I am confident that the US is going to plunge over the fiscal cliff. I can't see any way round it. Both sides are claiming a mandate from the recent election, and both are driven by ideology, not pragmatism. Even worse, both seem to think the other side will be blamed for any fall-out if they do take the plunge.
And then of course we have the debt ceiling limit coming up probably in February - no doubt that will be another fiasco.
Both should be big sell indicators for the US economy.
BUT - on the buy side we have a shale gas revolution which is giving US indusrty a huge energy price advantage over the rest of the world. At the same time wage inflation in China and India, and a US Dollar being aggressively weakened by an activist Fed mean more and more companies are bringing production back to the US from overseas. The US could be on the cusp of an industrial boom.
My feeling is at some point in the next 6 months it will be time to go long US equities. I think there will be a fiscal cliff / debt ceiling sell-off which will provide a good buying opportunity. Then hold for the long run. There will be rocky moments but once the politicians have got out of the way I think the US will be back as an industrial powerhouse.
Friday, December 14, 2012
Housing again....
Whether houses go up or down it seems we're all doomed. They go up and they trap "Generation Rent" in the apparent purgatory of non-ownership, they go down and you become a "Mortgage Prisoner".
Fortunately, as with most articles on housing, and especially those by Ian Cowie, it's all fluff and nonsense and can be largely ignored.
Fortunately, as with most articles on housing, and especially those by Ian Cowie, it's all fluff and nonsense and can be largely ignored.
Tuesday, December 11, 2012
Housing
Much is being made in the UK of the fact that home ownership levels are falling and the proportion of renters is rising as though this is a sign of coming doom and gloom, and home ownership is the overridng and all-encompassing sign of economic as well as domestic bliss. There is lots of talk of "people at the bottom not being able to get on the property ladder" and moeny spent on rent as somehow being wasted.
This bizarre view of home-ownership is particularly prevalent in the anglophone world (Ireland, UK, US and Australia being prime examples) as well as some parts of Asia - Singapore, HK and China leap to mind.
All of them view property ownership as some sort of god-given right and an unquestionable good. They also all view "strong" (read high prices) property markets as somehow a sign of a country's strength and stature. Indeed many governments jump on this bandwagon and actively encourage home ownership - many countries treat capital gains on "primary residences" as tax free for example, and in the US agencies such as Fannie Mae and Freddie Mac are effectively government sponsored mortgage washing machines that are specifically designed to allow banks to lend more against property than they would otherwise be able to, so encouraging demand and raising prices. The social argument is that home ownership creates a stable community and binds people together. The economic one that high prices are somehow a sign of economic strength is less clear. It appears to be more based on boasting - "our prices are higher than yours therefore we're better.
Individuals of course get sucked in because of the huge leverage they can get on property. Mortgages of 90+% were not uncommon before the crisis - famously Northern Rock offered over 100% (and look how that ended up - should tell you all you need to know about housing). Ignoring transaction costs (as most property buyers do for reasons i don't understand) this means that GBP5,000 + a 95% mortgage allows you to buy a GBP100,000 flat. 10% price rise to GBP110,000 and if you can sell then you've turned 5k into 15k. Luvvlyjubbly as Del Boy would say.
It was the baby boomers who started it all of course - i can remember my grandfather and my mother both banging on that land and property is a sure fire bet - "they aren't making any more of it". Clearly neither have lived in Asia where land reclamation and development is endemic. They rosde an ever-rising market on the back of financial deregulation and a huge post-war population boom creating strong demand.
Both those influences are going into reverse - banks are slowly being forced to return to the dull utility style industries they should always have been, and most developed countries now have relatively stable populations and many will start to fall over the next decade or so in the absence of immigration.
We keep hearing that a healthy (expensive) property market is a prerequisite for a healthy economy. I would have thought that the recent debacles in the US, Ireland, Spain and to a lesser extent the UK. would have cured people of this view but somehow it keeps coming back. We keep hearing that renting is wasted money, that home ownership is the holy grail. Of course the people who say that are the same ones that then bemoan the fact that the very healthy market they aspire to mean there are no cheap homes.
