chuffy

 

10th January 2009

When the Fat Lady stopped singing

The old adage that “when something appears to be too good to be true, then it probably is” will always be ignored when it suits. It is a shame that no-one heeded that as the asset price bubble gained momentum, fuelled by rates that were set too low by central bankers.

It is always easy with hindsight to see mistakes but when policy makers constantly applaud themselves for discovering what they believe is the nearest thing to alchemy; then a certain amount of flak is to be expected.

Our current difficulties are of such a scale that it takes a lot of taking in. A quick step back isn’t sufficient to see it in its entirety. It is spread across so many sectors and will affect so many individuals that one has to wonder if anything can actually be done to stop it going on for longer than the 10 year downturn endured by Japan during the 1990’s. The similarities between that situation and the UK’s current collapse are in a lot of ways quite striking.
The importation of low inflation from economies like China and India, coupled with the low interest rate environment and excessive public and private spending that was propelled by the inflating assets of equities and housing, has proven to be the undoing.

The temptation to deflect blame onto the US is now taking on a mantra level and the victim status of the UK’s economic woes is the cloak that some are trying hide behind.
The US did not create the problem on its own. The gut wrenching losses that threatened a smaller calamity than the one upon us now brought about the need to create a driver for the US economy.
Housing was seen as this catalyst and initially it did just that. Sadly the success was the undoing. What was a well financed and well controlled portion of the economy eventually became the scene of speculative orgy that, like the UK, seemed to promise a way for individuals to make money for nothing and Banks a risk free money making machine.

We have no-one to blame but ourselves. There are those more culpable than others but as we enjoy the right to vote and chosen to reward the policy makers with the powers of administration, we have to accept that at all levels responsibility has to be accepted.
Sadly the pain will be felt most by those who probably didn’t enjoy anywhere near the benefits that the mania of borrowing and economic expansion that underscored the last decade.

I must put my hand up and admit to participating in the madness and had more than a few goes on the “one armed bandit” that appeared to be stuck on hold at 3 cherries.

Having dabbled in commercial property via a direct holding, property shares and a property investment trust, I decided to channel an even larger percentage of my portfolio into the property sector at the end of 2003.

This took the shape of 2 warehouses in Bristol and a number of houses in our local area. The rent was yielding between 8 and 9% and although prices were already rising at way above historical levels, I felt comfortable because the economic fundamentals indicated it was still sustainable. I must admit that the 6 monthly re-valuations that showed ever-higher capital growth more than flattered my ego.

As the prices rose and the yields fell to under 6% and then to 5%, I stopped investing. The yield from cash was above what I could achieve via property and the old adage of “leaving 10% for the idiot” was at the forefront of my mind as we went into 2007.

I was further perturbed as the buy to let craze reached mania dimensions. We had a machinist leave our company because he was collecting more in rent than by working. He had no worry about the fact that his debts were approaching half a million on the flats he was renting out. This was compounded by hearing that buyers who worked for some of our customers had built up mini empires of flats and houses to rent out.

I started to dismantle the property portfolio and was lucky to find more than willing buyers even though the early signals from the US were signalling a turn in the market.

The real turning point for me was in early August 2007. We had been flooded out at the end of July as the River Severn broke its banks and flooded large parts of Gloucestershire. We set off to Devon until things cleared and a week later I returned alone on the train, leaving the Wife and kids behind with the car.

I chose the FT for reading matter and in that particular Saturday’s edition there was an article written by a respected German banker. He was explaining the causes of the demise and subsequent takeover of a German bank that had been pulled down by the toxic loans exposure it held.
The article had the effect of running an ice cube down my spine and the lack of water and the devastating effects of the local flooding were secondary to my compulsion to liquidate the property and equity holdings.

By the end of that week all the remaining property was gone and the stockbroker was busy finding buyers for the stocks.

 

 

 

2nd January 2009

New Beginning

Thank you for all the mail over the last few years. It has been over 5 years since the site has been updated and a lot has happened in that time.

On this, the start of the new format, I thought an update on what I have been up to would be appropriate.

I left off in the middle of a major upheaval at this end. The birth of our daughter, Grace, at 12 weeks premature had such an impact that everything else became a distraction from what was the most important thing. I can report that 5 years down the line she is in fine fettle and started school over a year ago.

On the investment front I have been very active during the period and managed to benefit greatly from the madness that was the every rising value of assets in the form of equities and property. I was fortunate to read the situation correctly, sold all the property and removed myself from virtually all my holdings as things started going wrong in the summer of 2007.

I continue to hold 3 equities and made the decision last year that I would stick with these companies for the duration.

These are Ffastfill PLC (LSE:FFA), First Property Group PLC (LSE:FPO) and Amino Technologies PLC (LSE:AMO).

Apart from the above, for all intents and purposes, I am out of the market. I see no reason to be grabbing hold of the cheque book and pen in order to rush back in either. That doesn't mean that there won't be a point in the future where I will venture back but I can't see that happening for a while at least.

As a distraction I have gone back to my second favourite interest, Horse Racing. That may appear as a jump from the frying into the fire, but I find it far less risky and until recently, far more interesting. I make a decent return on this investment but it remains a hobby.

The reason for the new beginning is that the current state of affairs has at last provided an element of interest. The constant harping back to the ruination of the 1929 crash and subsequent depression is never far from the media's pre-occupation but the lack of any un slanted comment has created an urge to put finger upon keyboard.

The new site will be expanded as more content is added and it will be updated on a weekly basis.

Where we are today.

It would probably be more appropriate to ask the question "How did we get where we are?"

The blame game is the biggest one in town and the rush to throw mind boggling amounts of cash around gathers pace. So we will take a step off the merry-go-round and turn the clock back to the end of the Clinton administration, the telecom and dot com crash in 2000.

You could go back further to take in the initial impact of the the rise of China or the relaxation of regulation of credit, banking practices in the UK and practically every twist and turn from since the end of the second World war. These have all had an effect as much as the Russian and Mexican crisis's, but my view is that the decisions taken to counter balance the asset write downs and the need to maintain economic growth and the total lack of supervision were the sparks that set off a change reaction that saw the madness of the 1920's repeated but on a biblical scale.

The causes and solutions are all open to debate and I find myself at odds in a lot of respects to policy makers and other commentators. The quick fix routes that are to be followed administrations around the globe is a recipe for extending the difficulties ahead, rather than a panacea for their settlement.

For my part, I have sought to protect myself as much as possible and take a step off the ride that seemed to promise a never ending route to riches. I intend to chronicle what actions I took, what I am doing during the current hiatus and what I see as being the way forward to repairing the damage that was incurred, even though I took early action.