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Housing Recovery Is Years Away


VedantaTrader
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A very reliable source, who works in one of our high street bank lending teams, told me that their bank is not expecting house prices to bottom out until 2010.

I was tempted to tell the person, 'I am a HPCer and I think you are being optimistic.' :P

No actually, come to think of it, I want to buy at the end of 2010. So I hope the banker is right. B)

My opinion is that any house price falls after 2010 will be inflation adjusted falls and that nominal falls will have mostly stopped. I'm now more certain than ever that house prices will continue falling in 2009.

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Fantastic post VT - you're a true credit to this forum! I took some time out to read it this morning, after a busy (and cold!) weekend. Bishopscourt isn't at its best at near-zero temps! ;)

Statinstonker - sorry to hear about your accident; I hope you get well soon!

A few commentary points:

- Bond markets: Would there need to be a collapse to cause these markets to freeze over and trigger interest rate increases? Surely, there will be a period where bonds just stop selling (which could happen fairly soon), before total repudiation occurs? IMO, this may mean that interest rates will be forced higher before China starts flogging off its US/UK bonds.

- Gold: Interesting at the causality and sequence of these rises. It looks like the initial gold bugs may have been a bit too keen, with USD safety coming before currency collapse due to inflationary pressures. Would you expect the sell off from USD, into commodities, to be rapid or gradual? My main nagging feeling with gold is that they may try to peg currency with it again and cause forced sales from the current holders at a low price. This makes gold feel less "safe" than it would otherwise be. Is there a way to avoid this risk by buying via the markets in some way (forgive my naivety here - I'm not a trader, just an armchair economist! ;) )?

Sorry about the late reply Tracktion and thanks for the compliment.

There are two main components or variables, price and time. Timing is more difficult to predict than price. So in all honesty it is very hard to say if the fall of the USD and the rise in commodities will be fast or slow...however, if we use volatility as a measure of the magnitudes of moves, high volatility I think will remain. So I would say the decline could be fast...

I see no chance of a return to the gold standard, at least not in the next decade. Perhaps, after the complete collapse of the whole monetary system it could occur, however, the politicians and many of the modern day economists believe they can solve the problems with the current monetary and fiscal policy. However, in the next decade or so, when these actions lead to ever deeper economic malaise and problems, then a gold standard may be possible, this after the total collapse of many fiat currencies. So gold is the most save asset i think you could be in.

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VT

I would say many of us here have cash we are hoping to use to purchase ourselves a property one day in Norn Iron or maybe even some other far flung place - whether its 5,10,20,50 or 100 grand - how would you advise us to hedge it in the time frame between now and when you see property prices in NI near their lows ?

Hi Weebobby, do you mean, what would you do with your cash, rather than having it in a bank account? Cheers. I personally think oil is very cheap now, silver, gold...however, at the moment, I want to find some stocks in Asia, Chinese that are paying a high dividends. The yields are fantastic at the moment. Some Asian shares are paying yields of 10% and many higher than that. Buying Chinese shares is not for the faint hearted, as there are so many classes of shares...H shares, B-shares, T-shares etc etc.

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Very good and thought provoking post

However I think a lot of people will struggle to read through such a long and dense post so I've taken the liberty of Editing it for clarity & spelling and have added a summary, some alternate graphics, and reference links - see attachment in Word format

Hopefully this retains the spirit of your original post

The area I would like to see more detail on is the interaction between interest rates and exchange rates, a lot of people seem to think low interest rates will automatically lower the currency, but I'm not sure that it's always so simple.

CreditCrunch.doc

CreditCrunch.doc

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Very good and thought provoking post

However I think a lot of people will struggle to read through such a long and dense post so I've taken the liberty of Editing it for clarity & spelling and have added a summary, some alternate graphics, and reference links - see attachment in Word format

Hopefully this retains the spirit of your original post

The area I would like to see more detail on is the interaction between interest rates and exchange rates, a lot of people seem to think low interest rates will automatically lower the currency, but I'm not sure that it's always so simple.

Hi,

It doesnt seem that much shorter :) , but thanks for taking the time and correcting the spelling, I was too tired to check it. The word document does not display the charts?

Anyway, I take the point about interest rates and exchange rates. Currencies are relatives, so I think currencies will not weaken or gain "massively" against each other, but all will lose against hard assets in the longrun. As for interest rates weakening the currency, they do, but again, I think this has been already priced in to the value of the currencies. the interest rate future markets have already priced in further cuts which will be reflected in currency valuation already. So when the BOE cut again, it won't change the direction of sterling.

What will weaken sterling I beleive is the money leaving the shores to pay for gas and oil imports, and everything else we import. Also, the banking sector or financial services sector is about 21% of the UK economy, perhaps higher, so now that a complete collapse of the financial services sector has hit there will be less capital flows/portfolio flows into the UK. I also beleive low interest rates reduces the attractiveness of sterling.

Sterling had been supported also over the last few years by merger and acquisition activity since 2003-2007. M and A activity now seems pretty dead. The high levels of debt in the Uk also make me bearish on sterling. However, fx rates are relative and the Euro fundamentals of the euro are nothing to write home about, same with the USD...so all central banks are cutting rates, which means the real fluctuations in my opinion wont be in exchange rates, although they will be sizable but against hard assets.

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  • 2 weeks later...
Let’s look at the past as a guide…between 2002-2007, Northern Ireland house prices increased by a multiple of 2.5. Let’s have a look at how other commodities performed in that time in multiples.

NI Property 2.5

Gold 5

Oats 5

Wheat 5.5

Oil 10

What confuses me is that if such a big rise in house prices in a short time is seen as a bubble (and rightly so), then why aren't the massive rises in the commodities listed also bubbles?

