Full Steam Ahead Towards the Iceberg of Depression Turbo-Charged

By Andy Shaw | January 25, 2010

Originally posted 20th March 2009

I wrote a few months ago that we were full steam ahead towards an iceberg of depression. Well in the last few weeks this lot have found how to strap a turbo-charger to the engine – very depressing! Which of course, is why it is called a depression.

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Let The War Begin

By Andy Shaw | January 25, 2010

Originally posted 17th March 2009

There’s some big problems out there at the moment and this week, would you believe, one of the most frugal nations on earth decided to stage an attack. Last week Switzerland’s Central Bank moved to devalue their currency…Now to most this doesn’t sound like a very big deal and actually sounds almost boring…but it is A VERY BIG DEAL.

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The Great Experiment

By Andy Shaw | January 25, 2010

Originally posted 13th March 2009

I’ve been meaning to write about this for some while now but there has never been enough time and as I stare at the notes I made whilst reading and evaluating the financial crisis, I see there really is an abundance that I could write about. However, this subject needs to be brought into play at some point as I will often refer back to it. It gives real insight into why the government appear to be making so many bad judgement calls with their (our) money – I will come back to this in the future as well.

Milton Friedman wrote in his book ‘Monetary History of the United States‘ (written in 1963  - and I haven’t read it, I am quoting from other sources) that the money stock decreased by a massive 31% in the Great Depression. The velocity of money (turnover) fell 21%. GDP equals money multiplied by velocity. Consequently, from 1929 to 1933, the breakdown of both resulted in a contraction in normal GDP of 50%. However, Friedman suggested that if the Fed had not let the money supply shrink then velocity would have been steady and the Great Depression would have been averted. Yeah right! I think he forgot to factor in the human equation there.

However, the Fed’s current chairman, Ben Bernanke, does not agree with me and he is an expert on the Great Depression. What’s more he has adopted Friedman’s strategy to greatly expand the money supply…as has Gordon Brown. Now whether this solution will work when the world is so much in debt is very uncertain. So uncertain in fact, that economists are already calling this, ‘The Great Experiment’ as this is pure economic theory which has never left the text books…until now.

My opinion is that an economy which is 100% funded on borrowed money revolves around two things:

1) Confidence that money will not be lost by a system that is outside of its control
2) The ability to initiate a new borrowing and lending cycle

Well firstly, I think everyone, including Warren Buffet, does not have full confidence that money will not be lost by a system that is outside of our control. Secondly, you can only initiate new borrowing if you have willing lenders and willing borrowers (neither of which are so inclinded at the moment – present company excepted, of course – but remember that we are a minority apart from what is generally accepted as the minority!).

I do not think this ‘Great Experiment’ will work as they are at least a year away from sorting out the banking crisis before they can start to re-build. So new money being dropped in is mainly going to the wrong people right now using the ‘trickle theory’, that is the hope that some will deposit it into the banks which will raise the banks’ capital ratios, thereby giving the banks funds to lend which will open the market up again (yes, these people really are running the economy for us all).

However, they have forgotten that the only ones who want to borrow at the moment are either us (and we don’t count) or businesses that are struggling and therefore not attractive to already weakened banks…

So what will solve it? Well in truth I don’t think it can be solved now; they have waited too long and they have gone down the wrong route and the longer they dither before making the right moves will mean that even more will need to be done.

The list I have provided already would be enough but that will probably not be taken up until it is past its sell by date, although I expect that some of the suggestions will HAVE to be taken up at some point. After that further action will be needed, of course. Frankly their actions – and inactions – have brought about a depression and will bring about some debt deflation – how much I simply do not know.

The time of waiting and seeing what they will do has now passed. They didn’t do the right thing, are any of us really surprised…No, of course not, but without hope then what have you got?

Now we have the period to go through which lasts until they realise that their chosen course of action has been the wrong one. This is really worrying as politicians hate U-turns and admitting that they’ve got it wrong but then here’s where Labour’s spin doctors have actually helped us for once. They’ll be able to spin it so that it won’t look like the wrong decision was made at all…and this is good for us because maybe, they’ll head in the right direction after that.

I think we now have 3 to 4 months of waiting while they begin to see the error of their ways. However, I could be wrong and it will takes 6 – 9 months instead. Either way, don’t expect too much good news for a while.

But What About Us?

