelly think they are St. Francis or mother Teresa.

Now out of the etfs. This isn't going to a rook & pawn end-game. There are going to be some pawn sacrifices to try and clear the decks. Hmmm. You know things are really bad when I descend to mixed metaphors.

now it just gets sillier and sillier. Morgan Stanley and Goldman Sachs converting to deposit-takers is a bit like asking a fox if he wants to stay outside and get torn apart by bloodhounds or would he possibly accept a job as an egg-counter in the chicken coup ? Fox do probability real good. Fox be good doggy for a while. This is a real pain. I've got physical gold with UBS and I've now got to go through the original contract (in German) to establish who legally holds title. Christ, if you have to check title on every transaction the entire system will grind to a halt. I've actually met Ospel, Varley, Wanless and a few others at various functions over the years. But as one venture capitalist said to me the other day, "I'd tell 'em to sit up straight when they talk to me" -a touch (or rather a shedload ) of hubris one might think - but he's right. There are still good entrepreneurial companies out there between £10-£50m and in the current circumstances, many of them are saying they will finance expansion through acquistion of distressed assets from cash-flow and the banks can go **** themselves. I've never seen this business model in thirty years. Businesses always gear up and play the probability that they can beat the bank. Not so today. Banks are being left with bad loans and good companies are walking away. If they don't have the money anymore, then they can't talk the talk or do the walk. One Exploration & Production investor I know said he could probably finance a bid for Barratts or Bradford and Bingley without bank finance but couldn't be bothered to go throught the can of worms. Contempt has reached cosmic levels.

Mmmm. That was a Wiley-E.Coyote moment. Didn't sell today. The spreads on BULL were outrageous :11.70-12.00 What's really interesting is how this has ratcheted up the idea of counterparty risk among all professional investors and really hardened attitudes. Everything has rude suspicion etched all over it. Almost everybody with substantial assets to invest is talking to market-makers, bank managers, fund managers, financial planners etc as if they were total scum. "Just do as you're ***** well told" .... "Look, if you want to **** about, I'll go elsewhere".... "You can just **** off" is all I heard last week. The idea of counterparty risk has filtered down from the banks to individuals. A lot of professional investors are now looking at guaranteed deposit schemes as little more than a necessary fiction. Of course, in theory, everyone knew this was the case. Now they genuinely factor it in to all investment decisions. Everybody is looking at everybody as if they were a pod from that movie Invasion of the Body Snatchers (the early black & white version is best - and the ending scarier). When you suspend ETFs, you shouldn't be surprised if people start to think of the smiley counter clerks in Building Societies and similar institutions as just drones in the pyramid (selling) edifice and speak to them accordingly. In thirty years, I've never seen it like this.

It's a Marshall Plan without the dosh & without the possibility of deficit spending without horrible consequences. Consider what that really means. It's boasting without winning a war. A disgraceful and immoral posture. It's similar to the tosh Obama has been spouting in the most self-obssessed manner since Rousseau about the uniqueness of his life, as if every little event in the little man's life were a part of Hegelian world history. For sheer conceit & sentimentality, it takes some beating. Nevertheless, that's where we are. (That's not to say you should vote for a man who serially crashes his planes but boasts as a warrior or a woman who can see Russia if she has her specs on.) But the Left are going to transform the word "investment" into something like "putting money into human resources" (usually government jobs) and they are going to impoverish everyone and they are going to cull the pensions of their loyal employees. It's like unleashing your kids on the world. We will them to succeed. They fail. We step in. They succeed. We boast. What are the consequences ? We don't know. But suppose I stepped in to save my children when I didn't have any money. What is my "investment" worth ? What is my handshake worth ? Am I not boasting ? That 1. I can save my children 2. I have the resources 3. My word is good 4. That the rest of my family will not fall down the well because of my boasting ? 5. etc etc It's nonsense to blame only the banks. Governments rode this privatised Keynesianism, democratised credit for all it was worth. It's a bit cloudy today and I can't see very much. So I'll stick to multiple Manhattans in the morning in Magadan. MM

Indeed. It's a variant of "investment" in "public services" coined by the Anti-Christ of Kirkaldy. Of course, what is truly Orwellian is that "investment" in bail-outs & public services will cost you all your old age pension and possibly the welfare state itself. Make no mistake: governments, like Wall Street, are going to short-change you for their bad "investments". I can see Alaska from here. MM

BUY ONE GET ONE FREE! SCS also available for a pair of your old Oxfam socks.