Look what happened to oil prices, dropping to a third of their peak.

I'd appreciate it if you could explain this a bit more, as I am considering moving a hefty % of my savings from £ into hard assets, but I don't know how it's possible to tell if massive increases in price of certain comoddities are due to speculative bubbles or not.

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What confuses me is that if such a big rise in house prices in a short time is seen as a bubble (and rightly so), then why aren't the massive rises in the commodities listed also bubbles?

Look what happened to oil prices, dropping to a third of their peak.

I'd appreciate it if you could explain this a bit more, as I am considering moving a hefty % of my savings from £ into hard assets, but I don't know how it's possible to tell if massive increases in price of certain comoddities are due to speculative bubbles or not.

I have not forgot about this JD...I havent been on much the last few days. Still finding my feet after the the New year and that. Have been a bit down about the fire and night clubnightclub fire in Bangkok New years eve, hadnt felt like posting much, was there last year and knew people who go quite often, luckily none were there that night

Anyway, I ll come back to this, but in the mean time check out the post(at the bottom)I did back in August, talking about the "commodities bubble", and the reasoning why...I do an analysis of specifically wheat...by the way,today, wheat is way down, yet the supply fundamentals have not improved, which nearly guarantees higher prices in the future. I have been reading some things, in some publications online, from southwestfarmpress, on wheat, I quote an excerpt from the article...

It also appears that the market is not willing to pay the carry costs required to ensure grain reserves needed to cover short crop years. Since the 1999-2000 marketing year, U.S. wheat ending stocks have declined from 950 million bushels to 306 million bushels last year.

ending stocks for the 2008-2009 marketing year are projected to increase to 606 million bushels or an increase of 300 million bushels. Three hundred million bushels is not much of a reserve in storage.

The five-year average U.S. wheat use (domestic and exports) is about 2.2 billion bushels. One year’s production at 1.9 billion bushels or less would erase excess wheat stocks and result in another price spike like the one experienced during the 2008-2009 wheat marketing years.

Improvements in the world’s wheat storage and transportation system have reduced the time it takes to originate and obtain delivery of wheat. More countries are exporting wheat than 10-year ago. A more efficient marketing system and more exporting countries reduce wheat stock requirements and increase the potential for price variability.

Price variability appears to be an integral part of the world wheat market. Current wheat prices are below costs of production, which signals that the market wants less wheat produced in 2009. Relative low prices will result is producers planting less spring wheat acres and less wheat acres in the Southern Hemisphere in 2009.

The market works and the current market structure have made financial management an essential part of survival and profit. Marketing strategies that take emotion out of marketing decisions are also essential.

post looking at bubbles and wheat specifically

Also, a great Jim Rogers vdo, and his reasoning and explanation why commodities are the place to be, over the next 10-15 years.Rogers on commodities and crisis

I ll get back with a more detailed answer on this.

One thing worth noting is that in the last oil bull market from the secular commodity bottom to the peak at the end of the 1970's/beginning 1980's oil went up a multiple of 25, and gold 24...gold is only up 3.5 multiples from the secular low this time.

Edited by VedantaTrader
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VT after reading through your explanation of everything I feel you have the knowledge to answer this question. I would like to know when you think would be the best time to buy a house as I am considering but holding out at this time? When will prices stop going down? How much will they go down by? I am a FTB.

Thanks

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Youtube video - click here.

Lot of common sense being taked on that video clip.

London house prices falling for 18 months as long as the economy does not get alot worse than it is now... and that is a big IF. Then prices will stagnate.

Also, cheap mortgage deals are irrelevant if you cannot get them.

Looks like the main stream media agree with us now :rolleyes:

Just ask yourself: is there any chance that Northern Ireland house prices will recover before London?

... not a hope in hell!

Edited by Belfast Boy
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VT after reading through your explanation of everything I feel you have the knowledge to answer this question. I would like to know when you think would be the best time to buy a house as I am considering but holding out at this time? When will prices stop going down? How much will they go down by? I am a FTB.

Thanks

Hey Barl8, welcome. It is so hard to put a time on it, but I reckon, they won't hit a bottom until 2011, could be very late 2010, but it could even be 2012. However, I ll go with 2011.

If you look at data from past house price crashes, they declined a minium of 4 years and sometimes fell for 7 years...so to expect the biggest housing bubble to be bottoming in 2 years is going against what history has told us about house price bubbles in the past. This was a mammoth bubble, and I don't see any reasons why this one will bottom out quicker. Unemployment is a lagging indicator, and it is going to steadily rise all of 2009,its hard to see how house prices can stop falling in that environment...

Hope this helps...at the very least I would wait until 2010, then see what deals you can find...

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I would certainly say no...This is going to play out over a longtime. Interest rates could stay low for 2-3 years. Who knows how long. Low interest rates should not be taken as a proxy for a recovery, infact the opposite is true. Low interest rates are indicative of an extremely weak economy, and therefore an extremely weak housing market. This is the point that few seem to grasp.

Estate agents and economists, and the media seem to think low interest rates are a cure for all the evils. They are not. Low rates are symptomatic of an anemic economy. Low rates in Japan, where the economy was in much better shape didnt revive the housing market.

I ve said it before, and I say it again...inflation at some point will pick up. It won't be this year, and perhaps not the next, and in all likelyhood it won't be until the housing market bottoms...which in my estimations, and based on history across other house price bubbles around the world, won't occur until 2012. To expect the market to have bottomed out after 18 months is naive in my humble opinion.

I have an idea why it is difficult for people and humans in general, and I include myself in this, to avoid sounding self-rigtheous, and that reason is that the information we are fed on a daily basis, is based on short term expectations of humans. A years appears to be alongtime. However, I ve been reading about inflation cycles...and they can take years to occur.

