Will 2008 Be Looked Back On As Worse, Or Much, Much Worse Than 1929? Part I

By Andy Shaw | January 23, 2010

Originally Posted 25th March 2008

There has been so much going on recently in the Credit Crunch that I think I could spend 200% of my time writing about it and still not explore all of the probabilities, let alone the possibilities. I also considered not saying anything about it as sometimes the truth can be really scary! So I knew before I told you all what I’m about to that I had to be able to present this info in a way that you could actually see the opportunities presented rather than getting depressed about it.

So the trouble is deciding what parts are most relevant to you as the property investor?

I watch the media and a lot of what is going at the moment on is being talked about, but as the financial guru’s are all speaking in their jargon, unless you are fluent in it, then you could actually think that there isn’t that much going on at all. It’s just the financial world having a few problems that doesn’t really affect me. Well, it does affect you!

And in actual fact there is so much going on that everytime I think, ‘I’ll write about that’, another chess piece either moves or falls which changes the importance of what I was going to discuss here. And they make moves that I didn’t know even existed in the game. It’s fair to say that the media actually seems to be keeping up with a lot of this stuff, but as the editors either don’t know or don’t understand the levels of importance then it is difficult for them to explore what is really happening.

Like last week, for instance, with the Fed cutting rates by 0.75%; it’s like trying to push the QE2 with a piece of string. But what else can they do, at least they are attempting to do something, unlike our central bank which has its hands tied by a mandate of watching inflation. Still, it does look like Mr King has had his ties loosened just a little as he has been hinting that he will let inflation rates rise slightly. I think I’ve mentioned before that if inflation is bad, recession is a 100 times worse, but what I haven’t mentioned is depression, and that’s 10,000 times worse and if the central banks don’t act in the right ways that’s where we could end up. If that happens then ‘All Bets Are Off!’.

So, the question is how much longer is Gordon Brown going to fiddle whilst our economy burns? If he had actually understood what was going on then there is a damn good chance that the very worst part of this credit crunch could have been averted. If, for example, he hadn’t sat on his hands when the Northern Rock crisis landed on his desk and instead he had just helped the ‘Lloyds buy out’, then this whole thing could probably have been contained by the central banks. Instead, because he didn’t understand the ramifications of his actions and because he didn’t understand that it would cost him more to go down the road he actually went down (in other words, he can’t add up very well), he opted for what looked like the path of least resistance and therefore we had a run on a British bank (unthinkable, even as I type now!).

But there is a glimmer of hope at the moment seen last week when Bear Stearns fell the Fed and JP Morgan moved to buy this fantastic business (with a cashflow problem caused by a lack of market confidence) for a few cents on the dollar. What kind hearted individuals ;-|. When I saw this happen my natural sceptic came through as this sort of thing is exactly the way I’d plan business takeovers, that’s if I was playing a board game and it wasn’t real life. The trouble is this is real life and I think they are still playing as if it’s a game. Which, of course, at their level, for them at least, it is; I was always too nice to be in real business :-)

Anyway, that said about JP Morgan (the first real blood letter in this crunch), they and the Fed stepped in and sorted this out because if they hadn’t then Bear Stearns could have been the domino that toppled them all. In my opinion at the moment the dominos are running off in so many directions that I think that there is every likelihood that they may not be able to contain all of the possible fall outs. The question in my mind is will they stop it, or rather can they let it carry on until all of the big players have had their next to free company like Morgan/Stearns.

Interlude – Before I could hit send on this article, I saw that JP Morgan have had to increase their bid from $2 to $8 or $10 (didn’t catch the exact amount) because the shareholders have worked out that if Bear Stearns were allowed to go bankrupt then because of the favourable rules for bankruptcy they would get considerably more than a sale to JP Morgan. Will these pieces ever stop changing direction?

But that’s the sceptic in me. If the Fed and JP Morgan hadn’t stepped in when they did, then as one commentator I read said this would have been an ‘Extinction level event’. I am not sure if it would have been or not, but in all likelihood he may have been right, as Bear was a major counterpart to virtually every important financial player in the world. So its insolvency would effectively freeze the assets of many hedge funds and other liquidity providers which, of course, could and probably would cause the financial system to seize-up. Then the American economy would have turned from a recession to a depression. The real difference is that one is caused by economic forces and the other through economic mis-management. Now I am a strong believer that our housing in this country is independent from what happens in the American market to a degree, unlike most pundits you’ll see on the media, but at their level we are not! So if you think Bear Stearns had nothing to do with you then you’d be right, but if the Fed hadn’t stepped in you’d be wrong, really wrong.

