The end of the beginning

(Must resist urge to sound like a broken record!)

So then, back in January, Halifax announced a rise in house prices.  This triggered the all-too-inevitable round of "blah, blah, it's over; blah, blah, bedsits in Bradford first to bounce!" horseshit all over again (honestly, some people will never learn).  But, as I predicted, that wasn't the turning point.  (Not that there won't be a turning point, but we're not there yet; and then, there's more than one type turning point...)  The cheerleaders then shut up - well, made slightly less noise - for a bit.

But then last month it was Nationwide's turn to announce a rise in house prices.  This was instantly contradicted by Halifax this time, but it's still got people talking.  It shouldn't really generate any conversation at all, since the most accurate of indexes has shown no positive movements whatsoever, but there you go, you can't stop people cherry-picking news and can't stop shysters taking advantage of it.  (Choice quote from the accurate index: "It is the eighteenth month in a row where the annual rate of change has fallen."  You don't get that in the Daily Mail or on early-evening news bulletins do you?  [Translation for the statistically illiterate - not only have prices been falling for eighteen months, but the rate of declines are getting bigger])

Today the cheerleaders are cranking it up a notch, proclaiming that there's only "10% more to fall".  This is just rubbish, there's no way such a conclusion can be reached; more specifically I'm calling bullshit on any form of "down a bit, then up a bit", or even "up a bit and down a bit", predictions (where the measurement of each stroke is given, the shape itself can be predicted usually - it's a cycle, always has been, always will be!); given the vagaries of the factors that apply there's no way any accurate prediction that fits that pattern could be reached - in any market, at any time.  What it is, is a simple exercise in salesmanship, that of setting expectations - "hmm, we're trying to say the market has turned, but people won't believe us when the monthly statistics are still negative..."  (Attention libel lawyers: I firmly believe the people who compile these predictions are all working with honourable intentions and are all fully qualified to do the job; instead my point is that the domain is inherently unpredictable to that level of detail, and that media commentators extrapolate the findings even further into la-la land.  Indeed, in the example of that quoted survey, the researches presented different ranges of findings based on different contingencies; it was the author of the news article which seemed to pick the most happy outcome as a headline and then only grudgingly acknowledged the other outcomes at the bottom...)

I'm disappointed, and a bit surprised to be honest, that the cheerleaders haven't been broken yet; they're more like cockroaches than I thought, and I didn't have particular high regard for them in the first place.  They still keep writing articles in the same hopelessly optimistic tone that they always used, and making the same old mistakes: "Mortgage approvals soar 19% in February".  Well, yes, this is true; but: it's still falling year-on-year (which is an inherently superior measure for a market with such pronounced naturally occuring monthly variations), it's still 75% lower than peak, and it's 66% lower than the conventionaly perception of neutrality.

(You see mortgage approvals are more of a proxy to the rate-of-change of the property market than it is the property market itself, so a 19% 'soar' from such a low baseline is more an indicator of a declining rate of falls not an imminent boom.)

So really that's the only conclusion available is that all the best data suggests that for the past eighteen months house prices have been falling, and falling hard; but the relative shallowing of the mortgage approvals show that rates of price falls should also moderate.

None of this is surprising if you're a chartist.  The classic Nationwide house price graph shows a definite pattern for house price crashes: the prices accelerate downwards until they cross the trend line, then continue to drift down, at a slower rate, for several more years.  And where are we now?  Just reaching the trend line, of course.  So when will the recovery start?  About six or seven years if it follows the same pattern.

Although, here's the real issue (finally, I knew I'd get there eventually): that graph is adjusted for inflation.  So, when it says the trend is 2.9%, in nominal terms it's 2.9% plus whatever inflation was at the time.  It's right to adjust for inflation, after all money has no inherent value, so 'real' prices are more useful than 'nominal' prices for any analytical purpose.

What this means is that the inevitable remaining decline in house prices could be achieved by stoking inflation, thus having little to no effect on nominal prices at all; or even to create positive nominal prices, no-one is going to ask too many questions if that happens (except me, and a few others who never get listened to despite being always right).  But why would they go to such lengths, just to win a few votes?  No.  You see this post has deliberately made the same mistake that all economic debate also makes, that the property market is the economy and vice versa; but it's interesting because it's a proxy for many other things, like government debt.  Kicking off inflation to attempt to weasel out of record government borrowing, now we're getting somewhere.

