Why The Current Blip Higher In House Prices Is Logical ..

[LuckyOne]

There is no denying that house prices have blipped slightly higher in the last four months or so. I submit that this blip is logical but unsustainable :

- Banks have been interfering with free market mechanisms by keeping houses off the open market and putting them into "financial engineering" vehicles to restrict supply. Dr Doom had a great thread on this.

http://www.housepricecrash.co.uk/forum/ind...howtopic=122299

- Markets never move unilaterally in one direction. They tend to try to punish the ill informed. Again, Dr Bubb warned of this in his excellent dead cat bounce thread.

http://www.housepricecrash.co.uk/forum/ind...howtopic=113818

- There is some fear amongst people with a lot of cash. They feel that owning property is a better bet than holding cash. While it is clear that owning a house is a poor hedge against inflation relative to some alternatives, it is a better option than cash. There have have been numerous threads on this topic.

- Interest rates are at generational or multi generational lows. This is the result of market manipulation to try to prevent a complete collapse of our system. Again, there have been numerous threads on this topic.

- QE has given the banks some time to try to rebuild their balance sheets by selling securities to the central bank (and ultimately the Treasury) at inflated prices. This is yet another topic that has been explored in depth on this site.

- Unemployment continues to rise.

- Household balance sheets continue to deteriorate.

Fundamentals can be interfered with in the short term by fiscal and monetary authorities.

Markets can also act in a counter-trend fashion for periods of time.

In the end, I can understand why house prices have risen in the last few months but I cannot accept that interference with market clearing mechanisms is sustainable for anything beyond the short term. Markets always win.

Edited August 24, 2009 by LuckyOne

[IMHAL]

Logic would say that when the cash runs out then the next tumble will come.

However - I really don't trust the authorities to do right by the people (for obvious reasons). So we can expect them to keep pushing as HPI comes back - through more shared equity schemes, looser lending from state owned banks and general printing and fear of cash.

[LuckyOne]

Logic would say that when the cash runs out then the next tumble will come.

However - I really don't trust the authorities to do right by the people (for obvious reasons). So we can expect them to keep pushing as HPI comes back - through more shared equity schemes, looser lending from state owned banks and general printing and fear of cash.

I agree with you up to a point.

One of the misconceptions about democracies is that they are there to protect the interests of all. Their existence actually depends on the interests of the majority at the expense of the minority.

At present, the majority appear to be over-extended and verging on going broke. The tyrrany of the majority means that this group will continue to try to protect their self interest at the expense of the financially conservative minority until the bond market (the mechaism by which the self interest of the majority is executed) says 'NO!!".

[IMHAL]

I agree with you up to a point.

One of the misconceptions about democracies is that they are there to protect the interests of all. Their existence actually depends on the interests of the majority at the expense of the minority.

At present, the majority appear to be over-extended and verging on going broke. The tyrrany of the majority means that this group will continue to try to protect their self interest at the expense of the financially conservative minority until the bond market (the mechaism by which the self interest of the majority is executed) says 'NO!!".

I agree re: point on democracy.

But what happens when/if the bond market does not function correctly? What I mean is - is it possible that the bond market can be subverted somehow? Because right now I am paying that the bond market fails and we get some sort of financial sanity back and before we get hyperinflation or a very severe depression and millions of famillies being thrown into the streets

Edit - also to say that the market may see this as a true recovery - when it is actually a break-up boom.

Edited August 24, 2009 by IMHAL

[LuckyOne]

I agree re: point on democracy.

But what happens when/if the bond market does not function correctly? What I mean is - is it possible that the bond market can be subverted somehow? Because right now I am paying that the bond market fails and we get some sort of financial sanity back and before we get hyperinflation or a very severe depression and millions of famillies being thrown into the streets

Edit - also to say that the market may see this as a true recovery - when it is actually a break-up boom.

It is all a matter of wealth preservation rather than wealth generation over the next decade or so.

As far as I can see, all of the signs point to a concerted effort to subjugate the discipline of the bond market which, collectively, allows us to live beyond our means.

I expect a breaking point to be reached, I just don't know when it will happen. I expect the consequences to be dire but I am not willing to make a large enough "bet" that it will be destructive if the outcome is either different to what I expect or less damaging than I fear.

[IMHAL]

It is all a matter of wealth preservation rather than wealth generation over the next decade or so.

As far as I can see, all of the signs point to a concerted effort to subjugate the discipline of the bond market which, collectively, allows us to live beyond our means.

I expect a breaking point to be reached, I just don't know when it will happen. I expect the consequences to be dire but I am not willing to make a large enough "bet" that it will be destructive if the outcome is either different to what I expect or less damaging than I fear.

Sorry to be thick - but how do you make a bet on this - do you mean PM's or something else?

[LuckyOne]

Sorry to be thick - but how do you make a bet on this - do you mean PM's or something else?

There is no surefire bet.

Imagine the following scenarios :

- A 10% chance of a full blown, deflationary death spiral

- A 15% chance of a long term but moderate deflationary "cut by a thousand deaths"

- A 20% chance of a low growth, low inflation environment

- A 20% chance of a low growth, high inflationary world

- A 15% chance of a high growth, high inflationary world

- A 10% chance of a low growth, hyperinflationary world

- A 10% chance of a high growth, hyperinflationary world

In all of these cases, there is an optimal solution if your "guess" turns out to be correct. There is also a risk that your choices could be massively destructive if your "guess" turns out to be incorrect.

On a probabilistic basis, based on historical returns, a portfolio of cash, gold, linkers (with a 0% floor on inflation), coupon bonds, leveraged commercial property and equities is not a bad idea.

Based on my personal opinion about potential outcomes, the right proportion is something like 10% (cash), 15% (gold), 20% (linkers), 10% (coupon bonds), 15% (leveraged commercial property) and 30% (equities) respectively but I could be massively off the mark and will change my allocations as the facts (rather than opinions) change.

The key is to live to fight another day rather than being wiped out if your expectations about the way that world will unfold are not met in these dangerous and uncertain times.

[porca misèria]

I agree with you up to a point.

One of the misconceptions about democracies is that they are there to protect the interests of all. Their existence actually depends on the interests of the majority at the expense of the minority.

At present, the majority appear to be over-extended and verging on going broke. The tyrrany of the majority means that this group will continue to try to protect their self interest at the expense of the financially conservative minority until the bond market (the mechaism by which the self interest of the majority is executed) says 'NO!!".

FWIW, I'd never try to go short on gilts[1]. Margins are tiny, and you'd need amazing timing to make a profit on it.

But I do have some money in a fund (an active managed unit trust, not a hedgie) whose manager has expressed an intention to short UK govt bonds and the pound, among other things. And he's making a profit for me, even as newly-printed money inflates gilts way above their market value.

[1] Neither would I go long on them, but that's on a principled reason: the UK govt is high on the list of institutions I have ethical objections to lending my money to.