But the real change came about last Sunday. I believe this happened when the Fed changed their rules on security for borrowing. Now this is the biggest thing I’ve seen for a while. What happened was that they usually just let the big boys come up to them with their Treasury bonds as security and borrow against them – you’ll have seen in the media that the Fed are releasing another £200 billion and it didn’t seem to make any difference as the market confidence didn’t return after each new release of funds.

Well, after last week, they can now bring their Mortgage Backed Securities as security for Fed loans. Don’t underestimate the importance of this one as this on its own could return confidence to the banking market. Now all the main players can take their MBS’s to the Fed and borrow against them at exceptionally good rates.

Now if the Fed had done this the week before then Bear Stearns may not have folded. There’s a big outcry against the Fed making this move in the money markets as mortgages have never really been liked by the money men. It was only in the late 80’s when they found a way of packaging several into MBS that mortgages left the domain of small banks in America.

Now the Fed haven’t lowered their guard all the way to let just anybody with MBS turn up at their door. At the moment they are restricting it to the likes of Lehman Brothers or Goldman Sacks etc., but this lowering of criteria is an enormous step.

What worries me is that they haven’t moved quickly enough and there are several others about to fall. Don’t get me wrong, that could well be part of a plan. I just hope the Central Banks email and phones stay working if they are making such a risky play.

So what does all this mean for us on the other end of the scale borrowing money?

Well, I haven’t got time to finish this today, so I’ll write it up tomorrow :-)

Best wishes

Andy

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Are The British People Over Geared?

By Andy Shaw | January 23, 2010

Originally Posted 25th March 2008

I was doing some research the other day to do with what’s called ‘The Pitch Document’ for our business Passive, and I was asked to find some research from a recognised professional that backed up my argument about the fact that the country is not over geared despite what the media says.

Well here’s quite a good one that I thought you’d like too -
Read the rest of this entry »

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House Prices Hit New High

By Andy Shaw | January 23, 2010

Originally Posted 24th February 2008

There was an article in the Daily Express the other day, which as we all know is very well known for it’s factual journalism. Also as we all know the Express’s job is to sell newspapers, and how they can best do that is not by saying what everyone else is saying, but by saying the opposite, as being different = more chances of different/new customers.

Read the rest of this entry »

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It’s a shame we live in a country that only has the illusion of a democracy

By Andy Shaw | January 23, 2010

Originally Posted 6th February 2008

I was writing an article this week on the credit crisis, and I started to go off track and discuss who is likely to win the next election. So I stopped it because it was too off track, but here it is now.

Before I start I would like to make my political affiliation as clear as I can.

Read the rest of this entry »

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“…Worrying about inflation at this time seems like fiddling while Rome burns.”

By Andy Shaw | January 23, 2010

Originally Posted 4th February 2008

For those who have followed my comments for the last few months I have often mentioned David Blanchflower as the only person on the Bank of England’s Monetary policy committee that seems to understand and is actually even capable of looking at the economy of this country and reaching the right conclusions.

Popular thinking would say that if eight of the countries so considered greatest minds voted one way, then it is likely they are right and the sole voice saying, ‘no, the way out is this way’, obviously must be wrong. The eight I’m referring to were the ones who voted to keep rates on hold.

The problem is that the MPC have a mandate to control inflation and they are waving that and saying we are doing nothing wrong. However, to quote David from a recent Telegraph article as he hit out at the other members of the team, ‘worrying about inflation at this time seems like fiddling while Rome burns.’ A member of the MPC stepping out in this way, probably means he won’t be there for long which is, unfortunately, very unfortunate for the economy!

I couldn’t have put it better myself. Now David did take a while to reach the same conclusion that I’d reached several months before but its better to turn up to the party late than never show at all. I was silently hoping that Mervyn King was for the chop at the end of his term, but unfortunately as he’s on Gordon Browns leash that wasn’t likely to happen.

