Update Aug 2010: Forecasting the Repossession Rate

The US economy is not only declining but is getting worse: in Q2, GDP was estimated to be 2.4% and is now being revised lower to 1.6%. In Q1 it was a healthy 3.6% which itself came down from 5% in Q4 of 2009. It's coming down in leaps and bounds.

It seems that there's a 6 month lag between the US and Europe: In Q4 of 2009 in the UK, GDP was 0.4% and 0.3% in Q1 of 2010; but was 1.1% in Q2 which was revised to 1.2%. Germany grew by a massive 2.2% and France by 0.6%. This reflects the good time the US was having 6 months earlier. This implies that Europe will experience a massive downturn by Christmas - if our economies are coupled. However, France has downgraded their forecast for 2011 - they will soon be followed by other countries including Asian ones.

This will skew the results and our forecast for the repossession rate will be less than accurate. This is forcing the WPM to take evasive action in order to prevent this downturn becoming a recession - the dreaded double dip. The WPM already advised using war-time economics where all contributors to the economy band together and make sacrifices but was ignored in favour of a monetary solution.

The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed.

Only value creation will do. This means evaluating what went wrong and changing the processes that led to it. Then finding out what goods need to be manufactured and services provided; skills needed to achieve them; skills providers to plug any gaps; and the demand for those goods and services. The governments will still pay for this project with the employers paying for the actual production/provision. But this is better than paying for other people's mistakes/crimes.

Many of the big banks that caused this problem were involved in derivative trading which magnifies losses as well as gains. The bankers kept the gains but the tax payers are paying for the losses.

Furthermore, derivative gains are NOT taxable and yet it's the tax payers that pay the losses. As part of the bail out, the government should have separated legitimate trades (taxable) from non-taxable ones. They would bail out the taxable ones and ask the people involved in non-taxable trades to sort it themselves.

For example, if a punter has a winning derivative against a bank who can't pay it, then the bank would go bankrupt. This is like when Nick Leeson made a lot of futures contracts on behalf of Barings bank, it was made bankrupt as the losses were greater than the assets of the bank.

These futures were not commodities but an index that has no legitimate value. These trades should be made illegal as they're gambling with other people's money without their knowledge. Hedge Fund operators should be forewarned that these are illegitimate ways of protecting assets because, if anything goes wrong, then the assets are not protected - unless they are bailed out.

While we have derivative trading, fiascos of this scale and greater, will become common place. I heard that Goldman Sachs made a huge profit last year. I bet they made it via derivative trading i.e. they didn't create any real value in the economy. If they're so successful, why is the US economy going down the pan?

They've siphoned a lot of money from the economy making it difficult to create real value. This is because that, in derivatives trading, to win somebody has to lose and it's you and me that are losing.

While this cheating, in the form of derivatives, is taking place, it'll make it difficult to get people to band together as the derivative traders will siphon most of the value without doing any work for it. War time economics can only work in the absence of illegitimate trading - how dare they call it trading.

Until next time, have a nice day.

UK Unemployment Trends

The British Office for National Statistics (ONS) recently published an article that showed peak unemployment figures in the UK's last 3 recessions: 1980, 1990, and 2008 - the UK didn't have a recession in 2000 thanks to the WPM.

In the 1980s recession the peak unemployment figure was 12%; in the 1990s it was 10.8%; and in the recent recession it was 8%. The latter was confirmed when June's unemployment figure dipped to 2.46m giving an annualised rate of 7.8%. Let's hope that this is the start of the down trend in unemployment which will signal the start of the recovery in spite of all the doom mongers in the press.

Three points make a straight line: 12, 10.8, 8. The line drawn is downward which means that the Government is either in more control of the situation or has changed it's policy from commodities to people. The line is also similar to the years when placed next to each other: 1980, 1990, 2008.

As you can see, there is a longer gap between 1990 and 2008 (18 years) than between 1980 and 1990 (10 years) which correspond to 2.8 and 1.2 respectively. In other words, a reduction of 1.2 percentage points was achieved in 10 years and 2.8 percentage points was achieved in 18 years. This gives a rate of 0.12% per year in the first 10 years and 0.15% in the 18 years that followed. That's a more aggressive reduction than in the first 10 years.

If this trend continues, then peak unemployment will be around 5.2% after the next recession which is currently the normal level. This means that the new normal level will shift lower so that we can have a normal level of 2.6% and peak at 5.2% for example. This will need closer cooperation between the employers, employees and the government.

