麻豆社

Could the source of your bemusement be revealed in the inflation figures?

I think a whole bunch of people have needed 'everything to be just fine' for far too long now. The 'boom' we have enjoyed has been fuelled by speculation, and people thinking that they need to jump on the bandwagon in case they miss out.

Case in point, a friend of mine was convinced he needed to buy a house recently. He [i]needed[/i] to get on the ladder for fear of missing out. That by paying rent, he was paying dead money. He was genuinely surprised when I ran the numbers for him, and pointed out that just the interest on his mortgage repayments would be a bout 150% of rental payments on an equivalent property.

For far too long, people have been encouraged to sell their very soul to buy things that they cannot afford, with credit that they do not appreciate the risks on. The last 10 years are finally catching up with us.

Inflation above 2% again, yet a call for interest rates to be cut immediately?

Could this inability by the BoE to cut rates be the cause of a serious house price drop?

I find it interesting that China controls inflation by controlling actual money supply ( ) whereas the UK and USA control it through interest rate shifts. Any comments on the effectiveness (or not) of these different methods?

Were all doom mongerers. They say the British are not happy unless they have something to moan about. Robert Peston you鈥檙e no different, I notice like many other media journalists your articles are sensationalised to appear more appealing to the eye. Well I will let all you negative people out there speak about the end of the world. In the mean time I will enjoy the 12% I am getting from my buy to lets and the 8% from my bonds.

I'm not at all bemused or surprised the B of E is holding its fire on rate cuts. There are inflationary shadows circling the economy just beneath the surface. The B of E's remit is inflation, not growth and inflation, though they've done their best to steer a reasonably decent course between the two. The Fed - in my opinion - has got itself into a right mess recently. I can understand their fear of market meltdown, but to be cutting interest rates when inflation in the States is on the rise, giving them next to no margin (at best) to keep a lid on increasing prices, will drag them into a nightmare scenario next year as oil and food costs continue to climb. Stagflation is now a real danger for the States. The B of E is probably hoping that by sending out consistent signals that inflation is their core target, it will realign - as much as Central Banks ever can - people's price expectations and moderate their behaviour as necessary. My impression is that many people still think the impending Crunch is just a minor blip - rather than the major financial chaos I believe it will be. To cut interest rates would just reinforce more spending, less saving and an even bigger hangover some time when the party finally ends.

"Which is why I was slightly bemused that the Bank of England didn't cut interest rates last week.."
Surely the BoE has inflation (REAL INFLATION - not that CPI nonsense) as it's current focus, not the stock market. Check out the price of wheat, milk and other staples. Check out oil and gas. Cutting interest rates into an inflationary marketplace is not appropriate at all.

1) Good point
2) Teddy thinks HMG has wanted joe public to be in heavy debt so they have to work around the clock to pay more tax and not have time to challenge the daft HMG policies in the streets.
3)We have previously posted we think hoses prices will collapse 300%.
4) Good point
5)What we need is a reality check.
Oil is running out, our public services and infastructure are drowning by over-population and the banking system is in severe trouble.

Robert,

Have you been reading some previous comments to your excellent blog site?

The truth is coming out now, after 10 years of economic self deception.

Easy cheap money = feel good factor = survival of a useless government.

We are learning 'you cannot borrow yourself rich', the real world is now beginning to hurt.

Thank you, Robert, for trying to spell out what is coming the British publics' way - a complete change of lifestyle... and no one is going to like it.

I don't mind being branded a scaremonger amongst my friends and colleagues, all but a very few bury their heads in the sand and proclaim everything will be alright. I most regularly hear '1929 can't happen here, the government won't allow it' - ha! as if the government has any control over free markets and what the banks get up to!

I reckon Darling and Brown are going to be presiding over the most calamatous collapse of the monetary system the world has ever seen.

Slightly bemused. Says it all really.

By the way, is that a helmet you're wearing on your photo - or is that really your hair?

#5 is sooooo right.