High borrowing to "get on the property ladder" leaves huge exposure to downside - if property prices fall your equity can be wiped out almost immediately and you can be stuck - a "mortgage prisoner". The only way out of this is either to pay off the underwater part of your mortgage or default. Both are net withdrawals from the economy through either higher saving to pay it off or a loss as the lender which then has to provision to cover that loss, removing profits that would otherwise have been relent.
Even in a rising market, property ownership creates a highly immobile and inflexible workforce. Property transactions take time and cost money. Many people will not entertain jobs that require them to move house, and large debts mean people are less likely to take entrepreneurial risks and will often settle for the mortgage slavery of a stable job "to pay the bills" rather than a shot at the big time.
In a falling property market lack of equity and a refusal to face losses make the immobility problem even greater. Often this is only resolved by the unfortunate borrower defaulting and parking the loss with the bank. These days many of those banks rely on their respective government to act as lender of last resort to them so effectively the loss moves onto the government books, forcing them to slash spending or raise taxes to cover it.
Lastly, if property is an "investment", as it is widely touted, then why should buyers be protected from the downside, as they have been in the current recession. If they buy a share and it falls in price they don't, or shouldn't, expect the government to cover the loss, so why should it cover a house price loss? Attempting to force house prices higher simply moves the losses on the books of the government and people who were sensible enough to get out before the bubble burst.
Fortunately in many markets it looks like government efforts to prop up property markets are doing little more than slow the fall - the slide continues in many parts of the world, and rightly too. Money freed up from housing investment can then be invested elsewhere in more productive parts of the economy - like making something for instance, and those poor sods who are ripe for a mugging in property an get on to the ladder they so aspire to. Just don't come asking me for a handout when it all goes down the tubes again - as it surely will.
This bizarre view of home-ownership is particularly prevalent in the anglophone world (Ireland, UK, US and Australia being prime examples) as well as some parts of Asia - Singapore, HK and China leap to mind.
All of them view property ownership as some sort of god-given right and an unquestionable good. They also all view "strong" (read high prices) property markets as somehow a sign of a country's strength and stature. Indeed many governments jump on this bandwagon and actively encourage home ownership - many countries treat capital gains on "primary residences" as tax free for example, and in the US agencies such as Fannie Mae and Freddie Mac are effectively government sponsored mortgage washing machines that are specifically designed to allow banks to lend more against property than they would otherwise be able to, so encouraging demand and raising prices. The social argument is that home ownership creates a stable community and binds people together. The economic one that high prices are somehow a sign of economic strength is less clear. It appears to be more based on boasting - "our prices are higher than yours therefore we're better.
Individuals of course get sucked in because of the huge leverage they can get on property. Mortgages of 90+% were not uncommon before the crisis - famously Northern Rock offered over 100% (and look how that ended up - should tell you all you need to know about housing). Ignoring transaction costs (as most property buyers do for reasons i don't understand) this means that GBP5,000 + a 95% mortgage allows you to buy a GBP100,000 flat. 10% price rise to GBP110,000 and if you can sell then you've turned 5k into 15k. Luvvlyjubbly as Del Boy would say.
It was the baby boomers who started it all of course - i can remember my grandfather and my mother both banging on that land and property is a sure fire bet - "they aren't making any more of it". Clearly neither have lived in Asia where land reclamation and development is endemic. They rosde an ever-rising market on the back of financial deregulation and a huge post-war population boom creating strong demand.
Both those influences are going into reverse - banks are slowly being forced to return to the dull utility style industries they should always have been, and most developed countries now have relatively stable populations and many will start to fall over the next decade or so in the absence of immigration.
We keep hearing that a healthy (expensive) property market is a prerequisite for a healthy economy. I would have thought that the recent debacles in the US, Ireland, Spain and to a lesser extent the UK. would have cured people of this view but somehow it keeps coming back. We keep hearing that renting is wasted money, that home ownership is the holy grail. Of course the people who say that are the same ones that then bemoan the fact that the very healthy market they aspire to mean there are no cheap homes.
