Ah So ! Thats What Pricked The Stock Market Bubble

Sponge Bob

The Bank of Japan sez the Torygraph

Recently (but 15 years after big the housing market peak in 1990) the Japanese Economy finally stopped shrinking and the easy money that eventually made it grow again is being withdrawn. We had a similar 'easy money' effect here after 9.11 in the states.

Governor Toshihiko Fukui has bled more than $140bn (£75.3bn) from his banking system since March 9 to reduce a menacing overhang of liquidity left from the battle against deflation. He is halfway through

Half way through, jolly good.

Hedge funds that had borrowed for zilch in Tokyo, to lend for a fat premium to overheating Iceland and New Zealand, began rushing for narrow exits

The storm has since swept up much of the globe, setting off the steepest falls in emerging market stocks and bonds since the Russian default in 1998.

"Most people underestimated the effects of monetary tightening in Japan," said Phillip Poole, an economist at HSBC. "The liquidity that has driven these markets is being withdrawn."

Thats one large central bank tightening things up. Not all of them.

The next Japanese spanner in the works will be the end of zero interest rates, or zirp as it is known. Bank-watchers have pencilled in July or September for the moment of reckoning.

Few investors lose sleep worrying about life after zirp, but our guardians at the Bank of International Settlements view it as the greatest imminent risk to global markets.

The Japanese have built up net foreign assets worth $2,500bn, investing abroad what they refused to spend at home during their 15-year slump.

Now they are buying again. Tokyo and Osaka land prices are ticking up smartly after falling 57pc since 1990. The IMF forecasts 2.75pc growth this year

I love the smell of estate agents in the morning

We have been warned. The ECB is about to bare its fangs for the first time since EMU. Germany is back, and a reawakened Bundesbank is snorting with the same bloody-minded determination it displayed before causing the 1987 crash and the 1992 bust up of the ERM.

and

"Housing mayhem seems unavoidable. The US hard landing begins now," said Charles Dumas, global strategist at Lombard Street Research.

Mortgage applications are down 17pc in a year. House sales are down 5.7pc, and inventories of unsold new houses are at their highest since 1996. The central prop holding up the US consumer boom is crumbling, leaving behind record household debts equal to 127pc of disposable income.

The rest of this interesting and portentous series of linkages are here.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/05/29/ccview29.xml&menuId=242&sSheet=/money/2006/05/29/ixcoms.html

Not all of it will come to pass for the reasons and in the sequences outlined there but todays happy German consumer confidence reports signals a nasty injection of reality into the Irish Banking system !!!!!!

Remember the US figure highlighted up there household debts equal to 127pc of disposable income and laugh ever so slightly because in Ireland Household debt has risen sharply and amounted to 120 percent of disposable income at end-2004. and has gone up a tad since. That Irish figure came from the IMF (not Dan Mc Loughlin or his mates in the banks who would see 'upside' and 'value' in a rotten turnip stinking out Grafton St on a sunny saturday )

http://www.imf.org/external/np/sec/pn/2005/pn05146.htm

The disposable income figure also smooths disparities in income levels between our countries and currencies. If the US finds it cannot sustain a housing boom when its households hit that level of debt then how can we either ????

US commentators are focusing on the relationship between incomes an d house prices . They use median incomes where we in Ireland and the IMF tend to focus on AVERAGE incomes

This from CNN .

http://money.cnn.com/2006/05/15/real_estate/reguide_moneymag_getrich_0606/index.htm

If you reside in one of the past decade's boom markets along the coasts or in the Southwest, brace yourself. Prices there were powered by two kinds of fuel: low interest rates and the willingness of buyers to pay up for the American dream.

In Los Angeles today, the median dream goes for 10 times the median income. That's unsustainable no matter how creative banks are in coming up with new hybrid loans.

Mayer thinks that, with fewer people buying but plenty still hoping to cash out, prices in the most expensive markets could drop 15 percent in the next year, if mortgage rates rise another point. The forecasters at Fiserv Lending Solutions and Moody's Economy.com, who crunched the numbers for our 12-month nationwide forecast, aren't so pessimistic, but they're hardly Pollyannas.