I have to admit I said a silent prayer for the British economy that they might just make David the Head of the Bank. I thought at the time, ‘It’s a long shot but it might just work.’ Well that failed as Mervyn King obviously promised to perform more tricks, like doing as he’s told and screwing up the economy just so that he keeps his job and Gordon can have more fake inflation figures. Mervyn is now the worst example of a jobsworth that I have ever seen and I really don’t think I am exaggerating here. Given the fact that this man has an extremely keen intellect, this is very worrying.

A further quote from The Telegraph:

”Acknowledging the threat of inflation, Professor Blanchflower said that nevertheless the immediate priority was to avoid following the US economy and prevent a downward spiral into recession, and added that a downturn in the US would likely lead to a fall in oil prices.

”He was in support of the decision by the US Federal Reserve last week to make an emergency rate cut and said that the Bank of England should be similarly pre-emptive.

‘”It is time for the MPC to lead, rather than follow,” he said.’

Now I’m against a rapid rate cut, and I don’t think that this is what David is saying here. I think what he is saying is exactly what I’ve been saying, that they should be lowering rates in small bites and often. And at the moment ‘often’ means monthly!

Another article comments about how the International Monetary Fund tore up its growth forecast for 2008. And it warned that damage from the credit turmoil has reached the point where governments may need to ignore the rule book and resort to radical measures. I can’t help thinking, finally the people who make the decisions are waking up to the few of us who have been screaming at them, ‘there’s an Iceberg in front!

Dominique Strauss-Kahn, the IMF’s managing director said, ‘What is clear is there will be a serious slowdown,’ and, ‘I don’t think we would get rid of the crisis with just monetary tools. A new fiscal policy is probably an accurate answer to the crisis.’ Is there any chance that Mervyn King or his owner, Gordon Brown, could try listening to this guy. Chances are not as Gordon is now fixated with just trying to come up with a way to regain his air of competence – to say that’s unlikely is at best an understatement.

I thought this next comment said what I’ve been trying to put into words for months:

“The worst blunders in modern economic history have been made by exaggerating the inflation threat. The Bank of Japan over-reacted in 1990 when inflation jumped briefly to 4pc. It proved to be a false alarm. The bank’s tight money policies compounded a downward economic spiral. The US Federal Reserve made similar errors in 1930, mistakenly believing inflation to be a lingering threat.”

Now any reference to mistakes made in 1930 worries me at this time. As even though I can make money out of times like this and plenty of it, I do not like to profit while others are suffering and at the moment that’s where we are headed full throttle.

The BoE are looking at the same or better indicators than I am and yet they are still reaching the wrong conclusions. I don’t know how they are doing this, afterall they have been taught to read them and I’ve have never been but then again I was never taught to buy property well either.

The problem is that inflation is the target, and as always it seems that hitting a target is more important than economic survival. The country has the worst budget deficit by far of all the G7 countries and at 5.6% is well over the EU’s legal limit of 3%, which of course really does leave interest rates to stand alone in the fight to protect the economy from recession. (i.e. 5.6% is nearly double – so why are the Conservative marketing department not making more of this little gem? I think at the moment their marketing department has so many awful stats to choose from that it really is spoilt for choice for what it can hang it’s hat on to win the next election. Either that or it’s just inept!)

Trouble is I get the feeling that Mervyn King and Gordon Brown will cripple the country in an attempt to hold back the tide of normal house price inflation. Maybe that’s me looking at it on too small a level, but it’s just a feeling I get. As I’ve always said they don’t understand the market, never have and never will. But that doesn’t stop people in power thinking they have the power to control the tide, as Margaret Thatcher said, ‘You can’t buck the markets.’ The trouble for them is they are fighting human nature, and human nature when faced with an insurmountable problem finds a way to deal with it on and individual basis. The property market is all about A property, not A market.

