Where Do People Think That We Stand?

[LuckyOne]

I think that the global policy response to the balance sheet recession means that a full blown crisis has been averted and that we are in a worse than normal recession but nothing more severe than that.

I recall reading that a "normal" recession lasts about 14 months. We are about 12 months into this one. This is a worse than normal recession so it may take us two years to get out of it so my guess is that we are about halfway through it.

The next question is the lag between changes in the economy and changes in house prices. Some seem to hold the opinion that house prices are a leading indicator. I think the exact opposite. I think that employment lags growth and that house prices lag employment. I don't expect house prices to bottom for at least 12 months after the economy starts to grow again.

[Deckard]

I think that the global policy response to the balance sheet recession means that a full blown crisis has been averted and that we are in a worse than normal recession but nothing more severe than that.

I agree with you, and I think this is why shares are recovering despite continuing bad news.

Global stock markets were pricing in a full blown depression, so there's plenty of scope for a rebound despite persisting bad news.

In other words news is bad, but in line with a severe recession scenario - a full blown depression seems to have been averted.

Incidentally, I am amazed that the usual uber-bears are not all over this thread to warn us of impending economic armageddon...

maybe the sentiment has really shifted, even on HPC?

[salamander]

I agree with you, and I think this is why shares are recovering despite continuing bad news.

Global stock markets were pricing in a full blown depression, so there's plenty of scope for a rebound despite persisting bad news.

In other words news is bad, but in line with a severe recession scenario - a full blown depression seems to have been averted.

Incidentally, I am amazed that the usual uber-bears are not all over this thread to warn us of impending economic armageddon...

maybe the sentiment has really shifted, even on HPC?

It's going to happen, and probably quite soon. The man behind the curtain is at the point of exhaustion.

Edited July 24, 2009 by narrowescape

[Flat Bear]

I agree with you, and I think this is why shares are recovering despite continuing bad news.

Global stock markets were pricing in a full blown depression, so there's plenty of scope for a rebound despite persisting bad news.

In other words news is bad, but in line with a severe recession scenario - a full blown depression seems to have been averted.

Incidentally, I am amazed that the usual uber-bears are not all over this thread to warn us of impending economic armageddon...

maybe the sentiment has really shifted, even on HPC?

It is worse than you think

[Deckard]

It's going to happen, and probably quite soon. The man behind the curtain is at the point of exhaustion.

It is worse than you think

That's more like it - thank you

Edited July 24, 2009 by VoteWithYourFeet

[mirage]

Global stock markets were pricing in a full blown depression, so there's plenty of scope for a rebound despite persisting bad news.

Is this true? I've seen all sorts of value estimations and many of them don't seem to think they ever got really cheap on a multi-decade historical basis.

I find it rather confusing.

[Hip to be bear]

In the early 90s house prices lagged a long way behind economic recovery due to high interest rates. Now due to base rates at 0.5% it is easier to part fools from their money (or rather for the banks to lend the fools more money than they will be able to repay if IRs rise to long term averages).

I voted for a lag of over 12 months, despite current evidence to the contrary. Time and the bond market will tell.

[Deckard]

Is this true? I've seen all sorts of value estimations and many of them don't seem to think they ever got really cheap on a multi-decade historical basis.

I find it rather confusing.

That's just my personal opinion - I should have added the IMO disclaimer to my statement

I have also read 1000s of research reports/analyses/commentaries/considered opinions and at the end of the day it STILL remains a matter of personal opinion, no matter what.

Don't believe anyone who tells you otherwise.

[Charliemouse]

I think we are heading for the worst depression in human history and we aint seen nothin yet.

All the stimulus and bail outs. all the QE, false dawns, green shoots and spin. Nothing is working. Banks continue to expect large profits. Executives still expect massive pay deals and are getting them even in Northern Rock which we are supposed to own but obviously have no influence in.

350 trillion dollars of stress in the system isn't going away anytime soon.

I think house prices will fall another 50% or even more if unemployment continues to rise, which it will because most businesses and banks are using any bail out tax money to balance the books, not increase loans or expand.

The public are either paying off credit cards and loans or going bankrupt so high street spending is soon to fall away.

Its going to be huge and we are all going to feel it weather we think we are protected or not.

Apart from that we should be fine.

Edited July 24, 2009 by charliemouse

[LuckyOne]

I think we are heading for the worst depression in human history and we aint seen nothin yet.

All the stimulus and bail outs. all the QE, false dawns, green shoots and spin. Nothing is working. Banks continue to expect large profits. Executives still expect massive pay deals and are getting them even in Northern Rock which we are supposed to own but obviously have no influence in.

350 trillion dollars of stress in the system isn't going away anytime soon.