Prices will flatten in most ex-boomtowns this year, and next year will be worse, says David Stiff, Fiserv's chief economist. "A lot of markets - particularly those where prices have increased dramatically compared with income - will see drops by late 2007," he says.

Those declines are expected to range from a few percentage points in Boston to as much as 20 percent in Miami and Las Vegas, says Economy.com's Mark Zandi. The more unhinged prices are from local incomes, the more likely a fall

thats Galway particularly ****ed so .

Pa ElGrande

S*1t, they've only just started and the stock market drops, that's a very sobering article in the telegraph.

Bluehair

Thanks for posting that, makes interesting reading.

shoegirl

I do think this is a portent of things to come over the next 12 months - to be honest I think once Iceland ran into trouble it was inevitable that there would be a severe fallout in the countries financed by Icelandic money.

The Japanese situation is harder to predict though. Add to this political instability in Thailand and the earthquake in Indonesia - doesn't look good for Far Eastern markets.

I am not entirely sure about the German market - it has been extremely slow to move and I'm noticing some key stocks are quite weak - its not as if the money is going there just yet.

I do think however, that local factors (i.e. very high public sector wages and SSIAs) will shield Ireland from this in the short term - problem is that the current overheating in Ireland may make things worse in the long term as we face massive levels of land/property deflation and massive public sector cuts, while at the same time are no longer able to fund the massive social welfare bill (current levels at the moment pay more than double the UK rate). The only thing I can see doing well is the outsourced services industry - execs I know from one major player are already lined up in delight waiting to sweep up the massive amount of outsourcing this may bring their way!

shoegirl

Sponge Bob wrote:

US commentators are focusing on the relationship between incomes an d house prices . They use median incomes where we in Ireland and the IMF tend to focus on AVERAGE incomes

EXCELLENT point. Not only are median incomes not generally quoted - and averages grossly distorted by high wages in a small number of sectors - its virtually impossible to find an accurate statement for the median wage anywhere!

If it is true that as much as 25% of the entire worforce is in low paid work, then the really median could be as low as 23-24k.

Sponge Bob

shoegirl wrote:

I do think this is a portent of things to come over the next 12 months - to be honest I think once Iceland ran into trouble it was inevitable that there would be a severe fallout in the countries financed by Icelandic money.

I did not realise that the Icelandic 'crises' a few months back was caused by a dead stop to speculative cash sourced in Japan. Thats was the fascinating bit for me. The next speculative bubble to unwind will be commodities. Copper and Gold and stuff.....maybe even oil to some extent.

Sponge Bob

shoegirl wrote:

EXCELLENT point. Not only are median incomes not generally quoted - and averages grossly distorted by high wages in a small number of sectors - its virtually impossible to find an accurate statement for the median wage anywhere!

True, so remember the status of the median in Ireland is further distorted by relief schemes such as affordable and social housing that is not available in the US where low income sub median earners tend to self finance their housing in trailer parks.

Also remember that our sub median is banked unlike the US and UK wher ethe bottom 20% tends to have no banking and no credit union access and are in distressed borrower moneylender territory all the time.

We have better access to cheaper finance , even if we are poor . This is good .

I was warning against confusing Median and Average , two very different things .

shnaek

Sponge Bob wrote:

I did not realise that the Icelandic 'crises' a few months back was caused by a dead stop to speculative cash sourced in Japan. Thats was the fascinating bit for me. The next speculative bubble to unwind will be commodities. Copper and Gold and stuff.....maybe even oil to some extent.

Was there not some connection here with middle eastern money and markets also? I thought I read something about that a while back. Either way I would feel more confident about Germany coming out of this okay than ourselves here in Ireland, considering Germany is the worlds biggest exporter and here in Ireland indigenous exports are something around 4% (excluding agriculture at 12%). Our weatlh is built on foundations of clouds.

Sponge Bob

shnaek wrote:

Was there not some connection here with middle eastern money and markets also?

Yes. Gulf states have had massive falls in their stocks since February, Saudi stocks are down 50% in 4 months and still falling. See here
and here .