And read Mr Schifferes article regarding where setiment really is, in the US:ie looking into a 'deeper, darker scarier hole than was previously thought'. No Peston 'hype' there!

I would though just add that the only reasons I can think of why property on agents books hasn't increased by more than 9% to levels of 15/20% already is due to the much maligned HIPS. People now have to pay upfront to sell a 3 bedroom+ property and this is generally accepted to have detered about a third of those who would normally choose to take a punt on selling.

However with lending institutions tighting their criteria regading morgages and of course simply not being able to get the funds from the money markets to lend as morgages (unless, ironically you're Northern Rock with the BoE there to tap) expect 20% to be a minimum figure by mid January.

I am an Estate Agent.

I can't help but agree that things are looking extremely bleak.

What concerns me most is that a recession will further fuel the collapse in house prices and lead to yet more defaults on mortgages and we could end up in a snowball effect that brings down the entire world's banking systems.

On the back of many years of excessive borrowing we may be in a new domain such that the whole house of cards might come down.

The question is: What should a private investor (someone who is not in debt) do to secure their savings and future income?

It's easy to recommend national savings index linked, but then I cannot even be sure if the BOE can be considered safe any more.

Any suggestions?

#9

You may pretend to take the persona of a lunatic, but your comment re HMG is actually quite apt. A busy and prosperous country is a content one. Government can do pretty much what they like if the country is too busy to notice. Its when the country is hit in the pocket, and they notice, that the country becomes discontent. History has at least taught us that much.

Thanks for the informative blog Robert. I'm no expert in these matters, but have been doing some research for the past few months and everything I've read seems to point to economic slow down. My only hope, as someone biding their time to get on the housing ladder, is that house prices come down to within the realms of reality (3-4 times income). Hopefully the buy-to-letters will feel the burn and dump their properties. Thanks again, Ian.

Headline on one 麻豆社 website $1trillion dollar problem, but in article $450bn. What's $550bn between friends?

how this pans out depends on how long each bank takes to sack its CEO. If they don't, this will drag on for ages as they will seek to hide losses. If CEO is sacked, then they'll be looking to write off anything they can in the next quarter to look good for the future. The sooner it happens, the sooner we'll know the extent of the problem and the scaremongering can stop.

Robert,

May i kindly suggest adding to your list the following:-

Inflationary problems in China and Asia, which may prevent the Fed, BofE and the ECB from cutting interest rates due to inflationary fears from imported goods.

The continuing decline in the US dollar in the face of its huge trade and budget deficits, which will continue to make UK and European exports more expensive.

The only benefits i can see from this situation are:-

The possible unwinding of the global imbalances created by Asia's undervalued currencies and funding of the US's deficits above that long term should help restore stability to world markets.

A global downturn should relieve some of the pressure on commodity prices, including oil, which is partly fueling some of the international tensions between oil producers (Iran, Russia) and oil importers (China, US)

Also, we should not forget that World trade is now bigger than ever that is helping millions of people in developing countries to escape poverty.

Robert,

Any chance of you organising a christmas party for all your blog contributors. Perhaps you could also invite a few girls ?

Excellent points #10, #11

In connection to point (1) in your list, this article says that the RICS have seen house prices fall over the past three months, whereas this article
saye that the Nationwide have seen house price growth. Does anyone know if this difference purely due to London, or is one of these opinions incorrect, or have I misunderstood the meaning of the results?

Comment 10 : Geoff Berry : 10.29AM

Easy cheap money = feel good factor = survival of a useless government

Not quite fair, I think. I know that in turmoil-free times any nincompoop can proclaim sagacity merely by surfing along on the mainstream wave. This doesn't mean that ALL those who go along with the mainstream are nincompoops. The real test for the government is how they deal with a situation where there is no mainstream to follow. Have they the vision, the acumen and the courage to make properly intellectual decisions that aren't just "going with the flow"? Or will they just vacillate until the next surge of popular opinion signposts them where to go?

The time is fast approaching.

