Friday, August 17, 2007

How can prices crash if the Fed keeps bailing the Stock Markets out?

European stocks boosted by US bank move

London's FTSE 100 index was boosted today after the US central bank announced that it was cutting the interest rate at which it lends cash to banks

Posted by david20040_0 @ 06:50 PM (2107 views)
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40 thoughts on “How can prices crash if the Fed keeps bailing the Stock Markets out?

  • david20040_0 says:

    How can any of us think of any sort of crash occuring when the Fed, BoJ, BoE et al keep bailing the markets out?

    There are losses one day followed by huge gains the next due to these interventions.

    Market forces are not allowed to take their natural conclusion.

    How can we fathom any sort of crash when this is allowed to happen?

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  • see comment to previous post.

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  • Cristiano Barbaro says:

    Personally I feel that all this intervention is doing nothing but driving the value of paper money down. But the fed and other central banks are not doing this for the good of the people, but for the benefit of the private financial institutions which after all are the shareholders of the various reserve banks.
    The real issue at hand is that the entire West has for too long abandoned investing into the real physical economy and just played global casino and betting. That is the problem. Take a drive through America and look at its obsolete infrastructure if you need proof of this. On the other hand countries like Russia and China, which are solidly investing into their infrastructure, and in particular into massive new power generating nuclear power stations of the IV generation, and also of the more portable PBMR type, are achieving solid growth and job creation. Real jobs, not paper shuffling in offices only.
    As a westerner just trying to get by I can’t help but notice just how massivley engaged in hedonism our collective leaders are at the moment. Right now I think I better buy a piece of land and start keeping some chickens and plant some veggies. Already (here in Italy) they are preparing the people for significantly higher food prices (25-30%, says our tv news) come this winter. But I don’t see my salary increasing though.

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  • The fundamental problems are still there as they were yesterday. We’ve had an asset bubble and now we’ll have the inevitable correction, be it shares, houses or whatever.

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  • Cristiano Barbaro says:

    Sorry, I am re-posting something from an earlier discussion, which unfortunately nobody got to see, as it was commenting an article at the bottom of the pile and it quickly got pushed out. Perhaps the news stories scroll could have a button to allow people to go back to older news (maybe I’m stoopid, but I couldn’t find a way). Anyway here goes, I hope the moderator will allow me to post it again, as I feel it may be of benefit to others to share this view (and also to find out if there are people who think like I do!).

    Here goes:

    It’s quite interesting watching how all these bailouts are occurrying in order for the fat cats and utterly greedy and corrupt financial elites to liqiudate their personal assets – all the while, they, the politicians and the various “ministries of truth” media tell the people to stay put, and to be calm. Of course when the wave of inflation due to the new flood of money will hit us and our savings are wiped out, then the people will wake up to the real truth. But there will be more spin etc. Actually I find laughable how the EU is only now beginning to probe the rating agencies like S&P and Moodys. It has been quite obvious for years that the stock market was just a casino for the rich. The only difference is that the rich risk the pleb’s money not theirs, unless they’re being terribly stupid.

    What really needs to be driven home to the corrupt establishment is that all these years of concentrating on the speculative, the pure gambling, and not on real scientific and infrastructure development (which create real jobs), have resulted in the mess we find ourselves in today – take a look at the USA’s infrastructure’s status if you don’t believe me. If the USA would spend less on wars and more on an Roosvelt style infrastructure development, they would very quickly become the economic and quality of life leaders that they had been in the 50’s and 60’s. But firstly they have to deal with acknowledging reality that:
    1. the US is currently bankrupt and needs to declare itself so, with a moratorium on debt
    2. for the sake of the people, the government must retake control of the issuance of money, not leaving it to that private enterprise, the FED, which after all since it is controlled by private banks (look at the board members) certainly has never had the best interests of the people at heart
    3. for the sake of the people the US govt must guarantee all pension payments etc… through the issuance of new govt bonds
    4. a low 1-2% max interest rate 50 year line of credit must be created (even out of nothing, the banks do that anyway even now), for hundreds of billions of dollars per year. Such a fund must be dedicated only to infrastructure deveolpment, which the US sorely lacks and will generate millions of real skilled jobs, which in turn will feed into the economy, generating real growth.

