Why Cooking The Books Isn’t Going To Work This Time

By Andy Shaw | January 25, 2010

Originally Posted 19th November 2008

My long time readers will know that I have been saying to watch the Libor rates and the unemployment figures for a sign as to what is going to happen next. People have said to me, ‘but there’s no problem with unemployment.’ I said, ‘there isn’t now, but there will be.’

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The Bank of England’s Latest Work of Fiction

By Andy Shaw | January 25, 2010

Originally Posted 12th November 2008

I’m talking about their inflation report.

Here are the notes I made while reading through – it should be noted at this stage that I got so fed up reading this report that I had to go away, have a drink and come back to it. This has been added in the articles section but it is not up to my usual standard as frankly this report is the worst I’ve ever read (as you’ll see) and I really don’t think it deserves any further commentary than my rough notes. Time will show how right I am, and guess what, I’ll be saying I told you so again within approx 6mths!

I was intending to write an article on it but as you will see from my notes my opinion is quite clear.

Notes on the BoE Nov 2008 Inflation Report

The graph on page 7 shows a V shape for GDP growth – Ha! Who are they trying to kid, other than themselves and everyone else… (that’s almost everybody!) This is just a joke and it really worries me as they have not yet seen the real problems with this situation.

They have not properly factored in the unemployment issue which I have been banging on about for ages which is the biggest problem we are facing, and even Capital Economics who I very rarely agree with are predicting 3.3million unemployed for 2010 – unfortunately these guys may be right for once.

Now given Gordon’s changing of the ‘who counts on the unemployment line’ statistic, this means that we will be right in the depth of an atrocious situation when the BoE think the GDP will be growing! I really do hope they are right and I am wrong as it would be a lot better if they were. Personally, I see unemployment getting far worse than I’ve seen it in my working life.

If you look at their ‘outlook for inflation’ fanchart on page 8 and then again on page 6 of the previous inflation report you’ll see it bears no resemblance.

http://www.bankofengland.co.uk/publications/inflationreport/ir08nov.pdf

http://www.bankofengland.co.uk/publications/inflationreport/ir08aug.pdf

And if you really want a laugh, look at the report from 6 months ago and compare it to this one on page 7

http://www.bankofengland.co.uk/publications/inflationreport/ir08may.pdf

Basically these guys are just closing their eyes and throwing a dart in the wall!…Unbelievable!

They say at the start of their Money & Asset prices on page 9 that, ‘the period since the August report has seen the most serious disruption in the global banking system for almost a century.’ They say that they are still uncertain and pondering about what to do. They must immediately cut rates now to make this very painful recession less painful – this could easily, very easily become a depression thanks to their inaction. The patient is (but does not yet look) critical, and they need morphine right now…bloody hell! What do they need to happen to see what they must, must do!!!!!

This is gross incompetence on a scale of which I have not seen since Field Marshall Haig sent people out of the trenches to walk (not run) in front of the German machine guns. King is an idiot, there is no better way to describe it than that!

Their assumptions on oil are wrong as well, as they were when I predicted that oil would fall to $90 a barrel. I wanted to say $80 and I thought that was just too unbelievable…so lesson learnt, I should have trusted my instincts!

Their assumptions on unemployment are wrong. They are not just wrong they’d be laughable if it wasn’t so very serious.

That’s it, I’ve had enough I can’t stand reading such poor assumptions any more. Where the hell did this lot go to learn how to read graphs, these guys couldn’t predict a sunrise!

Right I’ve had a 20min break and a drink and now I think I can continue to read this utter garbage. But if I see another line saying, ‘That is a substantially weaker outlook than in the August Report’ (or similar) then I think I’ll throw up!! How can they seriously expect me or other educated people to take these truly incompetent commentators seriously?

They actually say that there are no signs that companies cashflows have worsened….un…real!!! What the f**k are they smoking!

I cannot believe what I am reading!!!!!

They are talking about the recovery taking hold, there isn’t going to be a recovery for a long time, get used to it guys!

End of Notes

In conclusion the Bank of England is relying on the incompetence of the media to let them get away with this travesty, and what really annoys me is that they will get away with it, at the countries expense!

As for us property landlords, nothing has really changed. All that has happened is that they have demonstrated once again their incompetence. It is only their incompetence which appears to be continually growing in these times. I would truly love to hear what David Blanchflower is saying behind closed doors about these intellectual lightweights. I bet this is doing his head in.

Don’t worry, this lot will yet again be brought down to earth with a big bump very soon and that will be an advantage to property landlords.

Don’t forget the golden rule – protect your cashflow at all costs, as cash is the only thing that matters.

Your totally pissed off with the Bank of England commentator,

Andy

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If Someone Gets It Consistently Wrong Then Why Do We Continue To Accept Them?

By Andy Shaw | January 25, 2010

Originally Posted 28th October 2008

The Bank Of England and Mervyn King have been consistently getting it wrong for ages and as my regular readers know I’ve been saying this and questioning the value of their inflation targeting and furthermore their ability to predict the future. Also I occasionally write stake in the ground articles so that I can be held accountable for my predictions – this is so that I can continue to build confidence with my readers as I believe a track record is the most important thing. This is a way of ensuring you that I stick my reputation on the line when I state my opinions and forecasts.

