Which countries will go bankrupt?

With so many countries around the world now racking up debt like there’s no tomorrow it comes as no surprise that new indices are being launched to track this.  It will be interesting to see just how accurate the indices are or if they are able to give advance warning.  There is an article on it in the FT here.

3 predictions for 2009

I’m going to stick my neck out and make a few predictions.

1. The stock market crash is not over yet.

We are currently in a very large rally.  Bears, like me on this occasion, generally get nervous the longer such a rally carries on – have I missed the bottom?!  It’s a kind of anxiety caused by not following what other people are doing.  What if they are right and I am wrong?  But looking at it from a logical point of view I still believe we’re on the way down.

Unemployment in the UK is already up by 244,000 this year.  Personal insolvencies and repossessions will continue to rise for many many months yet.  According to the Council of Mortgage Lenders, lenders repossessed 12,800 homes during the first quarter, up from 10,400 in the fourth quarter of 2008 and almost 50% up on the 8,500 reported a year ago.

Corporate insolvencies will increase and we will see investors returning to defensive stocks.  Right now investors are favouring high yielding volatile stocks as they seek out both income and capital appreciation.  The defensive stocks have been far from the best performers in this rally so far.

2. House prices will keep falling for a few years yet.

Nationwide has house prices down 15% from April 2008 to April 2009.  Halifax has it down 17.7% and down 22.55% since it’s peak.  The most entertaining statistic is from Rightmove.  They have property down 6.21% since it’s peak.  Well I know whose figures I trust and it certainly isn’t theirs!  Nationwide have an interesting graph:

What’s particularly interesting about this graph is that right now prices are clearly still heading south as they cross the long term price trend.  This is a feature of markets – return to the mean.

In other words, prices tend to overshoot and undershoot the mean as they oscillate around it.  You can see from the last crash that prices went well below the trend and that is where we are headed now.

You can see from the start of the graph that in the 80s prices only just dipped below the long term trend but this time I think we will be well below it.

I expect unemployment, difficulties in getting mortgage finance and general economic bad times to force house prices down to £100,000.

Another interesting feature to remember is that last time it took about 6 years to reach the bottom of the market.  America crashed before us this time and they are still going down now.  If you are waiting to get on the ladder don’t worry too much about being left behind as I expect the market still has a long way to go before it hits the bottom.

3. Gold will rise again and may even reach $1,500 this time.

Gold tends to go up in times of uncertainty and fear.  Despite the fact that it pays you no income the attractions of gold are important in times like these.  There is no credit risk and a highly liquid market.

I know it’s been up around $1,000 already in recent times and retreated but I think that retreat is merely down to the same denial that has brought us this stock market rally.  When this stage is over I expect gold to rise again.  Timing is merely a guess but I expect movement upwards towards the end of this year.

That’s it for my predictions.  I’ll revisit this post later in the year and see if my guesses (and predictions can never be any more than a guess) are near the mark!

Base rate cuts won’t make us spend

Well, if they lower the interest rate today as some have suggested it will not be in order to make the banks lend.  That’s not going to happen.  It will simply be to send a signal that putting money in the bank is pointless and to encourage us to spend it.  I will be seeking a better place to put my money, not throwing it away as the idiots in the City want us to.

Government folly makes things worse

It’s painful to write this post – £325bn in toxic assets dumped on us taxpayers by the morons at RBS whilst they pay one of the men responsible for this horrific damage over £600k per annum as a pension.  Really, it makes my eyes water! And what’s worse than the sheer injustice of it is that this is a damaging move for several reasons:

1. The market needs to find it’s new balance and putting in a ‘false’ supply of money will only deepen the trouble we’re in

2. If we had propped the banks up to a small extent then we should consider it a lost investment and walk away but now, with so much at stake we are probably committed to the bitter end

3. If bankers are not punished for their behaviour then they will do it again, safe in the knowledge that their actions have no repercussions for them

4. The preservation of these part nationalised banks is now a political imperative so they already know they are safe

Bankers must be grinning ear to ear.

Comparison sites code of practice

The British Insurance Brokers’ Association (BIBA) issued a press release recently (full version here) commenting on the proposed creation of a code of practice for comparison sites. Their stance is that buyers of insurance on comparison sites are not being treated fairly.  Treating Customers Fairly (TCF) is a concept created by the Financial Services Authority (FSA) which essentially removes the ability of firms to say ‘well I followed the letter of the law’ – the concept of TCF forces them to consider the spirit of the law as well. It’s about principles rather than rules.

I’ve written before about my distrust of comparison sites (to various different degrees depending on the site) and despite the obvious bias BIBA is bound to have I can’t help but agree with them.

In January 2008, BIBA published market research which showed that:

* Over half of insurance buyers interviewed believe that customers do not fully understand the differences between each insurance policy offered via comparison websites
* 94% of insurance comparison website users do not believe that the details of what the policy covers and does not cover are explained fully
* 84% of insurance buyers said that the details of insurance policies offered via price comparison websites can be confusing
* 93% of consumers believe that insurance comparison websites should be regulated in the same way as insurance intermediaries
* 63% of buyers are nervous about purchasing from comparison websites
* 59% of insurance comparison website users believe that it was not very obvious or not obvious at all who the policy was underwritten by.

Essentially, it could be argued that comparison sites are selling complex financial products and customers need more protection from poor practices that could result in the sale of inappropriate products.

Time to nationalise banks?

We are now in a position where the taxpayers of the UK own significant chunks of major banks. It is now in our financial interests for those part owned banks to succeed.  In other words, if we let them go bust we lose a hell of a lot of our own money.  So why not go the whole hog and take over the rest of those banks? I am not suggesting takeover of the whole banking sector – just the ones that we already own a major stake in. And the final but essential part – give shares with voting rights to every adult taxpayer resident in the UK.

