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This is the last Money Morning for this year.
2007 has been interesting – in the sense of the old Chinese curse, “may you live in interesting times” – to say the least. And 2008 promises to be even more so.
The UK housing market is going downhill fast. And as we’ve been predicting, we’ve just seen the first commercial property fund ban retail investors from withdrawing their money. Friends Provident has frozen withdrawals for six months – expect others to follow suit shortly.
But rather than make a long stream of predictions about what’s going to happen in 2008 (we’ve made plenty of them in our Christmas issue, out today), I want to focus on what has been and will continue to be the biggest event of this year and next – the credit crunch…
The credit crisis: a brief reminder
It’s easy to get bamboozled by the scale of the numbers and the ridiculous acronyms that fly about when people start talking about the ‘credit crisis’.
But at the base of the problem, for all the talk of CDOs and SIVs and subprime and crunchy credit and all the other little phrases we’ve all become familiar with this year, is a very simple fact that anyone can understand.
Somewhere along the line, someone loaned money to someone else who couldn’t pay it back. That’s it. That’s all there is to it.
It’s been made worse because everyone along the line was making money from writing the loan business, while at the same time, everyone was convinced that they wouldn’t have to take responsibility for the loan if it went bad, because the risk apparently kept getting passed up the line.
So in this particular credit bubble, the quality of the loans has deteriorated further than ever – to the point where a large chunk of US subprime loans made in 2006 went into default before the borrowers in question made a single payment. And worse still, institutions have then been borrowing money to place huge bets on the quality – or otherwise – of these loans.
It’s important to understand this. Because all of the interest-free credit in the world, pumped into the banking system by the Fed or anyone else, can’t change the fact that at the start of this disaster, an unprecedented number of bad loans were written. And until they wend their way through the system, which could take years, banks and all the rest will be unhappy with the idea of taking on any more risk.
Why we could be heading for more write-downs
Anyone who thinks we’re anywhere near the end of the road needs to stop kidding themselves on. The latest story (which we have mentioned in MoneyWeek a few times already) is the trouble facing monoline insurers. Robert Peston at the BBC wrote a nice piece explaining them yesterday: The next threat.
Basically, the monolines are the companies that guarantee all these dodgy sub-prime backed bonds that have been written. They have pristine, AAA-credit ratings. But now, they are in danger of being downgraded by the credit ratings agencies. If the bond insurers are downgraded, then the quality of the bonds that they have insured is downgraded too.
Many pension funds and conservative investors are only allowed to hold bonds that are above a certain investment quality. So if the credit rating falls, we’ll see a flood of forced sales across the market – and bear in mind, that there is effectively no market for these assets in the first place.
That means even more bank write downs – so let’s hope the Chinese and Middle Eastern investors have got plenty more money to spend on ailing Western investment banks (for more on this, see yesterday’s Money Morning: The high cost of spending yourself rich).
So 2008 is really shaping up to be a tough year – but that doesn’t mean you can’t turn a profit. As I said, our investment experts, including Tim Price, Simon Nixon and Sven Lorenz, have all put their thinking caps on and given us their views on which stocks and asset classes to back this year. You can read their views in the Christmas issue, out today. See: Latest Issue.
Oh, and I meant to say the other day, if you get the chance you should read Jeff Randall’s column from The Telegraph this week – here’s the link: Blame game has begun. I’m a bit biased, as he’s defending journalists from the usual complaints by vested interests in the City and the property market that we’re talking the economy into a recession. It’s funny how they never complain about headlines that scream that house prices and shares will rise forever…
And just before I go, have you ordered a copy of MoneyWeek’s “How Much?!” yet? It’s still available to Money Morning readers for just £6.99 (just enter the promotional code MoneyW in the box at the ‘view basket’ stage of your order – you can order it here: How Much?!
Have a great Christmas and New Year – Money Morning will be back on January 2nd.
Turning to the wider markets…
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Bid talk boosts Johnson Mathey
In London, the FTSE 100 ended the day 61 points higher, at 6,345, although off an intraday high of 6,367. Bid talk saw platinum producer Johnson Mathey top the footsie leaderboard. However, broker downgrades saw housebuilders Persimmon and Barratt Developments suffer some of the day’s heaviest losses. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed 14 points higher, at 5,511, despite downward drag from construction stocks. In Frankfurt, the DAX-30 added 31 points to end the day at 7,869.
Across the Atlantic, good results from software developer Oracle boosted tech stocks and offset continuing weakness amongst financials. The tech-heavy Nasdaq Composite added 39 points to end the session at 2,640. The Dow Jones added 38 points to end the day at 13,245. And the S&P 500 was 7 points higher, at 1,460.
The tech sector also gave Asia a boost overnight. Gains for the likes of TDK and Hitachi saw the Japanese Nikkei add 225 points to end the day at 15,257. And in Hong Kong, the Hang Seng climbed 609 points to end the day at 17,626.
Sterling near all-time low against euro
Crude oil had risen to $91.16 this morning, and Brent spot was at $91.36 in London.
Spot gold had rebounded to $800.70 this morning, having fallen as low as $793.20 in New York last night on a stronger dollar. Silver had slipped to $14.18.
In the currency market, expectations of further UK rate cuts saw the pound hovering near an all-time low against the euro, last trading at 1.3807. The pound was at 1.9847 against the dollar. And the dollar was at 0.6954 against the euro and 113.18 against the Japanese yen.
And in London this morning, a report published by Ernst and Young today shows that discounting by retailers has been heavier and more widespread this year than last year. Up to 17th December, retailers have been knocking 36% on average off the full selling price of goods. Boots, books, DVDs and CDs have shown the heaviest reductions.
Finally, our recommended articles for today…
‘Tis the season of self-delusion
– Whether it’s the conviction that a January detox can make up for December’s overindulgence, or the way we always manage to block out last year’s family rows, this is truly a time for wishful thinking. Not least in the City. For more from Merryn Somerset Webb on why it’s time we stopped ignoring the falling housing market, rising inflation and very real risk of recession, read: ‘Tis the season of self-delusion
This energy sector is hot and bubbling
– Biofuels cause more problems than they solve, and wind power is just wishful thinking. But there’s one form of renewable energy that could really work – and Southampton is leading the way in its development. For more on an energy sector to keep an eye on, read: This energy sector is hot and bubbling