The coming worldwide credit crunch

Sorry to go off topic slightly, but I just saw an ad on the TV for this outfit: http://www.quickquid.co.uk/ Scroll down to the bottom of the homepage and check out the typical APR.

We're all doomed.

 Hi Dave

Yes thats true if you happened to make your first purchase all at the same time ( something unwise in any market, property too!) four years ago at the very top. However its also true that you could have bought 5 years ago at 15 or 18 months ago at 15 and now have an investment that has doubled in value is now paying a 15% yield and has paid you 5 years worth of dividends without a break someting like an additional 10,000 Canadian dollars. You can always go wrong if you try hard enough, but with this sort of investment you have to try very hard. I will wager that this trust is back to 50 in the near future, and in that case you will have done very well, even if you bought at the very top, something quite hard to do. With a little skill you could even have bought at 15 sold at 50 and bought back at 15, but imho you buy these type of investments for income and not worry too much at what the market values them at. If you want capital gains then I talked about that earlier in the thread around three years ago, I think Roberto knows what I am talking about.

But my point really is that to do better than the average, you have to think a bit outside the box. Although I do not buy these type of companies for the capital gains, I have done very well with cap gains. However I buy them for the income stream and to diversify away from paper money. If for example you want no risk, you can put all your money on deposit and be guaranteed to lose around 3% a year, real interest rates currently being minus three percent.

If you want real risk unlike anything else you buy a certain investment using 95% leverage, so that say a deposit of 5,000 euros, leads to an additional loss of 45,000 euros, wipeing out your entire investment AND and additional loss of 9 times your investment,  something a Wall street bank would be proud of. Perhaps thats why we are in the mess we are in.

TJ222,

Thanks for that infor about Canadian stocks/trusts.  Do the Canadian Energy Trusts invest in other oil companies, similar to an Investment Trust in the UK?

I've had a large chunk of my money in small and mid cap UK oil stocks (Dana, Soco, Encore, Aminex etc) since 2004.  With Dana gone now and Encore and Soco likely to be taken over this year, I'd like to keep some exposure to the sector, so will definitely look at Canada.

Cheers

Hi TJ222

Your point about dividends from some companies beating bank interest rates is well made and they do tend to be pretty reliable (unless they have a BP style disaster). However capital gains are much less reliable. For example if you had made your 1000 share purchase 4 years ago when shares were 50$ a share you would have been in a loss making position ever since. Exchange rates are affected by so many factors and investing in a currency you will ultimately have to change back out of adds to the risk.

This type of investment is not for the faint hearted and should only be made using money you can afford to loose.  

 Sanchez1

There are lots of Canadian and US oil and gas stocks on the NYSE and TSX exchanges. My favourites are the Canadian Energy Trusts and the MLPs. To give you one example try

http://finance.yahoo.com/q?s=ERF.TO&ql=0

It has a market cap of 5.5bn USD so its a very established business. It yields 7% at current prices and pays a monthly dividend.

Lets say you bought a 1000 shares a year ago at $23. Over the last year you would have collected dividends of around 2,200$ and a capital gain of around 7000$ giving you a total return of around 50%. Over the last 2 years the CAD has appreciated by 15% against the GBP, so there is another 15% gain in GBP terms.

To me oil is one of the ultimate hard assets. The world cannot do without out it even for a day. There are an ever growing number of users pitching their straws into an ever decreasing pot of it. As an extra 2billion Asians come on line over the next decade or so, someone is going to have to do without. The situation would be bad enough without money printing, but we in the west have that as well. Limited supply plus money printing is a recipe for continued price rises, thats the most basic economics of all. 

......And if the Euro survives we are going to drown in money printing as a direct result of desperate measures to stick it all together, anyone who drives a car or buys food and energy is going to wish they just let it fold.

Hope this is of some help.

Hi TJ222,

Out of interest, which Canadian oil stocks are yielding between 6 and 10%?  Sterling are the only Canadian oil/gas company that I have any real knowledge of, but they aren't in a position to pay dividends yet.

Sorry to go off topic.