    What types of infrastructure must be built? For starters new power lines, replacing the telephone pole stuff, and the old obsolete grid which due to lack of investment for years has produced frequent blackouts in major cities – once again the shareholders of private utilities companies were too busy sharing maximum dividends at the expense of infrastructure upkeep. The now dying car industry must be converted to producing now feasible IV generation nuclear power stations on a standardised production line basis, especially the new small and portable PBMR reactors. This is not only feasible, but it is a non negotiable necessity. Why? Well nuclear power is safe, it cannot be susbstituted by solar power (no matter what spin the greens like to put on it) and if we want to see the world develop it is the only way forward. For instance, want a new hydrogen economy? You cannot do without high temp PBMR reactors whose heat can produce hydrogen, and also desalinate water for the arid regions of the US and elsewhere on the globe. Such crash infrastructure programs are the only ones which can provide long term relief and future prospects for the people of not just the USA, but the world. However, the current financial elites and their media are totally against the idea why? Because at hear they are malthusian human haters, they favour genocidal methods thinly disguised as environmentalism, in order for instance to cull Africa and other continent’s populations by preventing them from developing any real industrial infrastructure. They tell us we have to accept raising food prices because of production shortages and the highly immoral conversion of corn into ethanol (this is also a net energy loss by the way, no wonder it is supported by the big oil producing companies, they know that ethanol will not decrease the demand for oil, quite the reverse). The human hating world elites (and financial monetarist elites in particular) favour the gambling casino in whatever form, and a human cattle like populace to be herded as they see fit. Their total nightmare scenarion is to see a figure like Franklin Delano Rossvelt come up again and take their toys away from them.

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  • Caffeine, Adrenalin, Steroids – but the body dies more quickly anyway.

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  • So they’ve pumped hundreds of billions into the money supply and the slashed interest rates. Its clearly not a free market economy.

    Maggie told us there’s no such things as socialism but I’m not so sure when I see the financial system sponging social security like this.

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  • dohousescrashinthewoods says:

    Plus, I think the markets are in deeper trouble than any central bank can bail out.
    Note it’s a couple of % recovery on around 10% drop.
    Ultimately, a market should work out the excess that has just been pumped in, presumably with a bout of hyperinflation.
    I wish I had the opportunity to flee the Anglo-Saxon world.

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  • david20040_0 says:

    Where would you flee too?

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  • david20040_0 says:

    There markets have all but recovered, news attention is waning, the cebtral banks have averted this crisis but where did they get the money from?

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  • Don’t worry – the die is cast..

    The mortgage lenders will be falling over themselves now to avoid anything that even hints at reckless lending, and the margin between bank rates and actual mortgage lending rates will widen noticeably.

    Shed a tear (just one mind..) for the poor sods who have overstretched themselves with a short term fix. When the fix period runs out, no other lender will touch them with a bargepole, and some will find themselves on their original lender’s (now inflated) SVR, and may in some cases find themselves paying double the interest they are at present.

    They thought they could just about afford a house – not any more..

    It will also be very interesting to see how the mortgage lenders look on the BTL brigade now. Traditional banking practice used to regard the lending of money to fund investments as a textbook no-no. That somehow got brushed aside in recent years – will it return??

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  • david20040_0 says:

    Uncle Tom, no they won’t.

    Lenders have realised that if the going gets tough and the markets go pear shaped the Central Banks will bail them out.

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  • >>Lenders have realised that if the going gets tough and the markets go pear shaped the Central Banks will bail them out.

