Why lenders have only themselves to blame for bad debts

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Britain’s borrowers aren’t out for the count yet, but some of them are certainly getting acquainted with the canvas. While consumer lending continues to soar, the number of debtors who find they can’t cope is picking up even faster.

Personal insolvencies hit another record high last quarter, up by 55% year-on-year to 27,644. Mortgage repossession orders are back to levels not seen since the shakeout from the last housing crash. And the numbers are likely to get worse before they get better.

Why? Because the latest cases will almost all involve borrowers who have been in trouble for some months. They don’t yet even reflect those who have been stretched by the Bank of England’s decision to raise interest rates in August, let alone others who will be hit by the all-but-certain hike this week…

The big rise in insolvencies was the result of a huge surge in the use of Individual Voluntary Arrangements (IVAs), which rose by nearly 120% year-on-year. No doubt some of that is due to growing awareness of IVAs and the fact that they offer an easier way out of debt than conventional bankruptcies.

Lenders use this excuse to play down the significance of the rise, complaining that IVAs are being aggressively marketed as a way for people to duck out of their liabilities. But that’s a trifle disingenuous.

IVAs are easier than bankruptcy, but they’re by no means a soft choice. People aren’t opting for them as a lifestyle choice; they’re doing so because they’ve taken on vast amounts of debt that they can never see themselves repaying. That conventional bankruptcies (up 25% year-on-year) and mortgage repossessions are rising as well provides plenty of evidence that this is not a case of a legal quirk allowing reckless borrowers off the hook, as the banks would have us believe.

The trend in mortgage repossessions strikes us as particularly worrying, because both applications and orders made have been rising strongly since the start of 2005. This, remember, is at a time when the housing market is supposedly healthy and still experiencing runaway growth.

If you look back to the last housing bubble, repossessions didn’t begin to rise sharply until the market had topped (whereupon they really took off). When the bubble bursts this time, things could get very unpleasant indeed.

But none of this should be even remotely surprising. Awash with cash in our high-liquidity world, lenders have been handing it out like play money. Then, for some reason, they’re baffled when it doesn’t come back again.

Of course, the sibling of all this silly money looking to be borrowed is the flood of cash demanding to be invested. This money likes to think of itself as smart money, but in reality it’s just as dumb as its brother. For evidence, just consider these two hedge fund stories we spotted last week.

In the first, we read that the new investment frontier is Mongolia. Yes, that’s right: a country whose best known export is still Genghis Khan.

To be fair, Mongolia has a lot going for it long-term, including vast amounts of natural resources. Unfortunately, it also has widespread corruption, terrible infrastructure and other undesirable traits that tend to be associated with markets that are not so much emerging as yet-to-emerge.

The hedge funds are aware of this. But almost as one they plead: “What else are we to do? We need something new and hot to justify our massive fees. Wanna buy a Mongolian Real Estate Investment Trust?”

But Mongolia is far from the worst investment idea currently sweeping the hedge fund world. Another fund plans to invest in football players in an effort to discover the next Wayne Rooney. Words fail us.

They plan to put hard cash into empty-headed, frail-limbed prima-donna players of a sport that has all the financial probity of Kim Jong-Il let loose in Fort Knox. There’s more sense in playing Russian roulette with a shotgun.

Perhaps instead of coming up with whacky new ideas, hedge funds should try to do a better job of managing the investments they’ve already bought into. Over the weekend, we caught up with a friend who works at one of the big commodity traders. These are blood-splattered times in the markets, he says. The price of oil drops another two dollars and a gallows cheer rises up on the trading floor: “There goes another hedge fund”.

Most of these collapses don’t even make the news. Sure, there was the high-profile Amaranth fiasco. And another fund, MotherRock, got a few headlines. But there are plenty of smaller funds out there, set up with just a few tens of millions in the bank. For a while, they made a lot of money from betting on rising energy prices. But not anymore.

Who or what might be next? Right now, we’re watching the copper chart and wondering who might be leveraged long to that metal.

Reading charts is a hit and miss affair, and certainly not the only thing that any investor should base their portfolio decisions on. Nonetheless, the pattern forming in copper at the moment is an interesting one; it often precedes a very sharp drop. And if copper follows oil down, there’ll probably be a few more insolvencies on the cards.

But they won’t be the kind where an IVA is any use.

Turning to the stock markets…


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The FTSE 100 closed 1 point weaker, at 6,148, on Friday – well off a session high of 6,177. British Airways ended the day over 3% lower, following an 8% fall in Q2 profit. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 closed 26 points higher, at 5,336, as strong US jobs data allayed investor fears of an economic slowdown. The German DAX-30 also closed higher, gaining 17 points to end the day at 6,241, with stocks led by a strong performance from Commerzbank.

Across the Atlantic, stocks closed lower on Friday. Despite the positive October jobs data, a surge in long-term interest rates and a spike in the oil price dragged on investor sentiment. The Dow Jones recorded its sixth straight fall, slipping 32 points to close at 11,986. Both the S&P 500 and the Nasdaq ended the day 3 points lower, at 1,364 and 2,330 respectively.

In Asia, the Nikkei closed 14 points firmer today, at 16,264.

The price of crude oil had dipped by nearly 1% this morning, last trading at $58.63 a barrel. In London, Brent spot was at $56.56.

Spot gold hit its highest level since early September – $629.40 -in Asia trading but had slipped back to $628 this morning.

And budget airline Ryanair announced a 24% increase in second-quarter profit this morrning. Net income has risen to 213.4 million euro from 172.5 million a year ago. The company attributes the growth to increased passenger numbers and fares. Shares in Ryanair were up by as much as 2.7% in Dublin this morning.

And our two recommended articles for today…

Why gold is different
– The prices of both oil and copper have fallen of late, prompted (say some) by fears of a global slowdown. But gold could be about to make its next move up. If you’d like to find out why John Robson and Andrew Selsby think gold is such a perennially strong investment, read:
Why gold is different

Can exporters wean themselves off the US consumer?
– Surely, there must be more to a $46 trillion global economy than the American consumer and Chinese producer? asks economist Stephen Roach. But is diversification of exports and growth in internal demand enough to rebalance an unbalanced world? To find out whether China and other exporters are still dangerously dependent on the US, see:
Can exporters wean themselves off the US consumer?


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