You ain’t seen nothin yet

I’m slightly off horses at the moment because I’ve been watching the situation in the financial markets and trying to get my head around what is going on.  It hasn’t affected me much to date, at least on the face of it, although there will be plenty of knock on effects.  Some thoughts then from my recent reading;

I read a report yesterday entitled “it’s grim up north” – it painted an absolutely desperate picture of the housing market in the Midlands and the North of England, in particular in new build flats.  I’ve never read a more bearish report – it talked about a “near-apocalyptic landscape”, an “armageddon scenario” and “carnage beyond our most bearish expectation”.  The thrust of the note is easily summed up – “you ain’t seen nothing yet”.

The property market is one of those that reflects itself honestly when it is healthy but presents a false picture when it is not.  Reports on the fall in property prices suggest decline but nothing that frightening, but the reality is that there is nothing happening.  Unless you already have a decent amount of cash it’s next to impossible to get a mortgage at the moment, and if you do have a decent amount of cash you’re not looking for a cheap flat.

The lenders aren’t lending at the moment, partly because they don’t have a lot of money to lend and partly because they know that anyone buying a property today is going to see the value of his investment fall sharply in the near future and there is a high chance that they will end up owning the property themselves.  The market is heading sharply down – barring a miracle this is a certainty.

The lenders themselves may look ok, but for many the die is cast.  They are in death spirals and there is no escape, like oil tankers heading for icebergs – the ships are still fine and afloat but there is too much momentum to be able to change course and disaster is inevitable.  As properties collapse in value borrowers find themselves underwater and default on their loans – the loans are secured on the properties and these get made over to the lenders, but they take huge losses on the deal.

Banks share liability with other banks – a problem that began in the US thus spreads around the world, infecting different marketplaces as it plays out.  Banks have fallen and unless large scale action is taken will continue to do so.  Governments are forced to step in to arrest the decline, and will have to write off fortunes bailing the banks out – in order to meet their debts they will have raise taxes, raise debt or print more money.  All unattractive options.

Why do these things happen?  I think it’s a mixture of greed, human nature and consequences of a long period of prosperity.  The raging bulls in the marketplace – natural optimists who look at life through rose-tinted spectacles – have been right year in year out for a long time now, simply because markets have just gone up and up.  Prudent financial thinkers found themselves out of vogue long ago, replaced at the top of the tree by the bulls.  In this modern world where the consumer has greater choice than ever before, the banks have been forced to take greater and greater risks in order to stay competitive – they have had to think very short term because they are being judged in the short term, and offer the sort of deals that they would not have considered in previous years.

What happens next?  The banks will suffer losses but as a group they have to survive – that is a certainty in my view, but there is a price to be paid to make this happen.  Property will continue to drop like a stone and many businesses will fail through inability to raise funds.  Cash will be king – if you have it then be patient as it will carry more weight in time to come.  The global wealth shift to China and India will continue apace, and I expect foreign interests will come in to pick up Western assets.

Of course much of what is to come has already been anticipated and is in the market now.  Hedge funds have deliberately accelerated the spiral in order to cash in, and governments are already considering what action to take.  This could be the time to come in and invest in the stock market – it could be as low as it’s going to get right now as the markets hit rock bottom when fear is at it’s greatest.  I think there is more bad stuff to come though – the property situation may well be a lot worse than consensus estimates.

I also think there is potential for a major wealth and power shift away from companies and towards individuals, although I think we’ve seen plenty of that in the last twenty years.  There are a lot of businesses that have far too many people now in this age of technology, and employees are so well protected that it’s very difficult to trim these businesses down.