More on houses

A Nationwide Building Society press release (29 April) says the average house is now worth £167,802. Prices rose by 10.5% in the past year. Perhaps we should be in a hurry to buy again.

All the previous three sentences are misleading.

First, “average” is hard to define. According to nethouseprices.com, in 2010 a semi-detached house in Sheldon, Birmingham sold for £10,000 while another in Harborne changed hands for £470,000. During the same period in London, semis sold for between £130,000 and £10 million (93 other semis went for over £1 million).

Second, as the Nationwide report admits, house prices are still 10% below the peak reached in October 2007. The good news is that they are more affordable now: using the Nationwide’s online database, here is a graph of first-time buyer mortgage costs as a proportion of average take-home pay in the West Midlands (the most typical region in the country):

The bad news is, the graph is affected by record low interest rates; the actual amount borrowed is much higher than it used to be. As late as 1998, new mortgages averaged £60,000; now, according to thisismoney.co.uk (25 February), the average new loan is £140,000 – 5 ½ times the median wage, far above the long-term trend (3 ½ times earnings).

Third, we face a long period of economic difficulty, with the threat of high unemployment. A falling pound could result in higher food and energy costs, and if the UK’s credit rating drops interest rates could rise. Each of these factors could easily depress property prices.

You have to live somewhere, but don’t think of it as a money-maker.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Very uncertain times

May I draw your attention to an interview with Dr Marc Faber on CNBC on 21st April (see videos on sidebar)?

Dr Faber is a highly respected commentator and his predictions of economic disaster, though cheerily delivered, are perfectly serious (he has a European way of giving bad news with an ironic smile).

He believes - and has done for a long time - that governments will try to inflate their way out of the long-developing overspending mess, and that eventually all "fiat" money (currencies not backed by anything that restricts the growth of the money supply) will become worthless. Then there will be a crash of epochal proportions, and the social consequences will be very painful (which is why his website is called GloomBoomDoom.com).

As he says in this interview, his view is that gold and silver are not to be considered as commodities like oil and corn, but as a form of money that governments cannot multiply as they do with their sovereign currencies. He advises (please remember that I cannot advise you here on this blog) investors to build up their holdings of physical gold and silver - "physical" because there is much speculation in this market and many times more in contracts than can be actually delivered. After that, maybe some investment in precious metal exploration companies.

Given Dr Faber's view of the real practical consequences of economic collapse, I think it is not irrelevant that he lives in Chiang Mai, northern Thailand, an area that can provide the needs of life locally and that is close to several international borders.

We may still have time - Dr Faber thinks that with continued monetary inflation, we could still see markets go up for quite a period; but from all that he says, and all that I have thought (and said) for years now, we appear to be facing a prolonged period of high volatility and the danger of sudden and savage reverses in valuations. Until inflation takes off, it can be good to hold cash; but if Dr Faber is correct, ultimately cash will be the worst possible investment.

I would also say that before considering your investment portfolio, there may be other issues to resolve - where you should live, what work you should do, what skills you should acquire, security precautions you should take, emergency provisions you should stock up with. Even if disaster does not strike with full force, big rises in fuel costs would transform the conditions of our daily life.

It is curious that we are now expected to be exercised by climate change issues, yet the media have yet to come to grips with our economic climate. It is still not generally known that the good old days (as remembered) of the Conservative boom in the 1980s (and mid-90s) was because of excessive bank lending, which caused both housing and the stockmarket to become heavily overvalued. This process of inflating the economy until it pops (as it must, one day, but who knows exactly when), has being going on for decades.

I've tried to get the message across to the public; perhaps I should spend my time quietly advising my clients, instead. Anyhow, I've told you, now.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Safety first

Investment expert Jeremy Grantham gives his views via Financial Times video:

• the UK and Australia are still experiencing bubbles in housing
• there are potential bubbles in commodities and emerging markets
• savers are being tempted (I'd say almost forced) into speculating when they should be cautious
• the US stockmarket is generally overpriced, but...
• investors should be more interested in big, boring, robust companies such as Coca-Cola, Microsoft and Johnson & Johnson

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Stockmarket fall imminent?

I've written recently about cash being boring, but safe until inflation gets going. Now, Charles Hugh Smith thinks the tipping point may be very close:



DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Sovereign debt default risk

CMA have released their first quarter report on sovereign debt ratings, as implied by market pricing of the 5-year default risk on government bonds. I give below a rearranged extract to show where the USA and the UK stand in relation to other countries.

It's worth noting that despite recent improvement, the UK is still out of the "AAA" bracket - by two rungs.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Circles and straight lines

The above chart from here (htp: Global Perspectives) is another of those attempts to perceive underlying order in the apparently random movement of the market and the economy. I've tried the same myself and suggested that the period from 2000 on may be like 1966 - 1982 (the last top and bottom of the market when adjusted for inflation). The interesting thing about the above picture is that the c. 16-year cycle appears to work over a much longer time - starting with the later part of the nineteenth century.

The cycle is not very regular - it varies from about 12 - 20 years - but tends to support my feeling that the real bottom this time may lie in the next 5 - 10 years.

Another quibble is that while some aspects may have a circular form, there are also linear developments that could change everything. One such is China's awakening from its centuries-long economic slumber, with the result that the world's financial centre of gravity is shifting from West to East; another, related to the first, is the unprecedented growth of debt in Western economies. A third is the development of computer technology and lightspeed communications, so that knowledge and expertise that took centuries to acquire can be transferred rapidly to developing economies. What we have lost through folly, we may not be able to regain through hard work.

This is why some commentators have switched their attention to the social, political and military implications of a permanent power shift - from democracies to authoritarian governments of one kind or another. Michael Panzner has tried to follow up the success of his Financial Armageddon with just such a conspectus, but events in the next decades will be determined by even more complex and subtle factors than the ones that led to the crashing end of the twentieth century's money system.

It would be a neat finish to observe that the Titanic had a casino and that the latter didn't have any effect on the iceberg - but (perhaps fortunately for haters of the glib), the ship didn't have a gambling joint. Though there was multimillionaire John Jacob Astor and his cronies, playing high stakes card games in the smoking room.

In short, for those who are focused on the money, I still believe worse is to come than has happened already. Others should remember it's not all about money.
_____________________________________

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.