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Christopher Wood is the man who knew. Back in October 2005, long before the terms credit crunch and subprime gained entries in the Concise Oxford English Dictionary, Wood told clients: "Investors should sell all exposure to the American mortgage securities market."
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.
Reader views (11)
There is still those optimists out there, whom still have jobs,and somehow delude themselves that this country could not do without their particular skills and input. Lets just see how they perceive things in six months time when unemployment starts to skyrocket.
Without money circulating in a consumer spending based economy,things can deteriorate very rapidly.
Very few people are indispensable.
- Antony Graham, Southport England
To Rob Storey, Basingstoke : where does Chris Wood claim to be a genius?
- Factgasm, Singapore
Gordans "economic miracle" was that we can all become rich by selling overpriced houses to each other with the government raking off a percentage in tax to spend on the bloated civil service. Of course this miracle was funded by debt which now no one can pay back. Result the UK economy is in a mess.
- David Barker, eastbourne
What more can one really add, he is right. The ignorance of the general public is staggering. There are still people out there who think there will be a recovery in a year!
Why does it take 10 seconds for some people to accept their house has gone up 10% in value, but 10 months to accept it's gone down 10%? Falls of 40% are on the cards.
The list of ills is extremely long and now the UK population will pay a severe price for the long mismanagement of the economy.
- Tim Miller, Road Town ' BVI's
"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"
Spot on! It's a shame that the vast majority of middle England didn't foresee this sham several years ago, they were far too busy congratulating themselves on how much they had "made" on their property whilst gorging themselves on mortgage equity withdrawal and dabbling in the buy to let pyramid scams etc. No more boom and bust Mr. Brown? You have just steered the UK economy to the brink of the biggest peacetime bust this country will have ever seen. Congratulations.
- Mark Smith, London
All the prophets of gloom are claiming to be geniuses now. Well I think its more a case of Bank executives being idiots.
Just as things were not as good as they appeared to be in the credit boom I suspect that things now are not as bad as they might appear to be(unless you are a bank shareholder). Take a look around you, the business world is still functioning, pay rises are under control etc.
- Rob Storey, Basingstoke
2005 - better than most.
You should read Conquer the Crash, written by Robert Prechter - in 2001.
- Matt, London
What an absolutely fantastic article. Thankyou. Bloggers on housepricecrash have been talking about this for years. Wood is right - it was all totally obvious and predictable, but timing is the difficult bit. Gordon has happily taken the credit for success caused by global influences, but now wants to pass the back when things look bad. Totally incompetent. The biggest losers? Fortunately the scum buy-to-letters.
- Inbreda, Notts
Can't agree more with his points, the psychology and economic understanding of the masses in Britain right now is basically greed driven ostrich economics. I'm incensed that unelected brown has presided over this like some sort of monetary alchemist and states he's done a good 'sterling' job, he's culpable massively but he's unfortunately not the only one, way to many VI's (vested interests) driven by greed will be the downfall to what I believe will be many of the so called 'affluent' G8 economies. Many other issues right now are simply tittle tattle distraction tactics.
Still what do you expect from those with prevailing logic of blowing more (hot) air into the credit/housing balloon seems sensible, when we can see clearly that it will go absolutely go bang. The vultures are already circling, its just that many others now really do 'think' they won't be affected and they'll be part of the 'mopping up' process and they'll be on the make at the end of it! Ludicrous, idiocy, greed, ignorance & self interest. I'm no banging green hippy (i despise labels, so simplistic) but feel very saddened by the fact that our 'intelligent' species simply cannot understand a concept of sustainability which will result in prolonged longevity. We haven't even started on the environmental impact, but very simply keynesian demand and supply economics, dwindling & declining natural or synthetic resource bases and an ever increasing demand for goods = our only planet & us lose - end.
- Mr Bahn, east yorks
True!
- Nitin, Bucks
Bring it on.
In the words of the great fast food chain. "I'm lovin it!"
- Guy Beckington, United Kingdom