High borrowing to "get on the property ladder" leaves huge exposure to downside - if property prices fall your equity can be wiped out almost immediately and you can be stuck - a "mortgage prisoner". The only way out of this is either to pay off the underwater part of your mortgage or default. Both are net withdrawals from the economy through either higher saving to pay it off or a loss as the lender which then has to provision to cover that loss, removing profits that would otherwise have been relent.
Even in a rising market, property ownership creates a highly immobile and inflexible workforce. Property transactions take time and cost money. Many people will not entertain jobs that require them to move house, and large debts mean people are less likely to take entrepreneurial risks and will often settle for the mortgage slavery of a stable job "to pay the bills" rather than a shot at the big time.
In a falling property market lack of equity and a refusal to face losses make the immobility problem even greater. Often this is only resolved by the unfortunate borrower defaulting and parking the loss with the bank. These days many of those banks rely on their respective government to act as lender of last resort to them so effectively the loss moves onto the government books, forcing them to slash spending or raise taxes to cover it.
Lastly, if property is an "investment", as it is widely touted, then why should buyers be protected from the downside, as they have been in the current recession. If they buy a share and it falls in price they don't, or shouldn't, expect the government to cover the loss, so why should it cover a house price loss? Attempting to force house prices higher simply moves the losses on the books of the government and people who were sensible enough to get out before the bubble burst.
Fortunately in many markets it looks like government efforts to prop up property markets are doing little more than slow the fall - the slide continues in many parts of the world, and rightly too. Money freed up from housing investment can then be invested elsewhere in more productive parts of the economy - like making something for instance, and those poor sods who are ripe for a mugging in property an get on to the ladder they so aspire to. Just don't come asking me for a handout when it all goes down the tubes again - as it surely will.
Monday, December 10, 2012
Here we go again....
It's been a busy month for the forecasters at the ECB, IMF, OBR and various bank economics departments - all have been busy slashing away at growth forecasts for the Eurozone and the surrounding economies for 2013 and 2014. This has provoked the usual outrage from commentators and pontificators that the Eurozone is pursuing the wrong policies and an expansionary fiscal policy of growing budget deficits will somehow fix the problem - a good example is today's offering from Ambrose Evans-Pritchard. I very much admire a lot of what he has to say, but i find his arguments re the Eurozone nonsensical.
His comment that "As Maynard Keynes wrote in 1931, deficits in a slump are "nature’s remedy from preventing business losses being so great as to bring production altogether to a standstill."" is selective use of the truth. Keynes assumed that governments would run roughly balanced budgets which would move into surplus in the good times as growing tax revenues allowed them to build up reserves and then into deficit in bad times as those reserves were expended on welfare, unemployment and other similar payments - thus acting as automatic stabilisers. He did not advocate growing deficits as a policy when budget deficits are already at 8%+ of GDP and total government debt is heading to, or over, 100% of GDP.
He also has yet another go at Germany for running a current account surplus - "Britain has a big current account deficit (unlike Euroland), and is therefore not morally obliged to offer the world reciprocal demand (unlike Germany with a 6.4pc surplus this year). ".
The message is clear - Germany should spend more on crap it doesn't need or want to bail out reduced demand for that same crap from everyone else.
Firstly, this assumes that Germany is some sort of single entity, or that Germans and their spending are directly controllable by the German government. Otherwise how is this increased spending supposed to be achieved? German culture views fiscal prudence as a virtue. That is hardly likely to change overnight, and frankly the rest of Europe should be thankful of their parsimonious nature rather than complain about it - without Germany the Eurozone would be well and truly up the creek with no paddles in sight. As it is Germany's deep pockets is the only thing keeping the whole thing afloat at present.
rather than having a go at Germany, the rest of Europe would do well to copy them. The current crisis is a direct result of growing debt allowing both governments and individuals to spend today money they thought they would have tomorrow. It now turns out they don't have that money and they are struggling to service those debts. Like any household, the solution to excess debt is belt-tightening. It's unfortunate that everyone has to do it at the same time, but that's what happens when tomorrow's consumption is brought forward to today by the use of debt. If the debt keeps growing then you start into the day after tomorrow's consumption, and the day after that..... that can only end in tears because eventually tomorrow arrives and you've consumed everything already.