Cheers

I think that some people may do well out of this crisis. - I agree. Also some people who have overstreched themselves will end up ruined. For the majority though there is pain in 1 form or another - we have to trim our costs and live within our means. I and, I imagine, many people on this forum have a vested interest both in the prosperity of Spain and the UK (or another country). Nobody actually knows what is going to happen and it is nice to be able to voice an opinion which has as much validity as anyone else's.

I don't subscribe to the armageddon theory. I think the Euro will survive (there will be a few fudges, crises and compromises along the way). I am not sure about Greece but I think the rest of the PIIGS will, with a little bit of help, stay in.

My personal view is that if you can don't panic, batton down the hatches and wait for the storm to pass. I'm not sure how long it will take but if there is 1 universal rule with economics it is that everything is cyclical - what goes up will also come down but what goes down will also come up

 My head is going around like your monkey!!!

I think that some people may do well out of this crisis. One example might be those people that have an income in a hard currency or in hard assets and live in Spain. For them many aspects of the cost of living might go down, ie rent and local services. 

I am not keen on the GBP, because I think austerity will cause a double dip recession if they push it too hard. If they bow to popular opinion and backtrack there will be a currency crisis caused by inflation. The UK is in a no win situation, its either pain now, or more later. Thats what you get when you allow Labour 15 years of systematic destruction of the productive part of the economy whilst swathes of the population get fat courtesy of the long suffering tax payer.

If I had to have income in a paper currency it would be the CAD. You can currently buy oil companies and other resource outfits in Canada that yield 6 to 10% in canadian dollars. Pull up a chart of CAD/GBP and you will see what I mean. An income of 6% plus, rising capital values (20% plus last year ) and a risning value of income and capital against the GBP. Oh and rising dividends as well.

If you live in a PIG (!!) and depend on a pension coming from the UK, perhaps you would be hoping for a break up of the euro and a devaluation? If your savings are in GBP but you live here (Spain), how relevant is UK inflation to you? On the other hand (or trotter), if you live in a PIG and your wealth is all in euros, but think you may return to the UK, it could be disastrous? If all your assets are in one of the two (UK or PIG) and you live there too, and you have no connection with the other, does it make any difference to you what happens to the euro? 

Some interesting opinions, from WSJ. The Future of the Euro: http://tinyurl.com/68r77ba

Edited: hope that link works; when I went back a second time to the site, I found I had to be registered to read the articles. Maybe need to clear my cache to view it again.
 

This message was last edited by Roberto on 10/03/2011.

From the Telegraph today

 "We should default and return to the Drachma to punish foreign loan sharks who have bled us dry," saidAvriani, a paper linked to the ruling PASOK party.

 "The EU will do too little, too late: the markets will dictate the solution," said Louis Gargour from LNG Capital, speaking at a Euromoney bond forum. He said Greece is already in the grip of an unstoppable debt spiral, spending 14.3pc of tax revenue on interest costs. He expects 50pc 'haircuts' on the debt, perhaps along the lines of the Brady Plan following Latin America's debt crisis.

The Greek crisis is going to from bad to worse. Ten-year yields spiked to 12.78pc yesterday and unemployment jumped sharply to 14.8pc in December, a reminder that the social trauma of austerity has yet to hit.

Greece is undergoing the harshest fiscal squeeze ever tried by a modern Western economy, yet public debt will end above 150pc of GDP by 2013 even if it complies with EU-IMF terms. "We should default and return to the Drachma to punish foreign loan sharks who have bled us dry," saidAvriani, a paper linked to the ruling PASOK party.

There was similar anger in Ireland yesterday where Socialist MP Joe Higgins denounced "the poisonous cocktail of austerity concocted by the witchdoctors in Brussels and in Frankfurt".

Premier Enda Kenny said Ireland was at "the darkest hour before the dawn." He has so far played down talk of a clash with Germany over the terms if Ireland's bail-out, but Irish politics may force him to default on senior bank debt if the EU refuses to yield.

George Magnus from UBS said EU leaders are living in a "parallel universe", unable see that the festering EU debt crisis cannot be resolved without going to the root cause and recapitalising the banks.

