Good news: Rate drops and recovery indicators

Doom is the only thing selling lately, but today we will bring you some of the Sunny statistics that are being largely overlooked. This doesn’t mean we are well down the road to recovery but there is the distinct possibility that 2009 will be a turn around year for the global economy, that turn around might be a turn for the worse too though! However, the statistics we will show you now are all positive economic indicators.

1: The end of March saw the housing figures compiled for the previous month [USA]. In February the US Housing sales jumped , existing homes up 5.1% and new build was up 4.7% as buyers took foreclosure properties and others that were thought to be at ‘bargain basement’ pricing opportunities. This could be a hiccup or it could be the start of a trend, it is important to note however, that it took spectacular price drops for the renewed activity to occur. The economic stimulus package also provides tax relief to eligible first time …

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Irish variable rates March 2009

Here are the variable rates on offer at present from Irish lenders

AIB variable 2.79% ICS variable <50% LTV 2.90% BOI variable <50% LTV 2.90% AIB LTV 50-80% 3.00% EBS variable 3.13% Halifax LTV<50% 3.15% KBC (12mth disc.std.var) 3.98% Haven variable 3.7% PTsb LTV<80% 4.1% PTsb LTV>80% 4.2% NIB variable 4.23% Bank of Scotland 4.23% First Active 4.5% Ulsterbank 5.4%

These variable mortgage rates are as of March 2009 ranked according to prices.

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Banks: give you an umberella when its sunny and take it back when it rains

Samuel Clemens (aka Tom Sawyer) brought us the quote which is the title of this post, ‘banks give you an umbrella when its sunny out and take it back when it rains’, his simply worded expression held as true in Missouri of the late 1800’s as it does today.

Recently we had a client who is on an interest only mortgage, their circumstances have changed right when their interest only period was about to run out, naturally we suggested that they ask for a continuance of an interest only period, while this won’t work down the capital amount owed it will keep their cash flow alive and if you have to chose between owing more and being unable to pay then the former is preferable. Sitting in a pot might not sound great but it beats the raw fire.

The bank were happy to comply and they sent out a letter, it was at this …

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How you are already paying for nationalization

With one bank totally nationalised and others due to get recapitalised any day now it is time to ask ‘Who is paying, or going to pay for all of this?’. And the answer is in short – the tax payer, it’s just a matter of when and how.

One interesting conversation I had today was with a banking colleague (and I don’t have many friends in the bank system!) who asked me this ‘How can some banks offer deposit rates that are so far above the money market?!’. I told him that this offer existed because of the margins being charged on their lending.

His belief was that they are effectively selling government bonds via their deposit function, the state can either capitalise them -and doing so goes on the official record- or they can be propped up with deposits paid in by the public for high returns, however those returns may eventually have to be paid for by the state and thus, ultimately, by the taxpayer.

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The Stimulus Scam

In this clip Peter Schiff argues against the stimulus packages, calling for less government and a need for savings. Normally economic theory supports that increasing savings during a downturn (Keynes – paradox of thrift) hurts the economy. Peter says ‘au contraire’ and this clip is an interesting take on the man they named ‘Dr. Doom’, he is however, the same man who saw with absolute foresight the coming financial crash and he wrote a book about it called ‘Crash Proof’, he is a fascinating commentator.

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Why a rate cut is now inevitable

The ECB generally maintain that they are there to control inflation, normally we interpret this as ensuring that prices don’t get out of hand, or shoot up too quickly and indeed that is generally what rate changes are for, rates are raised to control price inflation. However, when the inverse happens (deflation or rapidly falling inflation) they will cut rates to stimulate the economy.

Today the treasury briefings put the flash estimate of inflation as being 1.6% while estimates were that it would be 1.8% which means that we are witnessing less inflation than expected and at a pace much faster than expected, if the ECB want to maintain inflation at ‘near but just below’ 2% then they have to reverse this trend and fast so there is strong likelihood that we will see a rate cut this week in order to achieve this (or at least work towards it!).

The Zero Interest Rate Policy (ZIRP) being pursued in the USA may come to our shores, the UK is already contemplating …

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The bailout has arrived, Irish banks in line for Government funds.

The banking bailout has come along, as many of us always thought it would, in the form of a (potential) €10 billion Euro package. An announcement was made yesterday and shares in financial institutions surged on the back of the news. The actual details of the deal are scant at present.

The Minister of Finance remarked on RTE radio that the main thing he hoped to see as a result of this was for lending to return to the market, we can only assume this refers to enterprise lending and not to mortgages as the mortgage market has not frozen to the same degree the business loan/credit area has.

The National Pension Fund Reserve is the area the funds will come from, an obvious issue here is that the fund made losses of c. 33% in the last year and cashing out now will mean those losses are crystallised without hope of return should the markets come back any time soon. …

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How falling interest rates hurt banks during a liquidity crisis

The falling interest rates are heralded by consumers of Irish mortgage companies as a godsend – well, for the clients of the Irish banks who actually pass on the full rate cuts that is! However, at the same time it creates a rate compression which damages the bank and this is what we will consider in this article.

Banks have two sides to the operation roughly speaking, on one side there is the lending function which we are all aware of, mortgages, car loans, personal loans etc. on the other side is the deposit taking function which provides part of the money they lend out. There is of course the interbank market which supplements (and often surpasses) deposit funds for lending, but to keep things simple we will focus on a world where deposits roughly equal lending.

When

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Deflation or Inflation? What to expect in 2010

We have felt for quite some time that the risk of deflation will be met by monetary and fiscal stimulation to the point where it will give rise to several strong years of inflation. This extract is by James Grant of ‘Grants Interest Rate Observer‘. The question of ‘when’ the scales will tip in favour of inflation away from deflation is likely to be at some point in 2010.

This is why we are letting our clients know that we are watching the long term bond yields and when we see a divergence either in short to long or medium term to long we will be encouraging people to consider a longer term fixed rate. When the five year and one year cross that might be a good time, meanwhile, because more rate cuts are expected in 09′ it would not be the time yet for this kind of move.

We don’t have a crystal ball but we are keeping our eye on the bond market so that we can try to gauge …

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ECB cuts rates to 2.5% – tracker mortgage interest rates benefit.

Tracker mortgages are a mortgage that is tied to some form of base, be it the ECB base rate or the Euribor, in residential lending it tends to be the ECB in commercial it tends to be the Euribor. Today interest rates were reduced by a further 0.75% giving a new base rate of 2.5%, which is the lowest it has been since March of 2006,the Euribor is now at 3.743% and will see the base rate drop filter through in the coming days.

Commercial loans tend to follow the Euribor, specifically the 3 month money which banks actually tend to use to finance most of their operations. The way that banks operate is to sell long term but finance short term. This is where they create their margin and its based on the yield curve, part of the problem in the last 12 months was a yield curve inversion which made lending difficult and was a …

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