Best wishes

Andy

PS Here are the articles if you want to read them in full:

www.telegraph.co.uk/money/main.jhtml;jsessionid=54YMQALOVNU1HQFIQMFCFF4AVCBQYIV0?xml=/money/2008/01/28/bcnmpc128.xml

www.telegraph.co.uk/money/main.jhtml;jsessionid=54YMQALOVNU1HQFIQMFCFF4AVCBQYIV0?xml=/money/2008/01/29/cnmpc129.xml

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The Credit Crunch – As Karen Carpenter said – ‘We’ve Only Just Begun’

By Andy Shaw | January 23, 2010

Originally Posted 2nd February 2008

There’s a lot going on behind the scenes at the moment with the credit crisis and the Fed, even though they have openly cut rates by 0.75% and then 0.5% to try and give the look of having some sort of control. Yes, I know what you’re thinking, it doesn’t look like they are in control, and you’re right, but they actually want to cut more but they can’t cut too fast because the potential of a market collapse.

So at the moment the Fed is trying to look like an only slightly flustered Duck, yet its feet are paddling away as if there’s a dozen hungry Chinese chefs chasing after them.

I’d say that the rates which are currently at 3% in the US will be down under 2% as the Fed are trying to set the scene for the banks to trade their way out of trouble – Help me, Obi-Wan Kenobi; you’re my only hope!’. Obviously this causes large inflationary pressures, but I’ll come on to that in a minute as currently there is a much bigger problem to deal with than inflation.

You remember I said about the financial markets being so highly geared and that when one domino fell then another could topple after it and then the whole market could topple over. Well the first domino was the sub-prime crisis £300 – £350 billion, and as yet less than half of it is accounted for. So there’s still uncertainty there. Well this fell and pushed against the next domino. I thought that the next one would be the hedge funds (which would spell total disaster) but it wasn’t them. Well the next domino is falling and starting to put pressure on the others but the Fed and others are trying to stand it back up.

This domino is the Monoline Insurers. Never heard of it? Well this is a name that was new to me this week too but it’s only a matter of time before it becomes a term like credit-crunch or sub-prime crisis. These terms weren’t in our vocabulary either this time last year.

What is a Monoline Insurer - Monoline Insurers lend their balance sheets to weaker borrowers so that the weaker borrower can raise money in the global bond markets. Once the bond is insured then the big investors (pension funds for example) can buy it.

The problem is that the big investors are obligated to only hold onto investments that are either AAA or AA. Once they drop below that credit rating then they are obligated to sell. So if you imagine for a second that the insurance backing the bond is valueless, then that means the big investors are obligated to sell. What happens when everybody is obligated to sell at the same time?

Well the price goes through the floor of course. Now this causes the loss of value in several directions which is like sending domino lines fanning off. But coming back to the value of the assets, well they go all the way down to junk value and that ain’t good. So the Fed and others have worked out that the cost of shoring up those companies is going to be far less than the cost of the bonds becoming valueless.

I was chatting to my economist friend this week and I asked, ‘is the crisis as bad as when the third world debt couldn’t be repaid in the 70’s?’ His exact comment was, ‘Far worse, the only difference between now and 1929 is that the central banks are talking to each other.’ Now that’s saying something!

The early estimates for shoring up these insurers is another £300 to £400 billion. Somewhat less than the £1.2 Trillion if the credit worthiness of these bond insurers comes into question. But the early estimates for the sub-prime crisis were nowhere near what they ended up being. So the Fed is trying to come up with ways to stop this before the insurers have to announce the problem and therefore have the bonds value rating dropped. And so is Warren Buffet amongst others. From what I am told he is looking at using Chinese security to bolster up the Monoline Insurers. Which will of course solve this current problem if he and others can pull it off.

On a side note this cheers me up as a few years ago I predicted that Warren Buffet would overtake Bill Gates as the worlds richest man. Then he went and gave nearly 50% of his money to Bill for his foundation, so it looked until this week that my prediction wasn’t going to come true. However, I’d say that Warren is currently structuring the deal of his lifetime and the obvious question comes out, what next? This means that this won’t be the only deal he’s putting together.

Moving onto inflation - Well lowering these rates is going to cause inflation to rise, and to quote my economist friend again when I asked the question, ‘what are they going to do to keep some sort of control on that?’ He said, ‘when your roofs on fire, you don’t mind facing the terrorists in the garden.’ Which basically means if we stay in the house we’re dead, so at least we stand a chance facing the terrorists outside. I can’t help thinking that this is no way to run an economy :-)

The trouble is that this is how big business really makes money. They make money whilst everyone else is panicking so for those with plenty of cash or security right now is a good time to make enormous profits. Big business and the banks may or may not have orchestrated this crisis (that’s down to the conspiracy theorists to figure out for evermore), but the fact is that those who survive and have large cash reserves will win the spoils.