    To an extent that will work but the point we are at with US sub-prime would most likely be the tip of the iceberg and the FED pumping money in will be as pointless as trying to fix and amputated head back on with a bandaid.

    To my amateur view it seems that the outcome of the US problems would most likely lead to a recession, which in turn will extend to a world recession. This will lead to unemployment. There’s some canny bloggers on here who will position themselves accordingly and benefit regardless. House prices will crash if recession occurs, that’s an absolute cert but the many FTB who are currently priced out of the market will not benefit because they do not have a job. Recession isn’t fun, neither is having ones house repo’d.

    Regarding lenders being bailed out by central banks, I don’t know if anyone caught Newsnight last night but Richard Lambert formerly of the MPC and currently dir gen of the CBI bit back at a US commentator stating that it was not the responsibility of central banks to bail out lenders reckless lending practises. Talk about telling it how it is. Gave me a wry smile that’s for sure.
    Anyway it’s Friday and I’m missing valuable cider drinking time.

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  • You need to look at previous market tops. There is no such thing as a straight line fall. There will be pullback after pullback. The top has now been set however. This is a bear-market and will see-saw down for maybe 3-4 years more. It will take a similar time for this excess liquidity to unwind whether the global economy slips into recession or not. Only a mug would buy bank/insurance shares now. It is really quite laughable to read some people talking about buying into banks on this “dip”. You need to calm down David and come back in 3 or 4 years the gull impact will be clearer. Hope this helps.

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  • speculatorone says:

    Regarding bank etc, do you think they will now stop lending people 5,6,7 times their salary?

    Will they return to the 3x model? If they do that will have a big impact on house prices…

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  • @david20040_0

    “Lenders have realised that if the going gets tough and the markets go pear shaped the Central Banks will bail them out.”

    In the end, debt is debt. The proportion of GDP that America has to pay in debt servicing has been rising steadily for some time. Doubtless the financiers will dream up new convoluted ways to stave off the dreaded day of reckoning (and maybe cash out while things are still pretty peachy) but like America, the UK has been living on borrowed money.

    That said, I am worried that my savings will be devalued by all the money being pumped into the system …

    It may take years (yes years!!!) before the housing market finally hits the top of the rollercoaster. Be patient and live within your means. Our standard of living is going to drop and some homeowners will be financially wiped out.

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  • Did the Fed solve by it’s much hyped move the problem it created by years of recklessly low interest rates… I think not.

    This is a simple a**e covering exercise so that when this thing gets worse further down the road the Fed can say that it acted.

    For me personally it makes a mockery of the free market dream that the US (and the western world) aspires too, to be quiet frank I would go further and say it marks the end of intellectual argument for the US economic model… Get the gas axe out and cut up the Bear outside the NY stock exchange, it’s not wanted here anymore because the US one way free market economists will print money to save the Bull, but they will eventually devalue and destroy it!

    I am not playing the markets anymore and I am going to start a Mandarin course because mark my words boys and girls this is goodbye yanks…………. and hello Neh Ha Pongio!!!!!!!!!!!!!!!

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  • If the Central Banks keep bailing them out if times get tough, what is to stop them?

    If the Central Banks hasn’t, then I’d argue that they wouldn’t offer stupid multiples.

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  • speculatorone said…

    Regarding bank etc, do you think they will now stop lending people 5,6,7 times their salary?

    Will they return to the 3x model? If they do that will have a big impact on house prices…

    No, because prices are so high now no banks could ever do so.

    Also tha Central Banks will just bail them out.

    Where are the central banks getting the money to do this though?

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  • The lenders arnt being bailed out.. thats why they have been going bust in the states!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

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  • @david20040_0

    “Lenders have realised that if the going gets tough and the markets go pear shaped the Central Banks will bail them out.”

    In the end, debt is debt. The proportion of GDP that America has to pay in debt servicing has been rising steadily for some time. Doubtless the financiers will dream up new convoluted ways to stave off the dreaded day of reckoning (and maybe cash out while things are still pretty peachy) but like America, the UK has been living on borrowed money.

