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Taxmans favourite subject

#1 Taxmans favourite subject
13/06/2007 20:52


No not looking after a monkey for grads....

The impending crash (And a good argument) please.

a) UK house prices that keep going up and up – almost regardless of what the Bank of England does to short term interest rates;

b) share prices, that have increased more-or-less in a straight line since the spring of 2003;

c) a boom in takeovers of companies, financed by borrowing, and a great wave of repurchases of shares by companies, again funded by debt.

Now, a fall in longer term interest rates is simply the corollary of a rise in the price of certain US Government bonds.

And what has kept the price of those bonds high has been two trends.

A) the accumulation of vast foreign exchange reserves by China, Japan and other (largely Asian) exporting nations, which have been invested in US government bonds.

B) A decision taken some years ago by large insurers and pension funds to become more risk averse, and reduce their exposure to shares while increasing their holdings of bonds.

For some years long-term interest rates have been significantly lower than they should have been on the basis of their normal historical relationship with short-term interest rates and the health of the global economy.

Which is why what has been happening over the past few days is important, though largely unreported outside of specialist financial publications that i read vis: there has been a sharp fall in the price of 10-year US government bonds, known as US Treasuries, and thus a precipitate rise in the benchmark price of borrowing for ten years.

Indeed only yesterday, the yield on 10-year US Treasuries rose to its highest level for more than five years (to 5.27%).

This is much more important to all of us than what the Bank of England does to short-term interest rates.

For example, the rise in these long-term market interest rates pushes up the price of borrowing for our big banks and building societies and will probably feed through to the interest rates on new fixed-rate mortgages.

Now in order for BOE to repay its borrowing it has to pay the capital and interest, and your house is its meal ticket. There is no difference to BOE between £300k in a box under their bed and £300k in your slum in slough apart from your slum @ 5% is paying interest above what used to be the US Treasury interest was to BORROW money.

So BOE borrowed at 2% from USA and re-sold to mortgage debt and coined it back @ 5%.

If nobody can afford a house this hits borrowing across the G8 and indeed will lead to a correction in the market NOT the interest rate.

Your thoughts my dear 'beacons' of intelligence?

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#2 RE: Taxmans favourite subject
14/06/2007 12:12

Danny to Taxman (#1)

Well of course you are essentially correct in the longer term. The problem is no one can be sure what the longer term is any more, due to numerous distortions which have been used to extrapolate the normal macro-accountability, and put off the evil day. Ultimately however the excess global liquidity bubble must burst, since it is now unstable. The longer it takes to occur in fact the more disastrous will be the consequences when it eventually does. (We will all have to face up to reality eventually.)

You seem to have omitted the part which derivatives and hedge funds have played in the excess global liquidity, and the effect of the so-called "Carry Trade", due mainly to Japanese interest rates of zero or near zero. It has well suited the current profligate Western politicians not to take any sensible action to limit the various liquidity abuses, because their policies have destroyed most of the West's original dominance in manufacturing, technology, and other real- wealth generating economic processes. China of course has been able to fill the gap at near zero prices to the distinct temporary advantage and salvation of inept and downright dangerous meddlers like Brown, who has been protected from the reality of his economic tinkering (so far), particularly with a supposed low level of unemployment due to the public sector now employing half the working population, and actually believes that this is all due to his own skill, instead of understanding the real reasons!

There is an inevitable house price crash on the horizon and this time it will be much worse than the last. The problems of all-round corporate and private debt are going to cause an eventual global implosion, particularly with Private Equity, which has become the new form of corporate asset-stripping, entirely dependent upon ridiculous and downright dangerous high-gearing. All it needs is one significant derivative provider to have liquidity problems and this could then act as a pack of dominoes. (Evidently there has already been at least one near miss like this.)

Some are suggesting Gold, Silver, other precious metals or commodities as the best protection against the inevitable high inflation which will result when Western governments will soon not be able to meet their fiscal commitments in any other way. The best reasoned advice is to have a balanced relatively low-risk portfolio, and not hold onto any more than one habitable property, other than perhaps undeveloped or agricultural land.

It has just been announced by an authoritative source that leading scientists and oil experts are suggesting that global oil supplies will run out sooner than previously believed. This could be another cataclysmic trigger.

Meantime, eat drink and be merry, since tomorrow many may not have much money anymore, and may have nowhere to live?

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#3 RE: Taxmans favourite subject
14/06/2007 12:41

anon to Danny (#2)

Why worry about problems that you cannot influence?

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#4 RE: Taxmans favourite subject
14/06/2007 13:58

Anon to anon (#3)

Because an intelligent man can profit from all situations.

This is all very gloomy (except I don't have a house, and don't intend to buy one for at least a few more years). Do you two really think the crash is imminent?

I remember Robert Preston (the bbc business editor) saying something very similar...

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#5 RE: Taxmans favourite subject
14/06/2007 14:44

friday to Anon (#4)

40 yrs of oil left, said the FT yesterday (quoting BP). Would like to hear other people's coping strategies here.

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#6 RE: Taxmans favourite subject
14/06/2007 17:10

Taxman to friday (#5)

40 years of oil.. Ill be retired.

My children however will need heat and food....


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#7 RE: Taxmans favourite subject
14/06/2007 19:13

friday to Taxman (#6)

Taxman, in spite of risking to be seen half crazy, I have thought about it seriously for a while.

Of course, my arguments were less sophisticated than the ones you used. Its more a gut feeling. The way I started thinking about it is by tracing paralelisms between the economy and a human body. How there seems to be a slow slow decomposition of the economic tissues, of the social bonding. How humans seem to be losing, from the social point of view, the ability to identify each other. How we become a mass (totally different organism) rather than an individual. When we lose that, we also lose the ability to see human beings and start seeing only objects. Its a bit like a very very slow death, isnt it? When we see only objects in others, we become objects ourselves.

And, you see, this is the natural dying process, from which other organisms rise.

Its funny how our brains are wired to think sometimes.

Anyhow, I see a trade-off here between how far away you want to be and the conveniences/money/power/fame you might leave behind.

I always favored NZ, but I have fallen in love with a girl who wants to stick around Europe. I would gladly consider some parts of the north and mid west of the US. Australia, I believe, has a big long term problem: increasing desertification, water shortages and stronger climate shocks (all interrelated).

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