Given that this is their course of action and that first time buyers are hopelessly trying to return to the market at the moment, my advice would be to only make a play if you are certain that you have a great deal. Do not chase anything as there is no need. Things are probably going to get a lot worse before they get better so do not be pushed to increase your prices.

Put in your low offers and let the first time buyers bid higher. In the good times over 30% of their offers fell away prior to completion, so we can expect much less to be approved now. Put an offer in today, watch the property and when it comes back to the market let the agent know you are still interested but given the market turndown (don’t worry there will be one) you can only offer £5k less now.

Basically we’ll make even more money if we don’t chase the deals. It is still the right time to buy, if you can get it at the price you want, just make sure of the maths for each deal.

Best wishes

Andy

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It Appears That the Manipulation of the Press Is Alive and Well in the UK

By Andy Shaw | January 25, 2010

Originally posted 2nd March 2009

The other day I wrote about an article published by the Telegraph on the 11th February. The headline was ‘European banks may need £16.3 trillion bail out’. In the article the reporter revealed that he had seen a document produced by the European Commission which briefed the EU’s finance ministers on the true extent of the banking problem.

Then, less than a day later, the article’s headline was changed to ‘European bank bail-out could push EU into crisis’. I think the first headline told the story better myself, but guess what, two paragraphs had disappeared as if by magic.

Fortunately, I still have them:

“European Commission officials have estimated that “Impaired assets” may amount to 44pc of EU bank balance sheets. The commission estimates that so-called financial instruments in the trading book total £12.3 trillion (13.7 trillion Euros), equivalent to about 33pc of EU bank balance sheets.

In addition, so-called ‘available for sale instruments’ worth £4 trillion (4.5 trillion Euros) or 11pc of balance sheets are also added by the Commission’s estimate to arrive at the headline figure of £16.3 trillion.”

I suggest you re-read those paragraphs again as they are fairly heavy and consider that newspaper editors do not change content of this nature lightly. As the last news item that was this explosive, that would be the Northern Rock crisis. So did the editor get a call from Downing Street, or from Brussels? Or did he just think that what was printed yesterday maybe wasn’t relevant anymore?

For all non-sceptics out there, this is about as concrete as proof gets towards a conspiracy, as usually they don’t let these mistakes go to press. So if the article was right, as I believe it was, then we will be seeing a meltdown in Europe’s banking system. By then the US’s banks will look like positively good business models compared to Europe’s.

This means that in order to remove deflation we will have to see the return of inflation to get us out of this mess. Although they will not be admitting that and this will just be a ‘side-effect’ that was beyond their control!

My long time readers will know that I am an optimistic person although if you have been only reading me recently then you’d be forgiven for grouping me in with the doom-mongers. The problem is that I find all the lies and deceit going on at the moment very depressing.

Business leaders, prime ministers and presidents are all in complete denial about the size of the problem. They, of course, have to admit that there is a problem but they are not telling the whole truth about it. It is depressing to watch and Jack Nicholson’s line from A Few Good Men is, unfortunately, especially true here…”You want the truth? You can’t handle the truth!” The trouble is that the public can’t, so they don’t tell us.

Now I am not what I would classify as a sceptic. I classify myself as someone who listens to all points of view, then applies the facts and a healthy dose of common sense and then arrives at his own point of view. The trouble is that if I was running the banking system and trying to manage this crisis, then I would have killed that article as well. I would not want to tell people the truth as chaos could easily come from this and the last Depression ended in a world war.

I expect to see the Euro falling in value very shortly following on from the two back to back weekend meetings of the EU leaders. The crisis that has been kept hidden from the public’s eyes is about to be played out in the real world.

The landscape of our own economy and Europe’s is about to be re-shaped and we are in for some severe weather. I do not know the UK’s exposure to the Eastern European countries, but I hope it is far less than I think it is as this would make the US’s look like a buoyant economy compared to the one where we’d be heading.

Speak soon

Andy

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Nationalising The Banks, When Will It Happen And Is It The Only Way?

By Andy Shaw | January 25, 2010

Originally posted 26th February 2009

I’m going to quote part of an article today written by Nouriel Roubini, regarding the alternative choices to nationalising the banks and how he doesn’t see these as working. As you will know he is among a very short list of people whose opinions I have found myself most aligned with in all this mess. That said, I disagree with his current numbers and the scale of the depression.