Unemployment is not a leading indicator, it is a lagging indicator. Unemployment is beginnign to pick up pace. It will soar this year every month. I don't know of any house price bottom occuring during rising unemployment and tightening lending criteria.

Now is a time for focus on what to do, and how to be prepared for the next decade, when the market bottoms, whenever that will be, if even in the 2011-12 period...it could be much longer.

Humans are drastically bad at calling bottoms and tops in any market. The bottom will be in when there is complete despondency and no talk of a bottom...perhaps when people tell you that you would be crazy to buy a house as "house prices only ever go down" could mark a bottoming out. Bottoms don't occur when people talk about when the bottom will be.

I looked at the third property in your list Sarah...

Price £249,000

You can rent in Belvedere park for £600 a month for a 3 bedroom...

Lets look at the yield, which ultimately in all markets be it stocks, real estate, government bonds provides a VERY reliable clue to valuation.

11months rent*£600=£6600

House Price Cost £249,000

At £100,000 this house would have a yield of 6.6%...ie, £100,000 and rent would be £6600=6.6%

At £249,000 this is 2.5 times £100,000 so we can divide 6.6% by 2.5=2.64%

Fair value is historically above 6%, so based on this indicator alone we can see that this proprty is grossly over valued at todays estate agent speak of "realistically" priced at £249,000.

For anyone reading this, relax about buying a house. Plan what is the best thing to do with your money now for the next decade...save, research, invest. Why limit yourself to leveraging yourself up on buying a property, that will fall in value, that doesnt offer you value. The money you can save, by waiting and saving could work out at such a sum, that you could afford to spend more time on leisure and spending time with your friends and family.

I worked out that by waiting and not taking a mortgage out on a property in 2007 until today,you could have already saved £100,000 over 25 years, which works out at quite alot of money, when you factor in the time preferences of money and interest...

Lets say a property has fallen by £50,000 in the last year, which there are many many, and many have fallen alot more...

Over 25 years, that would save you £100,000...

which works out at £80 per week for 25 years... and £320 a month...that means you could go on a longhaul flight once a month for 25 years by waiting 12 months in buying....Put these drops in house prices into some sort of personal context, regarding your hobbies and plans for the future, whatever those might be...

I like travelling...so my example was flying

I like music, in the above example it equates to being able to buy a new piece of music equipment everymonth for 25 years...

Think very carefully FTB's before taking the plunge. Be methodical, and ask yourself plenty of questions.

Another way to look at it is this

Lets say we toss a coin...always a 50/50 outcome...

Lets say you find a house, costing £249,000

You toss heads it will go up 10% in the next year, tails it will go down 10% in the next year for sake of argument...

Looking at the environment we are in, which would you choose on a coin toss...I don't see any 50/50 here...I would be choosing tails...why take a 50/50punt on something that could drop £20,000 in months...This looking at it from pure coin toss perspective...

The reason I say this is because investment psychologists have found that humans feel the pain more of a loss, than the pleasure from a again. As all the averages and economic indicators are pointing down, and with hisory against you, ie a bottoming out in 18 months has never occurred, then do you rate this buy as still a 50/50...even at best.

After the last UK housing bubble - the bottom for real (inflation adjusted) UK house prices - was 1996. So it took 7 years to reach bottom. However, most of the nominal falls in the indices had happened in the first 3-4 years IIRC.

So at some point house prices will level off in nominal terms and continued to fall in real (inflation adjusted) terms only.

Therefore, we will have a nominal bottoming of prices then followed a few years later by the real (inflation adjusted) bottom in house prices.

The question is: for ordinary people who save their money in a bank in the UK (this does not apply to me ;) ) When prices have hit their nominal bottom and savings are being inflated away - would that be a good time to buy?

On a personal note: my circumstances have changed a bit :wub: I'm not sure I'll be buying a house at the end of 2010. At that point the housing market would have been falling for 3 years from peak.

You are totally right: house prices will not stop falling while lending is contracting and unemployment is increasing.

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After the last UK housing bubble - the bottom for real (inflation adjusted) UK house prices - was 1996. So it took 7 years to reach bottom. However, most of the nominal falls in the indices had happened in the first 3-4 years IIRC.

So at some point house prices will level off in nominal terms and continued to fall in real (inflation adjusted) terms only.

Therefore, we will have a nominal bottoming of prices then followed a few years later by the real (inflation adjusted) bottom in house prices.

The question is: for ordinary people who save their money in a bank in the UK (this does not apply to me ;) ) When prices have hit their nominal bottom and savings are being inflated away - would that be a good time to buy?

On a personal note: my circumstances have changed a bit :wub: I'm not sure I'll be buying a house at the end of 2010. At that point the housing market would have been falling for 3 years from peak.

You are totally right: house prices will not stop falling while lending is contracting and unemployment is increasing.

WEY HEY!!!!!

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  • 3 weeks later...
Hey Barl8, welcome. It is so hard to put a time on it, but I reckon, they won't hit a bottom until 2011, could be very late 2010, but it could even be 2012. However, I ll go with 2011.

If you look at data from past house price crashes, they declined a minium of 4 years and sometimes fell for 7 years...so to expect the biggest housing bubble to be bottoming in 2 years is going against what history has told us about house price bubbles in the past. This was a mammoth bubble, and I don't see any reasons why this one will bottom out quicker. Unemployment is a lagging indicator, and it is going to steadily rise all of 2009,its hard to see how house prices can stop falling in that environment...

Hope this helps...at the very least I would wait until 2010, then see what deals you can find...