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The 2nd Biggest Money Making Scheme in History is Taking Place and We Have to Be Grateful for It

By Andy Shaw | January 25, 2010

Originally Posted 16th October 2008

Firstly I’m going to explain something I’ve said before but has relevance to the article.

People say to me, ‘How am I going to pay off the mortgage (debt) on my own home? I can understand keeping mortgages on my investment property but with interest only I’ll never clear the debt on my own home? So how can I do it?’

I have many answers for this but the relevant one to this article is:

If your home is worth £500,000 and you have a £400,000 debt on it, then go and buy £500,000 worth of investment property, wait 10 years (while property doubles in value), then refinance the investment property and clear the mortgage on your own home. The exact time scale doesn’t really matter as long as you leave the investment for long enough.

So you end up with assets that are worth more than they were when you bought them and they have cleaned up the previous debt which was a liability, so as I’ve said many times before this somewhat beats the repayment mortgage model. Well a repayment mortgage involves all sorts of hardship and sacrifice that no one really wants to go through and frankly why should they have to when it is simple to get time and someone else’s money to pay of your liabilities for you?

So whatever size the debt is, what this method shows is the simple use of buying appreciating assets and then using leverage to increase your rate of return and effectively kill off your debt. Therefore whatever size the debt is, it is a simple process. Just imagine if you could buy those investment properties which are appreciating assets for £150,000 when it was really worth £500,000, then this leverage and time model produces huge profits. Then just imagine that you could control the market so that the people who own the £500,000 asset would not only be willing to sell for £150,000, but would be very grateful to you for buying at that price. Now we are starting to get really clever.

To achieve that would involve market timing to extraordinary levels, and realistically it would need an incredible control and influence over the market to pull off such a feat. I achieved it on a small scale when I did it in Worthing’s property market, but just imagine it on a slightly bigger scale, I’m talking trillions!

The biggest game play ever

Now to start…

But before that I should say that I could easily write a book on the events of the last two weeks (NB I wrote that on 1st October – the world got really busy shortly after that :-) ), let alone the events since the Northern Rock crisis, as these truly are interesting times.

The $700 Billion bailout plan has been incorrectly named. A more appropriate and accurate name would be a stabilization plan, or what it’s probably being called behind the most secret of closed doors, ‘OMG – Operation Money Grab’, as this is anything but a bailout plan. However, that’s how the Fed needs the banks to view it. Their only mistake was in the marketing of this plan to the American public (and it was probably a big mistake, as nothing is quite as it would seem right now, but I think they’ll recover from it).

The cleverness of this plan is truly astounding and really deserves absolute admiration and applause, especially as the spin that has been put on it has managed to get everyone standing in line and having to vote it through. I liken it to asking the question in such a way that we have to answer ‘yes’, even though we don’t want to, and even though I don’t like those situations I have to admire those who orchestrate them.

Now before getting to that situation for someone to say ‘yes’ to something that goes so wholeheartedly against the grain, you have to let them experience some real pain, so that the only solution is to do the unthinkable and agree to it. But before I come onto the OMG I need to explain the stabilization.

The survival of the world’s financial system is based on a very clever confidence game. (In other words it’s a con trick – don’t let anyone tell you otherwise and if you don’t believe me pull out a bank note and read what it says, ‘I promise to pay the bearer on demand…’)

The banks and the government gear all of their money and do not have gold backing up all of their promises. The banks lend to at least 12 times what they have in cash (this could be a lot more depending on where you get your info from). The government, to who knows what degree, are dependant on the price of what little gold reserves they have left and of course the hedge funds and selective investment banks who gear to 30 times cash invested. Not to mention of course that whilst the regulators back is turned for 29 days out of every month, they gear to much higher limits, like 45 times.

Is it any wonder that the financial system is in trouble, when you consider that if we take out an 85% mortgage then that is considered by most banks to be over-geared, yet that is only 6.7 x the capital invested. So we are over-geared when we are taking half the risk they are yet we are investing in an asset that we understand and can effect the value of. Whereas the problem currently is that the banks don’t know how to value some of the assets on their books and therefore this has brought about a complete loss of confidence and brought the system to its knees. Personally, I think only days away from collapse at anytime at the moment – but I think they realise this now (finally!)

Rules of the game

So to get back to the cleverness.

First you need to have either a big problem to fix, or you just want to make a shed load of money.

Second you need a rule that can create chaos in the market almost on demand. That rule is that some companies that hold certain assets that have to be AAA rated. If at any time those assets are not AAA rated then the company must sell those assets immediately for whatever price it can get.

This is a beautiful piece of work. Think about it – you create a system whereby if you want to you can set about a loss of confidence (which is the foundation for all worldwide banking), and in doing so this causes a rush to de-leverage, which in turn causes increased leverage by causing de-valuation of the assets as the assets then fall and lose there AAA rating, therefore forcing the asset holder to HAVE to sell it at whatever the last fire-sale value of a similar asset was. So if the last sale was for 50% of purchase price, they just have to hope that they can get the same – yes, they really did buy into this con trick with their eyes wide open!

So to put it in our terms, if the property goes down in value and your gearing goes from 85% to 90%+ then you must sell that asset immediately for whatever price you can get for it and if that means you sell a flat that you paid £100,000 for 3 months ago for £50,000 today then you have done the right thing – is it me, or was this not predictable! I only found this out earlier this year, otherwise I could have shown it was just a time bomb with a random timer just waiting to go off.

