Tuesday, January 22, 2008
Posted by David Smith at 08:45 AM
Category: Thoughts and responses

Equity markets did not respond enough last year to the risks of US recession. This year they have, dramatically, hence the fall since the start of the year and the rout over the past couple of days. Does it tell us there is going to be a world recession? No, or at least not yet. After four years of powerful growth, roughly 5% a year, the global economy will slow, possibly quite sharply, but a recession is highly unlikely. America will be a closer call. Central banks will cut, and probably more dramatically than they would have done.

Watch stock markets, but also watch the oil price. It is down 15% from its $100 peak and is telling us about global growth prospects. In the meantime, what about the role of the ratings agencies? The downgrading of bond insurer Ambac from triple A to AA rating was one of the triggers for the sell-off. The agencies failed to spot problems in sub-prime backed securities on the way up and are now helping push the markets down. Not very impressive.


You're not saying that Fitch shouldn't have downgraded Ambac are you? In fact they should have downgraded ALL these monolines months ago. ACA actually had to be delisted from the NYSE before they got downgraded. MBIA/Ambac credit default swaps are all trading at deep junk levels, 70% risk of default over the next 5 years. How can CDS markets imply 70% risk of default for companies still rated AAA?

Rating agencies and their model will be buried once this mess is fully unwound.

Posted by: Minh at January 22, 2008 12:39 PM

No I'm not saying that. In fact, I'm more or less agreeing with your final point.

Posted by: David Smith at January 22, 2008 01:25 PM

I started investing in the stockmarkets for the very first time last year - May or June time, right at the top.

I haven't jinxed it, have I?

Posted by: Paul C at January 22, 2008 01:31 PM

It was interesting watching Newsnight's 'shadow MPC' Tuesday night. Lord Lawson was saying quite explicitly that he feels we've been out on the razz for to many years and we're about to have to dose ourselves for the mother of all hangovers.

I've been saying this for the best part of five years, that the longer the credit boom went on the uglier the correction would be.

What perplexes me somewhat is why we're starting to hear a chorus to this tune now. Is it that everyone wants to seem wise after the event or that most of the media were unwilling to follow a contrarian line? (credit to our host for sticking to his bullish line and to the Telegraph's Edmund Conway for having broken cover ahead of the guns).

I suspect it's going to get ugly. I had a good chat with a friend of mine at the FT a few months back. I was arguing that economics is 80% psychology. He replied that no, economics is a mathematical science, but that to understand markets 80% of the science one needs to apply is psychology - an important distinction.

Sentiment seems to have turned. Perhaps not decisively as yet in as much as it could still be dragged back around but that looks to be a somewhat Herculean task - even for the Fed.

I fear that strongly negative sentiment will give the UK housing market a severe shock as buyers dry up (as the figures already sugget) and as late to the market BTL investors dump stock as capital returns evaporate and the rental returns no longer stack up.

The other key downside factor will be reduced lending and asset price downturns hitting consumer spending.

I've heard it argued that a weaker pound could spur exports to Asia. If that is all that stands between us and a recession let's hope Asian sentiment holds up.

Am I being unduly pessimistic?

Posted by: jonathan at January 23, 2008 11:51 AM

New-purchase mortgage approvals were down 38% in December 07 from December 06. If the trend continues the housing market will soon present what Estate Agents might describe (without realising that they are geniuses of irony) as 'an excellent buying opportunity, especially for first time buyers, as property has become affordible again'.

Anecdote - my father has 12 BTL properties bought in the 90's. Six of those have just been put on the market. The exodus is beginning even for old hands and will be accelerated by the new CGT regime. Recent BTL entrants are in deep s.

Posted by: T Gumbrell at January 24, 2008 07:32 PM

This is just the data for the banks of course, with one big player no longer present. The test for the wider series is whether and by how much it falls below its 2004-5 lows.

Posted by: David Smith at January 24, 2008 07:46 PM
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