The benefits would be fantastic:

1. Immediately there would be increased trust in those banks and we would all have a safe place to put our savings.

2. Increased deposits at our banks makes them stronger and that’s good because we own them.

3. We could all tell the bankers to shove their bonuses up their overpaid bottoms whilst handing them their P45s. We should do this anyway since they are pretty much bankrupt entities and whoever heard of an insolvent company paying millions in bonuses?

4. Other banks who had been reckless (i.e. most of them) should be left to go to the wall if they cannot cope.  More business for our newly nationalised banks!

OK, it’s not really nationalisation but it’s what I’d like to see anyway.  It’s our money and we should have more control and the ability to sell our shares to other people who might like to invest in the future of those banks.  I’m sure there would be a market for them.

Bank bonus reports misleading?

UPDATE:  I’ve just seen the losses from HBOS – almost £11bn!  Who knows how much more is lurking in other banks we’re currently propping up.  If this carries on then we as a nation will have insufficient resources to support them.  The UK’s CDS rates have been on the rise for some time now.  We should stop now while we still have a chance to avoid national bankruptcy.

I heard on the news last night that Lloyds were to pay a bonus package of £120m. They said the average bonus is just £1,000. Averages are a nice way of hiding big numbers. If there were 10,000 staff and the bonus pot was £10,000,000 then the average bonus would be £1,000 even if it all went to the one man at the top if the tree. Do they think we are stupid?

Hold on… a bit more detail from the Guardian here.

Apparently the boss of Lloyds feels that if staff have met targets then they should get their bonus.  Sorry, just run that past me again.  Your bank is effectively saved from failure by massive injection of public money yet staff get a bonus.  Is he trying to come across as some sort of hero of the people?  Other industries are shedding jobs, in fact other banks are shedding jobs, and you want to pay bonuses?  I have nothing against the junior workers but at least they still have jobs because of taxpayer cash.  Surely that’s enough.

Bank bonus disgrace

When banks are under pressure not to pay bonuses or just to reduce the bonus levels what do you think will happen? I expect those at the bottom of the tree – administration and ancillary services staff – will be the ones to suffer. How long before we hear ‘We’ve cut bonuses this year by 50%’ sotto voce ‘by only paying the top people’? After all, they are the ‘skilled’ people they can’t afford to lose. What a disgrace.

And what of the latest idiocy to come from Government – blaming everything on bankers when it was they who put in place the state of affairs that led/allowed the banking behaviour to develop. Despite their greed I do have a little sympathy with the bankers when they say what they did wrong was fail to anticipate the scale of the collapse. They worked within the framework that existed in order to maximise profits. That’s what shareholders expect.

The fact is that government policy (low interest rates for far too long), regulatory conditions (lax rules and not enough policing) and the (entirely natural) greed of bankers led virtually everybody in the banking industry to participate in practices that ultimately led to our current situation. The fact that they didn’t understand many of the financial instruments they were using is the part for which they cannot be excused. They didn’t understand the risks but proceeded with the gamble anyway.  Or worse, they understood the risks and thought they could escape with the cash before being rumbled.  Who could have predicted they would be rumbled yet still escape with the cash?!

Those at the top walk away with their millions from years of gambling excess while the rest suffer job losses and eroded savings. As usual the blame and the money goes right to the top.

UPDATE: an interesting take on the american solution

Another useless rate cut

The Bank of England has cut the base rate again. It is now just 1%. This is not good news. Banks are not passing on these rates cuts in full except where they are legally obliged to do so – for example if you are on a base rate tracker mortgage.

However, those kind bankers have seen fit to pass those rate cuts onto savers. Yes, those who have been prudent enough to save some money are now being penalised heavily. Pensioners who put their life savings into savings accounts in order to live off the interest are now truly struggling. Savings interest rates are falling rapidly towards zero.

Rate cuts are not the answer to our problems. I’m afraid a rather long and painful period of contraction is going to happen regardless and all we are doing now is making it worse.

Recession and the rise of fascism

There are usually more extreme views, more selfish views, expressed when money and resources are scarce. What is slightly frightening is that it is happening to us so soon. Social unrest is spreading with riots in Greece, the French as always, are protesting about something (this is not a criticism – I love the fact that they take politics seriously and don’t just swallow the government propaganda), riots in Lithuania, Latvia and other parts of Europe.

Now Britain has wildcat strikes over the issue of foreign workers. The BNP were quick to take advantage of this new attitude. There is a real danger that they will see many more recruits to the BNP’s fascist agenda. Did anybody else see the ‘striker’ (BNP activist?) on the news last night refer to the Italians as “eye-ties”?

We should all try to keep things in perspective and think of the bigger picture. If there is no foreign demand for the UK’s exports then we all suffer. We can no longer operate without the rest of the world. Just look at the total collapse in exports currently being suffered by Japan. It’s worse than the collapse in the US in the 1930s. Look at factories closing in China as a result of falling demand.

It’s just so obvious that individual nations cannot take the beggar thy neighbour attitude without serious consequences. The trouble is that if all nations co-operated we would have a smoother ride but as soon as somebody doesn’t play the game and behaves selfishly they get an advantage. A nation’s leaders cannot be seen by the electorate to cede this advantage therefore we must all go for the less effective action – selfish protectionism from the outset.
At the very least Britain should remain a fully active member of the European Union. Let’s not let the fascist idiots drag us down the least productive and frankly rather disturbing path they promote.