VT, thanks for getting back to me and thanks for the feedback. It's not easy to decide when to buy but I can hold off to 2010. As I'm now becoming more aware of my cash and were best to keep it, I want to make the most from it as possible. I've taken full advantage of the ISA account last year and still running at a 6% tax free interest for another 4 months but I can see that it will drop down to at best 3.5% after that. As I don't have a clue about stock and shares, were would you advise to invest the money in the next year that even a novice would be able to understand and know what is going on.

Thanks again

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  • 4 weeks later...

I would be very, very careful about listening to VedantaTrader on his inflation hypothesis. Despite using Japan as an example many times throughout his piece, VedantaTrader has forgotten the most key lesson of the Japanese experience.

Quantitative easing did not work!

The Japanese did the exact same thing as the UK and the United States by slashing interest rates to zero and printing money (admittedly, not as rapidly as we have done). Like VedantaTrader has mentioned, the cut rates did nothing to encourage borrowing and all that printed money never left the vaults of the banks.

What did all this mean to JoeSoap? 10 years of deflation and the gradual gnawing away at the Japanese standard of living. I couldn't find wage inflation statistics that went as far back as the 90's, so you'll have to take my word for it that they were pretty much negative.

japan_real_wages.gif

In my opinion, the experience of Northern Ireland is going to be an awful lot like that of Japan. The shake-out for the property market could easily take a decade. In that time, cash will be king. Living standards will decline, people will be more frugal and we will return to the days of dour, bean-counting bank managers.

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I would be very, very careful about listening to VedantaTrader on his inflation hypothesis. Despite using Japan as an example many times throughout his piece, VedantaTrader has forgotten the most key lesson of the Japanese experience.

Quantitative easing did not work!

The Japanese did the exact same thing as the UK and the United States by slashing interest rates to zero and printing money (admittedly, not as rapidly as we have done). Like VedantaTrader has mentioned, the cut rates did nothing to encourage borrowing and all that printed money never left the vaults of the banks.

What did all this mean to JoeSoap? 10 years of deflation and the gradual gnawing away at the Japanese standard of living. I couldn't find wage inflation statistics that went as far back as the 90's, so you'll have to take my word for it that they were pretty much negative.

japan_real_wages.gif

In my opinion, the experience of Northern Ireland is going to be an awful lot like that of Japan. The shake-out for the property market could easily take a decade. In that time, cash will be king. Living standards will decline, people will be more frugal and we will return to the days of dour, bean-counting bank managers.

Nubrit, I did say that it might not happen this year, next year, and it wouldnt happen until house price bottom out, which I have said could be 2012, and possibly longer.

The other point I want to point out is this, which I think is very important point. The Credit default swaps on UK government debt are very high right now, unlike Japan. I dont really see your comparison to be honest for a number of reasosns...

When Japan were met with their crisis in at the end of the 1980's, the JPY doubled in value between 1990-1995. In the first two years of this crisis the sterling has lost 30% against most currencies, and many cases more, like JPY. Firstly, if you are comparing the UK and Japan, then you need to ask yourself why this difference has occurred between the measure of a countrys value (the currency)? Why did the yen rise and sterling been falling?

The Japanese went on a quantitative easing spree for sure, they were, and pretty much are still the largest creditor nation in the world. So the world owed them money, they have more creditors than liabilities.

The UK on the other hand has many more liabilities, than future credits. Tax can't pay for this, raising taxes on the future will starve the economy of the much needed capital formation it will need. So the options are either to print the money to pay these, which will lead to inflation somewhere along the road. The other possibility is that the Uk will default on the debt they are creating. If that happens, the sterling will collapse anyway. Dont rule this out, there is a very real chance it will happen. The cds market is pricing this in to some extent already. The people who say this won't happen are the same people who said house prices would level off, who have really underplayed the severity of this crisis. This crisis will continue to spit out the worst case scenarios, which the consensus say wont happen. Expect the worst.

Your comparison with Japan just doesnt measure up, for the reasons I ve pointed out. Creditor/debtor...Yen under valued currency versus over valued currency...Japan is a producing society exhibited in a trade surplus versus a non-producing society with a trade deficit in the UK.

You say cash is king, but as Jim Rogers pointed out the other day what cash? Icelandic Kroner? Sterling? Or Yen? Gold? Gold is also a monetary unit. it is used as a store of value, ie as money, the same as sterling, USD , JPY...so in this deflationary environment gold has increased in value as you d expect, coming into its true role as money.

Your point is a valid one, but I see dont the comparison to be honest.

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Your point is a valid one, but I see dont the comparison to be honest.

VedantaTraderDec 14 2008, 06:17 PM

"I have been looking at crude and light sweet oil options that are dated right out to 2016...althought I imagine the liquidity could be a problem that far out. I m seriously considering buying the options on crude dated 18-24 months out. " VedantaTraderDec 14 2008, 06:17 PM

Oil prices have fell significantly since the above date

QUOTE (VedantaTrader @ Dec 13 2008, 07:26 PM)

"Now most bears on this site see the government actions leading to higher interest rates, higher commodity prices, higher energy prices. Whenever interest rates do move higher, perhaps up double digits eventually, what type of mortgage will you plan to take out, how do you plan to hedge against higher rates in order to finance your mortgage..." VedantaTrader @ Dec 13 2008, 07:26 PM

Interest rates fell significantly since the above post was detailed

I have been reading some of the previous threads and I feel that they should have a warning on them that they accept no liability for their writings just incase someone actually takes their advice.

Winston Churchill

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I have been reading some of the previous threads and I feel that they should have a warning on them that they accept no liability for their writings just incase someone actually takes their advice.

Winston Churchill

:rolleyes:

Anyone who blindly follows the advice on an anonymous internet discussion forum needs to sent all their money to me now, so I can look after it for them ;)

The advice given here is worth exactly what you paid for it - nothing!

