Two bits of news out last week. First, The Bank of England held rates at 0.5%. Second, Halifax says house prices dropped 0.6%.
Oh, we’re a fickle lot. There was a time, not so long ago, that interest rates at 0.5% would have had house prices thundering ahead at 50% a year. After all, most houses are bought with debt and cheap debt makes for expensive houses.
Just look at what happened in Ireland. They partied like crazy when they joined the euro back in 1999. ECB rates fell to 3% and caused an explosion in property prices. Prices in Dublin were literally doublin’ and became as ludicrously priced as prime London real estate.
Just imagine if rates had been at 0.5%! If this was three years ago, banks would have lent until every homeowner became a millionaire.
But today, despite record low rates, house prices are sinking across the world; we’re in a typical credit-cycle bust.
- What to
buy as the recovery stalls
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next phase of the UK housing bust
The banking cycle turned South two years ago and debt built up during the great expansion has to get paid back or go bad. That’s why we’re still in the middle of this recession. Here are six confirmation signs…
Six reasons for double-dip trouble.
1. Because the bond market says so.
The bond markets are an early warning signal. When financial markets are worried, money heads into government bonds, the so-called ‘flight to safety’. And when things are really scary, money heads straight for US government bonds. The US dollar is the world’s reserve currency after all. And because of its safe haven status, yields on their treasuries have been driven down to a paltry 0.6%.
Investors want to be sure of the return of their money. The return on their money is neither here nor there.
2. Because the stock markets say so
Stock markets are a lead indicator. That is, they’ll tell us which way the economy is likely to be heading. That’s because the financial markets react quickly (and sometimes violently) to news and views. The real economy takes a little while to catch up.
Even with this weeks rally, the FTSE is still down some 12% since mid April. China’s Shanghai index is 55pc below its peak.
3. Because the Baltic Dry Index says so
The Baltic Dry Index measures international freight rates and has fallen by 40% over the past month. Again, this is a lead indicator. It tells us that international trade is stagnating.
Think about it like this: on New Year’s Eve everyone wants a cab, so you’ll have to pay double. In terms of international trade, it’s like we’re at New Year’s Eve and nobody wants a cab. China’s factories are slowing down, they don’t need those cargo ships anymore – something’s not right!
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4. Because the CDS markets say so
Credit default swaps (CDSs) are a kind of insurance policy on company, or government debt. If you’re holding Greek bonds and you’re worried they won’t pay out, then you can buy a CDS (insurance policy). Obviously, when markets are worried about repayment, it’ll cost more for this insurance. Right now premiums are sky high. Here’s why.
The Bank of New York Mellon reports that the smart money is dumping Greek and Italian debt. Italy’s public debt is the third largest in the world after the US and Japan. Now, if Italy’s debt becomes a Grecian-like no-go area, we’ll be straight back into another banking crisis.
5. Because the central banks are withdrawing liquidity
World-wide, the central banks came together in early 2009 and lent the banking industry cash as the financial system stared into the abyss. But these special funding deals had a time limit. And time’s up. The FT reports that Spanish banks have been begging the ECB to extend their scheme. Fears are growing that interbank markets could shut down again.
6. Because the Governments are finally accepting the inevitable
Like the rest of humanity, politicians are subject to herd behaviour too. Austerity for one beckons austerity for another. Just look at Germany. Having got a pang of guilt over Greece’s austerity woes, the Germans took the idea to heart too. They announced their own austerity measures. So now, everyone’s at it.
Chancellor Osborne isn’t alone in his fight to balance the government’s books. How quickly this game changes! One minute Gordon Brown summons world leaders and organises a spending party, the next, they’re all cutting budgets and upping taxes. Why? Because nobody wants to be the next Greece, shut out from markets and bailed out by its peers.
Safeguard your assets
Evidence for a double-dip lies strewn all around us. Yet most economists refuse to see it. I guess nobody wants to be accused of ‘talking us into a recession’. Well, I don’t mind.
The fact is we never really finished our recession. Credit cycles simply don’t end in the benign way (and yes, I do mean benign) of the last eighteen months.
No doubt the Government will take the blame for leading us back into recession. But the fact is that it was inevitable. When banks go crazy and lend too much money, you’re at the top of the credit cycle.
Brown seemed to think he could stop boom and bust (credit cycles), but Flash Gordon was wrong. Neither he nor his buddies could hold back the financial tide.
I’m expecting the stock market to find it difficult to move forwards in this environment. I’m advocating a generous proportion of assets in cash, as there’ll be opportunities for bargain hunters coming up. We need to keep some powder dry.
I know that interest rates are negligible, especially on stockbroker’s accounts, but I’m not worried about losing out on some interest. I reckon a downward lurch back into recession will be a deflationary affair. This means your cash will be more highly prized than ever. Keep hold of it!
• This article was first published in the free investment email
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