As Mervyn King said, "The British economy is going through a difficult and painful adjustment, and we're going to do f**k all to help!"

Well, he actually said the first part of that in reality, the second part was added by me as I felt that this is basically what he said with his full 50+ page inflation report.

He went on to say, "This adjustment cannot be avoided." Now, he is talking about a lot of things here, but one of these is stopping the country going into recession (that's rather important for those that are in some doubt)! So correct me if I'm wrong, but America did avoid this, just this year in fact, and are at least having a damn good go at staying out of it! Whereas he seems to think it's inevitable so let's lie down and take a good kicking.

But wait for it, the really good news is that he says that he sees this continuing until 2011…nice!

He thinks that despite there being a strong argument that inflation will actually go to the negative side of things next year and in fact therefore solve the problem for him, that it is actually better to ignore that possibility and not even include it on one of his 'fan' charts!

Side note:

Fan charts are supposed to be things that cover 90% of all possibilities, and yet even in his own report it shows the bank only gets it in the middle zone of its predictions a mere 50% of the time! What I didn't like was the report said that these figure were inconclusive to saying what the banks predictive skills were like. I think I can help them there, as if they are right  50% of the time then they are wrong 50% of the time too.

The funny thing is that they are actually right a lot less than 50% of the time, which means they would have more chance getting it right if they flipped a $X!£%$% coin! (I wanted to swear there, but restrained myself J).

Yes they really are that bad at it, they would get it right by using a coin more often!

After listening to him and reading the report I am certain that they want this to cause a slowdown and they want us (not them) to have this pain as they totally believe that it is necessary and for the greater good! I think Nixon actually thought what he was doing was for the greater good too; didn't stop him being misguided.

Mervyn said, "Next year will be a difficult one, then after a while what we can look forward to is a not so bad decade."

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For those of us that are old enough to remember the recession Britain went through in the 90's, this may remind you of something that happened back then.

Virtually everyone was saying that we were in recession but the government denied it for ages. They were able to do this because recession is a mathematical calculation that is always worked out looking backwards, and it is really best defined after a longer period of time. So in other words by the time they make the recession call, we've been in one for quite a while.

Here's where the good news about recession lies, for when they make the determination that we are in recession (i.e. they give us a definite date), then traditionally we are only a month away from the recession actually ending. That is the only good news though!

But they will take their sweet time in announcing it, especially as it would probably kill off the last hopes of another Labour government. In my opinion we are in recession now; as to when it actually started, I'm guessing (and it is a guess) at some point between March and June. We'll have to wait for some time to see if I'm right or wrong.

The bad news is we won't be seeing an end to this current situation for a while yet, as the Bank of England clearly sees this as the government's problem and not theirs. So I don't see the bottom being reached for quite a while, definitely not before Easter next year and if they take the wrong action then the year after that.

Now as I said the BoE and the European Central Bank (ECB) really are faced with a problem, and they won't trust the indicators showing them that inflation is on the way down (that's next year I'm talking about, it'll still move upwards in the short term). So what they are intimating that they are going to do, is to sit tight and hope that the world economy slows. This is quite a strategy for the central banks but it will probably come to that (they won't admit it though).

This week the British Chamber of Commerce predicted a recession within the next 6–9 months, which means at least someone is being realistic about the announcement. However, they've still got the timing wrong in my opinion.

When I wrote my opinion of the latest inflation report the other day I said in it something like, if I didn't know better I would say the BoE want us in recession as their actions appear contrary to what they should be doing. Then I read this week:

Bill Martin who used to run the Fed (1951 to 1970, I think!) once said in a speech he gave when laying out what he would do as chairman, "make life endurable again by stamping out prosperity." This guy made it clear that he would actually go against whatever the recommendations by experts were when he thought it was prudent to do so, just to keep everyone guessing! Well Mervyn King seems to be following his lead, so obviously Bill is a mentor to this central banker.

To finish as I've said before, nothing has changed. The fundamentals are still the same. All you need to do is focus on the details, use the Can You Buy It Tool and make sure that the deals stack up and you get your money back. Whenever the news of recession is finally announced, this only really means that the rules of the game change yet again and we simply have to adapt to the changes!

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The truth of the matter is that the US economy is not in recession and it doesn't even look likely to go that way anymore this year. In fact the figures about to be released should be around 2% which would make it miles away from recession. Now when you consider most economic pundits including myself predicted that they would go into recession easily by this quarter why have our predictions been so way off base?

Well because despite the fact that everyone is quick to criticise the government over there, they were quick to respond and actually try to help the people (unlike over here). They brought in an economic stimulus package where they gave everyone $600, and how did they pay for it, well they wrote a guarantee. And what did the Fed do, well they cut, no sorry, slashed away at interest rates, leaving themselves open to criticism by the establishment of economists (and the results are plain to see, will somebody please show the results to Mervyn King and Gordon Brown?).