... having said that, following the advice on this website AND doing my own research, I have not lost more than 35% (so far) on property and I have not lost more than 40% (so far) in shocks and scares. Personally, I'm really glad I found this website. However, I would not advise anyone to follow my advice or anyone elses. Don't be stupid. Do Your Own Research.

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VedantaTraderDec 14 2008, 06:17 PM

"I have been looking at crude and light sweet oil options that are dated right out to 2016...althought I imagine the liquidity could be a problem that far out. I m seriously considering buying the options on crude dated 18-24 months out. " VedantaTraderDec 14 2008, 06:17 PM

Oil prices have fell significantly since the above date

QUOTE (VedantaTrader @ Dec 13 2008, 07:26 PM)

"Now most bears on this site see the government actions leading to higher interest rates, higher commodity prices, higher energy prices. Whenever interest rates do move higher, perhaps up double digits eventually, what type of mortgage will you plan to take out, how do you plan to hedge against higher rates in order to finance your mortgage..." VedantaTrader @ Dec 13 2008, 07:26 PM

Interest rates fell significantly since the above post was detailed

I have been reading some of the previous threads and I feel that they should have a warning on them that they accept no liability for their writings just incase someone actually takes their advice.

Winston Churchill

I havent time to pick over these posts but from memory you have selected a small part from those posts and quoted it out of context. In fact what i said was, that people on here would be wanting to buy in 2-3 years, and if you are taking out a mortgage over 20 years, 25 years, the threat of rising long term interest rates is a very real one. I have said many times, I dont expect higher longterm interest rates this year, or next or inflation to kick in until the housing market bottoms which in my view wont be at least until 2012. So the fact that you are saying interest rates have come down in the last few months is irrelevant. I said the BOE would cut rates, but what I also said was that it would do no good, and real interest rates would rise naturally regardless of what the BOE does. Again you seem to make that fatal error of linking all interest rates to the BOE base rate. I also said as insurance against higher rates...is taking out insurance not a wise thing? Real interest rates have went up since the BOE have cut rates even now.

Have you not seen the down payment required to get a mortgage?

Are personal loans now not in the double digits, with many of the main banks only offering rates as high as 18%, now that interes rates are 1% versus 6-9% when the base rate was circa 5%. The private sector and the free market will decide where real interest rates will go. As a net debtor nation and with debt not in our hands, are we really in control of where rates will go?

Yields on bonds will eventually go much higher I m quite sure of that, now I didnt say that would be this year...again you seem to another one of the myopic ones who looks at what happens day to day.

The second point about oil, well nymex light is at the same price today as it was in December so your claims of a significant drop since then are unfounded...can you provide a chart for me?

SO why did you think I said long dated options as far out as 2016...as I dont expect oil to move up much this year. Also, I said options with expiry in 18-24 months is not right now is it? What would be wrong with tracking options dated this far out? IS there not possibility that oil will not rise to 60 USD, 80 USD by then...so buying far out of the money options would offer and attractive risk/reward? Was the suggestion to buy deep out of the money options on Lehman a few months before they went bankrupt(which I suggested) such a ridiculous claim in hindsight?

It all boils down to timeframe...you have quoted me on something which I have pictured happening 2-4 years from now, and linked what has happened in a few weeks to nitpick over what I have said.

For sure I could be completely wrong in all this...but as Belfast Boy says, if you come on to an anonymous forum worrying about decisions other people might make based on information from two out of I m sure a million other posts in this forum then you need to look at yourself and chill out a little.

Anything I post or anyone posts is open to discussion....hence its called a forum!!!

I ll leave you with the dictionary definition of "forum" just so its fresh in your mind...

"a meeting or medium for the open discussion of subjects of public interest

"

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Your tone towards me comes across as patrionising and shows signs of insecurity. I trust this is not the case.

Just so it is fresh in your memory my friend, as we are in the mood of quoting dictionaries today, insecurity can be defined as

Insecurity is a feeling of general unease or nervousness that may be triggered by perceiving oneself to be unloved, inadequate or worthless (whether in a rational or an irrational manner).

A person who is insecure lacks confidence in their own value and capability, trust in themselves or others, or has fears that a present positive state is temporary and will let them down and cause them loss or distress by "going wrong" in future.

Quoting VedantaTrader

"I also said as insurance against higher rates...is taking out insurance not a wise thing? Real interest rates have went up since the BOE have cut rates even now"

Question? What form of insurance is available on the high street to combat rise in interest rates ? ?

As far as I am aware Capped products are no longer an option for people looking a mortgage ? ?

Quoting VedantaTrader

"It all boils down to timeframe...you have quoted me on something which I have pictured happening 2-4 years from now, and linked what has happened in a few weeks to nitpick over what I have said."

I apologise if you feel this is nitpicking as you referred to but as your definition of a forum defines

"a meeting or medium for the open discussion of subjects of public interest"

surely just because someone else questions your writings in the public interest you should welcome this.

Question? In relation to timeframe we are all aware that oil and food etc have inflationary / currency pressures do you think property is different and will not experience relative inflationary pressures? Of course the price will go up on all commodoties its only a matter of time? Please correct me if I am wrong.

Question? Did the price of oil reach its peak because of speculation or was it increased demand? Why did the speculators disperse mid summer time? Was this a result of government intervention?

Question? Is this crisis similar to any that have gone before this based on your knowledge and experiences.

Edited by Churchill
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Your tone towards me comes across as patrionising and shows signs of insecurity. I trust this is not the case.

Just so it is fresh in your memory my friend, as we are in the mood of quoting dictionaries today, insecurity can be defined as

Insecurity is a feeling of general unease or nervousness that may be triggered by perceiving oneself to be unloved, inadequate or worthless (whether in a rational or an irrational manner).