The problem with this evil scheme is that once inflation starts it can be very difficult to control.  It may sound straight forward, just put up interest rates, but that would kill off the very 'recovery' that's is needed to keep everyone happy.

This is why all the talk about the "worst being over" is a nonsense, the economic problems are bigger than a single recession.  Once again there are parallels with the Great Depression: the initial stock market problems were over in two years, the GDP falls had moderated after three, but there was no recovery until the middle of World War II, a good ten years later.  A more modern example is Japan, they've had about six recessions since 1990; and despite the various "recoveries" as they exited recession, they've still had no sustained periods of growth.

With all the money that's been pumped into the economies of the world, it can't help but stoke economic activity, almost by very definition; the 'recession' will soon be over, by that measure.  But that's not really the point, the point is that there is a very significant risk that things have been overcooked, hence all the warnings about inflation.  The recession was only the first chapter, the economies of the world are still fundamentally unbalanced, they're being propped up with mind-boggling amounts of free money; how this is going to be managed is going to be very interesting.  It might prove to be completely impossible.

An inflationary spike will inevitably lead to another recession, of some type, due to the usual problems it can cause.  This isn't just a double-dip recession, which is normal, rather the damage caused by the flame-out of the fake boom will cause severe damage; there won't be more borrowing capacity left for bailouts, and the latent inflation will be too high for money printing to be effective.  (George Soros describes the shape of the recession as being "an inverted square root sign", a small blip upwards followed by a permanent "step down".)

When I first started mithering about the insanity surrounding me on this blog I wasn't sure if the government had the madness to drive a recklessly inflationary policy, I thought that there was a possibility that they might let the recession run it's course naturally.  Now there's no doubt; and, as I've said before, it's time I did something about it.  I need to protect the Plan A (Mk III) development fund - and the dawning realisation that currency will be worthless very soon is a disincentive to make Plan A work too quickly - what's the point of earning money when it's instantly worthless - and instead concentrate on finding a vessel to carry wealth through to the other side.

There are certain things that can be instantly ruled-out: cash, savings accounts, pension funds, etc., these are all being sacrificed - of course this is going to make the economic outlook for years to come very bad, whole generations being made poor at the same point as they lose their earnings potential due to age - twenty million economically inactive people wholely dependent on the state, 60% income tax here we come (if we're lucky)!

This means that property isn't the worst investment available after all, who'd have thought it, although it's far from being the best - it'll only lose another 30% (corrected for inflation, if you believe the charts) rather than 50 to 90% that cash will lose.  I can't see it keeping up with inflation, especially as unemployment will keep wage inflation suppressed for quite a while.  And anyway, unless you're a multi-millionaire property isn't the sort of thing you can invest in as an inflation hedge; you have to go all-in plus mortgage or not at all.

So what's left?  Gold?  Well, yes, but that's quite a ride at the best of times, you have to cope with weeks like the last couple where it's lost $100 for no good reason; it's very volatile, but one of the few things that makes sense if you have no faith in politically controlled currency.  You can't destroy the value of gold; it can go up, it can go down, but it can't be destroyed.

Shares?  Not likely if you believe the "step down" theory, although it might work as an inflation hedge (to a certain extent), depending on the industry.

It's quite difficult, there's no passive means of protecting yourself.  The only winners are going to be: a) those in protected occupation (i.e. public sector, politicians, and other "snouts in the trough", just continue to live the good life on expenses, whee!, it's all in the rules!); and b) those who are ahead of the curve, and can move money about.  The moral of this story: find out what Warren Buffett is doing and copy him.


So then, in conclusion, this isn't the end.  This isn't even the beginning of the end.  But it may just be the end of the beginning.  (Someone famous once said that, I think it was a nodding dog or something...)  But that's not a good thing, there's more serious woe to come.  The next phase is the dead-cat bounce, and another couple of months of illqualified smug people saying how right they are; then we get the inflation shock.

Mark my words...