    That said, I am worried that my savings will be devalued by all the money being pumped into the system …

    It may take years (yes years!!!) before the housing market finally hits the top of the rollercoaster. Be patient and live within your means. Our standard of living is going to drop and some homeowners will be financially wiped out.

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  • Quotes from history spring to mind regarding dodgy trading and futile attempts to manipulate markets:

    ‘You can’t buck the market’ – Margaret Thatcher

    ‘It’s only when the tide goes out that you can see who’s been bathing with no clothes on!’ – Warren Buffett

    I’m now more BEARISH than I have been for many months…………

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  • @David 20040

    Where do they get the money? I have been asking myself the sme thing. Selling gold reserves? On Mike Shedlocks (brilliant) blog, the
    suggestion is that it is government-held pension funds?

    I don’t know. I give up.

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  • If Building Societies are awash with cash, then they will find adequate reason to lend 6 or 7 times salary.

    If they are caught with a run on funds (as we have seen this week) no matter how good the potential lender’s credentials, there will not be the capability of even lending 1 times salary!

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  • “the cebtral banks have averted this crisis but where did they get the money from?” David20040_0

    They create it out of nothing, i.e., they press a button and, hey presto, 2 billion $. Now if you or I wish to create 2 billion $ we have to work damn hard to earn it – so how is it that the central banks can are just allowed to create it out of thin air? Well, that’s okay, ‘cos the central banks are owned by governments, right? Wrong! the Fed, for example, is a private bank! Nice work if you can get it.

    ck one is right, the central banks don’t give a damn about falling stocks, they only pretend they are. In reality it’s time for global liquidity squeeze, a process that will see countless businesses and property portfolios go to the wall, at which time the banks (who manufactured the cheap credit regime in the first place) will pick them all up for a song.

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  • When the banks create money out of nothing, they are increasing the money supply and this has an inflationary effect. This is because there is the same amount of real wealth i.e. gold, diamonds etc, but now there is now more money out there and so the money looses it’s purchasing power. There is a delay before the inflationary pressure starts, but start it will. This will mean higher intrest rates in the future and so effectivley the borrowers in the future will be the ones foot the bill for the money that is being created now to prop up the FTSE etc.

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  • Completely unsustainable.

    What is the next step?

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  • David

    Wise up a while or rush out and buy before its too late.

    The markets have not recovered the FTSe is still 600 points low on its August high.

    Secondly what the fed has done for the markets is just a sign that it will act. what do you think interest rates are for to control mortgage repayments i hope not, what may well happen now is money will move aay from the US and the dollar may slide drastically, should that happen the fed will have to raise rates to protect it, they know the game and what their allowance is, they are playing a hand of poker and there is a danger someone may call their bluff !

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  • Wannabeemigre says:

    David20040_0-Weimar Republic ring any bells?

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  • Going back to “the money lenders” theory Greenspan seemed to me the one set up the big crash and Bernanke has unwittingly become the fall guy.

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  • Here’s an interesting point to consider, even though the fed lowered its inter bank lending rate by 0.5% yesterday, according to Newsnight not one bank tapped into it! Same goes for the BoE’s emergency fund… So why is this? My theory is that the banks are in total paralysis because they really really really don’t know who is liable for what! Just imagine the paper trail in 100’s of Enron’s, WorldCom’s and Baring’s banks… The central banks know this and are fully aware that the free market model has been so warped by the cheap credit boom that only a savage correction can result. I think once September gets here and all the city ‘great and the good’ return after 2 or 3 weeks in the Maldives they might have some very long nights and very long swords to deal with.

    This is just the beginning and to offer a blairite type sound bite.. Once this has all worked through we WILL be living in a very different economic world. Jobs will be very hard to come by!