I think house prices will fall another 50% or even more if unemployment continues to rise, which it will because most businesses and banks are using any bail out tax money to balance the books, not increase loans or expand.

The public are either paying off credit cards and loans or going bankrupt so high street spending is soon to fall away.

Its going to be huge and we are all going to feel it weather we think we are protected or not.

Apart from that we should be fine.

This is a balance sheet recession which is the direct result of uncontrolled excesses that built up during the boom.

People, banks and businesses are repaying debt at a very fast clip. Governments and central banks are building up debt quite quickly.

The way that events will probably unfold is that the private sector will repair their balance sheets by earning their way out of debt to the point where they can start spending again. It is at this stage that governments can finally start to repair their balance sheets.

This balance sheet repair is a necessary condition for recovery from the recession. I see it as a sign of strength rather than weakness which puts me in a minority camp.

[Guest happy?]

I think that the global policy response to the balance sheet recession means that a full blown crisis has been averted and that we are in a worse than normal recession but nothing more severe than that.

I recall reading that a "normal" recession lasts about 14 months. We are about 12 months into this one. This is a worse than normal recession so it may take us two years to get out of it so my guess is that we are about halfway through it.

The next question is the lag between changes in the economy and changes in house prices. Some seem to hold the opinion that house prices are a leading indicator. I think the exact opposite. I think that employment lags growth and that house prices lag employment. I don't expect house prices to bottom for at least 12 months after the economy starts to grow again.

I think we stand on the edge of a prepuce - casino capitalism has c0cked it up!

[Bloo Loo]

I stand about 3 feet away, but my aim is sometimes appalling.

[LuckyOne]

That's just my personal opinion - I should have added the IMO disclaimer to my statement

I have also read 1000s of research reports/analyses/commentaries/considered opinions and at the end of the day it STILL remains a matter of personal opinion, no matter what.

Don't believe anyone who tells you otherwise.

Exactly.

The most important thing to do is to avoid falling in love your your personal opinion to the point that you take personal financial decisions that will blow you up if your predictions turn out to be incorrect.

The failures of people like Bovey are obvious. I also know some uber-bears who have lost most of their money by being right in the long run but made their bets at the wrong time (in one case by an agonising 3 months).

[Bloo Loo]

Exactly.

The most important thing to do is to avoid falling in love your your personal opinion to the point that you take personal financial decisions that will blow you up if your predictions turn out to be incorrect.

The failures of people like Bovey are obvious. I also know some uber-bears who have lost most of their money by being right in the long run but made their bets at the wrong time (in one case by an agonising 3 months).

As Sir John Harvey Jones used to say...some time, it will be right to kill your favourite child.

[roman holiday]

I think we stand on the edge of a prepuce - casino capitalism has c0cked it up!

Things certainly won't be returning to normal. The US, and certain other countries, abused their privilege in the world.... no had first the self-delusion that they were privileged. That, and the frenzied excesses of, as you say, casino capitalism was the coup de grace of the old order. Expect lowered living standards people.

Edited July 24, 2009 by roman holiday

[Agentimmo]

Unemployment. This will be the killer.

All the jobs I see being destroyed. They won't be coming back to Europe anytime soon. They have gone East for good.

The stimulus packages since last year can't go on forever.

I'm usually an optimist. Honest. But I don't see where the next bout of job creation is going to come from to fill this gap in the short/medium term.

Houses will be traded , but only a fraction of the amount compared to the booms years, and only at the fraction of those prices. ie. down 50% or more.

[scottbeard]

I think we are heading for the worst depression in human history and we aint seen nothin yet.

...

Its going to be huge and we are all going to feel it weather we think we are protected or not.

+1

However, even though standards of living will fall noticeably, most people in the West should still have food and shelter. What I hope it will do is end the ridiculous wastefulness and over-consumption of recent years.

Unemployment. This will be the killer.

All the jobs I see being destroyed. They won't be coming back to Europe anytime soon. They have gone East for good.

You can never say never. Over the next 20-30 years I expect agriculture and manufacturing in Britain will take off big time, as oil shortages mean it no longer makes economic sense to ship everything round the world any more. May be too late for some of our generation though.

[Soul Reaver]

I agree with you, and I think this is why shares are recovering despite continuing bad news.

Global stock markets were pricing in a full blown depression, so there's plenty of scope for a rebound despite persisting bad news.

In other words news is bad, but in line with a severe recession scenario - a full blown depression seems to have been averted.

Incidentally, I am amazed that the usual uber-bears are not all over this thread to warn us of impending economic armageddon...

maybe the sentiment has really shifted, even on HPC?

We are all going to die. This is guranteed 100%

[FreeTrader]

This is a balance sheet recession which is the direct result of uncontrolled excesses that built up during the boom.

