Friday, 19 December 2008

The top ten credit crunch questions for 2009

The end of the year is approaching, and 2009 will soon be upon us. Here are my top ten credit crunch questions that should be answered within the next 12 months.

1. Deflation or inflation?

Despite the fact that the UK CPI recorded a 4.1 percent increase over the last 12 months, the MPC are more worried about falling prices. Determined to fire up inflation, the MPC are about to reduce the bank rate to something close to zero. On the other hand, negative real interest rates and a tidal wave of liquidity should normally guarantee double digit inflation.

2. Do UK banks need more capital?

Charlie Bean, the deputy chairman of the Bank of England, thought so this week when he talked to the financial times.

3. Have we seen the worst of the banking crisis?

Will there be more banking failures? Or has the credit crunch been transformed into a fiscal rather than a financial sector problem?

4. Commercial property – how exposed are the UK banks?

It is the unmentionable crash - empty shops and offices are now sprouting up like a bad case of the measles. Somebody must have financed those new offices and shopping centres. Was it the hapless UK high street banks?

5. Sterling – how low can it go?

The pound is edging towards parity with the euro? Can it go lower?

6. The UK housing market - where is the bottom?

Average prices are already down 19 percent from the peak, could we see another double digit decline next year?

7. Unemployment – will it hit three million by December 2009?

This week’s unemployment data was a shocker – 137,000 jobs lost in just one month. few more months of that kind of shake out and 3 million definitely looks likely.

8. Oil - $25 or $80?

Will the OPEC production cuts push oil prices back upwards? Or will the world economic slowdown deal a crushing blow to Putin, Chavez and their oil-rich fellow travelers?

9. Will Brown and Darling get away with an 8.5 percent of GDP fiscal deficit?

Actually, I know the answer to that question.

10. Will any be going to jail?

Trillions and gazillions of pounds of wealth disappear, but will anyone be held to account?


Anonymous said...

1. I've been convinced of near term (2-5 year) deflation for at least 6 months. I'm seeing rapid deflation in the prices of almost all non-essential purchases. I envision a return of inflation at some point in the future - but only once asset prices have been devastated.

2. I think it obvious that banks will need more capital - leverage against their capital bases was absurdly low when this crisis struck. Banks will need to write-off substantial bad debts as the economy continues to deflate and unwinding positions in the shaddow banking system expose a plethora of bad debts.

3. We've been told that no major bank will be permitted to fail. I expect that this will be upheld... of course, mergers and further contractions are entirely plausible. With government support and state ownership of three significant UK banks, the stakes are now raised. If things get out of hand now, we're looking at state and/or currency faulure.

4. I think banks are comically exposed to commercial property... though, I expect the losses will be borne mainly by investors in existing commercial property... I expect many adventurous pension funds to be wiped out.

5. Sterling can definitely go lower - but our currency, in my opinion, is no longer subject only to the free markets, but to political intervention in both the UK and Eurozone.

6. A double digit decline in house prices is inevitable. I'm wondering if the first of those two digits will be a 2, 3, 4, 5, 6, 7 or 8. Anecdotal reports suggest that Japanese property crashed by 90% after Japan's 1990 debacle. I see no reason why the UK should not be comparable. The IMF have already stated that the UK is the most seriously affected of any 'developed nation' - and there seems to be consensus that there has not been a bigger crisis in living memory... which should include 1990.

7. UK unemployment is already at 4m, if you include the "long term sick". Who knows where the official figures will end up... It likely matters most how the defintion of "unemployed" is massaged.

8. I see oil setttling somewhere between $30 and $50 - with lots of volatility. I think production will be cut agressively before the price reaches $30. A more relevant question might be "how much oil will be pumped in 2009?

9. If you "know" you should share... Depending upon your definition of "get away with" - my anwer changes. I expect Brown can expand debt by 8.5% of GDP... I expect he will have to. Do I expect his political career to survive? No. Do I expect that it will be cheap for taxpayers? No. Do I think he can do it? Yes.

