will this weeks events cause Recession?

deemy2004

The rise in house prices are a sign of too much money sloshing around the system.

Unfortunately ! The money supply figures don't look good i.e. growing by 11% ! Which means THERE STILL is too much money floating around the system which has the tendancy to flow into asset classes such as housing and equities...

Obviously equities are benefiting and housing is being supported... but its inflation that is the wild card... thus far it has been held at bay... Which is why the most we can expect rate cut wise is 0.25% IF it happens as there are VERY strong underlying inflationary pressures that I am sure are on the BOE's minds.

ivegotabig1

Hi Deemy
I respect your views,as you know.....but i seem to remember a post of yours from a few weeks ago saving that you thought a recession WAS coming, & then your post about the housing market last week saying prices would start falling by about october !! find it a little difficult to reconcile thoes with your current stance..

deemy2004

ivegotabig1 wrote:

Hi Deemy
I respect your views,as you know.....but i seem to remember a post of yours from a few weeks ago saving that you thought a recession WAS coming, & then your post about the housing market last week saying prices would start falling by about october !! find it a little difficult to reconcile thoes with your current stance..

well yeh I agree with BOTH !

Yeh I still stand by the view that the housing market will go negative in or around October

And yes we are trendign towards a recession.. but WHEN ! 18 months ?? Not around the corner ! Thats for sure.

You see, when you put money on a likelyhood i.e. a weakening or strengthening currency, you don't have the luxury of sticking to your opinion regardless...

The economy is awash with money... until something happens to change that - EVEN with a failling housing market - which i STILL expect - It increasingly looks like economy will keep growing but at a slower rate - sub 2%.

Ive got money riding on a economic growth - I'm stocked up to the hilt ! If I thought that a recession was really around the corner I would be liquidating those stocks as the market weakened - which it is not doing.

Housing yes - it is supported by the wall of money - More so than I thought it would - But I am correct in my opinion thus far that sepeculation will move from the housing market and back to the Equity markets AS the equity markets continue to rise ! Hence sharper drops in the housing market culiminating in a sharp drop over 1 quarter, just following the point when the housing indices go negative, probably around October this year.. When it dawns on the speculators - Why am I holding an asset that is losing value when I could be owning stocks that are up 15% in 1 year !!!

so yeh I stand by my housing view... and yeh I stand by my economy viewpoints which are born out by the weakening currency and the strengthening stock market.

NOW ! INTEREST RATES ! Because of the above view - I cannot continence a sustained drop in interest rates and am still of a view that the uptrend will resume at some point..

Now what if I am wrong ? and interest rates fall and keep falling ?

WELL - The currency will continue to fall
The stock market will rise much more strongly
House prices will rise
Inflation will rise
And finally -
Interest rates will rise to check inflation.

so the only loss would be on the exchange rated value of the portfolio and assets.

So yeh, you have to keep watching for news and signs of changing trends, rather than to dogmatically be stuck in a losing position.... Nothing wrong with being wrong - But a lot wrong with not recognising WHEN you are WRONG !

If I there was enough evidence to support a recession just around the corner than that is the direction I would now be leaning - But there isn't so i can't force myself to lean towards somethign that is a losing position until there is evidence to suggest that a recession is about to hit us..

Such signals would be perhaps a sharp fall in the £- were talking down to $1.50
A stock market crash...
A strong rise in inflation to above 2.5% CPI

Where not there yet on any of the above.

ReportInvestor

deemy2004 wrote:

I am correct in my opinion thus far that sepeculation will move from the housing market and back to the Equity markets AS the equity markets continue to rise ! Hence sharper drops in the housing market culiminating in a sharp drop over 1 quarter, just following the point when the housing indices go negative, probably around October this year.. When it dawns on the speculators - Why am I holding an asset that is losing value when I could be owning stocks that are up 15% in 1 year !.

Deemy is not wrong in his view of how the average Jo approaches investment - with a blindfold on, with hope in his heart and invariably with the wrong timing.

http://www.moneyextra.com/news/012255.news.html

"A staggering 97.8% of private investors have failed to identify shares as the best performing asset class over the last two years, according to new data from fund management house New Star Asset Management....

.....Just 2.2% of investors correctly identified that shares had returned the most over the period. The overwhelming majority of investors (62.8%) thought that property offered the best returns, whilst 2.7% opted for fixed income and 3.7% for cash. 28.6% didn't know.

In fact, equities as measured by the FTSE All Share total return index rose 35.3%, according to Datastream. Meanwhile, residential property returned 27.1%, commercial property rose 33.4%, corporate bonds put on 12.9% and gilts gained 9.2%, over the period.......

....This raises a number of important issues. Equities are still suffering negative sentiment, despite significant recovery from their 2003 lows. More worryingly, investors still hold the misconception that the housing boom of the late 90s and early millennium is continuing," he says........"

Pal

The problem is that those stats are completely misleading. It says that:


"equities as measured by the FTSE All Share total return index rose 35.3%, according to Datastream. Meanwhile, residential property returned 27.1%, commercial property rose 33.4%, corporate bonds put on 12.9% and gilts gained 9.2%, over the period."

The figures for both commercial and residential property completely ignore the fact that you can borrow to purchase both. The investment return on your initial deposit and purchase costs could therefore be much higher than 27.1% or 33.4%.

It is however true that most investors are completely incapable of seeing what is actually happening in the world around them, and tend instead to focus on events that may have happened several years ago. They also are far more biased by negative past events (i.e. a stock market crash) than positive past events (10 years of stock market growth prior to the crash and the positive growth over the last 2 years). I read once that this is actually a natural evolutionary response to stop you doing something really stupid twice, like stick your hand in a fire.

Deemy's view of the current economy seems sensible to me.

It seems to me that the main problem we have in the economy at the moment is that all the excess money supply is being created by mortgage lenders and credit card companies lending money to people, and this accounts for ALL of the current economic growth we are experiencing. I have not researched the figures but it seems to me that a country with 11% p.a. growth in money supply should be growing a lot faster than 2-3% a year!

This ties in with the view that almost all of the excess money supply is being absorbed into the housing market by rising house prices.

Eventually consumer's borrowing capacity, or their willingness to borrow, will simply run out = economic slowdown, possibly even recession. Cutting interest rates to boost borrowing only delays the eventual slowdown, as the debts still have to be paid back at some point.

When will it happen? No idea. Could be happening now, but personally I am still of the view that an external shock is required to really damage a fairly strong economy. We still have to see what the oil price rises will do to the UK economy over the next year or so.

deemy2004

Don't forget that Britain is still a big oil producer. So the oil price rises don't have the same Net effect as they do on say Germany, Japan or France or the USA which consume far more oil then they produce.

Britian has reaped a bonanza in oil reciepts since the 70's ... where has all that free cash gone ???

Though oil IS running out in the North sea... since we have passed peak oil production.

Pal

True about oil, we are now a net importer. However we do import a lot of goods made from oil, all of which you would expect to rise in price fairly soon, especially if the pound is weakening at the same time. Add the fact that we consume massive amounts of oil to transport food around (one of the major constituants of inflation measures) and there must be some pretty big inflationary pressures about to come through, which should suggest interest rate rises rather than cuts.

Nasty balancing act for the BoE.

deemy2004

Merlin King appears to be know what he's doing..