You must remember that all the banks and funds signed up to this when they wanted to do business in that market. Would you get into property if you were forced to sell when the price went down? Well funnily enough, that is what we all sign up to on our mortgages but they’d have fun collecting that money!

Third you need to have a way that you can control the fallout as you switch on the chaos that will allow you to take the rule book and throw it out the window as and when you choose.

This is quite easy if you have enough money and allow things to go on that will fail automatically, because they never could work. What you are probably thinking now is why would anyone want to do that? Well, I’ll come onto that in a little while.

Fourth you need to get a precedent set that means that we don’t want to do this but we must if we are all going to survive. But the pill can’t be too bitter too swallow for the public or the politicians. However, you want the precedent to be set as high as possible so that when you keep going back and asking for more the people will think that at least they are not asking for that much again.

Pretty soon you have had three, four, five times or more what you originally set the precedent for, and each time it was accepted as a necessity, because it was a necessity as that was the plan of the trap in the first place.

Fifth you need at least one patsy to take the fall if play needs to go the wrong way. I.e. no plan is ever any good if it does not have an exit strategy. In this play I think there are literally dozens of patsies.

Now what I’m discussing here is obviously the American stabilization plan & the subsequent ‘New Plan’ of Gordon (patsy numero uno) Brown’s to buy shares in the banks. But other than saving the economy of the world (which is a pretty big reason – and definitely one hell of a smokescreen) why would they do it, what would they have to gain? And I’m not talking about a few extremely wealthy people benefiting here, I am talking about the US government finding a way to solve their biggest problem ever, and it has been a question I have asked myself dozens of times – How are they going to solve the problem of the US debt?

A BIG Problem

Let’s say you have a total debt in US Dollars of

Taken from one of the National Debt clocks – The Outstanding Public Debt as of 15 Oct 2008 at 05:52:18 PM GMT is:

$10,310,820,514,802.11 That’s 10 trillion US Dollas!

Which is no small amount of money to pay off, well that’s if you can’t find someone to pay it off for you that is…

You can’t raise taxes and you want to spend more than you are receiving.

You need to pay off the debt and you want money, then what is the best way to get that money? Buy undervalued income producing and capital appreciating assets, which you can gear up and get a leveraged return on. However, you can’t do that as that is going towards socialism and goes against the system. So you have to create a climate that allows you to buy assets like AIG for chump change or no money and have the public say it is in their interest to do so.

Side note the American citizens complained when their tax money was used to buy up AIG. If they understood what had happened then they would all be celebrating. AIG was bought with an $85 billion guarantee (in other words $0 money down. In return they received 80% of a business with assets worth over $100 billion).

Who paid for that? The shareholders and the company was literally given away to get round its cashflow problems. This was a stunning business deal, absolutely stunning and allowed Henry Pullson to make literally a fortune for the government! Yet taxpayers were disgusted at the use of public funds, they are not blind yet they cannot see! And the shareholders, well they took the risk didn’t they? Unfortunately, they weren’t ready for OMG.

But this phenomenal business deal/swindle pales into insignificance compared to Fannie Mae, Freddie Mac and all the banks to come, not to mention hedge funds and pension funds that are about to let them buy up their assets at what I expect to be no more than 65 cents on the dollar.

Fannie & Freddie are a better deal by far to that of AIG though. They each own around $800 million in mortgage loans and guarantee the credit worthiness of another $3.8 trillion in mortgage backed securities. If these are held to maturity they will be worth a lot more than was paid for them (and we are not talking just a few million more!). What did this cost Mr Paulson? $2 billion in cash that he borrowed at 3–4 % and $200 billion in guarantees that cost him nothing.

Not a bad deal. $2 billion to get hold of $5.4 trillion in mortgages and guarantees. And as the $2 billion wasn’t his money anyway then he just bought £5.4 trillion worth of property for no money down! Makes you feel like a real amateur when someone new to property investing pulls of the deal of the millennium on their first time out.

This bitter pill will be helped along the way by the government, saying to banks when they start to announce that they will be buying them, that is (I wrote before Gordon’s announcement that he would start taking shares in banks), ‘now don’t you worry, we are not going to force you to show that loss on your balance sheets, in fact we are going to give you time to go out and make more profits so that you can support that loss, that you made!’ They’ll pat them on the back and send them back to work, and the banks will be grateful and we should be grateful to that they did too. This is a glimpse at how beautiful this plan is.

Now let’s look back. What has the government got? Well, it’s got billions and trillions in asset values that it has paid somewhere between 2cents and 65cents on the dollar for. It has funded it all with further debt which it borrows at 3-4% (via the sale of treasury bonds) and has a yield producing a prospective 10-15%. So a fantastic tax free revenue. Then, if it waits and holds onto these geared investments, while holding a high percentage of the business but not enough to not make the entrepreneurs do their stuff and make further profits, then in ten or fifteen years they sell these assets back at a huge profit and pay off their national debt.

Of course, depending on who is in at the time will determine on whether the money is used to clear the debt, but when faced with a huge windfall of cash, a politician can either pay off debt which will win him a few votes, or he can do something popular that will get him re-elected. So you can have two guesses if you need them as to what will happen to the profits. That’s assuming of course that whoever is in at the time doesn’t decide to offload these assets before they have reached a peachy return.