A person who is insecure lacks confidence in their own value and capability, trust in themselves or others, or has fears that a present positive state is temporary and will let them down and cause them loss or distress by "going wrong" in future.

Quoting VedantaTrader

"I also said as insurance against higher rates...is taking out insurance not a wise thing? Real interest rates have went up since the BOE have cut rates even now"

Question? What form of insurance is available on the high street to combat rise in interest rates ? ?

As far as I am aware Capped products are no longer an option for people looking a mortgage ? ?

I wasn't actually referring to capped products, but the possiblity of buying out of the money call options on interest rate products which if interst rates were to rise, spike up, then the rising costs of servicing a mortgage would be offset by the increasing value of an in the money call option.

In a similar way, which I recommended to my family and some people I know, that if you spend lets say £2000 worth oil and petrol each year when oils at 40 USD, then if oil rises to 80 USD, you will be paying more like £4000 a year for oil and petrol. So by buying £2000 worth of an oil related product which tracks the price like an etf, an option, or some stocks that give you exposure to oil, then at least if oil does rise in value and you are spending more on petrol etc, then your £2000 investment can be sold to offset your increased costs. In effect you are still paying for petrol at the 40 USD level, even though the price has now risen to 80 USD...

I believe similar actions can be taken with all kinds of costs and risks.

Quoting VedantaTrader

"It all boils down to timeframe...you have quoted me on something which I have pictured happening 2-4 years from now, and linked what has happened in a few weeks to nitpick over what I have said."

I apologise if you feel this is nitpicking as you referred to but as your definition of a forum defines

"a meeting or medium for the open discussion of subjects of public interest"

surely just because someone else questions your writings in the public interest you should welcome this.

It does come across as nitpicking, as you quoted one line out of what would have been a fairly lengthy post. If you had quoted the whole post then at least it would have been seen in context where I clearly said and defined wha timeframe I was talking about.

Question? In relation to timeframe we are all aware that oil and food etc have inflationary / currency pressures do you think property is different and will not experience relative inflationary pressures? Of course the price will go up on all commodoties its only a matter of time? Please correct me if I am wrong.

You are making an assumption that of course commodities will go up over time. Why of course? They declined between 1982-2000, why would it not have been obvious commodities should have rose in this timeframe...why did they not? My first post in this thread was that inflation would not kick in until house price bottomed out. However, any gains in house prices will be nominal and not in real terms. However, any rise in house prices will be dwarfed by the rise in commodities. You also need to take into account that there will be different levels of supply and demand within certain assets(real estate, commodities, stocks, bonds, etc) so it is very likely in my opinion, growth in stocks, house prices will be anemic, due to an over supply, and a reduced demand for real estate. Where as commodities demand can grow slowly, but as commodities prices are more supply side driven, and supply is dwindling rapidly, then the individual supply and demand for certaian commodities will also drive up prices. However, all inflation has it roots in a monetary phenemenon, and inflation is monetary in nature, however the relationship between different price levels for different products, items, utilities and assets are not linear in nature...hence the individual supply and demand issues that will differ between different assets.

Question? Did the price of oil reach its peak because of speculation or was it increased demand? Why did the speculators disperse mid summer time? Was this a result of government intervention?

I prefer to look at the quarterly average price of oil, as an indicator of the supply and demand issues of oil. The quarteryl average shows that oil has moved since 1999 from under 10 USD to 90 USD. Yes oil was at 147 USD..but it was only at 147 USD for one day, less actually, a few minutes. It spent a few months above 100 USD, and it has now spent 6 months below 100 USD, the quarterly average has now started to decline. This for me is a better way to smooth out the "noise" so to speak. It also clearly shows when measured against the fundamentals the true nature of the supply and demand of oil over the last decade. I don't believe oil will stay at these levels for very long.

Was it down to speculation, well like I have pointed out speculation will drive the price in the very short term, but as above the true supply and demand factors are exhibited by the smoothing out of the short term noise and price with a quarterly moving average.

Speculators were responsible for the rise in prices...but not in the way that many people think. The open interest reports on the futures market showed that the non-commercials( speculators) were net short oil and the commercials were net long (like airlines) , infact,South West airlines openly said at the time they had billions in long positions in order to hedge against the rising costs. So as the price started to rise, and the non-commercials, speculators were caught short, they closed/covered their short positions, of course the price then spiked up as more and more net shorts covered and we had 147 USD...the price naturally followed the path of least resistance which was up, as the covering removed the resistance. SO speculators were net short and inadvertently caused the price to rise, but not in the way people think.

Question? Is this crisis similar to any that have gone before this based on your knowledge and experiences.

Its in so many ways the same it would seem and in many ways different. I m young so I dont have much experience of anything like this. I guess I m trying to piece together the jigsaw like others are doing. I do think this is a bad situation, being made worse by government.

Edited by VedantaTrader
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  • 3 months later...

SORRY, FORGOT TO INCLUDE THE PRICE SCALE IN THE CHARTS,HAHA. However, the percentage changes can been seen in the highlighted area.

It was six months ago, I wrote the piece which is pinned at the top of this forum. It is never easy to predict the future, and with economics, it is even more uncertain that. However, the best we can do is try to look at the patterns and inter-market relationships that exist, and watch how they evolve in real time, with price being the superior guide in watching these relationships unfold into the future. The best we can do is to outline as many different possibilities as possible as to what might happen, and then assign a probability to each scenario to avoid making costly mistakes with regards risk…in this case, to buy or not to buy a property.

I think now is as relevant a time as ever to come back and have a look at how events have unfolded in the last six months.