Robert it all very well for you and many of your colleagues to now highlight the catastrophe that is hitting the financial markets and to explain how this has come about but, the big question that you and all other city editor's should now be answering is why did you not highlight this to the same extent some years ago. Because I now understand that CDO's were first widely used back in the 1980's by junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palletable to customers. Even then some doubts were raised about this practice and as we can now see this has prolifertaed to the point where it is now a monster, out of control.

Instead of commenting on the lack of earlier intervention by the FSA and the Bank of England surely the more important question for you and you city colleagues to answer is, is the relationship between city editors and city CEO's too incestuous for the editors to give an independent report or account of the mal-practices that go on in the city.

The thing that bemuses me is that all this is happening before house prices have actually crashed. Once the market does start to fall and the buy-to-let mob decide to jump ship, I don't see anything to stop house prices falling to long-term trend values. That's maybe a 50% drop. (Not that I'd see that as a bad thing in itself - I'd actually like my kids to be able to afford to live somewhere when they grow up.)

Would the banks survive such a fall if borrowers defaulted in droves as they have in the US? Possibly not. Would that cause a recession? Probably, though in a computerised age, new banks could step in and replace them very quickly. A leaner, fitter banking sector less likely to take stupid risks might be a good thing long-term.

The problem is how long it takes for stability to return and lending to resume. So, if there's got to be a crash, let's hope it happens quickly.

The head of Blackstone said that 30% of American industry profits came from the banking sector a point we need to compare with here.
Cheap credit has for the medium term gone and the problem is how the banks are going to try to keep their obscene income stream up.
With this incompetant government in awe of the banks regardless of the damage to the rest of the economy reality will only return when Labour M P's are lining up at the dole counter with the rest of the economy.
Its all about openness and coming clean, a thing that can never happen under Labour. To get some semblence of reality to the extent of the problem all clearing nbanks in the UK should be made to declare their off balance sheet 'Special Investment Vehicles' and derivitive positions if taken at full value, to public scrutiny. Only then will we know the true extent of the problem. The party is over and a new basis needs establishing urgently.
The econony can not be bled any more by the avaricious greed of the banking sector and the very notion o paying out bonuses when so many are without in the real world slaps of arrogance that needs removing.
No doubt the stock market will be subject to some window dressing before December 31st so thig swill look better and fund manager will then seek to claim their performance bonuses but that would be resisted as well until all pension funds come clean on what SIV and derivitive liabilities they are holding where the market price has in effect evaporated.
Gordon Brown claims change is the key word of his tenure, then lets see some honesty and no spin return back to this world, or maybe he is as void of knowing what they really mean as he is about running the economy.

Britain's in trouble, no doubt about it. I have written to Vladimir Putin, who I count as a personal friend, to ask him if he will consider helping you guys out by taking over Britain. I've asked him to do it as a personal favour. After all, why else would he be interested in Britain, as it noe is. Don't get your hopes too high, however, as he's very busy right now.

Stagflation has arrived.....nuff said.

Hi Robert - I am with you to your last paragraph.

As the U.S. has already found, cutting interest rates does nothing for falling confidence and has simly resulted in a more rapid full of the US dollar against other currencies, most significantly against the Euro where the Central Bank rate is stll less the the Fed's.

Having worked in the property market for 10 years from 1980 until 1990, I know there is a lot of wishful thinking about the value of a house. a house is worth what it will fetch on a wet Friday in February when there are two other similar or better houses for sale in the same road. But most agents have not got the courage to tell an owner that believes one similar to his which was sold for half a million (so he was told) will not be at all happy to be told his house my fetch 拢275,000, so goes elsewhere and is told 拢470,000 so that who he instructs. Suprise, suprise, the house does not sell. For a great many householders it is actually much worse than this. Say he bought the house for 拢300,000 two years ago and was able to put down 拢150,000 from the sale of a previous house this is his equity. The house is owned by the bank or other linder until the motgage is paid off in full. No wonder he feels poorer. You will notice that the current interest does not even come into this calculation. This is oc course one of the reasons that cuptting the Feds Prime Rate has had little or no effect. A cut artery needs a blood transfusion and surgary not a sticking plaster.

mwahahhahahahahhaaaaahhaaaa....