President Bush got on the TV and told everyone that they will sort it out, and here's the start with a stimulus package. Now this despite the fact that most of us believe that he is lying when we see his lips moving, so why do they listen to him? Well I think despite his various failings he can still sell em 'snake oil' (whereas Gordon Brown can't! That would require a personality!), and then most recently the Fed backed their mortgage institutions and have said they will back other financial institutions.

Now this is what I call support! And why do they do it? Well they do it for the greater good. They have to as in times like this the paradox of de-leveraging occurs. Which is that of the banks deciding that they are over-geared so they try to de-leverage. Then what happens is that the value of the asset slips so now they can't de-leverage any more and they have actually increased their leveraging because of the asset value slippage. This is where support is needed in the way of the guarantee of public funds which bolster up the sentiment and are used for the good of all to buy the assets that the banks no longer want and allow them to de-leverage without the asset value slippage. The funny thing is, on those funds it is very likely that the government and the Fed will return a very fair profit.

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Last year people were in a way protected because they did not think they could find a deal. This lack of knowledge prevented some from making mistakes as they didn't think they had a deal. It also prevented some from acting as they didn't know what a deal looked like so didn't progress.

However, this year the rules have changed and just because you can now easily talk with an estate agent and get them to lower the asking price from £190k to £170k does not necessarily make it a good deal. Whatever price they were selling for this time last year is utterly irrelevant. Never before since I have been investing in property has it been easier to get a good deal. But never before since I've been investing has it been harder to get the maths to work and protect our cashflow making it a great deal. Good deals are not good enough in today's economy, they need to be great deals or better!

If you are just coming into this environment now, please remember that the book was written at a time when finding the deal was considered to be hard. Today that is considered to be easy and if you are in traditional property investment whereby you tie up cash and wait, then that holds true. However, if you want your money out then at the moment it is harder than it has ever been, and this is where caution is needed.
 
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I thought you'd like to see some email correspondence I've been having with an economist friend of mine.

My email to him:

There's been a couple of moments when I thought I was dreaming in the last couple of days so thought I'd write you for a reality check…

Did Bernanke really say that he doesn't know which way to send the rates!

Did King really say that current monetary policy is not having much of an effect on inflation?

I only heard both of these comments 2nd hand, if they are right do you interpret Bernanke as someone telling the truth or just incompetent. And is this Mervyn's way to be able to lower rates while holding onto the fact that he can still say his mandate is just inflation?

Maybe this is his lead in to change his mandate to include the economy?

His response:

Great to hear from you.  I miss our chats.  There are few people that are as interested in monetary policy.  There is no one who is as controversial as you.

Central Bankers have got a problem.  Oil and food costs are pushing inflation way above tolerable limits which means central bankers should raise interest rates to quell the flames. So when the ECB raises rates and the dollar depreciates and the price of Oil goes up (as it does when the dollar goes down) then raising interest rates might actually accelerate inflation!  How about this….raising rates dampens consumer spending but it has no consequence on fuel or food.   In my view, raising rates will do nothing, at best, or makes things much worse.  Have Bernanke give me a ring.

The real problem is the financial crisis.  People I respect anticipate another bank failure/rescue and are much more afraid of a deflationary spiral rather than the reverse.  Central Bankers and Chancellors of the Exchequer should be taking steps to avert recession and subordinate inflationary concerns for the moment.

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The good fight that the Bank of England and the ECB are fighting against inflation to the detriment of the economy could very well all be just a waste of time that actually keeps the economy in a recession for a lot longer than is necessary.

Now before I start on this article, which paints a pretty poor picture of the way it's likely to be, you should remember that this is merely a market cycle and just means a different set of rules apply, because the market is going a different way than usual.

It does not mean that this is doom and gloom, just that it is what it is and as such we can learn to profit from whatever storm comes our way. The people who lose are the ones who are scared of change, or those who are slow to recognise change and adapt to it. All that it takes is a little flexibility in the direction you travel in to arrive at the same destination.

What does oil have in common with UK housing?

I saw from the IMF that despite the price of Oil nearing $150 a barrel, the global demand for oil has plummeted and the IEA has cut their forecast for demand several times this year. Yet the price is detached from these fundamentals…why?

Also some oil companies are paying tanker companies to effectively park offshore because they can't find buyers. Or to put it in real terms, they can't find buyers at that price!

So this means that the price is just speculative. It was under-valued in my opinion at $60 a barrel, but it is definitely over-valued now and the only way to sustain these prices would be to dramatically cut back the supply (a suggestion which I don't think the US government would like too much).