So who better to orchestrate such a wonderful bailout of the US debt than the former CEO of Goldman Sachs, who ran one of the largest funds on the planet? This guy is phenomenally clever (not usually a necessary skill for a member of Bush’s administration, but this guy is a master with money).

And why do you think Warren Buffet said, ‘If I had $700 billion I’d buy all those loans?’ He even offered to fund 1% of the deal – it’s that good even Buffet wants in. Afterall, Mr Paulson is going to buy another $2-$3 trillion of assets for $700,000. This guy really knows his stuff and could very well be the cleverest money man I’ve ever seen! So for some guarantees and some borrowed cash this makes this series of deals the best trades ever done by far.

Then moving onto the plan to buy up parts of the banks, Mr Paulson decides to follow that forward thinker Gordon Brown with his idea to buy up the banks. Oh come on, talk about a patsy play, Gordon Brown has never had an original thought in his life and is so inept that to be able to even consider a man with his lack of intelligence could come up with such a clever play is the most ludicrous element of this whole event thus far. Still the US public bought it and so have everyone else from what I see on the news and in the papers. Anyway I’ll move on and not dwell on this point.

It won’t stop there though as Paulson’s onto a good thing and will make us all suffer a little while longer whilst he takes probably more than enough money in guarantees from the US tax payer to make enough money to pay off the debt. Well, maybe ;-)

However, let’s not go assuming that this money will be spent in the direction that it was intended. Henry Paulson will probably be a distant memory and the new President (or the one after) will probably see this windfall as a great way to impress the public by his generous spending plans.

The next day

I woke up this morning to hear that the bill had been passed. So now we are onto the next phase. The precedent has been set and what will happen is that this will not work from day one. This will take time and as Paulson knows that this wonderful technique has already delivered a potentially huge pay day, he’ll be hungry for more, just so long as he can hold off financial meltdown. However, this will be a dangerous game and if he makes a similar mistake to the marketing of the ‘bailout plan’ then he may just not pull it off.

Which of course could be absolute disaster. So even though I feel I can see through to the true agenda, along with every other armchair economist I am left with no choice other than to welcome in this new order and hope that he pulls it off and isn’t too greedy.

Finally this is good news for us as property investors. However, we will have to endure more pain before this drama shows signs of really slowing. All that happened yesterday was that they brought the patient back a little from the brink of death, the patient is still in intensive care. The patient will survive, but he may spend the next 5 years in a convalescent home.

This means for us that there is going to be less competition and more deals. However, the property investing plate that has been wobbling and which will require more work for the next year or so is definitely the mortgage plate. But as I have said many times before, there will always be one area in property investing that isn’t working correctly and that is to your benefit, as if every area was working, then everyone would be able to do it and so take advantage of whatever the shifts in the market show you.

The Future

Thanks to the inaction when it was necessary to avert recession, we are now faced with one coming at us full on. And I note now that other economists are predicting sub 1% inflation next year. So I have to ask where the hell were they when I was yelling about we need rate cuts and stuff inflation? Well the public has a short memory and at the moment they don’t even fully realise how close the world has come and in fact how close it still sits right now next to financial meltdown.

People will carry on making their own assumptions (as I have here) about what is happening and blaming whoever Paulson chooses to blame for this crisis, whilst the true goal was achieved and went almost unnoticed. Am I right? Well, who knows, and at the end of the day, who cares, as what does it matter? But if I am right, then the American people will owe a debt to Henry Paulson that they can never repay for finding a way to rid America of the biggest milestone ever and all they had to do was use OMG to take from the rich and give to the richest.

Seriously though, what matters to us at our level is that we stay flexible and play by the rules that they lay down for us. Property investing is like sailing, the skill is learning to be a good enough sailor so that you can sail in any weather. At the moment the scared property investors are the ones who are like poor sailors.

One of my favourite Warren Buffet quotes is, ‘I get fearful when others get greedy and I get greedy when others get fearful.’ This is a man who just bought shares in two enterprises, Goldman Sachs and General Electric. The deal he did means that he will probably double his investment in under five years and as he has also bought the assets at an all time low compared to value, he could end up making yet another sweet, sweet deal. This is a man who is not scared by the term ‘credit crunch’, who instead is out spending and not hoarding cash, because he knows now is the time to get a great deal.

Will the shares in those two entities go down more? Probably, but he doesn’t care because he is an investor and not a speculator. He has taken a position in those companies, as we do in a property, and is in this for the long term. He understands the value of his assets. This is the secret to investing. Get to know the value of your assets and then you will no longer be fearful when others are.

Best wishes

Andy

PS Expect to see some more interest rate cuts soon as their ‘dead cat’ bounced the other day, but it’s still a dead cat. When they realise this, then they will act again. This will make our lives easier. Also keep an eye out for the 3 month Libor rate, as that will tell you when the storm is calming down.

One of the greatest financial errors of all time was when they raised interest rates in the Great Depression; rest assured even our politicians are not that stupid and even Mervyn knows where he can stick his fight on inflation (and it is not as sunny there as it is in Cyprus – I won’t bother saying I told them so, as it really is too painful that they missed it!)

PPS If you don’t know what the number one biggest money making scheme of all time was, and still is, then I’ll give you a clue, it was operation FED.