How will you cope when the cashpoint is shut down and no money is available?

This scenario could be the reality very soon.

"Bemused" - from a journalist? The problem is that most journalists think they 'know' too much!

I have had several written interactions with successive governors of the Bank of England in which I chided them for ignoring aspects of inflation that are - in my view important - their response has always been that the Bank is changed only to manage against the inflation statistic as defined by HM Government. That is - without taking any account of house price, or asset, inflation or the cost of housing etc. Journalist know this fact. The wonder is that Bank is being concerned at all about anything else - I do wonder if they are acting beyond their powers!

The problem is perhaps the ideas of 'matrix management' so pervasive in modern society - this makes nobody actually responsible for anything and gives rise to the 'Sir Ian Blair' syndrome - this also pervades most of the Worlds major business - including our major Banks. There are also far too few independent 'Auditors' - the accounting industry has merged into too few firms to keep an adequate check on company managements.

In essence interest rates should have been far higher over the last decade - they were lowered far to far and far too often. It should have hurt, by not doing so the hurt will be more substantial and more long term - no matter what is now done with interest rates - the free market will ensure that this comes to pass no mater what bankers do - they are impotent.

Is this the new economic paradigm that many people were heralding only a year or two back? (Consistent growth with low inflation).

Or is it good old market cycles playing out again?

I think we should be told.

I don't understand the purpose of maintaining interest rate levels as a response to inflation which is principally a result of globally set prices, not domestically determined ones. Neither do we need currency strength to keep a lid on imported inflation as the biggest factors are dollar denominated and we would continue to appreciate against the dollar with or without a cut.

I feel optimistic.
Unemplyment is low but labour supply not tight because of flexible international labour markets. Lots of investment in hard and soft infrastructure. Nuclear power back on the agenda. Value of North Sea oil high. Inflation under control despite external pressures. Bank shares rebounding. Olympic building boom to get underway. Price of property in London holding firm. Affluent middle class still has big discretionary spending power. Service sector needs a good jolt to compete harder on price.

'..bruised by the jolt'(sic). The operative word here is jolt not a crash.

Re: point 5. A lot of debt is trading below 100p in the pound because a) during the credit boom it was underpriced, so investors won't buy it at face value and want a discount; and b) there's over-supply in the debt market due to reduced demand from investors. This is causing large discounts on prices as banks try to spread the debt they've created across a wide pool of investors. It's not necessarily anything to do with the performance of the company that's borrowed the debt.

Otherwise all good points.

From the gleeful schadenfreude of many of the posters above, I'd hazard a guess that they've predicted 10 of the last 3 recessions....!

I look forward with fearful anticipation to house prices falling "300%"

Good article except I can not understand why you are asking for an interest rate cut. The remit of the bank of England is to meet the CPI target. Inflationary pressures are building, to cut rates now would completely send out the wrong message i.e keep on borrrowing. This would only defer the crisis and make the debt problem worse. Unfortunatly after such a long booom period the only medicine is to batten down the hatches. Lets hope the medicine does not kill the patient who did not realise how sick he was.

Robert why are you calling for an interest rate cut?

Do you think it is appropriate to bail out reckless borrowers and lenders to the detriment of savers and people on fixed incomes (i.e. pensioners)... yet again?

Inflation is obviously alive and well, even the CPI (Comedy Price Index) can't hide it.

The focus has to be on inflation, the economy and housing market will have to take a backseat and a long overdue reset to normal after years of being pumped up on low rate steroids. It's gonna hurt but there is no other option.

# James HOLLOWAY rember buy low sell high

Here's a rather frivolous indicator of the coming crash:

The poser's weapon of choice immediately priorto the crash of thelate eighties was the Ford XR3i cabriolet. Today, its the BMW X5.

What is it with X-cars and crashes?