There are two parts to the solution to this crisis - firstly exactly what's happening - massive internal devaluations by countries such as Greece brought about by high unemployment driving down wage costs until those virtuous and solvent Germans start moving their manufacturing there, and a large external currency devaluation to help the whole Eurozone.
This is the biggest mystery to me in the whole thing - how the Euro is anywhere close to 1.30 against the dollar. I don't even understand how it's above parity, let alone at current levels. At some point reality will hit home and the currency will fall - I can only assume the FX market is waiting for more signs of growth in the US and the end of QE there before hitting the sell button, but it has to happen.
In the meantime, this is going to be a long slow slog, but economic pain is the only solution I'm afraid. There is no quick fix.
Friday, December 7, 2012
Japan's pain on a global scale
It seems that the world's leaders are finally waking up to what should have been obvious all along - the developed world by an large is going to re-enact Japan's misery. The UK have pushed austerity out to 2018, the ECB are admitting European growth will be next to non-existent for years to come, the US is only growing because they're running huge budget deficits - growth will stop as soon as that deficit is tackled - either by going over the cliff or by negotiation.
With major central banks all moping up government bonds (UK, US and Japan in QE, ECB promising it to "stabilise markets" and SNB to recycle the proceeds of their huge purchases of foreign currencies as they cap the Swiss Franc), rates are going to remain very low for a long time to come.
Equities may or may not rise - it seems each round of QE gets a smaller and smaller response as the idiots in equity land finally spot what fixed income land has known all along - QE means things are bad, and when things are bad you buy bonds and sell equities. The extra liquidity being pumped in is no longer prompting the spectacular rallies of the last couple of years - instead it's being saved.
There is a lot of talk of a bond bubble, but if my assertion that the world is experiencing Japan's pain on a global scale is correct then there is plenty of room for yields to fall further - just look at 10 year JGBs at 0.70% versus UK at 1.74%, Germany at 1.29%, France at 1.98% and the US at 1.58%.
New bonds, whether corporate or government issued, will have low coupons and hence long duration and high price volatility in response to moving yields. It'll be a bouncy ride but I believe the trend over the next couple of years is going to remain rising bond prices and at best stagnant equities. Property may continue to rise in select spots as excess liquidity leaks into that asset class, but like equities, at some point reality has to catch up with the market and a correction will occur.
With major central banks all moping up government bonds (UK, US and Japan in QE, ECB promising it to "stabilise markets" and SNB to recycle the proceeds of their huge purchases of foreign currencies as they cap the Swiss Franc), rates are going to remain very low for a long time to come.
Equities may or may not rise - it seems each round of QE gets a smaller and smaller response as the idiots in equity land finally spot what fixed income land has known all along - QE means things are bad, and when things are bad you buy bonds and sell equities. The extra liquidity being pumped in is no longer prompting the spectacular rallies of the last couple of years - instead it's being saved.
There is a lot of talk of a bond bubble, but if my assertion that the world is experiencing Japan's pain on a global scale is correct then there is plenty of room for yields to fall further - just look at 10 year JGBs at 0.70% versus UK at 1.74%, Germany at 1.29%, France at 1.98% and the US at 1.58%.
New bonds, whether corporate or government issued, will have low coupons and hence long duration and high price volatility in response to moving yields. It'll be a bouncy ride but I believe the trend over the next couple of years is going to remain rising bond prices and at best stagnant equities. Property may continue to rise in select spots as excess liquidity leaks into that asset class, but like equities, at some point reality has to catch up with the market and a correction will occur.
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