Peripheral EMU will remain trapped in deep slump without debt forgiveness but the EU cannot do this until lenders are strong enough to absorb the losses. "The sequencing of this has to start with the banks, otherwise there will be fears of another Lehman. The EU and IMF are in denial about everything we have learned over history."

"The US banks raised $200bn of common equity in six weeks and that proved to be a turning point. If the EU does that, the crisis goes away," he said.

Olli Rehn, the EU economics commissioner, has been pleading for a policy shift to lessen the burden on debt-stricken states, including a cut in the punitive interest cost imposed on Ireland.

However, EU leaders have the final say on the terms of the rescue machinery, and they are answering to their own angry electorates. The eurozone remains a collection of sovereign states. That is the nub of the matter.

 Roberto

I can't tell you because I don't know exactly what will happen, but I am as near as certain as I can be that the Euro area will have to restructure. The one size fits all policy cannot and will not work with economies as diverse as Portugal to Germany. Did the average Spanish man or Greek man ever want to be like the average German? What about the social and economic and educational differences. What about the weather lol. I dare say that if I had to live in Germany I would have a different outlook on life and what to do with my time? Did anyone ever ask the man in the street if they wanted to be IN. If my memory serves me correctly the few time there was a referendum, they voted NO and had to be asked to vote again until tey gave the right answer.

If you watch the Farage youtube clip its clear that the reason the EMU is being held together at any cost, is lets say not for the good of the people. However history shows markets to be stronger than any politicians and markets always win in the end.

If I had to guess what will happen then I think the euro will break up in stages. There is muted talk of a Northern and Southern Euro, to get the PIGS off the backs of the Germans. You can bet that the major creditors will want time to postion themselves so they lose least and the patsy tax payer takes the bill. My guess is that sooner or later Spain will go back to the Peseta. The longer its all held together, the bigger the bill will be and the higher the risk of social unrest and a currency crisis. Some form of default is now inevitable, you can;t have austerity AND repay all the debts, its not mathematically possible. You certainly can't fix a problem of too much debt, with more debt, which is what the eurocrats are prescribing.

As you pointed out I am not too keen on any currencies, you need a bit for bills and other transactions, but not to store your wealth. I would rather have GBP than Euros, but rather have hard assets than GBP. Inflation is now officially 4% plus in the UK, so if you belive that figure and are getting say 1% nett on your pounds, then your real rate of return on paper money is minus 3%. I suspect the real cost of living is going up at more like twice that rate in the UK. 

 http://www.youtube.com/watch?v=yGeWssOF2OM

TJ, please don't stop posting, the vast majority of us here I'm sure appreciate your contribution. I certainly do. Stanley, if you don't like it, get off the thread, no one is forcing you to read it.

At the risk of sounding a bit thick (as is my wont), can you just clarify, do you predict (and nobody will hold you to it by the way) that Spain will have to revert to pesetas, and devalue? If so, would it be best to transfer any euro savings into sterling asap? Or is sterling screwed too? Seems to me everything everywhere is bad. Although I suppose you will suggest gold? (still hanging on to my bracelet!!)

stanleymiguel,

TJ222 is one of the few people (the only person?) on this forum to call the Spanish property market and Spanish economy correctly.  It would be a shame if he decided not to post any more as he is a real asset to EOS.

And the property Justin was talking about is not his home.  As he mentioned in the article, it's his office.

 Costa Chris

I wish you every sucess and hapiness in Spain. Its is not all doom and gloom I agree, a few people will probably benefit from this calamity. In this very thread I never said do not come to Spain and I have always agreed that the lifestyle is probably one of the best in Europe. What I did say is to enjoy everything that Spain has to offer, RENT don't buy. Let the stress and cost of owning a house be someone else's problem. Its not like there is lack of choice in renting and the costs are superb.

Ads

If you look through history, one thing that you can guarantee is that there will be no warning of a currency devaluation. What generally happens is there is a long Bank holiday at the banks with no warning and when they finanly open up again, voila you have funny money in your account. The authorities have to continue reassuring you that all is ok, right up to the last minute, otherwise there would be a run on the banks before they could close. When the Greek crisis first broke, there were hundreds of millions of euros leaving the banks for Germany, as the rich and smart money got out. This is a real problem for the authorities. Watch out for especially attractive deals on lump sums for savings lol!