    And the affect on house prices of all this… the only way is DOWN… BABY… for you and me now… the only way is DOWN… BABY… for you and me now!!

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  • This 50 basis points cut from 6.25% to 5.75% is given to financial institutions where they collateral is not measured for its value and its only for a short term say 3 days to 90 days. (This bascially gives them a last respite not to go bust.)
    But what this means to me and the housing market that the bare minimum that you will get and also the 607,000 people coming of the cheap fixed deals this autumn will be around 6.5%. And more for the more doggy credit history.
    Coming from 4.5% to 6.5% will add £2400 pa to a £100,000 mortgage.
    Banks will also get more strict to whom they lend hence people might get a mortgage somewhere between 7-9%.

    We must remember the benifit of this credit crunch will lie with us. As not every Tom, Dick and Harry will be able to get a mortgage or what he gets he can’t afford. This will reduce the price as demand will go down with supply increasing due to fall in returns and sales due to arrears.

    But we shall also remember, that due to this slow down, a lot of us will also be out of the job. Hence will not be able to afford it anyway.

    I would really suggest people to look more objective press for information. Reading economic news with a biased view helps no one.

    Also I have read a lot about the stock market on the blogs. I would really like people posting such blogs to link it House Price Crash so that mere mortals like me can make more sense out of it.

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  • David2004 – the fed, as I understand it – bailed out the stock markets – not mortgage lenders. You seem to be implying that the Fed will support house prices around the world. I don’t see any indication of that. The fact remains that no-one is willing to touch sub-prime credit, meaning lenders cannot bundle their lent money and ‘sell’ it to create more money to lend. The magical creation of money has stopped. Suddenly. If the mortgage lenders no longer have unlimited funds, they have to decide who to lend to (rather than giving it away to anyone), and that is going to affect the sub-primes first and the BTL brigade. The downward spiral has started.

    I think we will see the evidence in repossession figures in 6 to 12 months time.

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  • Easily David:

    Quote of the Week:
    Conventional thinking has it that had the Fed only created $5 billion and filled the hole in bank capital, the [Great Depression] could have been avoided. But the issue at the time wasn’t, as conventional monetary economists believe today, the few billions necessary to recapitalize the banking system – but the ongoing tens of billions that would be required to sustain unsustainable Credit Bubble-induced inflated asset prices, inflated corporate profits, inflated earnings, and myriad worsening economic maladjustments.

    —Doug Noland, in the July 20th Credit Bubble Bulletin (replace “billion” with “trillion” in the above and you basically have today’s situation).

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  • Deepak,

    Ever read any Chomsky on the media?

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  • Further to my previous comment David, here’s a quote from the CNN Money article also posted today.

    “The Fed’s job is to protect the financial system. That’s why it’s trying to rescue the gigantic subprime enablers while letting borrowers and mortgage companies go under. ”

    Which I think says it all. the Fed is bailing out the system at the expense of mortgage companies and individual borrowers.

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  • stillthinking says:

    Is this really entirely about the sub-prime mortgages, isn’t it also about the high leverage/gearing they all seem to be on. The mortgage issue is just a tipping point. If I have a share worth 50p then I can watch the price drop to 0 and then I lost my 50p, but I get the feeling they are wiped out financially at 45p.

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  • stillthinking says:

    “the Fed is bailing out the system at the expense of mortgage companies and individual borrowers.”
    These two are the villains though, stupid lending decisions from one and fraudulent applications from the other. Give that the value comes from somebodies savings I trust that the borrowers don’t have the choice to walk away. Modern serfdom, so what, they made the arrangement themselves.

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  • @stillthinking,
    It’s not just Sub-Prime. I suspect it’s the overall leveraging of property, which is susceptible to downward price pressures.

    If you own a house outright and take an Equity Withdrawal package of 85%, then is the event of a 20% house price drop, the house is worth less than the money you owe on it (ie: negative equity).