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More Thoughts on the Economy Part XIV

By Andy Shaw | January 25, 2010

Originally posted 24th February 2009

The ECB Is Further Behind The Curve Than Almost Anyone Is Realising

I’m going to cover how and why what hasn’t yet happened in this crisis is actually a lot worse than what has and why the epicentre for it is not going to be the US and will actually be Europe.

The ECB doesn’t have a central treasury as we do in the UK or as the Americans do and this could bring about a big earthquake. Having a central treasury means that we can make the decision to print money. Now in good times you can look at not being able to print money as a good thing, but when it all goes pear-shaped it is a very bad thing as simply put, ‘They Cannot Act’.

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World Trade Is Falling Into An Abyss

By Andy Shaw | January 25, 2010

Originally posted 17th February 2009

Consumer spending is about 60% of world GDP and with assets falling or having fallen around the world and unemployment starting to rise, the consumers are in a state of shock and have stopped spending. Not a lot we didn’t know there but it is relevant to us as the central banks are not calculating this collective drop off properly. For example, they said exports would pick up because of the low exchange rate of the pound; well what if no economy is looking to buy?

China

China saw 20 million laid off in the last quarter. People returned to work in January simply to find the factories no longer there. Their GDP is going to fall off a cliff and I now think that China could go even deeper into recession this year than I predicted and that we could very well see China with negative growth. As you will know this is especially not nice when you consider that they need 8% growth a year just to create new jobs for the 20 million new workers who come of age each year.

Japan

Japan’s GDP was down 9% in the last quarter!!! For those who don’t know, that is awful! The companies are seeing 20 – 30% drops in sales and are currently laying off massive amounts of people.

Eurozone

This dropped by 6% in the last quarter, led by the financial powerhouse of Germany with an 8.2% drop! I’ll come back to Europe in a little while.

US

Their GDP drop for the last quarter will be revised down from the now positively respectable 3.8% drop to 5% when they have factored in the actual (not assumed) export figures and inventories. So do you think this year is going to be worse or better for the US? Anyone who is betting on a recovery this year is a fool and you should take their money.

Here’s a quick assessment of the world’s top economies:

No.1 US  - Economy in the toilet

No.2 Japan  - Economy in the toilet

No.3 China  - Economy in the toilet

No.4 Germany  - Economy in the toilet

No.5 UK  - Economy in the toilet

No.6 France  - Economy in the toilet

No.7 Italy  - Economy in the toilet

No.8 Russia  - Economy in the toilet

No.9 Spain   – Economy in the toilet

No.10 Brazil  - Economy in the toilet

I could go on and on. There are a few cash rich countries, like Saudi Arabia, who won’t struggle in the depression but I’m sure even they will experience a bad downturn.

European Bank Losses Could Dwarf The US

A Daily Telegraph reporter has said that he has seen an ‘eyes-only’ document, showing that bank losses in the European Banks could be as high as £16 Trillion ($25 Trillion, an unimaginable figure!). Now Europe is obviously much larger than the States but if they have to borrow that much to sort out the banks then this will kill the currencies. So the Euro is going to get a lot weaker if the bank troubles prove to be even half of this. Now this figure makes Roubini’s estimate of nearly $3.6 Trillion for the states look like a walk in the park by comparison.

This means sterling could be in for another fall in value too, dependant on what the damage really is in the UK. Now this is coming at a time when the people who buy bonds are getting very concerned about the capability of Spain, Greece, Portugal, Italy, now also Ireland and Britain to pay it back.

Apparently, some of our banks were even more lax in their capital ratios than the US banks and have lent on a 50:1 basis to places like Eastern Europe who are now struggling to repay and have the double whammy of their currency devaluing.

Now Europe, unlike the US and Britain, doesn’t have a Central Bank that can step in and buy up banks selectively. If it takes on one from one country then it has to take on others from all member states. Now I can’t see the ECB wanting to support Italian, Spanish or Irish banks.

Let’s Not Forget The US

Tim Geithner (US Treasury Secretary) released his bank bailout plan this week and it got a good slating for being short on details. The problem is that he knows it is desperately bad and he can’t tell the world the truth as the markets would go into freefall again. The US are going to be spending more like the figure of $10 Trillion that I mentioned last month, which at this time seems unimaginable as well.

