October 2008
“Honesty is the recognition of the fact that the unreal is unreal and can have no value, that neither love nor fame nor cash is a value if obtained by fraud.” Ayn Rand (Atlas Shrugged) Some would see the irony that last year was the 35th anniversary of Ayn Rand’s masterpiece. Ayn Rand was one of the modern prophets of Capitalism. Her followers, of which I am one, are in the highest echelons in Business, of which I am not. Significantly Alan Greenspan, ex Chairman of the Federal Reserve and Architect of this current fallout was a keen disciple.
After the events of last week, the cry is for bring Government intervention back into Capitalism. That the period of a Laissez-Faire economic model are over. It’s time to wake up and smell the coffee, which is what Rand’s quotation is all about. So what was unreal? This was unreal: In the 1980’s to buy a house one needed x3 or x3.5 ones income or 2.5 joint income. The average earnings at that time were about £15,000 so a house would in the region of £45,000 – 65,000 pounds. The interest rate being around 11%. Fast forward to 2007 and once more the income multiple of buying a house was x3 – x3.5 of income with the average earnings being £25,000 p.a therefore house prices should be about £75,000 – 95,000. Indeed back in the late nineties this was still the case. But now house prices are averaging £250,000. This means in order to buy a house ones income would have to be around £64,000 if a 10% deposit was put down. Put it another way, the short fall between the income multiple and current house prices shows a deficit of £155,000! That means that most mortgages are over extended, especially for 1st time buyers, by £155,000 of imaginary income.
So what happened? Two things: First’ Interests rates fell to around 5.5% which mean that money was cheap and so more spending which pushed house prices up. So the doubling of house prices only meant that while the value of the house had increased over 100% the cost of repayments were the same as when people were paying 11% on say £100,000. Secondly; People lied about how much they earned, and thus over extended themselves.
“Money is neither lost nor made, it’s simply transferred from one illusion to another” Gordon Gecko
“Wall Street”
And what an illusion, I shall spare you the description of how the banks deluded themselves for so long about whether or not “the King has got no Clothes” namely sub-prime loans. But why? Well for one Osma Bin Laden must be rolling about in his Cave right now. Rewind to the late 90’s early 00’s and we had the Dot.com Boom/Bust that challenged traditional valuation models and unhinged our fragile economies just about recovering from the last recession of the early 90’s. Just when we thought it could get no worse what happened?
BAM ! BAM!
And in 2001 the Twin Towers along with the Pentagon and airline passengers of four Planes shook not only the media audience but also the financial community. With the world economy already shaken by the Dot.com bubble drastic measures were required to stabilise the financial system. Alan Greenspan achieved this by reducing interest rates to such a level that money was dirty cheap and Banks and financial institutions began giving out Credit for anything secured or unsecured.
For us in the U.K we were Bombarded with television programmes such as: “The Property Ladder” showing us how we all can become property millionaires, then “A Place in the Sun” followed by “Location, Location” now we have “Dislocation, Dislocation”. Over the last 5-7 years the U.S Dollar has been suffering from depreciation against all the major currencies and Public funds have been financing one illegal war and another costly foreign policy that creates enemies rather than destroys them. The financial cost and human cost almost incalculable.
But the establishment have sighted the new bogeymen, not Al Quada, but the “Short Sellers” which is utter rubbish. While inflation is riding up and the cost of everything is hitting the ceiling, our Salaries and wages remain steadfastly stagnant. Pay rises of 3.7% are given when inflation is running up at 4.7% i.e a 1% pay cut. Property prices are taking a tumble and those remortgages to fund our desire to mimic the “Lifestyles of the Rich and Famous” are getting ever more expensive. If that isn’t bad enough the Government are using our money through taxes to Bail out companies that contributed to this mess.
We have been here before in the 1970’s and a retro advert of “Labour is’nt Working” is well and truly over due. Trading over the week was interesting, I did very well out the financial mess upon till Thursday then I gave back to the market Monday, Tuesday and Wednesdays profits in the space of 45 minutes! Such is the life of professional speculators. By Friday things were so crazy that our Floor manager told all traders to cut their positions at Market (The market price, to realise any profits or losses) it’s the financial equal to cease firing, or rain stops play. Of course the Stock Market rallied because all the short sellers had to cover their positions and you can only do that buy buying to close your position.