I think we will see a fundamental price correction in oil at some point when the people buying it realise that it's not worth what they are paying for it and then that market has gone. Actually I saw an interview with a guy on Bloomberg the other day who said that the world supply of oil was 85 million barrels a day and the world demand was 86 million. That painted a picture for sustained price inflation, but in actual fact I don't think that is the real picture and he was either deluding himself, or trying to talk the market up.

A fundamental is - as the price rises, people stop using their cars so much, and therefore stop spending at the destination which their cars would have taken them to. The supplier in turn does not buy from his supplier, who in turn does not buy from his supplier…etc. (a very simplified explanation)

So what then happens is that demand for oil slows and then the fundamentals kick back in on the price. This is just a supply and demand situation that has altered shape because some institutions have currently changed the shape of the market, because a market price is defined by supply and demand unless acted on by an outside force.

Now this is where we see a similarity to the UK housing market. Effectively speaking, speculators have changed the rules (the credit crunch liquidity problem). The real factors that defined the price of the UK housing haven't gone away, the shortage of land and immigration are still the leading drivers, it's just that only a small percentage of people can get mortgages right now, and the first time buyers who would now be able to get mortgages because of the price reductions cannot get them because the lenders want larger deposits.

Side note: I was talking to a developer in Cyprus and he was saying how he wanted to get some houses finished quickly because prices of materials were going up so fast. I said to him that he'd be better off slowing his build timetable down because commodity prices will start to fall some time next year.

The problem is that it's silly season right now, so all bets are off. We need to see where this mess ends up so that we can predict what will happen more accurately. Though none of this changes a great deal from being a great deal, you just need to be able to tell that it is a great deal and currently we are getting some of the best deals we've ever gotten hold of in the UK.

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What is today's market?

Stated another way the question is - 'Is there really a property market?'

The media would have you believe that 'THE MARKET' fell by a X percent last month and it has fallen by X percent since this time last year. So what does that actually mean? It means that those who still have property for sale on the market and must sell are willing to slash prices, and those who would sell in the ideal world but are not that concerned if they don't, are simply staying put. So if only 5 or 10% are in a position that they must sell, are they speaking for the entire market? The media would have you believe so.

If you say that of all the people who would want to sell (being 'THE MARKET'), 20% of those people had to sell, and 80% don't, but would like to. Well currently the 80% have all gone home leaving the 20% (this is an exaggerated figure, it's probably nearer 5 – 8%) to set the market price. So what is 'THE MARKET' then, the 20% or the 80% or the collective 100%?

If we said that it was 20% that had to sell and the market fell by 10% then effectively that could be made to read that the market has really fallen by just 2% as a whole. At the end of the day I think it was Mark Twain who said it best, 'there's lies, damned lies and statistics!' Frankly, that is not as important as the next point.

The whole point being it is a buyers' market right now, and the value of a property is what someone is willing to pay for it when the other person is ready to sell it. As for actual value well, that's a different story and is still down to how we structure our valuations.

Where to focus your main efforts

For the last few years I have been proving to countless people that there really are deals around all over the place and that you really can buy property extremely below perceived market value prices. People would come to see me, still not believing it was possible, and then leave with seeing me find property right beneath their own noses that they had looked at before and still didn't recognize as a deal.

In today's market anyone should be able to identify a motivated seller, but for those who can't, they are the ones sitting on their roofs contemplating whether or not to jump! Today the territory has changed shape somewhat, people are finding deals more easily, but that doesn't mean they are able to get their money out.

And frankly, in times of potentially rising rates, this is a very dangerous time to be taking too many risks, which is why I have said in several articles to really push the vendors down on price. As what can really look like a deal today, even though it is £20 - £40k cheaper than a year ago, may still not actually be a deal as the real deal to be had was at £60 - £70k discount and actually the £30k discount which they bought on was really £10k above the price they should have paid…

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There are a lot of people quoting parallels between the US and the UK property market and citing Spain as a warning of what there is to come. There is also the declining market in Ireland which again, after its rapid price correction, is now not really much of a surprise that it overshot the mark. However, one real reason for this more recent slow down is detailed below.

There are reasons why there is some truth in the UK following the US and it mainly comes from the global banking system, causing the lenders to leave the market for a while, or if they stay, they stay at very high rates. So that is a possible problem that could cause a fairly serious UK fall. Another is the tightening of monetary policy to bolster against risks of inflation. Either of those obviously run the risk of serious damage to the UK market. The jury is out on this one, so we'll have to wait and see. However, the fundamental difference in the UK with the US, Spanish and Irish markets remains.

So what is it? I pulled these stats out of a recent article I read that really helps to emphasise a point I have been trying to make about the UK being different for so long.