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Where The Hell Should We Be Putting Our Money? And Why Is It That 99% Of People Are Always Listening To The Wrong Advice?

By Andy Shaw | January 25, 2010

Originally Posted 19th September 2008

As you know I am fairly well wired in to the credit crunch. I am finding it fascinating to watch and at the same time awful to see. Being over in Cyprus at the moment I am of course not getting the info as quickly as I would like and after spending lunch with a developer yesterday to have Alison tell me that Lloyd’s were merging with HBOS really showed me once again how fast things are unfolding. Then when I watched it on BBC later and saw that this monumental story was only the 3rd item on the news I was astounded again.

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Interest Rates Are They Coming Down?

By Andy Shaw | January 25, 2010

Originally Posted 18th September 2008

A few months ago when the inflationary pressures looked to be at their worst and the world seemed to think that the prices were only heading one way, I said that oil prices and commodities in general would fall sharply. I think oil was at $145 and still heading up at the time. I don’t think I said it in that article but I did in a later one, that I thought oil would end up somewhere between $90 & $110 in the short term. So when last week oil dipped below $100 in less than 3 months after me saying this, it brought a smile to my face.

But is this magic? Did I just guess right? It’s neither. The cure for high prices is high prices; the economies of the world were heading toward a recession and therefore wouldn’t be able to afford to buy the stuff (or for that matter any other commodities). I also looked into reports that oil producers were renting tankers to store oil in, as they couldn’t sell it, so it’s hardly magic and in fact quite easy to predict even in today’s turmoil.

Side note:

So why is it then that some things which should be predictable are not so easy to predict? Well, that’s when someone in power isn’t playing the game the way that they are supposed to play it. This is usually because they are learning the game or just not competent enough to understand the full ramifications of their actions.

I’ve included a few links below with graphs that look like large mountain regions in the Himalayas. The first one is the crude oil price, and the next one is the commodity futures. You’ll see that oil resembles a big mountain and commodities looks like the Eiger.

http://www.wtrg.com/daily/crudeoilprice.html

http://www.bloomberg.com/markets/commodities/cfutures.html

Well most of the indicators I see are showing us that unfortunately the market downturn for the economy is going to get worse and not better. We seem to be following a close third to Spain and Germany’s lead into recession. The US economy now looks like it is slowing once again and heading the same way too. The government and the Fed have managed to hold recession off this far and thanks to this have made the idea of recession a lot more palatable than it would have been with interest rates at 5.25%.

Now to carry on with the US here for a minute, unemployment in the states is the biggest worry. Payrolls fell by 75,000 after declining by 51,000 in July and the unemployment rate stayed at a 4 year high of 5.7 percent. (This is one of my biggest concerns for the UK too, especially as unemployment took it’s biggest jump in August for 16 years and I saw recently that some forecasts are predicting a rise from 5.5% to 6.7% in 2009, and then going above 7% in 2010! If this is correct, and I think that it is, then this is very bad news as this shows from just one indicator that we could be looking at 2011 before we see a recovery or possibly even 2012. If correct, then this means we will be in for some very uncomfortable years ahead, especially with an interest rate stuck at 5%)

As I type this the US government and the Fed are devising ways to help the people through this by various methods. And the Presidential candidates have even mentioned the possibility of lowering rates further to well below 2%. That’s 2% for those not up on current affairs. Not the 5% that we are paying, nor the 4.25% that the Euro Zone is paying.

America cut rates despite what the inflationary indicators said and this took their currency down with their rates. They went to bat and tried, and are still trying, to save their economy and country pain. All this despite the fact that what they did looked like fools’ play.

Now approx 70% of America’s GDP is made up by consumer spending, and given the inability of US consumers to borrow against their homes, and with rising unemployment, this is going to be hit hard. Consumer spending data showed retail sales dropping 0.3% in August for the second month in a row (July was down 0.5%) The government will look for ‘new ways’ to keep their people spending as otherwise their whole economy will suffer. They don’t seem to operate the blame culture as much, or in anyway the same way, as we do in the UK & Europe. They take the much more Entrepreneurial stance of, ‘This is where we are, what do we now have to do to sort it out?’

So with all these commodity prices having come down and the value of the dollar increasing, it gives the Fed more scope to lower rates and come up with new alternatives to stimulate the economy (although they won’t be admitting that for a while).

So how can the Fed be even considering lowering rates, given that only recently they were under pressure to put them up?

Well as I said in another article a few months ago, all of the price increases were raising inflation, but when these fell back they would not only lower inflation but could actually cause deflation. I think that picture, whilst it only had a slight chance of happening a few months ago, has now become clear and has a real chance and is even very likely to happen.

Now if oil drops even further than I predicted and goes down to $75-$80, which it very well could, that would really have the effect of decreasing inflation by a significant amount and it would also drag down counterpart commodities as well. Now given that Europe and Japan are in recession, and the emerging markets have reduced their demand because of the high prices, the thinking that oil in the short term could be lower still no longer seems so unreasonable, as it was when I first wrote about it at the peak. (Long-term, however, I think that oil will go much higher than it is now and much higher than it was in the summer, but that is another story.)

Side note:

I know that some of this stuff may not be very interesting to the majority but it is actually the very stuff that brings about the interest rate changes, and therefore I like to include it rather than just tell you where I think rates are going. Hopefully it gives you insight into my arguments and assumptions, so that you can learn to read the indicators as I do.