So, what does this mean for us buying little 1 & 2 bedroom properties?

Well frankly nothing’s really changed, there are lenders willing to lend, as they need to make a profit, so I would say that as rates go down further (which they are now certain in my opinion to do so) I don’t think the lenders will be passing on all of the rate reductions. They’ll want to make a higher spread on the money they lend to you.

But for the next few years we will see lower interest rates, so avoid the fixed rates at the moment if I were you. I think the Fed will drop down to 2% or maybe less and I think that Sterling could easily go down to 4% again, that’s once the spin doctors have figured a way of selling higher inflation to the population without public sector inflation rises J (prepare to see some strikes). Also on a personal note I am steering clear of any longer term tie-ins than 2 years at the moment, as the banks will have to raise rates after this crisis to curb inflation. And in 2 years time I’d say it’ll be on the upward turn so that would be a better time to lock into say 5 years. But I’m only guessing here, as frankly we’ve never seen a series of situations like this come along in our lifetimes. So I’m having to rely on human nature, my instinct and as usual deciphering the truth from all the rubbish out there.

The trouble is that Gordon’s spent too much and that means taxes are going to have to rise as the economy is not in nearly as good a shape as he says it is. It is good for us property investors, all the factors make it probably one of the best markets ever, but the economy as a whole isn’t good. Oh, and don’t be fooled by the fact that the headline rate of tax is lower than when he came to power, as an average thanks to stealth taxes I think we are all paying about an extra £1,350 per year, or something like that!

When it comes to politics, I think its safe to say for now that all the conservatives have to do is show up for the next election and they’re in. Which isn’t good for democracy, but then again we don’t really live in a democracy, do we? – but that’s for another time.

Yes, but what about us?

As for whether it’s a good time to buy property then the answer is yes, it’s always a good time to buy property. You should know that by now. But now the rules apply harsher than ever:

1) Know when you are going to get your money out (at least within 2-4 months of when you think it will be)

2) Know you can get the valuation you need before buying (at least within £10,000 of what you think you’ll get)

3) Re-finance as quickly as possible, get your money off the table and back onto your credit card or drawdown facility (try not to use Mortgage Express on the ‘in’ as you don’t have to wait for 6 months to re-finance)

4) Protect your cashflow at all costs. Do not use your reserves to purchase right now, even if the deal looks stonking. Protect your 34% reserve.

5) If you are already into your 34% reserve, then stop buying property and work on raising credit to get you back to that reserve – it will pay you dividends!

Remember the market doesn’t fall like the stock market it takes time so don’t completely ignore the press, but then don’t trust them wholeheartedly either. You are not buying in the property market, you are buying A property, from A motivated seller. Always keep that in mind while the so called experts are trying to get to you.

Remember you can increase the sellers level of motivation with your knowledge of how bad the crisis is right now, so use it to lower the price and get better deals. Then use it again to get higher re-valuations. You are selling to each person, the vendor and the valuer, it’s just a different sales line.

I’m going to be covering more on this but I thought this was enough to take in for now (and as I digest it all myself :-) ).

Best wishes

Andy

PS As I said recently I have never seen a better time to buy than right now. For example, we pulled a deal this week for £69,950 on an expected val after an £8k refurb of £145k.

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Minimum & Maximum Age For Buy To Let Mortgages

By Andy Shaw | January 23, 2010

Originally Posted 30th January 2008

Hi,

I was just arranging a few purchases for my father-in-law. He’s now nearly 66 and his wife is 61, so I had to consider the age problem at the end of the mortgage term. Here is some information my packager sent me on age restrictions for both young  & old on the Buy To Let mortgages. I saw someone was asking the other day about whether they could get a BTL mortgage from the age of 18 and the answer is yes, they can.

Read the rest of this entry »

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Why The Libor Rate Lowering Is Probably Good News For You

By Andy Shaw | January 23, 2010

Originally Posted 24th January 2007

Since the credit crunch I’ve been watching the Libor (LondonInter Bank Offered Rate) pretty closely as an indication of when I think the confidence may return to the banking sector.