The inventory of unsold homes in the US has hit a 20 year high, according to my favourite research company 'Capital Economics' (side note: I suggest you search the site if you want to read what I think about these muppets and their poor quality research. However, this firm is very well respected for some reason and the public has a VERY short memory). Spain continues to build more than it requires now and that was if the market was bullish and it is not, so this could well cause further problems for Spain over the next few years and I would be very careful buying in Spain right now. The poor resale market is well known, but if it was to suddenly flip over to a declining market then it could cause an excessive value fall similar to the US and all because confidence is lost.

Try to think about the US another way, the market is still a falling knife and needs serious research before investing, but currently you can buy a lot of property for not very much money. This indicates that money can be made at some point there in the future, no shock there but the problem is getting in just before the rise starts, that's if that's your game of course! Personally, I prefer making the rules myself not waiting for someone else to change the game.

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The BBC brought out a wonderfully useless statistic yesterday and used it for their main headline, whilst they had struggled all day with different ways of presenting the info and different editors thinking maybe they were getting it wrong, therefore resulting in changing the figures several times, e.g "1,000,000 in negative equity", "2,000,000 in negative equity", eventually settling on "23,000 people took out 100% mortgage and the price of the market has fallen therefore they are 'probably' in negative equity."

Whatever happened to this supposed bastion of straight forward, honest, factual reporting? What a disgrace! They should be ashamed of themselves!

Anyway, the point being once again, they, as with all media, are just generalising on a market, not caring that they are inaccurately informing people of 'the way it is!'

We were speaking to a surveyor the other day and discussing the various devastation in his industry, which included one of the larger surveyors recently going to the wall and 100 surveyors being laid off. One of the points he said to us was that the lenders are insisting no surveyor can be requested by name, and if that happens the surveyors must report to the lender immediately. This is yet another sign of the lenders getting very nervous.

He also seems to think along the same lines as we do about the market. Basically, in his words, there is no market because nothing is really moving so prices aren't going down, as many say.

So what is going on then as the market is supposedly falling? Well, the ones who have to sell are reducing their prices, and the ones who don't need to sell simply aren't placing themselves on the market. So it may well be true that if you wanted to sell the market has fallen, but if you don't need to sell then what difference does it make? The only difference, as with the value of all markets, is confidence and at the moment confidence, with all this media manipulation and poor figures, is understandably very low.

So what's coming up then?

Well, I think Mervyn King's assessment that the worst is yet to come is, unfortunately, correct. However, the real unfortunate thing is that it doesn't need to be!

But frankly they won't do anything about it, so like all legendary marketeers he's telling you first what he's going to sell you, i.e., "a dim future", then he's going to tell you what he's really selling you, i.e., "a dim future". Then, he's going to tell you what he's actually sold you, i.e, "a dim future", and because of that he'll be able to continue to sell you "a dim future" and, what's more, you'll buy it!

Why? Because the masses are fooled when they are told something so often that they end up believing it, simply because they have heard it so many times, from so many places.

The truth is, it doesn't need to be that way, it just will be that way.

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In times of market rises and easy money all you have to do is be 'in' something to profit from it. However, I see some of the basic risks that the uneducated have gotten wrong which is why in times of uncertainty they seem in a rush to protect their money. Knee-jerk reactions of course are more than often the worst thing to do!

For those who may well need reminding, the only people who lost money in the 1990's property market crash were…the ones who sold. Doesn't seem to be much about that in the media at the moment does there?

Trouble is times like this bring in the real speculators, the people who believe they can make the arbitrage of selling high and buying low. You'll hear a lot of that sort of thing in the next few months. However, the voices of the vast majority of repossessions will go unheard unless it makes good air time.

The risk to me at the moment remains the same as it always was, as I have always said that it doesn't matter what the property market does, as long as you have cashflow to weather the storm. So with cashflow protected the most important risks are covered by having a plan.

When I was taught to fly, I was taught that you don't ever say you are lost, unless you are actually lost. The exact phrase until you have rediscovered your location is that, if asked, you are 'temporarily unsure of your location'. You learn so much when you learn to fly regarding navigating that it is unlikely that you will be unsure for long as you planned your route really well before leaving. So when you become 'temporarily unsure of your location', all you need to do is set the plane to fly in a circle while you sort out where you are and if necessary you retrace your course until you rediscover the route you originally planned.

However, when it comes to something as important as their financial security most people don't ever sit down and actually come up with a plan, they react to what is going on around them and then complain or get scared when it looks like it could possibly be going wrong. After all, they've planned for nothing and it's not working out, that means they have to panic as that'll surely help the situation

I know my greatest successes have happened when I have a clearly defined plan. So here's a little re-tuning session for those who are unsure of their course or maybe forgot to plan their route before taking off.

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