Biggest crash in world history coming up
Sunday, August 12, 2007 at 11:18PM None of my friends want to talk to me about economics, which is frustrating. Because I think we are in for an almighty wipeout in the financial markets, which has only barely begun to get going. And that is interesting, and worth a conversation.
As I have posted previously, I think a lot of exotic financial products, and a lot of very exotic investment strategies done with borrowed money, are about to fail spectacularly. As a side effect, a lot of perfectly solid markets (in stocks, bonds, property, commodities) are going to be cut in half, and a lot of institutions, to their intense surprise, are going to be wiped out.
More specifically, I predict the implosion of a very large number of hedge funds over the next year or two (and probably a lot sooner than that). Let's be more specific: I suspect that more than 25% of the hedge funds in existence today will not exist in two years time. (Oh come Julian, don't be shy, what do you REALLY think? Well, I really think at least half of them could vanish, but I'm trying to sound conservative and thoughtful here.)
And I think we'll lose more than one really, really big, globally known bank, insurer, and/or pension fund.
We may not lose them technically: governments and central banks will probably try to coordinate a rescue. But if they survive, they'll have been artificially resuscitated after having gone under.
Also, a lot of junk bonds will turn out to be junk. A shedload of private equity firms will go bust, and a stack of grossly overleveraged companies will collapse before 2010.
And residential property prices will fall through the floor in real terms over the next couple of years in a bunch of countries, including the USA and my dear and darling Ireland. (Put a figure on it... OK, from peak to trough, a fall of over 30 % in real terms. There. The trough may well take a lot more than a couple of years, mind you, and inflation may mask the fall, but in real terms I'd be surprised if it's less than 30% in Ireland's case. America, being vast and varied, I'll call a fall of over 30% on the coasts and large urban areas, before it eventually bottoms out. Again, I'm being conservative, and secretly think it could be more.)
Note that I think the real-world economy is in pretty good nick right now. But the financial world, across many asset classes, is about to have the biggest crash (in dollar terms) in the world's history. Bigger than the dotcom blowout? Yes. Will it wreck the real economy? Don't know. Haven't I predicted enough for ye? Don't be greedy.
Ah, sure, while we're at it, we'll lose at least one of the Big Three American car companies.
Well, that has the potential to make me look very stupid indeed in 2010...
Anyone want to argue?
Reader Comments (18)
Data released this week showed a 22% increase in new home sales in the west and a small tic up in the south.
I would not argue, however, because I have never been able to predict anything, the economy notwithstanding.
I'd also note with worry the unwillingness of public figures to speak out on economoic matters. Given the importance of 'confidence' to global financial markets it seems that any public statement on 'unconfidence' is seen under new terror legislation as an attack on national security, and MI9 have legal authority to eliminate you with full prejudice. I'd hate to see the next Gough novel artificially curtailed in such a way.
Really, my motivation for that post (and for my long February post, ) was entirely unworthy and egotistical: I wanted to go solidly on the record with a couple of predictions, because if I turned out to be right, I wanted to be able to grab my friends, point to the posts, and say "Told you so!" (The least appealing words in any language.) It all reflects very badly on my character.
I've been arguing with my friends for years about Irish house prices. I've been maintaining Ireland's been blowing an ever-increasing bubble (driven by ludicrously loose credit, and by eurozone interest rates set to suit a depressed Germany, not an inflationary, booming Ireland), and that it'll end in an immense house price crash.
Most of my friends not only disagreed, but bought a second house, just to annoy me.
We shall see.
Glad you've been finding it interesting.
Predicting the debt & derivatives debacle is probably the achievement I'm proudest of on this blog. That and stealing Will Self's pig, I suppose.
I must get back to that subject soon. (The debt debacle, not pig theft). It really does fascinate me...
http://xroads.virginia.edu/~hyper/Allen/Cover.html
Site has published Frederick Lewis Allen's excellent 1931 book "Only Yesterday." From the chapter Home Sweet Florida, about the land speculation in the mid-1920s: "Just as it began to be clear that a wholesale deflation was inevitable, two hurricanes showed what a 'Soothing Tropic Wind' could do when it got a running start from the West Indies."
Sure you're in the right job?
Yes, I do sometimes think wistfully that I should take a few years away from writing, and just trade ferociously. But noone would trust me with money in advance of my predictions coming true. Who'd have given me twenty million to short the NASDAQ in 1999/2000? Who'd have let me short property and financials in February 2007, when I was predicting a global debt and derivatives debacle?
Anyway, if I was inside the financial system, I'd have no perspective on it, and my edge would be blunted.
It's fun being right though. And if anyone ever does want to finance a contrarian fund whose investment strategy is based on reading lots of novels and some second-hand paperbacks of German philosophy, well there's a Mail Me button over there somewhere on the right hand side of the page...
As i write, I'm finding it hard to keep in the giggles. Sitting in a freezing office of a construction company in the Liosban Este. on the Tuam road in Galway. Im posting on this article but i've spent most of the morning reading way way to many of your posts and articles as i dont really have anything to do here at the moment. Like yourself i didnt engage in the property speculation during the boom. I was travelling for two years and returned to Galway in 2006 when the party was in full swing. If felt a bit like going into a bar sober at 11pm on St. Patricks day. I began working here in June 2006 when the housing boom was at its height. I don't own a car, an have always been considered a deviant in my job. Secretly im delighted that that the entire thing has come crashing down. At least once a week for three years i would have a conversation that went something like this:
Celtic cub: "Where are you living Mike?",
Me: " I'm renting a place in town"
Celtic cub:(Smugness starting to creep in) "Oh renting? . . and how much is your rent?"
Me.: "Its around €600 a month"
Celtic cub: (Smugness snowballing) "And why don't you buy a house? you could get a mortgage for less than that, And you could rent out the rooms. We've just moved into our new house in (athenry/ Oranmore/ Dough Uisce/ Ros cam) and we're renting our place in wellpark/ westside etc. The rent in town is paying the mortgage for us"
Me: "Houses are too expensive at the moment. I'll wait until they come back to normality"
Cub: "You should get on the ladder now while you can, sure you will have first time buyers allowance. . . Renting is money down the drain!"
me: " I dont think its "money down the drain" it gives me the freedom to live where i want and not be tied to a house"
Cub: "Money down the drain. you are just paying the mortgage for someone else"
at this point i would notice something in the distance which needed my immediate attention. I have an almost owerwhelming desire to stand infront of the worlds media this week outside the Dail with a banner reading "Money down the drain!!"
Reading your post after seeing your "portrait" in Courrier International, about how you survived the Irish properity. Your post is pretty accurate and sensible, and reminds me that back in March 2007, leaving in the City in London, a colleague of mine was also talking about the butterfly effect the subprime crisis would have on the world. He was a visionnaire.
Now, it's been 3 years since the beginning of the crisis, and it seems people are not learning a thing from history - even from the very recent and still burning one...
Good Luck!
Mike, lovely stories. Yes, I recognise those conversations... Best of luck with the construction company! Perhaps you can tender to build a bunker for the Fianna Fáil leadership. They'll need one, to survive the fallout from last month's events.
I'm sure Hugh Hendry would appreciate your research and analysis style, it seems to quite closely match his own so far as I can tell. (http://news.bbc.co.uk/2/hi/programmes/newsnight/8565245.stm)
What are your most recent economic prophesies, you know, aside from structural imbalances in the Somali goat market?
~Cheers and thanks for the wonderful writing