What we see now is the “green shoots†of recovery being touted in the mainstream media…goodness we have even seen two months of house price rises in the last six months, which from my reading on sentiment on this board and in general seems to have brought into question some peoples sentiment. Some are getting cold feet regarding staying out of the property market, in the fear that prices could start to rise. The economic indicators in the economy although still anaemic do show signs of being “less bad†than before. Stocks are up, and the banking system seems to have stabilised.

However, I don’t see any of these as real positives. I just see it as a natural occurrence of events.

I m going to quote some relevant parts from that piece back in December, and look at what has actually happened in the last six months, and give my opinion on what I think will play out over the next 6-12 months.

Quote .

"Lowering the rate of interest artificially and price fixing the cost of money encourages speculation. Speculative money flows to where the fundamentals suggest there is an opportunity. The money never flows straight back into the bubble that has just burst, at least not for many years, usually a decade, but if the policy actions are bad enough, perhaps decades later if ever. It is my hunch that this new inflation of the money supply will lead to the assets where the supply and demand fundamentals and the opportunity is, that will be commodities and alternative energy, not stocks, bonds or real estate in the western world. Artificial stimulus in the end always leads to mal-investment in other parts of the economy,"

I stated before that re-inflation never flows back into the same bubble that has popped. I said the money will flow to where the opportunities are. So in the last 6 months house prices have risen twice, but overall have still fallen in this last 6 months.

It shouldn’t really be a surprise that we have seen some rises. After all, we have had a 500 billion GBP taxpayer bailout of the banking system, a round of QE and interest rates cut to near zero, and the ramping up of gigantic fiscal deficits that will be there for our lifetime, and have also led to an increased chance of a UK debt default. That is quite some effort and outlay of capital to achieve two months of house price rises. A good attempt!

I do think it is important to get this in some perspective which brings me back to this quote from six months ago. The money will not re-inflate the housing bubble. I have said over the last six months we will see single digit percentage falls over the coming years in nominal terms, in real terms possibly more. What is important is to look at what has happened in other markets other than the housing market.

I had said six months ago, the inflation will come in the recovery and the money will flow to where the fundamentals suggest the opportunity is…that place is commodities. The recovery in my opinion is a very dangerous thing.

And here is the reason why…the important theme to understand is that this has all happened in a very weak economy. Excuse all the charts, but they are necessary to make my point. And also, excuse the poor image resolution as I m just using print screen function other wise they will be too big to upload.

CrudeOilChart.jpg Crude oil futures

CottonFutures.jpg Cotton Futures

HeatingOil.jpg Heating oil, and we are in summer.

HighGradeCopper.jpg High Grade copper futures.

CoffeeFutures.jpg Coffee Futures

CornFutures.jpg Corn Futures

WheatFutures.jpg Wheat Futures.

SugarFutures.jpg Sugar Futures

Palladium.jpg Palladium

OatsFutures.jpg Oats Futures

CocoaFutures.jpg Cocoa Futures

AluminiumFutures.jpg Aluminium Futures.

US_DollarIndex.jpg US Dollar Index. As can be seen the USD has weakened, which is what you would expect as USD liquidity returns. In an inflationary environment, you would expect the USD to weaken, and hence commodities are moving higher. However, I do think the USD will gain in strength over the coming months, as deleveraging continues, causing government bonds to move higher, stocks to correct, commodities to correct and house prices to fall.

30Yr_US_Treasury_Bond.jpg

This tells a story. Mortgage rates are influenced by the long end of the yield curve. We can see that the T-bond has crashed in recent months, leading to a weaker USD. This concept is a a bit of a head fry. The price has moved down, which means the yield has moved up. When bond prices move up in price, the yield moves down. Hence thats why when the bond prices moved up at the height of the collapse we saw the yields move to historic lows. Now however, the interest yield is moving up as the price moves down.

Also interest rates and bond prices move inversely. So when the FED, and other central banks cut interest rates, the prices went up. If in the future interest rates move up, then bond prices will fall as they have been and the yields will move higher...These are used to set mortgage rates, with mortgage rates set a few basis points higher than the government yield, potentially locking the mortgage financing and refinacing market...There isevidence of this already happening. mortgage rates

Spread_on_yield_TBond.png

I selected the 01/02/09 and 13/06/2009 to compare the spread on the long dated bond in the last 4 months. It is clearly moving higher, as can be seen.

Lets not be naive and think that dollar liquidity will not cause a similar problem here.

The other reason, why this is posing the greatest of migraines for Mr Bernanke is this chart...Mortgage_Resets.jpg

There is a st*tstorm of option arms and ALT-A mortgages which will recast and reset at in the next 2 years. One can see the subprime debacle is behind us, look 2007/2008...However, there are about 500 billion USD of these toxic mortgages which will need refinancing.

This might explain why the FED have been buying bonds (by creating new money to buy them), to try and raise the prices and hence lower the yields, so that they will not reset at at a higher rate mortgage...which will only increase the defaults. Estimates put the default rate at 61% on these mortgages.

The bank Wells Fargo , JP Morgan Chase and others have large exposure. So will we see TARP 2 needed... more problems ahead for the banking system. More money thrown at the problem?

The FED and Bernanke in their genuis don't realise that their actions are counter productive, creating new money to buy bonds is what will increase yields...I guess we can't expect them to get anything right.

So...

As can be seen in a very weak economy commodities have performed very well indeed. Oil has doubled in 6 months, sugar has doubled, copper, corn, wheat, coffee all up 30-70%. So the money flow seems to be going to where the opportunity is.

Now this is the point I want to make. I think we can all agree that house prices will only rise in a vibrant economy. It is my thought that a price recovery will be nominal and not in real terms. If house prices go up in anyway that resembles a recovery, then be afraid…as oil will be at 400 USD, commodities will rise a lot.