So what does this mean for us?

With this inflationary pressure curbing off, I think finally both the BoE and the ECB are likely to cut rates. This is going to make the dollar stronger still, which could push inflation upwards again or much more likely will just slow its decent. However, I think this time next year we will start to see stories about deflation given that we have seen two major bubbles burst in the last year (housing and credit). It is not out of the realm of reason and this is what should happen, as bursting bubbles are by definition deflationary events.

So unless Mervyn is set on getting us into a quick recession (which I tend to think he is) and stuff all those that don’t survive, then I think we could be about to start seeing a series of LONG OVERDUE rate cuts. I did hope that ‘reason’ would have brought these about sooner than they have done but I think the question is now, not will they but when will they and by how much?

Now if the powers that be were reasonable then I’d be able to predict this without too much trouble but for this decision I think we’ll have to wait and see and as I am trapped in Cyprus at the moment and being not so connected to the financial markets, I’m not willing to say if it will be this month or next, but I think it will start this side of Christmas (FINALLY).

However, these guys have gone against the grain before and they could do again, so we’ll have to wait and see whether they want recession badly enough or not. We live in interesting times!

Best wishes

Andy

PS I’d like you to know that I wrote this Sunday morning just before the Lehman Brothers problems showed up on the news. It demonstrates just how much is happening at the moment. I’m still in Cyprus and it is Thursday morning now.

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Why We Should Be Grateful When They Make The Recession Call

By Andy Shaw | January 23, 2010

Originally Posted 26th August 2008

For those of us that are old enough to remember the recession Britain went through in the 90’s, this may remind you of something that happened back then.

Virtually everyone was saying that we were in recession but the government denied it for ages. They were able to do this because recession is a mathematical calculation that is always worked out looking backwards, and it is really best defined after a longer period of time. So in other words by the time they make the recession call, we’ve been in one for quite a while.

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My Opinion On The Bank Of England’s Inflation Report

By Andy Shaw | January 23, 2010

Originally Posted 14th August 2008

As Mervyn King said, “The British economy is going through a difficult and painful adjustment, and we’re going to do f**k all to help!

Well, he actually said the first part of that in reality, the second part was added by me as I felt that this is basically what he said with his full 50+ page inflation report.

He went on to say, “This adjustment cannot be avoided.” Now, he is talking about a lot of things here, but one of these is stopping the country going into recession (that’s rather important for those that are in some doubt)! So correct me if I’m wrong, but America did avoid this, just this year in fact, and are at least having a damn good go at staying out of it! Whereas he seems to think it’s inevitable so let’s lie down and take a good kicking.

But wait for it, the really good news is that he says that he sees this continuing until 2011…nice!

He thinks that despite there being a strong argument that inflation will actually go to the negative side of things next year and in fact therefore solve the problem for him, that it is actually better to ignore that possibility and not even include it on one of his ‘fan’ charts!

Side note:

Fan charts are supposed to be things that cover 90% of all possibilities, and yet even in his own report it shows the bank only gets it in the middle zone of its predictions a mere 50% of the time! What I didn’t like was the report said that these figure were inconclusive to saying what the banks predictive skills were like. I think I can help them there, as if they are right  50% of the time then they are wrong 50% of the time too.

The funny thing is that they are actually right a lot less than 50% of the time, which means they would have more chance getting it right if they flipped a $X!£%$% coin! (I wanted to swear there, but restrained myself :-) )

Yes they really are that bad at it, they would get it right by using a coin more often!
After listening to him and reading the report I am certain that they want this to cause a slowdown and they want us (not them) to have this pain as they totally believe that it is necessary and for the greater good! I think Nixon actually thought what he was doing was for the greater good too; didn’t stop him being misguided.

Mervyn said, “Next year will be a difficult one, then after a while what we can look forward to is a not so bad decade.”

He knows that the risk of a recession is very strong next year, he even said it, yet still he does nothing as this will help him get inflation to 2%. “Stuff the economy as long as I have a tick on my bit of paper!” is basically what the guy was saying, reading between the lines (even though I didn’t have to look too hard). He was saying fiscal policy is the government’s responsibility. I think he is trying to get the message across to our wondrous leader that his (Mervyn’s) mandate should actually be the whole economy, not just inflation (which I totally agree with, well one or the other of them have control of both, not the way it is right now as that’s just stupid). They just view the upside risks of inflation as far more pressing than the downside of recession.

What amazes me is that today the Eurozone has gone into negative growth for the first time ever, and after speaking to my business partner in Spain yesterday you can be certain they will be there next quarter too, which means they are officially in recession. Well the Eurozones GDP in January looked like ours does now…Hello boys, do you think there’s any small precedent been shown here?! This means that keeping monetary policy too high means you’re going into recession.

Is it me or are they just galactically stupid, or is it really that the BoE are really just trying to force the governments hand to give them control of fiscal policy? That’s probably too way out, but I have considered it.

Before I go on it did say at the start of the report that not every member agreed with the report. I’m taking a wild guess at David Blanchflour, as he is the ONLY member of the MPC that agrees with me (or rather I agree with him) that keeping rates too high is desperately damaging our economy.

