2008 Market Crash?

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Are we heading for a property price crash?

Over the last few weeks there have been comments from industry experts all warning us that the UK is heading for a house price crisis or property price crash in the very near future, but when and is it really likely to happen?

Well some of the UK banks have claimed that the housing market will experience a slight downturn but nothing like the crash being claimed by some. Certainly we should see no sudden crash.

It all seems to stem back to 2005 when everyone said the housing market would crash. Back then the average house price was around £162K up from around £60K in the 1990’s. So then as now really, everyone was talking of the imminent house price crash.

At the same time in 2005 banks started offering customers huge mortgages based on their ‘affordability’ which was determined by the bank, rather than sticking to the traditional and more sensible in my opinion, method of lending 3.5 times a persons salary. At least this way you knew approximately one third of your salary would go towards paying back your mortgage and you would not be stretched beyond your means every month.

This was also combined with an all time low of 4.5 per cent Bank of England base rate, which contributed to the massive house price increases we’ve seen over the last 2 years.

So will there be a house price crash? If you compare today to the 1990’s then there are definite similarities; massive house price increases and concerns about long term affordability. Today we’re all worried about our huge mortgage debts rather than massively scary interest rate hikes.

If current house prices fall flat or even fall slightly as they seem to have been doing in recent months most home owners will be able to sit tight. Most homeowners can afford to wait and see what happens with the market rather than being forced into selling their homes because they cannot afford it.

Certainly people who have been repaying a mortgage for 10 years or more should have enough equity in their property to ride out any fall in prices.

Simon Duffy writes for the Financial Blog a UK Finance Blog talking about all aspects of personal finance including loans blogs, credit cards blogs, tenant loans, credit cards blogs, mortgages blogs, insurance blogs and more.

Why Welcome Stock Market Crash

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans.

A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven.

The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are!

Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004.

The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement.

Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted.

All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue).

But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets.

The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed. Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors. That is a considerable achievement.

So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

The Author is an Professional Indian Stock Market Analyst and running his own stock market consultancy - BullRider. He provides trading tips, calls, during the market hours. Nifty , Stock Futures Trading Calls are provided thru SMS. Email Address - : mail@bullrider.in

BullRider – INDIAN STOCK MARKET TIPS, SHARE CALLS, NIFTY CALLS, INTRADAY BTST PICKS

Stock Market Crash

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans.

A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven.

The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are!

http://www.bullrider.in

Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004.

The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement.

Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted.

All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue).

But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets.

The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed. Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors. That is a considerable achievement.

So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

Could the 1929 Wall Street Crash Happen Again

So why did the crash happen and what can today’s investors learn?

One of the great myths about the great crash was that it precipitated the Great Depression. Financial analysts and historians disagree on how much effect the crash had on the looming Great Depression of the 30s. The economy was already collapsing prior to the Wall Street disaster and poor people, who would be the most affected by the Depression, were not investing in the stock market. For them, poor farming conditions and the great dust bowl would be far more significant to their plight. The image of the Wall Street tycoon leaping through their skyscraper windows is a myth. Most survived the crash with their mansions intact. They lost large amounts of paper wealth but they had sufficient funds to survive and then prosper in the low market. For the middle class it was a different story. Throughout the 1920s the market had been doing so well that many ordinary Americans were investing. More people were investing although many could not afford to do so. People were investing on speculation—borrowing from banks, buying stocks with an eye to selling them in the future for a profit that would cover the debt and interest and more. When prices began to drop, people realized they would not only fail to make money but they might not be able to cover the debt either and so panicked. Banks had lent heavily to fund this share-buying spree and when the market collapsed they found themselves saddled with debt, which caused many banks to fail. Millions of people lost their savings and, disastrously for the economy, businesses lost their credit lines and were forced to close, which caused massive unemployment. The middle class now found themselves without savings and, in many cases, work. The over-reaction of the Hoover administration to the Wall Street Crash probably exacerbated the situation and the passage of the Smoot-Hawley Tariff Act caused more harm than the crash itself.