Fortunately for the US, the consensus in the financial leadership is to fix the system no matter what so as not to have a repeat of the Great Depression. The trouble is that the Eurozone central Bank does not have the power of the Fed to act so swiftly and frankly, they do not have the inclination either. However, if this report is real then you can bet we won’t see next month being a stupid ‘wait and see policy’ so far as interest rates are concerned, they’ll cut them by 0.5%.

In the US there are going to be a lot of high profile bank bailouts to be done over the next few months. Several economists I read are now predicting a 20% drop in the stock markets by the autumn. If I was holding bank stocks right now and had been holding them since before the downturn started, then I would seriously consider selling them, taking the loss and perhaps buying them again in the autumn. Afterall, you could be looking at a wipe-out if the banks are in as bad a condition as this report suggests, so crystallising a loss now will seem like a prize should the bank fail.

And of course, if this report turns out to be real then you will definitely see a large drop in bank shares value even for unaffected banks.

If you view the world economy like a great boxing match, we are currently sitting in the corner after having the s**t kicked out of us in Round One. The referee nearly stopped the fight, but somehow we summoned up enough extra energy reserves to make it through. The only problem is that the bell is about to go for Round Two! And although this fight has no limit, it’s pretty certain that it won’t go past Round Three!!

Conclusions

Get out of bank shares; do not believe the downplaying of the world’s financial leaders; scrutinise every deal a little more harshly and do not try and fudge the maths on a deal. If the figures don’t work, walk away as there will be another opportunity along any minute.

A deal is a deal at anytime, regardless of the market!

Best wishes

Andy

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The Bank Of England’s Quarterly Fictional Novel

By Andy Shaw | January 25, 2010

Originally posted 16th February 2009

Yes it’s that time again when the Bank of England try to explain why they got it so wrong and predict how they are actually going to get it right next time. My last article said how I couldn’t be bothered to write this up further as an article as it was so depressing. This time it is slightly less depressing and they have at least mentioned half a dozen times that they did get their last one so very wrong.

In business, if you fail or get something wrong the lesson you learn is a valuable one. That lesson is to listen to the people who were telling you to do it the right way and to not make the same mistake again. In business new mistakes are wonderful opportunities to learn and mistakes you repeat are a sign of your general weakness and lack of understanding.

Guess what, they are going to make the same mistakes again…

Notes on the BoE Feb 2009 Inflation Report

I called the last one a work of fiction the day they released it.

Here are some of their words today:

“The outlook for GDP growth – GDP was estimated to have fallen by 1.5% in 2008 Q4, a substantially larger decline than envisaged at the time of the November report.” (Not by me, it wasn’t ‘click here’ to read what I said).

Check out Chart 1, they are still predicting a ‘V’ shaped recession…WRONG! These guys are the Muppets… I’m thinking is there any point in reading the other 49 pages of this report as their basic misunderstanding means they will get nothing right. These guys are running our economy…arrrgh!

They used their ‘best collective judgement’ for that, too!

Their chart also indicates a -3.75% decline in GDP as opposed to the IMF’s -2.8%. I think the BoE are nearer to the mark here than the IMF. Personally I was thinking -3.75 to -4.25% but I’m ok with their prediction. However, I am not ok with their recovery position. I would say till March 2010 we will be at the depth of the depression and then it may slowly, over the course of a year, move up to -2%.

By 2011 it maybe -1% and then finally show some minimum of positive growth in 2012. But I know my estimate is only a reasonable guess and fiscal policy could make these predictions wrong; that’s if they make the right fiscal decisions of course.

As for inflation they only predict it going negative in 2010 for a slight period of time. I disagree strongly and think we will see some negative value no later than June. I would say their fan chart is therefore off by about -1%, other than that, I am tended to agree with it’s course.

They do condescend to mention they could be wrong on the downside and on the upside because of the currency deflation. I think this will mitigate somewhat later (although it may wrongly do so) and this will mean inflation will be more negative than their projections.

Basically, this is like a football manager answering a question on how his team will do in the big game. “We’ll either win, or we’ll lose…but maybe it’ll be a draw.” At least have the cohones to give a prediction as anyone on earth could predict it going up or down!

They said that as inflation was unlikely to achieve the 2% target that, “a further easing in monetary policy was needed.” Now that should mean we really are headed for 0 – 0.25% interest rates people. Expect another 0.5% cut next month – happy days for those with variable rate mortgages!