One of the WPM's self-imposed goals is to bring the Government and the people closer together. In fact, this aggressive approach to reducing unemployment averted a recession in 2000 which our European and American cousins succumbed to. The fact that this has finally been achieved, implies that the WPM is slowly achieving its goal - one of them anyway.

Forecasting the repossession rate

There is a little known group called WPM who have been active for 26 years. In 1998, they helped the British Government avoid a recession whereas Europe and the USA succumbed to it in 2000/01. Since then, these economies were propelled into the stratosphere and crash landed in August 2007 with what has become the worst economic disaster since the Great Depression that followed the 1929 stock market crash.

In 2008, the WPM plotted data from the UK economy on a graph and predicted that it would turn around in the 1st quarter of 2010. In December 2008, it forecast that the repossession would be around 50,000 homes in 2009. The Council of Mortgage Lenders (CML) forecast 75,000 homes will be repossessed.

In the 1st Quarter of 2009,  12,700 home were repossessed which gave an annualised rate of 50,800. In the 2nd quarter, the CML reduced their forcast to 65,000 and late in the 3rd quarter, revised it again to 48,000. In 2009, only 46,000 homes were repossessed - lower than the CML's 3rd and lowest forecast and lower than the WPM's optimistic forecast.

Did the CML learn a lesson from all this. No. Their forecast for 2010 was 53,000 - still in an upward trajectory. The WPM didn't make any forecast as they were helping the Government to reduce the growth of unemployment and persuading Lenders not to jump on the repossession bandwagon.

However, the WPM were persuaded late in the 1st quarter of 2010 to make a forecast. They jokingly said 32,000 at first but settled on 38,000. They were told that that can't be right because we're in a slump and the figure is lower than 2008 which was 40,000. The WPM responded by saying that that's what you said about our 50,000 forecast back in 2008.

The true reason was, if the WPM's prediction that the economy would turn around in the 1st quarter of 2010, then the repossession rate would be relatively low. Well, we are in the first quarter [at the time] and this prediction has been proved by the actual repossession rate being better than our expectation of 50,000. Besides, a down trend has been established and the next move has to be lower. And they stuck to their target.

When the 1st quarter 2010 repossession came out at 9,800 giving an annualised figure of 39,200, the CML said that they would revise their estimate in the 2nd quarter. This result puts the WPM's forecast within a stone's throw away from the annualised figure.

The 2nd quarter GDP figures were expected to be around 0.6%. When they came out at 1.1%, the president of the WPM exclaimed "32,000 here we come". However, the 2nd quarter repossession was 9,400 which meant now that 32,000 was too far away with only 6 months to go. Besides, the US economy has been falling for 2 quarters and India and China have lowered their growth forecasts. This doesn't bode well for the rest of us. Let's hope that their forecasts are also wrong.

There are 4 pieces of good news:

1. The 2nd quarter repossession was lower than the 1st quarter
2. The CML has lowered its forecast to 39,000
3. The annualised rate is now 38,400 - the 38,000 has come into view
4. June's unemployment figures dipped to an annualised rate of 7.8% from 8%.

The president of the WPM has absolved other forecasters for getting it wrong as they don't influence the outcome whereas the WPM does. Some pundits can understand influencing the outcome in a particular direction but not forecasting the actual figures with pinpoint accuracy.

You may say that the WPM's forecast of the economy turning around in Q1 of 2010 and the repossessions in 2009 were done in hind sight and I can't prove otherwise. Even the current prediction of 38,000 for 2010 will go the same way since the figures from Q1 and Q2 point to that figure.

The WPM has consistently refused to forecast unemployment figures, GDP, output, etc. So, this may be classed as a flash in the pan, well, 3 flashes. The WPM used to predict GDP in the late 1990s and early noughties but has stopped doing so since. Maybe forecasting indicators is less important than achieving them. Perhaps they use them privately as goals to achieve. Your guess is as good as any.

Maybe the WPM will talk about the problems facing the nation and propose potential solutions to get round them. Only time will tell. I'll post any information that comes my way.

Lastly, with all the negativity in the economic press, it looks like the 3rd quarter repossession rate will increase. Let's hope that the employers and lenders pay lip service to this negativity and we get an even lower or static figure for the 3rd quarter.

The next set of figures will come out in November, 2010. So, until then, bye bye.