we’re doomed, mr. mainwaring, doomed
Turbulent times, these. Irrespective of the colour of our political persuasion we all, either directly or indirectly, have some skin-in-the-financial-game of investments and the subsequent return on that investment. However red we (OK, I) claim to be I am inextricably linked to the free market and my financial worth (and freedom) is undeniably determined by such factors as house prices, interest rates, pension fund returns and Footsie index levels (I’ve always liked the sound of the latter more than its reality). The bad news is that that worth is imminently to take a pounding as a series of financial disasters are about to strike as we email.
As I’ve mentioned before, I don’t like property developers; they’re just not my cup-of-tea. The ten years to 2007 made them appear far more savvy than they really are as investing in property was a no-brainer. You bought property, knocked down a wall or two, installed a new kitchen, sat back and watched it soar in value. If you were particularly lazy you didn’t need to go even that far and it was the nearest thing we’ll ever see to free money. 2008 saw the end of the property bonanza. 20% off the bottom-line in the blink of an eye but, cue the Bachman Turner Overdrive soundtrack, we ain’t seen nothing yet. Scratch beneath the surface of the recent house price stabilisation and there’s trouble in then there hills:
1. Banks are terrified to lend – It’s still nigh on impossible for would-be buyers to get a loan. Most current mortgage offer require a mandatory 25% cash deposit and 90% loan-to-value mortgages are now so rare, official statistics have stopped even noting them! Total mortgage advances have collapsed by a third since December 2009.
2. Property is still unaffordable – C’mon ask yourself if house prices have dropped to a fair and reasonable level? Admittedly a difficult one for all us house-owners but you know it hasn’t. In 2001 the average mortgage was 3.5 times salary; in 2007 it was six times and it’s currently back at a smidgen under five. Uh oh.
3. The only way is up – No, not prices, interest rates. Right now the Bank of England’s artificially low interest rates, coupled with £200Bn of ‘quantative easing’, are intentionally easing the burden on overextended borrowers. But it can’t continue indefinitely and the inevitable increase will see mortgage payments rise and repossessions skyrocket as tens of thousands fail to meet their new commitments. I know you don’t want to hear this but it’s going to happen whether you like it or not and the subsequent impact on supply and demand will prevail.
Moving on from property, go take a look at the FTSE and you’d hardly believe a meltdown ever happened as, on the whole, stock prices are OK and various institutions are even predicting an end-of-year FTSE figure not that shy of 6000. Impressive huh? Well no, not really. Even I know that there are two ways of increasing an organisation’s profitability – you either sell more or cut costs, and if you can do both at the same time you’re a wise (and rich) man.
Company profit is the real key to the value of the stock market. If companies make more money, share price will rise. And profits have been OK of late but have been gained not by selling more, but by taking the ol’ cost-axe to the business in unprecedented levels. There’s precious little new business to be had out there and companies are going to continue to cut to the bone whilst trying to capture market-share from their competitors. If the corporate section is going to keep raising profits it’s going to have to be driven by real growth and new business winning. But where on earth is this going to come from? Broadly speaking, not from the US, certainly not from the EU and for the vast majority of UK business not the East. No, for the majority of home business, it’ll be in our local UK market but with a public-sector led recession imminent, it seems unlikely to amount to much.
Traditionally, Europe has been a great market for the UK and on the surface, the European Union appears, by the skin of its teeth, to have survived its sovereign debt crisis. Its bailout policies and austerity budget plans have (just about) steadied the markets and averted the collapse of the Euro. Phew. However, we all know Europe is an unsteady alliance of two vastly different economic groups and, in reality, is it a dysfunctional marriage awaiting a very messy divorce?
On the one side we have the traditionally prudent and conservative ‘Northern’ states personified by Germany with its high saving and investment levels complemented by low personal borrowing and spending. On the other we have those diametrically opposed profligate states, Portugal, Greece and Ireland whose debt levels have been shown to be massively unsustainable. Portugal’s combined debt equates to over 200% of its entire income. Imagine owing the bank double your annual salary? Yep, you’ve already spent two years’ worth of your earnings before you even receive it. Ouch. It can’t end well and individual country bankruptcy and/or the collapse of the Euro would be my guess.
In summary, and like it or not, we’re in uncharted territory and living under extremely unstable and unpredictable economic conditions. Years of cheap, easy money and an overload of readily available debt have led to many mistakes:
– Too many people have borrowed too much money they can’t now repay.
– Too many people have bought houses they can’t afford without negligible interest rates.
– Too many people own stocks (either directly or via pensions and investment products) that are not worth what they’ve paid for them.
– Whilst thankfully not at Portugal’s level we are also drowning in debt. For the first time in history Britain owes in excess of £1 trillion.
– The collusion between the Bank of England, the European Monetary Union, western governments and central banks the world over is keeping interest rates at an abnormally low level.
– We’re about to enter a worldwide recession and the most devastating era of cost-cutting in our lifetime.
Stupid boy, Pike, stupid boy!