I am not sure if the Saudi slump is linked with Japan though. It seems more like a good ole local bubble as they tracked oil prices and like all bubbles, it bursht !!!

From

http://www.dailytimes.com.pk/default.asp?page=2006%5C05%5C14%5Cstory_14-5-2006_pg5_25

In the process Suhaimi found himself at the centre of the confidence crisis that swept the bourse, halving its value in three months and wiping some $400 billion off investors’ books.

Tuweijri said restoring confidence would be a priority after ithe crash that has hammered many of the 9 million Saudis half the population who play the market, often borrowing heavily to buy stocks.i

Bit like Paddy and his property market obsession what! what!

shoegirl

Sponge Bob wrote:

True, so remember the status of the median in Ireland is further distorted by relief schemes such as affordable and social housing that is not available in the US where low income sub median earners tend to self finance their housing in trailer parks.

Also remember that our sub median is banked unlike the US and UK wher ethe bottom 20% tends to have no banking and no credit union access and are in distressed borrower moneylender territory all the time.

We have better access to cheaper finance , even if we are poor. This is good.

It depends on where the median really is. For a start affordable schemes are a tiny percentage, heavily subscribed to, and often are not open to low earners as they either earn too little or haven't the savings to avail of them - even if they are able to access the schemes. The US does have rent controls in some regions which is unconstitutional in Ireland which is equivalent to the same thing - but as you rightly point out, urban rent control in another city 1000s of miles away is useless to somebody whose only housing option is a trailer park.

What has helped us in ireland, ironically is the regulations which strangled the moneylending industry in the 1980s - it generated a demand for and fed the credit union movement, whilst shielding those who remained users from the worst of its effects. The point on the non-banked is a good one - however there are no studies on the non-banked in Ireland so for all we know it could be 20%. I certainly do know of several adults who have no current account facility for example and in one case she doesn't have a bank account at all. One actually has a job on about 37k a year, another has been on social welfare for the last 5 years and the last is a 60-something housewife. I noticed with interest that NIB dropped the cashmaster account when they changed their packages and did not replace it with a cash account. Likewise AIB dropped a similar account type about 5 years ago. Banks are quietly dropping these kind of accounts and this can only lead to an increase in the number of people without accounts, or with very limited accounts.

Out of interest, is anybody aware of any studies that might suggest what the median might be?

ronbyrne2005

obviously the japanese's determination to hold their currency at at relatively stable level to facilitate exporters allowed the carry trade to flourish.

dochasach

Somehow I completely missed the Icelandic problem. Possibly we can learn something to avoid a crash and burn? When I first visited Ireland there were strict lmits on the amount of currency which could be brought out of Ireland (something like 400 pounds if I remember correctly.) The goverment knew how easy it would have been for outsiders to distort the economy of a small country.

I wonder how much property investment in Ireland is associated with money from outside of Ireland?

Those in Spain, Cyprus, Portugal, Bulgaria, Romania, Florida and Turkey must wonder about the effect of Dublin's home grown investors on their shores.

Sponge Bob

shoegirl wrote:

The point on the non-banked is a good one - however there are no studies on the non-banked in Ireland so for all we know it could be 20%.

I defer to your wisdom shoegirl. I am sure its 10% but I feel that its not as high as 20% based on observation and anecdote not science.

I certainly do know of several adults who have no current account facility for example

Like me. I do not NEED a current account .

I have a credit card to clear each month , that deals with overdrafts.

Otherwise its a deposit account only for me. The only drawback of deposit is that I cannot write a cheque , shucksypoos, and cannot spend more than €600 on 'a whim' , coz the drinklink will not give me any more. Therefore I must 'plan' these expenditures which suits me fine.

If I am haggling I say 'cash price' if they will not discount for cash I whips out the cc and sez to thr merchant 'Fine, put it on that so' and they usually demur and agree a cash price

Otherwise deposit does s/o d/d and the usual suspects .

Current accounts are grossly overrated. About once every 2 years I have to buy a bank draft though.

My bank periodically tries to 'upgrade' me to current and I just say no.