Take a look at Chart 1.1 – this shows how terrible their August report predictions were (they were actually predicting interest rates rising then – they must’ve thought Trichet was right, given the ECB’s completely ridiculous interest rate rise in September). How awful their November report predictions were, and this report shows a ‘V’ in interest rates which they have based on a ‘V’ shaped recession!!! As I wrote earlier, they are now basing their assumptions on the wrong data.

Although this chart predicts a 0.25% cut in rates and not till later in the year, let’s see what they cut it by next month. My money is still on a 0.5% cut but then these Muppets don’t read charts very well as has been proven for so very long.

These guys still think we are in a recession. I think we will have to wait for 2 more inflation reports to hear or see the ‘depression’ word mentioned.

They see sterling recovering a little in 2009 (as do I) and then more in 2010 & 2011, but their charts have been wrong before, so now I agree with them I am getting worried that I may be wrong.

They seem to misunderstand the housing market and are like the majority of the general public; completely unaware of the true property value. No surprise there I know, but at this point it is to our benefit that they do misunderstand it.

Their global GDP forecast which is made up by a consensus is predicting -0.5% which is exactly what I thought it would be. For a rule of thumb though, 2.5% is considered a recession so this is much worse. I can’t remember which financial institutions predicts it to be 0.5% growth worldwide this year, I just knew I disagreed with them.

I do agree that there is a real possibility the recovery could be sharp when it happens because of the way they have cut interest rates but my opinion remains that it won’t be for a considerable time because of a number of factors.

Chart 2.8 shows that the surge in unemployment well and really emphasises what I have been saying about how the UK hasn’t really felt the problems yet. It shows that we haven’t even started the 2 years+ of pain from unemployment figures and echoes the figures I cited in the last article where unemployment is likely to hit +3 million during 2009.

The report states that “the likelihood of a period of persistent deflation in the United Kingdom is judged to be small,” i.e. they do not think we are going to get into, or indeed are in, a depression, which is why they are still forecasting a ‘V’ shaped recession. Let’s hope the BoE have got it right and I, together with Nouriel Roubini and George Soros, am wrong but I wouldn’t bet on the BoE!

They think the ‘V’ is coming. What this means is that they will not use all or hardly any of the measures I have been suggesting for a long time yet. This is quiet worrying as it confirms my thoughts that they would fail to act. Conclusion: the depression is here to stay.

I think that in 3 months time the economic data will still be insufficient to change this viewpoint and in fact we will have to wait until August for them to figure an increase in support is needed or even likely.

They do admit that there are ‘considerable uncertainties about the pace of recovery’ and they think a key risk is that it will take longer than anticipated to stabilise the global financial system. They do mention another big downside risk, being protectionism. So they are seeing these problems that I am anticipating to be very bad. However, in my opinion they are deluding themselves and looking on the bright side.

When you have no money on the line, it is easy to (be an optimist) not be a realist.

*End of notes*

I am seeing movement from the banks and I think that the period of real opportunity will soon be upon us, so watch out for indications of much better deals from lenders over the next 6 – 8 weeks.

Best wishes

Andy

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What Barack Obama Has Brought To The Party Part II

By Andy Shaw | January 25, 2010

Originally Posted 12th February 2009

“You Never Want A Serious Crisis To Go To Waste”

Rahm Emanuel was a senior political advisor to Bill Clinton and most recently a member of the House of Representatives from the state of Illinois. Apparently he is one of the most powerful (and foul-mouthed) members of the liberal Washington elite. Interestingly enough, Emanuel supported Hillary Clinton in the campaign but Obama picked him as Chief of Staff anyway.

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What Barack Obama Has Brought To The Party Part I

By Andy Shaw | January 25, 2010

Originally Posted 11th February 2009

I’m going to cover some stuff here that gets a little in-depth and it is not really of much interest to the average Brit but as we are now linked to the US in this fiasco then as an investor, you might want to know details of the goals of the silver tongued president, Barack Obama. He comes across brilliantly on TV, but what he is intending to bring in is nothing short of revolutionary and I do not mean that in a good way.

What he will bring in over the next 4 years will have a profound effect on investment and will significantly change the economic landscape, so it is important to see what’s coming from a way off, especially in times of change.

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