Read the rest of this entry »

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USA cuts 3/4% in one go

By Andy Shaw | January 23, 2010

Originally Posted 23rd January 2007

Hi,

I was asked this question and thought you may be interested in my answer.

HI ANDY WHAT DO YOU THINK THE IMPACT WILL BE FOR THE UK BOTH SHORT AND MEDIUM TERM? CHEERS

Hi Xxxx,

These are interesting times.

I’m mixed as to my thinking on the effects of this. From one point of view, I love the way the Americans are willing to change direction and fight to keep their economy out of recession, knowing that they will get a slating from the boffins for cutting so far and so fast.

I would say that I am 85% confident of a rate cut of 0.25% next month, I think they will refrain from dropping any sharper, but I do think they got it wrong last month, and maybe should cut 0.5%, even though any jump like that does show poor financial management.

Still in my opinion, Darling is useless and just a puppet controlled by the worst ex chancellor this country has ever seen. And Mervyn King is a lame duck who is controlled by exactly the same person. I’m hoping Mr Brown lets some reality slip into his figures (probably for the first time) and starts to change his thinking otherwise we could be facing a long period of uncertainty which will badly affect the value of the pound, and therefore the economy too.

I don’t think the way is really going to become clear until the remainder of the 350 billion loss has been accounted for. I think there’s about 200 billion that the banks have still got to own up to, but hopefully with their figures coming out in the next few weeks we should see some reality returning to their balance sheets. Then we’ll have to wait and see what the markets think of that, and whether they believe them.

So I think we are looking at an unknown period for the next few months whilst we are waiting for figures and reactions. I could make a prediction but at the moment it would be just a guess so I’d rather not do that until I’m more certain.

Best wishes

Andy

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What Was Edited Out Of The Bank Of England’s Minutes Of The Meeting This Month! What They Thought You Didn’t Need To Know

By Andy Shaw | January 23, 2010

Originally Posted 20th December 2007

Picture the scene… Posh surroundings, The Bank of England boardroom, Mr King is sitting there and in walks the Monetary Policy Committee members, they sit down and Mervyn breaks the silence, ‘Right where do we start?’

To which the entire MPC team cries out, ‘Well we cut bl**dy interest rates that’s where we start otherwise the countries sc***ed!’

Mervyn replies, ‘Do you really think it’s actually necessary?’ At which point they wrestle him to the ground and David Blanchflour sits on Mervyn Kings head and says, ‘Look this is going to be bl**dy unanimous so we’re not getting off until you agree!’

Then Mervyn said in a sort of squashed muffled voice, ‘Ok, ok…if we are going to actually run the economy properly and not just all pop in for 30 seconds and vote each month. Then we’d better now actually start to look at some of the factors that actually affect the economy for the first time! Then maybe we’ll actually be better at our jobs next month too. What’s more if we also minute what we are now looking at as well, then everyone will know we are not complete idiots! So would it be possible for you to get off my head now David as we can now start the meeting as we all know the outcome?’

Obviously that was all kept out of the minutes for understandable reasons. So after Mervyn agrees that the current direction is bo**ocks and he really has been heading the country straight towards a mountain, claiming all the way that well, that was our mandate. He and the team have now finally agreed that inflation even though that’s their primary mandate has to play second fiddle to the impending collapse of the countries economy. As Homer’s brain commented one day, ‘Brrravo!’

In the minutes they actually said that a substantial loosening of policy is needed, which is the BOE’s way of saying, ‘Oopps we got it wrong and need to shift direction fast. Or none of us will be getting a peerage chaps!’

They are even contemplating lowering rates at a larger than 0.25% at a time, and possibly putting a 0.50% cut in place. Which of course would return it to where it should have been left about a year ago (Of course I enjoy being an I told you so person, it is one of the fringe benefits of being a good predictor :-) ), the chances are that because they left it too long in the wrong direction that now they’ll have to go below this ideal figure.

