UK in denial on housing, says the prophet of fear

Not that many people were listening, perhaps because Wood seemed obscure. As a strategist for Hong Kong brokers CLSA Asia Pacific Markets, Wood has built a big following among the class of investor that like their news to be bad, or at least would rather hear it early.

His weekly Greed & Fear newsletter is a pithy summary of how awful things could get. It is short on respect for those supposedly in charge of ensuring financial stability.

Wood travels a lot and was in London a few days ago to take the temperature. His brutal conclusion is that Britain is the most vulnerable of the Western economies to a serious downturn and that the crisis in the housing market has barely begun. You may want to pour a stiff drink at this point.

"The grim nature of America's housing market is by now well understood," he says. "But in Britain the story is only just beginning, with massive denial still rampant over the condition of the property market in the world's biggest rip-off city." Wood found himself amused by the local concern about rising food prices and thinks the mortgage approval numbers are a better sign of what's in store (see chart above). "A housing collapse like the one Britain is about to experience will render all talk of inflation as an absurdity," he adds.

According to Wood's figures, household debt in the UK as a percentage of income has gone from 70% in 1987 to more than 160% now. Other Western economies have seen rises in this area, but not to the same degree. Hence his claim that the UK is in the worst possible shape to deal with a downturn.

"In Britain there is an almost pathetic lack of understanding of the potential downside of boom-bust credit cycles. Hence the shock at the all-too predictable demise of the wholesale funding-addicted Northern Rock. And hence the British Prime Minister's evidently ludicrous self-belief that he had presided as Chancellor of the Exchequer over an economic miracle as opposed to a totally irresponsible debt binge." Just because Wood was right before doesn't mean he's right this time, but the call on subprime wasn't an isolated lucky hit. He's been publishing Greed & Fear since 1996, taking the title with him as he moved jobs. In 1997 he warned Thailand was in deep trouble just before its currency devaluation led to the Asian financial crisis. In 2000 he advised investors to get out of the Nasdaq just before the tech bubble went pop. By his own admission, Wood sometimes calls things too soon, which would mean lost money-making opportunities for fund managers who always followed his suggestions. But he tends to be right in the end - and on this occasion he's not even a lone voice.

On Sunday a Swiss newspaper quoted a secret report by hedge fund Bridgewater Associates which predicted that banks will lose $1600 billion from the credit crunch - four times the $400 billion so far seen as the best guess.

Fear has the upper hand on greed at this point.