When asked the question is it possible that inflation won’t return to 2%, he jumped in to say, “We will take the action necessary to ensure it does!” It is such a shame that he is not that passionate about the British economy too, just our inflation rate and achieving his goal! I think someone with that much passion about what he does would be clever enough to sort this mess out quickly if his hands weren’t tied.

When asked what can he say to people in negative equity and what can he say to people who feel the bank should be doing more in these circumstances, he unbelievably said, “The aim of the bank will be to explain to people that as decided by Parliament the aim of BoE is to meet the inflation target.” In other words, “Tough, it’s not our problem!” The horrible thing is, he’s right it isn’t!

He went on to say, “The best contribution the BoE can make is to give realistic explanations to people of why these shocks to the world economy have occurred and to explain that they are determined to bring inflation back to target.” Well, I don’t know about you, but now that I know that the BoE will do what is necessary to bring inflation back to 2%,  I feel that I no longer need to look at the economy because they are going to sort it out!!!!

He is of the opinion that the house market position was clearly excessive and a sharper slowdown is expected. Just so you are all certain I’m going to do f**k all to try and stop that. Maybe when there are riots and other media pressures I may just take a look at it over my tea break :-)

He was asked about unemployment and said he didn’t know what’s going to happen with unemployment, but if it raises too much then we may do something. That was really him saying that he thought he may actually lower interest rates when enough people have lost everything.

But I think his greatest comment was, “Pretending there is some magic solution here” – when referring to the difficult adjustment in the housing market. That was just real bollocks, the magic solution which he says isn’t there bloody well is; it is simply a reduction in rates to around 4% which will provide not a one time fix all, but a patch that will get us through with significantly less pain.

Basically these people do not look like they will be adjusting rates at all over the next few years. However, they will continue to watch the figures and when they have gotten too bad then they may do something. I think the metaphor for this is shutting the stable door after the horse has bolted. My final remark is, ‘why is it that we are not blessed with anybody with vision in this the most important part of our economy?’

Anyway, so what does their lame duck approach mean for us?

Well basically as I have said many times before, they make the rules we just play by them. My opinion is that they are badly screwing it up right now which I’ve been saying for several years now. Essentially that doesn’t matter as I can’t do anything to change it, but what I can do is play the game with the new set of rules.

So, in my opinion the signs of real improvement (despite all I’ve said above) are actually starting to show.

On the positive side most commodity prices have plunged over the last two months, after many set all-time record highs earlier this year.  Corn, which peaked around $7.75 per bushel earlier this year, has now plunged to below $5.00. Wheat has plunged from around $12.50 per bushel to near $6.00. Rice is down sharply as well and we all know that oil and gasoline prices have declined recently too.

I was talking to a developer in Cyprus about six weeks ago and he was complaining about the prices of materials keep going up and he wanted to get the villas built quick. I said to him then (before the prices started to go down) that he shouldn’t worry as commodity prices would start to fall. Well guess what…

The Libor rate (this is the rate the banks borrow at and therefore set their mortgage deals from) has continued to come down. It is still way above the historic spread above the UK interest rate, but it moved downwards everyday in July. So this is why we are starting to see a few more deals coming to the table. I think this will continue to fall unless there is some big economic upset or a 9/11 type attack. Given this fact alone, within three months the mortgage deals will have all reduced by about 0.25%, which is the same as a ¼ point base rate cut.

And it still will have a way to go down. What I think will happen is that the commodity slowdowns and the recession coming to bear will actually make the BoE cut rates despite them clearly not wanting to do this. I think Gordon may think that if he doesn’t want to be deported after the next election that he really should lift a finger to help. Mind you, I think he is living in a land of make believe, similar to the way so many people in power are, and he is not facing the reality of what he must have the courage to do.

Unemployment is still a big worry to me, as in when I talk to people who run businesses and they are telling me what is really going on with the layoffs, so I think those figures are going to grow substantially (maybe they’ll wake up then!).

So, nothing has really changed except my expectation that they would have figured out that they need to cut rates sooner rather than later. Well that hasn’t happened, so what this will mean is that the deals we are getting today are going to stay at least as good and probably are going to get better the further into winter we go.

I was astounded at a recent deal we pulled in for £60k the other day, when last year we would have paid £90k for it and still would have had it value for £125k minimum.
But as I said in a recent article, just because the price is 33% cheaper does not necessarily mean it’s a deal. It is only a deal if you can refinance it and release all of your money.

So really the message from all of this is don’t hold your breath waiting for the BoE to put the game on again. It is down to you to do research, research, research and seek out the very best deals, so nothing has changed there!

Best wishes

Andy

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Negotiating A £20,000 Discount from the Estate Agent Does Not Necessarily Make It A Good Deal

By Andy Shaw | January 23, 2010

Originally Posted 5th August 2008

Last year people were in a way protected because they did not think they could find a deal. This lack of knowledge prevented some from making mistakes as they didn’t think they had a deal. It also prevented some from acting as they didn’t know what a deal looked like so didn’t progress.

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Why Aren’t We Hearing About How Well The US Economy Is Doing?

By Andy Shaw | January 23, 2010

Originally Posted 30th July 2008

The truth of the matter is that the US economy is not in recession and it doesn’t even look likely to go that way anymore this year. In fact the figures about to be released should be around 2% which would make it miles away from recession. Now when you consider most economic pundits including myself predicted that they would go into recession easily by this quarter why have our predictions been so way off base?