Personally I don’t like the thought of too large a rate change in any direction. I personally think 0.25% is too big a figure anyway and it should be smaller corrections and more often of 0.10% (but what do I know). I think any rate change takes so long to show the effect that fast rate changes in any direction are foolhardy from an economic point of view. That is of course on the understanding that you have a competent navigator at the controls. Clearly with this U turn we are not in this fortunate position as I have been saying for quite some time now.

On a quick side track… I think this succession of bloody noses that Merv has taken in the last few months actually means that he could be a good choice to keep in the job as it may have taught him some valuable humility. But they definitely need to replace a fair few of the members of the committee including Kate Barker as they don’t get it. And she should know better after putting that monumental report together.

Back to the point. So for me as a person who has 80% of his portfolio on discounted rates this will obviously be good news for my monthly payments! But I bet they wish they’d cut the rate by 0.25% when the US cut by 0.50%, that would have shown far greater competency.

But the really good thing from our point of view as property investors was that the LIBOR rate dropped from 6.39 to 6.21. This was also due to the Central Banks dropping money into the economy to create a good market sentiment. Well the lower LIBOR rate is a good thing as it means the lenders will have more confidence, but it doesn’t resolve the underlying problem.

The Underlying Problem

The problem is that there is a huge amount of cash out there, but the banks don’t want to lend it to each other, because they do not believe their balance sheets. This is because of the uncertain amount of bad debt that each bank has in its SIV’s. Then when one bank says they lost £9.4 Billion of write downs, the other Banks don’t believe them and they all don’t trust each others statements.

Now the first rule of lending is you have to know what you are lending against is solid, but as they don’t know, and they are worried that when the end of year figures go in, will they then be a) accurate and b) truthful.

This is the long term problem and I think the only way this is going to be resolved is if the central banks keep dropping money into the markets on reduced security criteria until confidence is regained. Once confidence is regained then the SIV’s can unravel with a little more privacy the way the banks got round the third world debt in the 70’s :-)

So what does all this stuff mean to us then?

Basically, what happened in the meeting this month is pretty earth shattering where it comes to the Bank of England, even though they only made a small direction change, they have indicated a substantial course correction over the next few months. This is big stuff but because we’re British it is played out as low key.

So that means to us as Property Investors is that over the next four to six months we will probably have the problem of rent coverage not being enough removed once again, and we will bring in the problem of there not being enough mortgages to go around! However, that is countered by the fact that everyone thinks the Property Market is a very poor investment right now. So the majority of people who would normally eat up the available mortgages are currently hiding in the pub where they can find the real countries experts on property.

When I wrote my last article, I imagined that the MPC would have had a 5 to 4 vote win and therefore lowered the rate to 5.5%. This would have indicated no rate change in Jan, probably not in Feb, but then 1 in March and probably 1 in May. However, what they’ve done is move the goalposts (which is good news, well it’s all good news in property, as long as you’ve got an interpreter), so I think it is likely that we will probably get upto 3 rate cuts in the first 4 months of next year and we may even get 4 or 5 by the autumn (obviously the usual caveat goes with this as I am trying to predict a group of people that don’t seem all that bright).

So I think that it is unlikely now that we will have more than six months to make hay and buy property before everyone else figures out that it’s actually still performing. And the economy has improved for the contrarian investor from a risk perspective since the minutes of the meeting came out.

In conclusion

Get buying, it don’t get much better than this! :-)

:-) ), the chances are that because they left it too long in the wrong direction that now they’ll have to go below this ideal figure.

Personally I don’t like the thought of too large a rate change in any direction. I personally think 0.25% is too big a figure anyway and it should be smaller corrections and more often of 0.10% (but what do I know). I think any rate change takes so long to show the effect that fast rate changes in any direction are foolhardy from an economic point of view. That is of course on the understanding that you have a competent navigator at the controls. Clearly with this U turn we are not in this fortunate position as I have been saying for quite some time now.

On a quick side track… I think this succession of bloody noses that Merv has taken in the last few months actually means that he could be a good choice to keep in the job as it may have taught him some valuable humility. But they definitely need to replace a fair few of the members of the committee including Kate Barker as they don’t get it. And she should know better after putting that monumental report together.

Back to the point. So for me as a person who has 80% of his portfolio on discounted rates this will obviously be good news for my monthly payments! But I bet they wish they’d cut the rate by 0.25% when the US cut by 0.50%, that would have shown far greater competency.