On 10 June the papers were flush with the story that the CML had warned that 23,200 people who had taken out 100% mortgages last year could soon be in Negative Equity. Could be ? Today the CACI survey raised the figure to 150,000 (not restricted to 100% LTVs) and warned it could be 360,000 if there were a 20% fall. IT WILL BE A LOT HIGHER THAN THAT. Because: Not included in these figures 1. Mortgage Equity Withdrawal. Even people who bought in 1970, 1980, 1990, or 2000 can get swept up into the maelstrom. Mortgage Equity Withdrawal (MEW) converts an historic purchase price into a new, invariably higher one and takes you many steps closer to the 100% LTVs. There might be many reasons for an MEW - a) holiday home purchase refurbishment c) leisure expenditure d) BTL ramping to enable the next puchase e) capital expenditure on children f) cash-flow problems. Although d) and f) are obviously highly problematic, it looks at first glance as if a) and c) are simply transfers of wealth. But they are transfers of wealth in a declining market so are merely less toxic (admittedly by a long way) than d) and f) 2. BTL Portfolios. The 100% LTV figure exludes all those BTL Portfolios which effectively borrowed a) more than 100% and inflated the value of present value to increase the MEW in order to produce the cash for the next deposit. ENTIRE PORTFOLIOS WILL HAVE TO BE LIQUIDATED. By a lot more than 20%. Ergo the 360,000 CACA figure must go higher. 3. Previously mortgageable property (just), most notably Council, will be unmortgageable. The difference between a Cash price and a Mortgageable price is a lot more than 20%. Ergo, the 360,000 figure must go higher. 4. Liar Loans. When these go wrong and forced liquidation ensues, the shortfall will be more than 20%. Ergo.... 5. And the genie in the lamp is of course the avalanche of unemployment. Just as MEW converts the purchase price, unemployment scuppers the 25 year mortgage contract. And so on and so forth... I think this market will retrace to at least 2003. THEREFORE ALMOST 100% OF TRANSACTIONS POST 2003 could go badly wrong. Some will be able to stick it out but when unemployment strikes in the form I think it will, the 360,000 Negative Equity or 200,000 Repossessions being touted will simply look laughable. You do not want to know the number of post-2003 transactions. If you thought the CML 23,200 was scary.... Downward spiral or Mansonesque Helter-Skelter ? Dunno. But take your pick.

now 3.85p and worth £1.92m someone empty their pennyjar go in to a bank and buy it please.

oh dear, 4.3p today (£2.15m) Sell your house in Hackney and become a FTSE baron (at least for a while).

It's probably not true that house prices can go to zero - unlike businesses - but they can fall like a brick. They could easily fall 50% in some of the frothier parts of London and then continue to fall for sometime until they revert to the mean of their multiple of rental value. Housing is a highly leveraged market. It works wonders on the way up. On the way down, it is a force of nature. Just look at Land of Leather (LAN) a company whose fate is closely correlated to the housing cycle. It sells sofas but is highly geared. In April 2007, it was priced at 295p and valued at £150m with several brokers and journalists rating it a BUY. By September 2007 it had fallen to 213p (£110m). Between September and January it drifted to around £1 (£50m) It then issued a profit warning and halved to 53p (£25m) Six months later, it has fallen to 6p and is valued at £3m. It has effectively run out of money and can't trade its way out. It is now trying to raise money in the market but even if it succeeds, the £15m won't see it through. Gameover. So farewell then Land of Leather Keith's mum says You're in for a real good hiding And on a bumpy ride Like New-Builds in Newcastle. The game is also over for legions of 'homeowners' who don't own anything, are highly leveraged and will run out of cash - leaving them exposed to an invigorating force of nature. How far can a 3 bed terraced house in Outer London fall ? Someone asked me the other day what they should do to shift their house on at £385k. What's the probable rent I asked. About £1200. Oh then it would have been worth about £290k in 2006...but historically it would be worth around the £180k. (Based on 5% and 8% yields). She went white. But it could go lower than that because in the present environment you might need 10% giving a value of just under £150k. She looked like she needed to lay down on a sofa.... The point about this story is a) it depends whether she needs the cash and the speed of the downward spiral. For highly-geared business this is often a lethal combination. And so it may prove for many 'homeowners.'