Apparently about the same time is was almost impossible to rent a safety deposit box in a German bank, they were all apparently full of gold.

Stanley

I am posting on this thread for other people's benefit. But if you would like me to stop just say and I will post no more.

TJ 222 STOP BLOWING YOUR OWN TRUMPET WE ALL CANNOT BE AS CLEVER OR AS SMUG AS YOU

JUSTIN ISNT BOTHERED IF HIS HOUSE IS WORTH TWO PENCE ITS HIS HOME NOW THATS WHAT MATTERS

Thanks TJ and Justin. So informative.

What would your advice be for those holding Euro currency in Spanish Banks. Would you only leave a bare minimum in account and transfer from the UK only when required? Do you envisage there will be problems ahead on this score or is that an over-reaction?

TJ, thanks for your recent post which I thought was a fascinating read. Also, thanks to Justin for his excellent,  honest appraisal of his property situation which gave a context to TJ's post. All in all it makes very concerning reading. I'm surprised that there has been no response as yet. I took the opportunity to read all 19 pages of the thread. Your first post on 20 August 2007 certainly got some responses ( if I'm honest I'd have been a doubter too at that time too) . It was like living history and I agree, what you predicted has all come to bear (if you can give me 6 numbers for Saturday evening I'd be grateful!)

Taking what you have said alongside the re-rating of Spain's economic standing by Moody's Rating Agency yesterday makes me concerned that some, if not all of what you now predict for the future, might also occur. I hope not but Justin himself is also talking about further falls in value of his own property! I've spent many hours reading the broadsheets and comments on the current economic situation, particularly as it pertains to Spain. Justin talks of estimating 3000 empty/unfinished properties on his walk to Manilva. Anyone who plays golf on the CDS will have seen the courses surrounded by thousands of closed up apartments/empty shells and empty building sites. The golf courses are surrounded by them. There have been estimates from credible commentators and economists of one millions empty properties and a bank debt of €2.5 trillion. This needs re-financing and from where?

With the spectre of EU interest rate rises, which will further exacerbate the issues in the peripheral countries (whilst looking after the core countries like Germany), the outlook is bleak and I worry when I see some articles on here encouraging people that the time to buy is Spain is now. From all that I have seen and read it certainly isn't.

We bought in early 2001 solely as a holiday home. Whilst the nominal value tripled and is now back to double our purchase price another 50% fall will bring us back to base but we've had wonderful holidays and since early retirement four years ago long stays in the sun. Other are not so lucky. A close friend, seeing what I'd done bought two places "off-plan". He's one of the lucky ones. He got both properties. One he uses for holidays and lets out, the second which he bought as an investment which he now needs as he's been made redundant, has been on the market 4 years, lost half its original value and has not had one viewing!!!

Taking all that and the loss of many ex-pat friends who own businesses/properties who have handed in keys and lost leases and returned to the UK with nothing, it is some consolation to read that many contributors to EoS, including ourselves, are still enjoying what we have and making the most of it. However, for each one of us there are many personal tragedies. They have not been as fortunate in their pursuance of living the dream. For some it's too late to hope that the good times will come again in time, for others I hope you return soon.

It's not all gloom and doom but I am realistic and believe in facing the future as informed as possible. We want to sell and buy another property which will require further UK savings to be sent to Spain so I, for one, will be keeping a watch and waiting for more favourable times.

 Having just read Justin's appraisal of his property to put some perspective on prices, I thought I would post a few comments.

I have not commented on this thread for a while mainly because the only news I have is much more of the same and  am aware that is not something most people want to read. I recognise that many people are now in a postion whereby there  is little they can do and I feel for these people and do not want to add to there anguish. I did spend a lot of time writing on this thread in 2007 when there was still time, to try to get people to avoid this sort of situation and not to listen to all the vested interest on this board, telling people that it was great to buy for lifestyle reasons and property allways recovers in time. Justin can probably afford to be sanguine about his loss, I doubt that is the same for most people.

Justin says he first noticed something going wrong in 2009, its a shame he didn't read my posts which began on Aug 20 2007. In the thread I detailed carefully exactly what I thought was going to happen. I challenge anyone to go back through it and find anything I got wrong.