10. This is the multi-trilllion dollar question isn't it? Facts emerging about Madoff suggest that the Sec was complicit with the fraud... and, I seriously doubt that the US is any less reputable than the UK in its financial system. While I think that many should be prosecuted for treason (debasing currency is treason) as well as fraud, I'm almost certain that most will get away with their crimes without criminal consequence. I think this is morally unjustifable, but I feel sure it will happen all the same.

Mark Wadsworth said...

1. Deflation
2. Do UK banks need more capital?
3. Have we seen the worst of the banking crisis?
4. Commercial property – how exposed are the UK banks?
5. Sterling – how low can it go?
Another five or ten per cent
6. The UK housing market - where is the bottom?
Another 20% next year and another 10% the year after that
7. Unemployment – will it hit three million by December 2009?
8. Oil - $25 or $80?
The oil bubble is over, I'd expect it to stay roughly where it is for a few years
9. Will Brown and Darling get away with an 8.5 percent of GDP fiscal deficit?
Politically? Possibly yes. Economically? Certainly not.
10. Will any be going to jail?

Anonymous said...

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marksany said...

How much worse can it get? Much worse; think Cuba.

1. Inflation - temporary deflation, followed by hyperinflation as the govt can't get the artificial money out of the system. Zimbabwe.

2. Bad debt write off will gobble everything thrown at them.

3. Have we seen the worst - nope

4. Commercial property - will wipe out cautious investors who were convinced their money was safe. Could take a high st. bank down

5. €0.6 = £1 The French/Germsn power axis in the EU will not miss any opportunity to punish the pound

6. Housing prices in the SE can go a long way - what are prices like in Doncaster? London could be there, once it has higher unemployment.

7. Builders & Estate Agents: I'll live at mum & dad's until the recession is finished. Car workers (like me): I'll keep this perfectly good car a couple years longer than I planned.
Retail: This sofa/TV/fridge has got a couple of years in it. Bankers: I don't need a new loan, I'm busy paying off what I have. Hairdressers: I'm growing it a bit longer/these £10 clippers are good. Catering/Restaurants: This Lidl meal at home ain't so bad.

8. $25, who needs oil when we have no industry and walk everywhere

9. "Get away with" as in not be hanged from a lamppost?

10. No way

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

On your questions of culpability and the guilty being brought to account:

People need to be suffering real hardship before they become angry enough to demand this.

I'm already seeing shops boarded up. Then will come the empty shelves, after the price rises. THIS is when everyone will realise the game's up. By the time justice is demanded the exit plans will have been put into full use.

Justice ? If Iraq is anything to go by we can forget it.
What could be more treasonable than taking one's country to war on a pack of lies ?

Anonymous said...

1. Inflation. The debts cannot be paid and it is inconceivable that they will be written off.

8. $80, assuming that free markets and the dollar survive at all. The current low price is a temporary blip. Most wells are not viable below $40 devalued dollars, and oil is not just about cheap flights - it is essential for heat and agriculture, without which we will all die.

10. Most unlikely. Not unless there is a revolution. Successful revolutions are always carried out by the army, and I don't think we are there yet - the army is still on the side of the establishment, and that won't change without the kind of cultural shift that takes decades.

DBC Reed said...

As a land taxer I cannot understand why commercial property headed downhill earlier and faster than residential. I thought it was because they imposed business rates on empty commercial property
but they have chickened out of that ,after all the high pitched squealing and demolitions.Would be interested in any explanations.

Anonymous said...

Hi Alice,
This is the end of year quiz. Great stuff.
1. Deflation or inflation?
Demand deflation is underway as the banking sector shrinks loan books and the process of de leverage takes place. Negative headline inflation rates will be flattered by interest rate changes and VAT cuts but core inflation will remain in modest positive territory. On Planet ZIRP, the conditions are prepared for a return to inflation in the medium term but for now the immediate concern is avoiding the big D. Suddenly everyone is talking about ZIRP, QE and Gladwell’s tipping point.