People, banks and businesses are repaying debt at a very fast clip. Governments and central banks are building up debt quite quickly.

The way that events will probably unfold is that the private sector will repair their balance sheets by earning their way out of debt to the point where they can start spending again. It is at this stage that governments can finally start to repair their balance sheets.

This balance sheet repair is a necessary condition for recovery from the recession. I see it as a sign of strength rather than weakness which puts me in a minority camp.

I'm not sure this is true, at least in the case of individuals.

Aggregate household debt is hardly rising these days, but it's not actually falling yet. And since nominal GDP is declining, the household debt-to-GDP ratio is still increasing.

The CML emphasised in its market commentary a few days ago that aggregate regular and lump sum mortgage principal payments have not increased over recent months. Is it possible that households overpaying mortgages are being offset by those that have fallen into arrears?

I'll be able to update the above chart for Q2 next week when the BoE releases the June lending figures, but after today's preliminary GDP release it's a virtual certainty that the debt-to-GDP ratio will have risen even higher.

It's also interesting to note that the debt-to-GDP ratio didn't fall back during the last house price crash.

[General Congreve]

I'm not sure this is true, at least in the case of individuals.

Aggregate household debt is hardly rising these days, but it's not actually falling yet. And since nominal GDP is declining, the household debt-to-GDP ratio is still increasing.

The CML emphasised in its market commentary a few days ago that aggregate regular and lump sum mortgage principal payments have not increased over recent months. Is it possible that households overpaying mortgages are being offset by those that have fallen into arrears?

I'll be able to update the above chart for Q2 next week when the BoE releases the June lending figures, but after today's preliminary GDP release it's a virtual certainty that the debt-to-GDP ratio will have risen even higher.

It's also interesting to note that the debt-to-GDP ratio didn't fall back during the last house price crash.

Very good point. Not to mention that if deflation takes hold, the debt to GDP ratio (both national and personal - all payable by the voting public, either directly or through taxes) will get even worse, crippling the economy in a vicious downwards spiral.

So what do for the powers that be? Cover their eyes and let everything crash, or continue to QE their little socks off to stop deflation but devalue the currency and create inflation to shrink the debt? Although bear in mind that QE is essentially more taxpayer debt. Damned if we do, damned if we don't.

The wheels have finally come off...

[LuckyOne]

Very good point. Not to mention that if deflation takes hold, the debt to GDP ratio (both national and personal - all payable by the voting public, either directly or through taxes) will get even worse, crippling the economy in a vicious downwards spiral.

So what do for the powers that be? Cover their eyes and let everything crash, or continue to QE their little socks off to stop deflation but devalue the currency and create inflation to shrink the debt? Although bear in mind that QE is essentially more taxpayer debt. Damned if we do, damned if we don't.

The wheels have finally come off...

As I learned very recently, this is the debt deflation trap that Irving Fischer described after the 1929 crash.

http://en.wikipedia.org/wiki/Irving_Fisher#Debt-Deflation

It goes something like this :

Following the stock market crash of 1929 and the ensuing Great Depression, Fisher developed a theory called debt-deflation. According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:

1. Debt liquidation and distress selling.

2. Contraction of the money supply as bank loans are paid off.

3. A fall in the level of asset prices.

4. A still greater fall in the net worth of businesses, precipitating bankruptcies.

5. A fall in profits.

6. A reduction in output, in trade and in employment.

7. Pessimism and loss of confidence.

8. Hoarding of money.

9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

It sounds ominously familiar and is probably the reason that QE and fiscal stimulus are being pursued so aggressively globally. Zero nominal interest rates and largely positive real interest rates (deflation) will crush the economy further ....

There is no other "cure" for what ails us although there is a non-zero probability that the side effects of the medicine are actually worse than the disease which it is trying to cure ......

[Charterhouse]

As I learned very recently, this is the debt deflation trap that Irving Fischer described after the 1929 crash.

http://en.wikipedia.org/wiki/Irving_Fisher#Debt-Deflation

It goes something like this :

It sounds ominously familiar and is probably the reason that QE and fiscal stimulus are being pursued so aggressively globally. Zero nominal interest rates and largely positive real interest rates (deflation) will crush the economy further ....

There is no other "cure" for what ails us although there is a non-zero probability that the side effects of the medicine are actually worse than the disease which it is trying to cure ......

Thanks for your excellent posts in this thread. It is indeed a balance sheet recession and you are right to draw attention to the debt deflation trap that awaits if inflation flips negative. In my mind this is the main real reason behind QE, to boost the money supply enough to try and avoid deflation. Inflation is a real dichotomy right now, we probably either get deflation and risk tipping into a Japan scenario, or things are overdone and we get moderate over-inflation for a few years. Inflation is MUCH easier to control which is why the BoE should be focussed on avoiding deflation at all costs.