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  • The fact is the FED haven’t bailed out anybody. All they have done is effectively given an indication that they are prepared to act, between meetings, to “calm” the markets and provide liquidity. There seem to be several misconceptions which need explaining though:-

    1. The FED are a bank. They are owned by their member banks. Notably JPMorgan and Lehman brothers. They exist mainly to lend money to the government and to other banks. Their primary objective is to preserve the banking “system” (i.e. their members) to enable them to continue to make profits. They could not care less who goes bankrupt, so long as it isn’t them. They control the government and money supply, not the other way around.

    2. They have not “bailed out” anybody. They have offered to provide SHORT-TERM liquidity i.e. overnight money to other Banks in the system who have emergency cash flow problems. They have simply reduced the rate at which they will provide this short-term cash temporarily to prevent member banks becoming insolvent due to an inability to sell debt at the moment, and to prevent them being FORCED to sell assets at knock-down prices. It is a SIGNAL to calm markets and prevent forced selling of shares.

    3. No-one is going to support share prices, house prices, bad investments, currencies etc in the longer-term. There simply isn’t enough cash around to do it. The FED’s PPT (Plunge Protection Team) appear to have been buying certain shares/futures in the ast few weeks in an attempt to prevent panic-selling. However, this can only be short-term.

    4. Interest rates/House prices. The FED may or may not cut interest rates. The only reason they are likely to do this is if they believe inflation is no longer a threat, and the economy needs to be stimulated or a recession is imminent. Up till now their view was inflation was a greater threat. Allowing the markets to correct over the next few years in an orderly and not panicky decline, is probably the best that can be hoped for. Don’t forget inflation is much more serious than a few poor punters who were mis-sold mortgages on homes they couldn’t afford and have gone bankrupt and are homeless. When did the US (or UK) ever give a toss about poor people?

    5. UK interest reates/house prices. Largely driven by the US. MPC has warned many times ofthe dangers of borrowing too much and assets prices being stretched. I believe they will keep rates at a level high enough to keep a lid on CPI. (although RPI has ramped) and won’t be concerned about speculators (property and shares) losing money. The MPC is not owned by investment banks, and to that extent we have seen a different approach in the UK to the US. My view is that interest rates are already high enough to destroy the house price bubble, but it will take 3-4 years. Today’s interest rates won’t work through till next summer/autumn. There is ZERO profit to be made by BTLs buying now, the risks are huge due to leverage.

    6. Interest only mortgages. I read somewhere that 40% of mortgages are now interest only. Think about that for a moment. It means those people are effectively renting not buying. They are renting not at a rental yield of around 3-5%, they are renting at a rate of maybe 6-7%. In addition, they are usually highly leveraged. Even a 5% down-turn in house prices will see them lose 100% of their capital. Plus all the fees they have paid out etc. Assume they manage to hold on to their home for say 10-20 years. How will they ever pay for it? All these baby boomers with BTL’s and holiday homes, and remortgages to help their kids get on the “property ladder”. How will they pay for their retirement with a property which has fallen in value when they had an interest only mortgage? The simple answer is that they can’t. Interest only mortgages are a scam. The whole housing mortgage market is a huge scam based on future capital growth. No different to the private pensions scam. I know several 50 something BTLers who have all put their flats on the market in the last few months, to try and get their cash out. None have sold, and neither are they being let. This is the absolute top of this market give or take 5%. Hedge funds and investment banks will make just as much money on the way down as the way up. Ignorant punters can only make money on the way up. The up escalator just stopped. Those that get off now or have got off will be very fortunate. The vast majority, who are being encouraged to invest for the “long-term” will lose alot if not all their money and won’t ever touch property again. Stop worrying about the exact timing of the top. It is irrelevant. You can’t hit it. We are now in both a property and a share bear market. Stay in cash. Stay calm. Enjoy life. Wait over the next 5-10 years for opportunities to buy if they present themselves.

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