Amoung other things I said that alot of property would be unsellable at ANY price and unemployment in Spain would hit 20%. I also said that Spanish banks were foolishly hanging onto foreclosed properties to try and cushion the impact on the market and that this would compound the problem and lead to a catastrophe later on. We are now approaching that time.

What follows is a very quick shot at what I think is coming. If you are of a nervous dispostion or cannot do anything anyway pls do not read on. IF you can sell or are thinking of buying PLS read on.....

Very shortly Spain will be forced to recapitalise its banking sector as the loans are coming due for roll over and the EU is requiring much tougher rules on core capital held by banks. However Spain does not have this money and unlike the Uk and US which had to do the same, Spain cannot print money by itself. Even if there is a bailout for Spain, which I doubt, one fo the first conditions on examining the banks books, will be an immediate dumping of their foreclosed property book.

Spain along with the other PIG countries are now all but locked out of international money markets and credit default swaps are at all time highs, indicating much worse to come despite the bailouts. Tolerance to more bailouts is puting so much strain on the northern european countries that Merkel risks losing her power in Germany along with anyone else that defies voters wishes for an end to bailouts.

No one actually knows what is going to happen and when, but its becoming clear that a one size fits all monetary policy across Europe is not sustainable. Many prominant economists at the time stated this. The most likely outcome is that all the so called periphery countries leave, either by volition or otherwise.

I applaud Justin for his honesty, unfortunatley he is way too optomistic. There are two big flies in the ointment for any soft landing anytime soon.

1. No one is talking about interest rates, but it was cheap money that built this boom and it will be the lack of cheap money that finishes it off. Most people are under the mistaken impression that government sets interest rates, they do set short term money, but its the markets that really set rates and the market has said no more. This is what started the whole Greek crisis off. Despite all the pledges and all the wringing of hands by the EU, Greek and other Med country bond spreads are the highest they have ever been today. Once bond rates get to 7% ish, actually it does not matter what they go to on the upside.

Trichet has just said that EU interest rates need to go up to maintain credibility in a rising inflationary environment. Germany will not tolerate inflation above the mandate. The problem is that Germany having a real economy is now growing too fast for emergency rates and risks inflation. Meanwhile the Med countires are on their knees even with emergency rates.

To go back to any historical norm, interest rates need to double and then double again. The longer real interest rates are negative, the more eventual trouble will be stored up. Just as house prices doubled as rates halved, so the REVERSE must happen. Its incredible to think that house prices have crashed so far, BUT yet interest rates have hardly even moved off the bottom. It does not take an economist or any number of articles written on eye of spain to sum up what is going to happen. I was sick to the stomach to read that article by the bank property man, trying to lure people onto the Titanic.

2. As interest rates double, prices will fall another 50%, but this is excluding any devaluation from a return to traditional Meditterean currencies. Countries exiting the Euro will devalue quickly compared to say the Euro or GBP. By the time a person from the UK converts his house back into GBP it will probably have lost another 50%. The worst case will be for those who have a loan in say GBP on a property in Spain. The loan will remain in a hard currency, but the property will be priced in a rapidly depreciating one.

Thanks for that.  Austerity is not a word any of us like to apply to our own circumstances, but although I make no claims to being a financial wizard and I am certainly not a professor of anything, the whole thing smacks to me of slight of hand made digestible by speed of delivery, some clever graphics and "reasonableness" presented by an "expert".  What is not to believe?  Quite a lot actually and I need more time to think about the whole prospect.  An example though is that the "Professor" assumes that reducing public services by getting rid of public servants will only increase the call on Government funds due to people claiming benefits because they have no work.  However, in reality, although the public will suffer from reduced services, the exchequer will benefit because despite being less tax take from employees on the the public purse, that is an entirely mythical sum.  Putting those people on the dole will actually cost the Government less than paying them to provide a service, especially when you then reduce the availability of out of work benefits at the same time.  I will have to think about it and play the film again, but thanks for giving me something to think about other than my tax bill!

Mike

Austerity

http://www.youtube.com/watch?feature=player_embedded&v=FmsjGys-VqA