This in my opinion will lead to an inflection point, in that with the CPI moving higher, the central banks will be forced to push up interest rates. However, I think it will be very difficult for the central banks to push rates up.

Central planning never works. A central bank does not know what the right quantity of money in the economy should be. After the year 2000 they lowered interest rates to historic lows. This was the catalyst for all the cheap credit which entered the economy and led to the bubble. Of course the central bank raised rates in baby steps, much to slowly and late in the day, which popped the bubble. If we are going to have central banks setting interest rates, then there is a policy they need to enact, which I don’t think they will be able to do. Also for political reasons they have didn’t do it before. They really needed to raise rates to nominal GDP growth+CPI to curb the bubble before it got out of hand.

I contend that they will not be able to do this easily. Lets say the economy recovers, and grows at 2.00% a year which is below what Darling is projecting in the next few years. In that scenario, lets say CPI is 4.5%. In order to reign in inflationary pressures, the central bank will need to raise rates above the sum of these two numbers, which would be circa 7.00%. With the increased debt load due to all the bailouts and fiscal deficits, will they really be able to do this? If they do, can anyone imagine the consequences? My take on it will be that it will be a “double dip†recession. Raising rates, will burst the bubble they are creating now, in government debt, and will make the next slump, deeper and more prolonged, with unemployment climbing higher.

During the preceding bubble, they did raise rates, however, the never took rates above or even to the level of GDP+CPI. The point of raising rates is to slow down credit growth. However, when the BOE were raising rates, credit growth actually increased and did not decrease, which shows that interest rates were not sufficient and much too low for too long. This is the puzzle the central banks are faced with. And this is the corner the government actions have backed themselves in to.

If they don’t raise rates, then the risk is that inflation and prices in all the places where people don’t want to see price rises will run out of control, ie the cost of living, heating oil, petrol, taxes, services, food costs, clothes etc etc. Already from the previous charts, commodities have went up a lot in a very weak economy. In a vibrant economy, where houses will recover it will not be a real recovery, and in that situation the cost of living will be uncomfortable, and in the end will lead to fuel protests, social unrest, an up spike in crime. It will not be a time for thinking about speculating or buying a house unless one can really afford it without a large mortgage.

I don’t know if commodities have bottomed out, however, the start of the bull market began in 2000, they are now moving up from a higher base than then.

I see inflation coming in the next 5- 10 years, who knows, maybe by 2010/11 it could be showing up. Infact, a little anecdotal, it seems alive and well today. I actually filled up the car the other day at a garage and the cost was now 109p, I bought the set of cut throat razors this morning, and they are now up by 50p, a 20% rise. Yesterday I read this…

Already

I am actually more concerned now than before. I would not consider buying a house for the next 5 years, unless it was bought with a very small mortgage, or outright. The reason, being for the reasons outlined above. I would not even feel comfortable with a 5 year fixed. After 5 years time, where could interest rates be? I would also stay away from a variable rate and interest only…Does anyone know what is the longest fixed rate mortgage available right now? Can you get a ten year fixed?

However, I think rather than setting a date, it is better to play it by ear, and take a wait and see approach, as things can change quickly.

Over the next 6-12 months…I said we could see a rally lasting six months. The FTSE has rallied. I actually think the market will fall again, an could make new lows, towards the end of the year, and commodities, including oil will could also test the previous lows, then I think it will be the buying opportunity of a lifetime. Any corrections in oil or other commodities provide a good chance to buy more.

So to summarise. Between, 2003-2007, we saw stock markets rising, house prices rising, commodities rising from a base which made them the cheapest inflation adjusted for 200 years. The USD dollar weakened, the GBP moved higher. In this period no one really cared about the rising prices(until the 2007), as they indulged their minds in the illusory nature of the temporary wealth stored in bricks and mortar.

In the last six months we have seen a mini pattern of that same occurrence between 2003-2007. The USD has weakened as can be seen in the USD index chart, the GBP has strengthened, and returned to the same pattern against the GBP/Yen. However, there is one difference this time. In this pattern house prices have fallen, unlike 2003-2007, when they were rising under similar inter-market relationships…which brings me to my point that they wil not be able re-inflate the bubble that has just burst. It has never been done in history. It takes a decade or longer for an asset class to come back into favour. And when it does come back into favour, the general public don’t participate anyway until the latter stages…It is only the smart money that participates in the beginning.

The next 6-12 months…

Stock market correction, possibly making new lows.

Commodities will correct.

Government bonds will increase in price as a flight to safety.

The GBP/Yen will correct also, possibly making new lows.

The USD will strengthen.

House prices will fall.

More money will printed and thrown at the problem. They will blow not succeed in kick starting the housing market in any meaningful way.

They will succeed in blowing up an bigger government debt bubble. They will increase the chance that interest rates will have to increase a lot in the next 5-10 years, they will increase the chances that when this happens, bond prices will fall, and bond yields will rise, especially in the long bond…which is used to set mortgage prices, thus increasing the chances that any recovery in housing is not realistic.

They will increase the chances if sowing the seeds for bad inflation.

The events of the last 6 months, I would call a microcosm of what will happen in the coming decasde…

Weakening USD, rising commodities, falling house prices in real terms, real interest rates and yields moving higher, higher taxes, stock market in a large range, but losing value in real terms with civil unrest and geopolitical problems emerging and becoming more acute in the coming years.

I hope I have been able to articulate my point ok, as it is quite difficult to explain. Anyway, I could be wrong about the timing of these things happening...I think however, it is hard to argue with price and relationships in any market, and thus far this seems to be the way it is playing.

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Edited by VedantaTrader
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