2. Do UK banks need more capital?
Charlie Bean is right, the banks will need more capital. This week the CEO of Barclays warned the banks will continue to reduce loan books, the Crosby report warned of the £160 billion refinancing need of the bank system over the next three years and further asset write downs are inevitable as the economy contracts.

3. Have we seen the worst of the banking crisis?
The government has made it clear the banking crisis is over since HMG will always act as the investor of last resort shunning due diligence in the process.

4. Commercial property – how exposed are the UK banks? The banks have a significant exposure to buy to let residential and to the leveraged commercial property market. They will remain circumspect about updating property valuations and marking to market.

5. Sterling – how low can it go?
The Big mac index suggests Sterling is oversold against the Euro with fair value around 1.45. Sterling has experienced Dollar parity and a 50p dollar. Parity with the Euro is not steady state or permanent.

6. The UK housing market - where is the bottom?
The big lenders are no longer forecasting. But a further 15% - 20% is possible, generating an overall fall of between 30% and 35%.

7. Unemployment – will it hit three million by December 2009?
Claimaint count looks set to hit 2 million next year and 3 million on the LFS measure. We could be looking at an unemployment rate of over 9%. Even as the economy recovers unemployment will continue to rise for up to eight quarters thereafter.

8. Oil - $25 or $80?
Oil hits nearly £150 dollars in July (high Summer) and struggles to hold $40 dollars in the Winter. It’s a funny old world but this is not reality, just the speculative unwind. Oil is a finite resource, controlled by a cartel with a relatively inelastic demand curve. Consensus is for a $55 barrel in 2009.


Anonymous said...

1. Deflation or inflation? Overall deflation for the near term (6 – 8 months), as demand nosedives followed by the rise of inflation / Stagflation for a longer period
2. Do UK banks need more capital? Yes definitely, but I fear whether the gvt.s actions will solve anything or merely keep the patient in a Persistent Vegetative State.(PVS)
3. Have we seen the worst of the banking crisis? I still fear no, despite govt assurances, they are more likely to stay alive inPVS.
4. Too much
5. Another 20% ( my finger in the air figure – market over reaction may take it lower
6. Another 15-25% next year as the need to sell makes actual prices fall
7. Already there with long term sick. The curently fiddled unemployment fiures will 3m+
8. Around $50 a barrel as steady state
9. Politically yes (though I hope not), economically we’ll be spanked
10. No. As for an earlier comment about revolutions – remember the forces owe allegiance to the Queen not the Govt. There has been marked sea change from who the govt is, and the old establishment are. I do however expect civil unrest though.

Anonymous said...

1. Def then inf.
2. Yup.
3. Nope.
4. As a turtle on its back.
5. Versus what?
6. Back to 1997, or earlier.
7. Presumably.
8. Depends on whether the Chinese Empire breaks apart.
9. No-one will bother to lynch Darling.
10. If only to protect them from the mob.

Anonymous said...

Think of a disaster mover in a crippled building - its columns overloads. Here one snaps violently, and everything shakes. Then a few more - and the whole things comes down.

What is the unthinkable? Think it. The IMF stepping in to bail out the UK end 2009 with the abolition of minimum wage and 8% interest rates, say.

B. in C.

Anonymous said...

"This week’s unemployment data was a shocker – 137,000 jobs lost in just one month. few more months of that kind of shake out and 3 million definitely looks likely."

Alice, the rise was 137,000 in the three months to October, taking the total to 1.86mn. At that rate, it will not take "a few more months" to raise unemployment to 3mn, but rather nearer to 26 months. This, of course, is assuming that things get neither worse nor better. No need to guess which camp you will be in on that one!

Young Mark

P.S. I went shopping in Worcester this weekend and it was heaving, so much so that I abandonned the attempt. Mind you, we don't have many recently unemployed investment bankers in this neck of the woods, nor are we paying London property prices on rapidly depreciating houses!