Why I am an optimist by John Mauldin

John Mauldin sends out a weekly investment letter which has a readership of over a million people, the genius of his letters are that he doesn’t purport to know everything, luckily for him though he knows enough experts in enough fields who do, he draws on his knowledge and theirs to provide poignant and relevant financial interpretations of many events around the world but with a specific focus on the USA (he’s a Texan). Below is a recent letter that inspired me, so often we get caught up in news that we forget that the human race is an incredibly adaptable and innovative species. So I bring you John Mauldin’s thoughts, as to why he is an optimist, and I tend to agree….

Why I Am Optimistic About the Future

I am optimistic by nature. An entrepreneur friend of mine gave me a term that I have grown to love. She calls it “psychic income.” It’s that bit of hoped-for future income that is in our minds, that drives some of us, inflicted with the entrepreneurial gene, to do …

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Fixed rate price increases likely

We are going to look at the Euribor yield curve today considering its moves from 20th of June against two dates in August with a view to deciphering what it means for rates in the Irish residential mortgage market.

First of all we see that the June vs August lines on the 11th showed a drop in short term rates, this would normally imply an increase in liquidity (generally) as well as a lack of inflation expectation until circa the 2yr mark at which point the blue euribor line trends higher. We would take it that the expectation is for low rates to prevail for the next year then rise to about the 1.5-2+% range.

The prices changed from June to August and the implication is that sentiment changed from low short term rates to rising longer term rates to depressed short term rates and much higher longer term rates. This is a goldilocks scenario for the banks because they will be able to justify and earn large margins on the short …

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What did bankers do wrong exactly?

Sometimes I have to wonder where the blame-game changed course and the organisations with no commitment to societal well-being were burdened with that responsibility, while those with an inherent responsibility then moved into the realms of innocence in the whole fiasco.

Imagine if you will, a bold child being held responsible for eating all the cookies and spilling all the milk, that of itself is easy, and when you go to met out ‘blame’ you might focus on the child, but if this all happened while their parents stood idly by do you still focus on the child or do you apportion significant blame to those who have the responsibility of guidance and direction? Indeed, any person who understand the nature of a child will realise that they don’t really consider the wider costs of eating all the cookies and spilling the milk (such as depriving their siblings of same, no milk for the tea etc.).

So with this in mind I’ll turn to banking, commercial banks don’t have a moral code …

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Why aren’t mortgages MORE expensive?

In looking at any product or service you will often hear people mention ‘supply and demand’, it is one of the foundations of Microeconomics.

Generally if supply increases prices drop, if it decreases prices rise. By how much is a question of how elastic the demand is versus supply.

We know from our day to day experience that there is still a high level of demand for mortgage finance, charting our figures back to 2005 has shown us that if we take out ‘noise’ of m/o/m figures that demand is still at relatively high levels.

However, we also know, from our daily interactions with banks that criteria is getting harder, conditions more restrictive, underwriting is more forensic, the supply of mortgages is decreasing rapidly.

Using a simple chart you would get something along the lines the one below, the blue supply and demand lines show  the situation at a certain point in time, we’ll say that is a year ago, the green line of supply shows the current situation – it has moved to the left because of the decrease.

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Why aren't mortgages MORE expensive?

In looking at any product or service you will often hear people mention ‘supply and demand’, it is one of the foundations of Microeconomics.

Generally if supply increases prices drop, if it decreases prices rise. By how much is a question of how elastic the demand is versus supply.

We know from our day to day experience that there is still a high level of demand for mortgage finance, charting our figures back to 2005 has shown us that if we take out ‘noise’ of m/o/m figures that demand is still at relatively high levels.

However, we also know, from our daily interactions with banks that criteria is getting harder, conditions more restrictive, underwriting is more forensic, the supply of mortgages is decreasing rapidly.

Using a simple chart you would get something along the lines the one below, the blue supply and demand lines show  the situation at a certain point in time, we’ll say that is a year ago, the green line of supply shows the current situation – it has moved to the left because of the decrease.

Read More

Ireland is downgraded by S&P

We wrote about this in the past, the risk associated with a ratings downgrade to the country, and here it is laid out in plain English.

A downgrade on our rating from AAA to AA+ has the effect that everybody knows about, raising debt is more expensive, so in the past if we had to pay (for instance) 150 basis points over base to clear bond issuances then a downgrade will have you paying (for instance) 180 basis points as the market views your nation as being a higher risk [bear in mind that AA+ is not a ‘likely defaulter’ rating].

However, this has already been priced into our bonds for the most part as they all had to offer higher than average margins to clear, what the downgrade does do though, and the bit that I don’t see in the press and can’t figure out why, is to cause the enforcement of automatic international treasury rules.

What does that mean? It means that there are institutions the world over that have money …

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Ireland is downgraded by S&P

We wrote about this in the past, the risk associated with a ratings downgrade to the country, and here it is laid out in plain English.

A downgrade on our rating from AAA to AA+ has the effect that everybody knows about, raising debt is more expensive, so in the past if we had to pay (for instance) 150 basis points over base to clear bond issuances then a downgrade will have you paying (for instance) 180 basis points as the market views your nation as being a higher risk [bear in mind that AA+ is not a ‘likely defaulter’ rating].

However, this has already been priced into our bonds for the most part as they all had to offer higher than average margins to clear, what the downgrade does do though, and the bit that I don’t see in the press and can’t figure out why, is to cause the enforcement of automatic international treasury rules.

What does that mean? It means that there are institutions the world over that have money …

Read More

The name is ‘Bond’, ‘Failed Bond’, UK Economy ‘Shaken’, but not stirring.

The UK had a failed bond offering last week and that is giving the world some indication of the state of the UK economy. They have failed in their bond auction, something that has not happened since the mid 90’s, the cover gap was 0.93 which is markedly less than the 0.99 cover failure the UK witnessed in the 90’s.

Where to? Where will the bond market go? Where will currencies go? What is going to happen next?

I think you can take this domino and walk through the path it might take. A failed bond means that the UK will have to offer more interest in the future to attract investors, how can you do this? Well, you can continue to print money (which they are effectively already doing), and this will devalue your currency (which is happening already). With a devalued currency and more money you can thus pay off the higher rates you promised in your bond …

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The name is 'Bond', 'Failed Bond', UK Economy 'Shaken', but not stirring.

The UK had a failed bond offering last week and that is giving the world some indication of the state of the UK economy. They have failed in their bond auction, something that has not happened since the mid 90’s, the cover gap was 0.93 which is markedly less than the 0.99 cover failure the UK witnessed in the 90’s.

Where to? Where will the bond market go? Where will currencies go? What is going to happen next?

I think you can take this domino and walk through the path it might take. A failed bond means that the UK will have to offer more interest in the future to attract investors, how can you do this? Well, you can continue to print money (which they are effectively already doing), and this will devalue your currency (which is happening already). With a devalued currency and more money you can thus pay off the higher rates you promised in your bond …

Read More