article by markmills on cer forum

a very good article by Markmills on CER forum.

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All this panic is great news for investors.
According to the media, heaps of property trusts will be wound up, and buyers are waiting for them to be liquidated in a panic frenzy. The banks will sell them up and then collapse, and we'll barely survive through this economic deep freeze and come out of this as cavemen hunting kangaroos with clubs.

However looking at the history of Japan after the Hei Sei (was it) bubble around 1990 gives a different perspective to the media scrum. Office properties fell to (say) 20% of their original value over ten to fifteen years of economic slowdown. (lucky we have property values that are nowehere near the same bubble levels they had - a possible drop of 30% in values is far from 80%).

Did the financiers sell up companies holding commercial properties? Only is they absolutely had to.

Japanese property trusts and companies and individuals that invested in property had negative equity for a long long time, and the fiancier's blinked.

Why did the fianciers blink?
1. In most cases the repayments were not effected.
2. Interest rates collapsed from over 10% to below 2% due to recession boosting the Interest cover ratio and Debt servicing ratio.
3. The government stepped in to maintain the level of economic activity, as governments in Aus, US, UK, Europe, Japan, China are doing now.
4. The financiers were supported by the government with liquidity when it was needed.
5. There was a conspiracy (in the good sense) to sweep the asset position under the carpet, and focus on what mattered - getting the loan repaid, and not putting unneccessary pressure on the borrowers who are doing the right thing.
6. It is bad for the banks to sell up a paying customer, as they no longer get the income they need to pay down their debts, and they effect the value of their own securities.

There are a lot of problems in the US re overborrowing, but when you look at the numbers, the US federal government can afford to borrow $1 trillion per year (about 7.5% of GDP) for 16 years to get their real debt level to 2 times GDP. (UK gov borrowings were 2.5 times GDP after WW2). If they really need to - that is what they will do until the economy adjusts, and balance sheets are sorted out by the municipalities, states and private borrowers.

I'm not worried at all longer term. My sentiment is now long term buy, as we are near the bottom, as every country that can is heavily stimulating their economy. I'm buying lots of things right now with my ears pinned back. This is a once in a decade opportunity to buy listed assets cheap. Last time was after the dot com crash in early 2003.

Excuse the essay approach here.