A reply to current market conditions

Well, as with all bubbles this one had to burst. But how could it have been foreseen? The only thing I knew, and wrote about, was the obscene nature of the earnings needed by many average earners in the UK to purchase average property, with some lenders offering 7 x an individuals earning power, not checking credit records and offering 100% mortgages!

Seeing all that written down looks crazy, it looked crazy to me two years ago, unfortunately it didn't look bad in a 'buyer's market'. I must admit I never knew of the complexity of the situation, I didn't know the extent to which the banks were involved, especially those that didn't offer mortgages. However, much has already been written about the state of the sub-prime market and what it is and I don't need to add to it. What I will do is comment on the governments' response to the crisis.

This week has seen losses in all major markets, many markets have set new records, Selling is the order of the day and by the end of the week the UK government had to do something. They propose to pump money into the banking system, though not in the same way as the US. The US is concerned with selling the assets that no one wants. Even Buffett thinks that this is a good idea, and thinks that if the investor can get leverage of 80%, and the government gets the gains of sales first then everybody wins.

Personally I think if you have a rotten egg, no matter how you gloss it up it'll be hard to sell. Governments pumping more money into this route, I think, will be throwing good money after bad, effectively saying adios to it. For once, I agree with the UK's stance. The UK gov is pumping money into 8 of the top banks, as a stakeholder. They will effectively be part-nationalizing the banks.

Ordinarily I'd say that the market should dictate who goes out of business. In normal conditions that would be fine. Present day conditions suggest that if the market was let to run course, banks, financial institutions and even whole countries could go bankrupt! Judging from what can happen, looking at Argentina, and many African countries that cannot get credit, letting the market decide, in its manic depressive present state, is not a good idea.

A person, wouldn't go as far to say a friend, but someone was talking to me about this issue a few weeks ago. They called me a communist when I suggested part nationalising banks- this was about 2 weeks ago. Ordinarily banks, being the wholesome prudent institutions that they are (we wish!) would be fine managing themselves, as I said. As we all now know, they cannot run their own businesses. They need money and guidance, like amateurs.

In these dark days one can hope that with the whole nation buying a share in the banks we can collectively all get a good deal. With my RBS shares hitting the low 70s this week *previous high over 700, I truly hope the banks bounce, imagine me getting a 10 fold (I plan on purchasing some bank stocks, the part nationalised ones of course) and the whole nation getting a 10 fold return. That's my kind of communism!!!

What about the rest of the economy?

Well, there are a few businesses out there making money. Consumers are still spending. I think once the banks are dealt with, we can side step disaster. Though, looking at the press I tend to think if there was a disaster, more of a disaster than there already is, I'd blame them. They micro-report (like micro management, but reporting EVERYTHING), they are not balanced and they are the mirror that MR MARKET stares into. Greedy and Fearful, but never forward looking. I enjoy learning languages and I'm yet to find a language that sees shortsightedness as something worthy of praise.

And on that note, keep in the market, and if you still have money left buy the best businesses at nice and cheap prices!