Robert

I have been tracking various commentators views on potential movements of the stock market for about 7 years now. They often seem to get it wrong about stock market direction. But based on their sorts of approach to prediction..And I don't know if it's a technical signal of a forthcoming prolonged 2 or 3 year drop in the stock market but last time bank share prices dropped below the value of the FTSE100 in relative terms was in early 2000 we then had a three year drop in 2000-2003. I might be a little off in my calculation but this appears to have happened recently.

Previously bank shares recovered but everything else went south..it would probably need one major international event to destabilise things?

When I cleared my mortgage off just over five years ago the guy at the bank thought I was weird.

`Most people are doing the opposite,' he said, as he gave me a withering look of contempt.

Little did he realise that we were in the middle of an economic illusion created by cheap money generated by central banks keen to keep `the markets' content.

The dream is over, the glass is cracking, we are looking into a deep dark hole of debt; personal debt, corporate debt and government debt. There is no escape.

Who is weird now?

The only surprising thing about your blog Robert is that whilst strategically minded people like myself have been anticipating this "jolt" for at least the last five years you're only just catching up.

All the trademark signs of the impending descent into banana economy status for the UK have been around for a long time. Interesting though that whilst the COO of Blackstone says of the American mortgage problem "the mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier" the World Economic Forum despite its trade deficit still rates the USA as the most competitive country on the planet. It said that "The US gets its leadership position through a winning combination of highly sophisticated and innovative companies that lead the world in research and development and operate in very efficient and large markets. This is buttressed by an excellent university system that works closely with business, a very flexible labour market, a unique ability to attract talent and a financial sector that supplies the needed capital for risky innovation ventures. These strengths allow the US to overcome weaknesses related to its macroeconomic imbalances."

Pity really we have none of these attributes and therefore nothing to fall back on.

Richard says: "I find it interesting that China controls inflation by controlling actual money supply ( ) whereas the UK and USA control it through interest rate shifts. Any comments on the effectiveness (or not) of these different methods?"

The reserve ratios in the UK and US are for all practical purposes zero, having been lowered after every past recession to keep up liquidity (debt based). Now that the ratios are so low as to be negligible, the Fed and BoE only have interest rates to work with. And as we're seeing, the markets are setting their own rates anyway.

The only thing left for central banks to do is to take on bank assets in exchange for short-term loans to maintain liquidity.

It's the socialisation of risk, and inevitably leads to self-destruction, though the road there is long and slow.

This is correct, 100% Guaranteed.

Slowdown is better than boom and bust. Atleast we will all have a soft landing
not a crash.As far as interest is concerned, the BoE should look at the inflation figure. The era of low interest rates have fuelled increase in asset prices and inflation.

Crashes usually happen when least expected. This one seems to be well signposted which is why a soft landing should be achieved at the macro level.

For individuals there might be a pinch and institutions will certainly have a change of attitude to the price and availablility of credit but I'm not expecting a large crash.

mwahahhahahahahhaaaaahhaaaa!!

This is correct, 100% guaranteed.

Easy money supply should stop to prevent price increase. We have had a low interest ragime in the past which created this housing bubble. If the BoE is going to cut interest rate, then it will help increase the bubble until the bubble gets burst.

I'm puzzled. Your arguments for why we should be gloomy appear, on the face of it, to make sense.

But presumably people who deal in these sort of things for a living know about this already. Why, then, have recent falls in the stock market been so modest? If things were really that bad, shouldn't the bottom have fallen out of the stock market by now? The fact that the markets have largely held steady suggests to me that things can't really be that bad. Can they?

dont worry if you missed the boat because that boat was called hms titanic

Some excellent comments.
Particularly 10,11,14,17,19,20,21,23,25,26.
I assume 29 is a wind up.

Robert - I'm sorry to see you are 'bemused'. Your colleague Evan Davis has just published his blog as to why the Bank of England may not have cut rates this time round.

Why not tap him on the shoulder and ask him to explain how things work. Don't be scared, - it takes a strong man to ask for help.

