Thursday, 6 November 2008

Mr Shiller...Mr Shilling?




Thanks Andrew for the video.

For some reason, I have been in the same view as Shiller in term of pessimism in the past year and a half.

There is a risk, non negligible that stock markets could revisit their 1996 level , same for housing. If such thing happens, then we will be fighting a depression not a recession.

Let's just hope that the later will happen - just a longer than usual recession. I'm more in the camp of a more severe than usual recession albeit still a recession that will last at least 2 years but then it will back to growth but a slow growth.

But no one can predict the future, at least one can manage risks: no more debt, more saving and holding into the current job...at least until the storm unravel...

6 comments:

Anton said...

"U.K. house prices fell at the fastest pace in at least 25 years, strengthening the case for the Bank of England to lower interest rates today, HBOS Plc said."

I think what we have is worse than 1990...at least in the UK and US.

Not sure about the rest of the world.

-Anton

Charles Monk said...

Is it really wise to get rid of your debts, if we are about to enter a period of negative real interest rates? I rather like the idea of my mortgage principal eroding all by itself.

HousingFinland said...

"Is it really wise to get rid of your debts, if we are about to enter a period of negative real interest rates?"

How about during a deflationnary period?

To be franck, taken debt or more debt today is foolish, for many reasons:

1- Interest rates will fall to 2% or lower maybe 1% in the euro zone

2- House price will lose about 20-40% in values in the next 3-5 years.

3- More company will go bust or restructure (Technology and Forest companies) in the year to come, with probability to have more fire sales pushing prices lower and could have a contagion effect into the overall market ...

Is that wise to pile up debt to buy assets that are, today, inflated?

As the ECB told today, during its press conference: "after a boom, we have a bust" - Jean Claude Trichet, 06 Nov 2008

Should I buy at the top of the boom? ...I will not give such advise, as it could have devastating effect people finances, stress level and ultimately quality of life.

So for the people who have not wake up to the reality, the world has changed, precisely on the 15 sept after the failure of Lehman Brother and its massive implication...

Last, I'm not telling for people to sell or get rid of their debt, I'm just telling people to be very very carefull if you plan buy today or take debt...simply because, some might not be aware of the situation...and that's all about this blog...to put information that newspaper will put after the event...

Charles Monk said...

Yes, this is a different question from whether to buy any assets (with cash or borrowed money).

I only meant about existing debt, and I mean low-cost, long-term mortgage debt. Should you use cash to pay it off, or keep cash liquid and leave the debt standing? Holding the cash might be smarter, I think.

Deflation/inflation would have the same effect on both cash and debt, wouldn't it? It's a question of the rate relative to the interest rate.

HousingFinland said...

I think the ECB will let interest rates low, for a quite long period. As low as 1% from 2009 until 2011? At least it might be forced to approach, its main rates toward the zero level because the deflation forces are far too great to fight and far too powerfull - these forces were build over two decades, through the build of an unprecedented credit expansion and the use of derivatives...

During those time, house price will have to come down, and will come down, that will be the primary asset that will deflate along with stocks, but who knows by how much?

People will be angry and will show it through voting toward the extreme...The politicians will have to be smart and concentrate on trying to maintain social cohesion..unfortunately no one country can do it alone. So coordinated Fiscal move will have to be handle at European level if not orchestrated by the IMF.

Now if you are still interest to buy a house, then I will advise, to make such a move, once the market or economy show clear signs of stabilization, to make housing investment(so maybe in about 2-4 years time(at best?) from now. Stock market will recover much earlier as it corrects much faster (liquid market)), that will give you some early signal that the worse is behind...

In that sense, if such scenario happens, I will advise then , in order to buy a house (most probably at a discount of -10% to -50% depending on the location):
- Trying to take a fix rate loan for 15 to 20 years loan at hopefully low rate (2%?) , rate will be low especially. But if deflation is the real threat, be prepared to see the housing price to carry on declining, albeit at a smaller pace (something observed in Japan or even Germany and during some period for most developed countries)...

Again, I repeat, everyone financial situation is different. So anyone should seek personal advise that fit him and his budget. I would advise as well to follow common sense on top of high paid advisers...
And last, no one is able to predict the future..and forecast made 6 month ago are becoming vintage as more information are coming and need to update the new forecast. i.e what people say today might be wrong in 6 month time...SO BE PRAGMATIQUE AND HAVE A FLEXIBLE VIEW but most importantly MANAGE YOUR RISKS...

last go to gym ad enjoy good time with family and friends. The world has been rolling for thousands years and it won't stop anytime soon ;->..unless Martians attack earth..that will be the subject of another article...

Another point, I understand as well that Central Bankers, Finance minister, IMF and co will spread the message that everything is fine and consumers should keep on spending and housing is fine...at the end those people rely on the fact that money is flowing and that debt is consumed.

In that sense, it is sensible. Should they say the contrary, the current market model will collapse as debt is the "blood" of the system.

They certainly don't want any panic, but this is what they got in October during a week or 2 that forced government to nationalize bank and push Central Banks into coordinated rate cuts. As I said at that time, the patient had had an "heart attack" and the system was almost in the brink of collapse...

Andrew said...

I see the BRIC economies are all now having their difficulties. Brazil also is now having financial problems. The number of lay offs around Finland has been significant in the last few months and the message from managers is often a similar one of 'sudden deteriation in outlook not forseen in our forcasts'. Credit crunch phase 2 is where the good quality companies cannot raise finances for investments or the future is so uncertain that they cut right back on all unnecessary spending and aim to survive. Asia is probably not going to come to the rescue. They will have their own problems to deal with