But the really good thing from our point of view as property investors was that the LIBOR rate dropped from 6.39 to 6.21. This was also due to the Central Banks dropping money into the economy to create a good market sentiment. Well the lower LIBOR rate is a good thing as it means the lenders will have more confidence, but it doesn’t resolve the underlying problem.

The Underlying Problem

The problem is that there is a huge amount of cash out there, but the banks don’t want to lend it to each other, because they do not believe their balance sheets. This is because of the uncertain amount of bad debt that each bank has in its SIV’s. Then when one bank says they lost £9.4 Billion of write downs, the other Banks don’t believe them and they all don’t trust each others statements.

Now the first rule of lending is you have to know what you are lending against is solid, but as they don’t know, and they are worried that when the end of year figures go in, will they then be a) accurate and b) truthful.

This is the long term problem and I think the only way this is going to be resolved is if the central banks keep dropping money into the markets on reduced security criteria until confidence is regained. Once confidence is regained then the SIV’s can unravel with a little more privacy the way the banks got round the third world debt in the 70’s :-)

So what does all this stuff mean to us then?

Basically, what happened in the meeting this month is pretty earth shattering where it comes to the Bank of England, even though they only made a small direction change, they have indicated a substantial course correction over the next few months. This is big stuff but because we’re British it is played out as low key.

So that means to us as Property Investors is that over the next four to six months we will probably have the problem of rent coverage not being enough removed once again, and we will bring in the problem of there not being enough mortgages to go around! However, that is countered by the fact that everyone thinks the Property Market is a very poor investment right now. So the majority of people who would normally eat up the available mortgages are currently hiding in the pub where they can find the real countries experts on property.

When I wrote my last article, I imagined that the MPC would have had a 5 to 4 vote win and therefore lowered the rate to 5.5%. This would have indicated no rate change in Jan, probably not in Feb, but then 1 in March and probably 1 in May. However, what they’ve done is move the goalposts (which is good news, well it’s all good news in property, as long as you’ve got an interpreter), so I think it is likely that we will probably get upto 3 rate cuts in the first 4 months of next year and we may even get 4 or 5 by the autumn (obviously the usual caveat goes with this as I am trying to predict a group of people that don’t seem all that bright).

So I think that it is unlikely now that we will have more than six months to make hay and buy property before everyone else figures out that it’s actually still performing. And the economy has improved for the contrarian investor from a risk perspective since the minutes of the meeting came out.

In conclusion

Get buying, it don’t get much better than this! :-)

So what does all this stuff mean to us then?

Basically, what happened in the meeting this month is pretty earth shattering where it comes to the Bank of England, even though they only made a small direction change, they have indicated a substantial course correction over the next few months. This is big stuff but because we’re British it is played out as low key.

So that means to us as Property Investors is that over the next four to six months we will probably have the problem of rent coverage not being enough removed once again, and we will bring in the problem of there not being enough mortgages to go around! However, that is countered by the fact that everyone thinks the Property Market is a very poor investment right now. So the majority of people who would normally eat up the available mortgages are currently hiding in the pub where they can find the real countries experts on property.

When I wrote my last article, I imagined that the MPC would have had a 5 to 4 vote win and therefore lowered the rate to 5.5%. This would have indicated no rate change in Jan, probably not in Feb, but then 1 in March and probably 1 in May. However, what they’ve done is move the goalposts (which is good news, well it’s all good news in property, as long as you’ve got an interpreter), so I think it is likely that we will probably get upto 3 rate cuts in the first 4 months of next year and we may even get 4 or 5 by the autumn (obviously the usual caveat goes with this as I am trying to predict a group of people that don’t seem all that bright).

So I think that it is unlikely now that we will have more than six months to make hay and buy property before everyone else figures out that it’s actually still performing. And the economy has improved for the contrarian investor from a risk perspective since the minutes of the meeting came out.

In conclusion

Get buying, it don’t get much better than this! :-)

Best wishes

Andy

PS When he arrived home that night Mrs King said to Merv, ‘How did your day go dear?’, Merv replied, ‘Would you believe David Blanchflour actually sat on my head until I agreed to vote for a rate cut!’

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