Well because despite the fact that everyone is quick to criticise the government over there, they were quick to respond and actually try to help the people (unlike over here). They brought in an economic stimulus package where they gave everyone $600, and how did they pay for it, well they wrote a guarantee. And what did the Fed do, well they cut, no sorry, slashed away at interest rates, leaving themselves open to criticism by the establishment of economists (and the results are plain to see, will somebody please show the results to Mervyn King and Gordon Brown?).

President Bush got on the TV and told everyone that they will sort it out, and here’s the start with a stimulus package. Now this despite the fact that most of us believe that he is lying when we see his lips moving, so why do they listen to him? Well I think despite his various failings he can still sell em ’snake oil’ (whereas Gordon Brown can’t! That would require a personality!), and then most recently the Fed backed their mortgage institutions and have said they will back other financial institutions.

Now this is what I call support! And why do they do it? Well they do it for the greater good. They have to as in times like this the paradox of de-leveraging occurs. Which is that of the banks deciding that they are over-geared so they try to de-leverage. Then what happens is that the value of the asset slips so now they can’t de-leverage any more and they have actually increased their leveraging because of the asset value slippage. This is where support is needed in the way of the guarantee of public funds which bolster up the sentiment and are used for the good of all to buy the assets that the banks no longer want and allow them to de-leverage without the asset value slippage. The funny thing is, on those funds it is very likely that the government and the Fed will return a very fair profit.

Whereas if we look at the UK economy it is on a slippery slope and being pushed downwards by those bastions of good and balanced reporting who are otherwise known as the media (all of them). As I’ve said before we can avoid these treacherous waters despite the media’s intention for us to get wet and a fair number to drown. But in order to do this they need to cut interest rates by at least another 1%; this does of course fall on deaf ears.

Trouble is they (the UK policy makers – 8 out of 9 of them, the only one who is on my side actually studies the US economy (as he lives there!)) are fighting a fight that shouldn’t be fought right now. Just like I have said, if you cut all taxes down to just 10 pence in the pound you will vastly increase revenue into the economy (a paradox I know, but that is the way it is, just look at what happened with the Bush tax cuts in the US for a recent example). They (the Bank of England and the government) are fighting terrorists in the garden whilst the roof is on fire, at the end of the day you always have to fight the greatest threat to your survival first and if the roof collapses and kills you, then who cares about the terrorists? If the economy collapses into recession, then we won’t have to worry about inflation!

The high commodity prices we are experiencing right now should/will actually be short lived and come down nicely by this time next year. If you note the price of oil came down as I mentioned it would recently, so the cure for high prices as usual is of course…high prices.

Another thing is that I am expecting the Libor rates to continue coming down. So if they stop fighting terrorists for a second and start smelling the smoke, then we may well be in for some rate cuts that can prevent what I see coming. And this time unlike earlier cuts this year we will actually feel those cuts, as before the banks had to build in their comfort margin, which I believe is well and truly constructed now. However, if Libor comes down enough anyway and returns to pre-credit crunch levels then we should see a 0.5% cut off current rates as well (which could happen), so just 0.5% from the Bank of England would get everybody back in the ball park.

So there we have it, the US is an economy that has as its central bank a bank that has a dual mandate, inflation and the economy, whereas our central bank is just working on inflation only. Does anyone else think this is madness or is it just me?

So another question is why are we not hearing about the good news because I think it’s fair to say we need some?

Well this opens for us the political problem and Gordon Brown, where even the supposedly loyal newspapers are turning away from him because they want him out. Now if the media were to be airing the good news, then do you think it would be more difficult for them to oust Gordon then, after all it’s proving somewhat difficult now?

So this does raise the question of whether we are hearing all this bad stuff just while they try to get rid of him. Now I think we all know that I am no fan of Gordon Brown (that doesn’t really cover it does it?) but I wonder whether the media is in anyway generally aware of the trouble and pain they are causing at this time of economic turmoil. Afterall, all they’d need to do is give a fair balance to the figures coming in and the sentiment, then the feel good would start to come back quicker. Or is it simply because nothing sells like bad news, or should that say nothing sells to the British public like bad news.

The trouble for the press is that some things are getting better, and it will only be so long before they can’t just keep selling doom and gloom as there are some good figures coming out. Things are starting to swing a little towards positive factors and the feel good is starting to show. Still, I’m sure they can find something else to try and make the public feel bad about.

I think the US economy will play the wait and see game at 2% interest rates whilst we will wait and see at 5% (who do you think will do best?). Their economy will survive this whereas ours will really suffer although the fundamentals of our property market are really strong right now (and the US’s are weak). Therefore when the rebound happens it will be fast. As to when it happens then the jury is still out and this could end up being down to how desperate Gordon Brown is to try and stay on as leader, as he may well take more risks to keep his job.

So what will they do next regarding rates? Well, unfortunately they’ll wait and see (and I really am hoping I’m wrong here and they cut rates). They will not take a chance and give the public a boost in the best feel good time of the year, why would they ever want to do that! Then I think as in times before when they realised they needed to cut rates (which they do now, they just don’t know it) they will cut them slowly.

Still here’s to hoping that I’m wrong and they cut the rates in August as that would start to pull us back up the slippery slope!

Best wishes

Andy

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