I started this blog in June 2007 asking these questions: Are we in a massive asset bubble that will blow up in our faces ??? - ANSWERED YES ! Is western and particularly British society on the verge of social collapse??? What are the best common sense long term investment strategies to keep you rich? When will consumption/debt bubble economics end and a real savings/production economy begin ???

Tuesday 28 August 2007

Overheating sees house price downturn in Europe

House prices on the overheated fringes of Europe have begun to turn down sharply, replicating the early phase of the sub-prime property slide in the United States.

Housing booms in Romania, Bulgaria, Croatia, and even Russia are all looking stretched to extremes.

Irish property has fallen for the past four months in a row as higher eurozone interest rates start to bite harder, while the speculative bubble in the Baltic states has burst.

House prices in the greater Riga region of Latvia fell 3.5pc in June, following a 1pc fall in May. Flats in the old city became more expensive than Berlin by early this year in a speculative frenzy, much of it with euro, Swiss franc, and yen mortgages that could prove disastrous if Latvia's currency is suddenly devalued - as may well happen, given the country's current account deficit has exploded to 26pc of GDP.

Similar booms in Romania, Bulgaria, Croatia, and even Russia are all looking stretched to extremes. Danske Bank has warned that much of Eastern Europe has been inflated by a "monster bubble" that recalls conditions in east Asia shortly before the crisis broke in 1997.

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Business comment: Look to China for root causes of the crisis

This crisis has not fundamentally been about equity market valuations. The proximate cause of this crisis has been difficulties in the US sub-prime mortgage market. But although the story started there it didn't have to.

A week's break in the Med did not bring escape. No sooner had I arrived than, as news of market shenanigans reached us, some chap, recognising me from my photograph on this page (and that was a first!) pinned me to the edge of the swimming pool and asked me the fundamental question: "What on earth is going on?"

The first thing to say is that the gyrations of the equity market, although striking, are not extraordinary. This is the third significant global sell-off in equities since the beginning of 2006. After its recovery in the last couple of days, the FTSE 100 is now some 8pc below its July peak. But that means that it is pretty much back to where it was at the beginning of the year.

Yet this crisis has not fundamentally been about equity market valuations. True, some equity markets have looked toppy, especially the US. But the UK market has not appeared to be seriously over-valued. This puts this episode in stark contrast to the dotcom boom and bust and the equity market crash of 1987.

The proximate cause of this crisis has been difficulties in the US sub-prime mortgage market. But although the story started there it didn't have to.

It could easily have begun somewhere else. The saga which this episode set running is about the financial markets' wholesale embrace of risk at the prospect of little extra reward, and about the distribution of this risk around the system.

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Brace yourself for the insolvency crunch

Yes, investors are jumping back into the stock markets, hoping this is just another routine shake-out - much like February 2007, or May 2006 - before the rally resumes. The `buy-on-dips’ orthodoxy dies hard.

And yes, speculators have renewed their leveraged bets on the yen and Swiss franc carry trades, borrowing cheap in Tokyo and Zurich to play global assets. The core belief is that nothing has really changed, that the world economy is still in rude good health.

Be very careful. Interest rates in Europe and Asia are that much higher now, with delayed effects starting to bite hard. Japan’s economy has stalled to 0.1pc growth in Q2; the euro-zone has slowed to 0.3pc; and China’s refusal to import (by currency manipulation) makes it a drain on world demand. Above all, the credit bubble that perpetuated the rally of the last eighteen months beyond its natural life has definitively burst.

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House prices hit a standstill

House prices slowed to a standstill during August, according to the latest survey from Hometrack, the property website.

The group recorded the lowest rate of monthly growth since November 2005, with average house prices "unchanged".

London, the real engine for house price growth over the last 18 months, was the only region to record a price increase over August. However, it was a rise of just 0.1pc. Three regions recorded price falls of 0.1pc, namely Yorkshire and Humberside, the North and South West.

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Wednesday 8 August 2007

Cramer melts down. Markets, too?



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