I'm surprised that this hasn't all come sooner. I had not realised before September that the banks were borrowing stupidly from eachother but it was clear that the whole of the UK at least was borrowing like mental from the banks. Lack of housing supply has had some effect on house prices but the main driver has been the insane eagerness to borrow too far and lend without looking at the risks. NR might have lent prudently, but borrowed recklessly to be able to do it!
The country almost NEEDS a financial crisis to get itself back into a sensible situation. It would never manage to lower house prices, withdraw from over-extended borrowing whilst the credit was so freely available. We are all so weak willed (present company excepted of course) that we couldn't choose austerity unless it was forced upon us by our own greed and short-sightedness.

Yes, the Bank of England's MPC should have acted sooner. They should have raised rates a few years earlier to avert the credit bubble and control runaway house price inflation.

I didn't hear many complaints about their inaction back then.

We didn't honestly believe that our net worth had tripled in 10 years just because the bank had given us an oversized loan? C'mon get real.

I agree with 22! Stagflation here we come!

Add in the potential of a catastrophic breakdown of the US economy from massive sub prime losses; huge amounts of unsellable properties except at highly discounted prices and also expect further drops in the US Dollar over the next three months.

With a collapsing dollar the return on US treasury bonds becomes less attractive to overseas holders of US government debt. How long before the Chinese and oil exporters join Giselle Bundchen in wanting payment in a hard currency and not the flaky dollar?

Sit tight, strap yourself in and expect a very bumpy ride!

I'm not sure the NRK memo was leaked out by mistake, there must be several people with positions on NRK an involved with the media bashing.

With all the central banks scared stiff of inflation I believe we are much more likely to suffer the kind of recession that prompted Keynes to introduce demand management. This is of a course a pair of dirty words now, but perhaps we need Keynes back? The fact is that moderate inflation (7% - 10% PA) helped a very large number of people to overcome their mortgage problems and contributed to economic growth. Of course Moneterism was needed in the eighties, just as Keynsianism was needed in the 20s. Economic targets are always behind the times. Is it now time to stop worrying about inflation?

I too am feeling gloomy. Here's why.

Market crises & collapses are usually the result of unbridled greed and the cupidity of financial operators aided & abetted by the lack of necessary supervision by public institutions that are inoperative, corrupt or ill-adapted.

For too long we have been creating risky artificial capital, without due regard to the risks involved for borrowers and savers alike.

yours

Keeping my seatbelt on (even when at PC)

Robbie

Reasons for feeling GLOOMY and insulted too.

Opacity at work.

The BBA said financial stability should be the paramount aim of financial institutions and regulators, and transparency should be pursued as far as possible -- except "when messages might be misunderstood by an anxious public".

Good grief, just how thick do they think we are???

Re # 20. Note Nationwide (and Halifax) only report houses on which they have offered a mortgage. These data are, by definition, skewed upwards because it weights the 鈥榟ot鈥� areas more than weak areas (as weak areas see fewer transactions). They are also open to abuse by over-valuing properties deliberately as most developers do, whilst ignoring the incentives they give such as 鈥榞ifted deposits鈥� (a.k.a. fraud), guaranteed rents, first year mortgage payments, solicitors fees etc.

RICS data, it should be pointed out GIVE ABSOLUTELY NO DATA WHATSOEVER ABOUT THE MAGNITUDE OF HOUSE PRICE CHANGES!! Contrary to what every single lazy journalist who has ever quoted them says. It is a 鈥榙iffusion index鈥�, showing the BREADTH of the quantity of surveyors reporting rises, less those reporting falls. A very negative number shows that many more surveyors are reporting falls, NOT how big those falls are.

Hope that helps.

Financial markets dont like surprises/shocks. When the Fed drops 50 bp in one go, it has far more impact than individaul banks decalring balance sheet write downs. Those who spot the alarming inflation/demand curves in China/India etc. are right that it creates the feeling of anxiety, but not panic.
If I were Osama I would be polishing the tips of my armory right now.

> Keep your seatbelts fastened.

Yes, but you need to be belted in
because the markets are shooting UP so
fast!!

#62 Very good points