Could it happen again?

Investors are continually told “no” and that there are things are in place to stop the sort of crash that happened in 1929. But evidence seems to imply otherwise. To prevent panics such as 1929, buying on speculation was made illegal. Stock markets instituted measures to temporarily suspend trading in the event of rapid declines. The US Glass-Steagall Act of 1933, mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities. For decades, these rules seemed to protect the markets and no more collapses occurred. Invested slowly came back to the market. But when the Regan administration relaxed some of the regulations managing brokerages in the early 1980s, the stock market began to pick up. The crash of Monday, October 19, 1987 was even more severe than the Crash of 1929. On Black Monday of 1987, the Dow Jones Industrial Average fell 22.6%. While it was the largest single day drop in history, it did not precipitate a recession or depression. Other economic indicators were on the upswing and the crash seemed to only affect the larger investors. The late 1990s also saw a period of “irrational exuberance” as billions were invested in speculative ‘dot-com’ businesses. The ‘dot-com boom’ will be remembered for the founding spectacular failures of new Internet-based companies that eshewed standard business models, and focused on increasing market share at the expense of the bottom line and launched IPOs based on ideas rather than demonstrated businesses. Most major investors such as Warren Buffett had not jumped on the band wagon and when the collapse came in 2000 were not affected. The same can not be said for the majority of passive investors who saw the value of their mutual funds plummet. That crash followed by drastic US deficits implemented by President George W Bush, a collapse in Asian real estate markets and the September 11 attacks marked the beginning rather lengthy recession in Western nations. So what of today? Even more mutual funds pumping their value on speculative stocks, an overpriced bubble market with millions of people involved, many of whom are seeing their other investment, their houses, sinking in value, and all with access to computers and brokerages that can sell their stocks quickly makes for a very volatile situation. The next crash will probably indicate more than any other whether investors are more sophisticated today and will avoid repeating 1929 style panic collapse or will precipitate a much larger, quicker and significant exit from the market.

Jay Northco is the Editor of www.cramerwatch.org.com the website that pits Wall Street Guru Jim Cramer against a stock picking monkey to see who can make the better stock picks.

Causes of the Great Depression and the Stock Market Crash

On October 24, 1929, hailed as Black Thursday, the stock market crashed, triggering the Great Depression. The stock market crash did not actually cause the Great Depression, but rather contributed to the disaster of the Great Depression, which was caused by a number of serious economic problems.

Although the “Roaring Twenties” appeared to be a prosperous time, income was very unevenly distributed. Businesses prospered tremendously, but the workers received a relatively small share of the wealth produced. At the same time, taxes were lowered for the upper class. As a result of these trends, the top .1 percent of American families had an income equal to that of the bottom 42 percent. World War I also weakened the economy.

After World War I, the United States served as the world’s banker and primary creditor as Europe struggled to pay war debts. Bankers lent too heavily to borrowers in Europe and made the international banking structure extremely unstable by the late 1920s.

Farmers were already in a depression in the 1920s from World War I. Farmers expanded their output during the war when demand was high, but after the war they found themselves competing in an over-supplied international market. Prices fell and farmers were unable to make a profit. The stock market crash of 1929 specifically had an impact on the Great Depression. Speculation in the 1920s caused many people to invest in stocks with loaned money (credit) and used these stocks as insurance for buying more stocks. But in the later 1920s, stock investment began to decline due to lack of confidence. In late October, prices began to drop rapidly and investors became fearful and began selling stocks.

On Black Thursday, October 24, 1929, the stock market crashed and major corporations suffered huge losses. Thousands of banks were unable to stay open since investors were unable to pay back the loans they took in the 1920s. In 1932 and 1933, stocks hit rock bottom, about eighty percent lower than they had been in their highs in the late 1920s.

The demand for goods declined because people didn’t have any confidence in the economy and felt poor. These trends caused America’s economy to sink into the worst depression it had ever seen. The stock market crash inhibited the ability of the economy to recover from the underlying problems that affected the economy including unevenly distributed wealth, agricultural depression, and banking problems.

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