My personal feeling is that the real economy is only just starting to see the effects of the recession, 2008 was all about the financial sector, 2009 and 2010 are going to be about the retail economy, and consumers are going to get hammered. People need to learn to save again, to repair their own household balance sheets as fast as possible, which is going to mean large contractions in retail sales as people wean themselves off their credit cards.

That said (and I know this doesn't make that much sense to many people) I still think we have seen the worst of the house price falls, because credit is so important to mortgage finance, and the finance tap was turned off so suddenly and abruptly when the banks got into trouble at the start of this crisis, so house prices have actually probably LED the recession this time round rather than lagged.

[Wait & See]

All I know is, no one is spending, the banks are hording and our wonderful government is printing.

This won't end well.

Edited July 24, 2009 by Wait & See

[LuckyOne]

Thanks for your excellent posts in this thread. It is indeed a balance sheet recession and you are right to draw attention to the debt deflation trap that awaits if inflation flips negative. In my mind this is the main real reason behind QE, to boost the money supply enough to try and avoid deflation. Inflation is a real dichotomy right now, we probably either get deflation and risk tipping into a Japan scenario, or things are overdone and we get moderate over-inflation for a few years. Inflation is MUCH easier to control which is why the BoE should be focussed on avoiding deflation at all costs.

My personal feeling is that the real economy is only just starting to see the effects of the recession, 2008 was all about the financial sector, 2009 and 2010 are going to be about the retail economy, and consumers are going to get hammered. People need to learn to save again, to repair their own household balance sheets as fast as possible, which is going to mean large contractions in retail sales as people wean themselves off their credit cards.

That said (and I know this doesn't make that much sense to many people) I still think we have seen the worst of the house price falls, because credit is so important to mortgage finance, and the finance tap was turned off so suddenly and abruptly when the banks got into trouble at the start of this crisis, so house prices have actually probably LED the recession this time round rather than lagged.

Thanks. As mentioned, Fischer's views were something that I was taught about very recently. Can't remember who it was who brought it to my attention so I can't make a better attribution.

I am unsure as to the last bit. Part of what really accelerated the balance sheet recession was mark to market accounting at financial institutions.

Households are a funny hybrid of accrual and mark to market accounting.

The mark to market of houses impacts spending (the so called wealth effect) and the ability to refinance when mortages come due or people try to withdraw equity. Clearly the fall in prices has had a severe negative impact here already.

For most people, I think that accrual accounting is more important than mark to market accounting when it comes to their houses mainly due to the full recourse nature of mortage loans in this country. For as long as rates are low and people have jobs (positive cashflow on an accrual basis), they will continue to stay in their houses for as long as they can. This ability will be increasingly threatened once the focus of this recession changes from the balance sheet to the real economy. My personal opinion is that the recession is currently undergoing its inevitable transformation from a pure balance sheet recession to a more broad based recession.

I think that we have seen a reasonable proportion of the wealth effect on house prices already but I think that the worst is yet to come on the accrual front.

That said, I do believe that we are more than halfway though the decline in house prices and that we could escape a lot more damage if QE gives everyone the time to repair their balance sheets.

Psychologically, I think that house prices have a "memory" which makes them much more sticky to the downside than they ought to be based on the fundamentals. This is not what I want to see (or what many on this site believe to be true) but I suspect that as long as QE "works", we won't see prices go to anywhere near where they "should" be .....

[Charterhouse]

For most people, I think that accrual accounting is more important than mark to market accounting when it comes to their houses mainly due to the full recourse nature of mortage loans in this country. For as long as rates are low and people have jobs (positive cashflow on an accrual basis), they will continue to stay in their houses for as long as they can. This ability will be increasingly threatened once the focus of this recession changes from the balance sheet to the real economy. My personal opinion is that the recession is currently undergoing its inevitable transformation from a pure balance sheet recession to a more broad based recession.

I think that we have seen a reasonable proportion of the wealth effect on house prices already but I think that the worst is yet to come on the accrual front.

That said, I do believe that we are more than halfway though the decline in house prices and that we could escape a lot more damage if QE gives everyone the time to repair their balance sheets.

Psychologically, I think that house prices have a "memory" which makes them much more sticky to the downside than they ought to be based on the fundamentals. This is not what I want to see (or what many on this site believe to be true) but I suspect that as long as QE "works", we won't see prices go to anywhere near where they "should" be .....

Two good points here - accrual accounting is more useful unless forced disposal kicks in, hence the focus on "affordability". Because of the lack of a need to post more collateral to "top up" your LTV, you can stay in a house with limitted negative equity for quite some time as long as it remains affordable.

I also agree with the psychological point although that would probably imply that prices would start to fall further in coming months as "reality" kicks in for people.