The credit squeeze will intensify over the next three months. “There are the causes of the crisis and there are the drivers,” says Wolfgang Munchau of the FT by way of introduction at the Unicredit Global Market conference this morning.

The causes are twofold: Monetary policy – interest rates were too low for too long – and bad regulation. The like of which spawned the ‘shadow banking’ system of offshore, off balance sheet and off radar financial activities about which we have learned so much in the past eight months.

As to drivers, there is one in Munchau’s eyes – real estate.

The distinction between the causes and driver is that one tells us how we got here and the driver tells us how long it will last. Okay, so dear reader, I think you can see where this is going. Munchau is a super bear on UK, US and Spanish property. No doubt Ireland too though not specifically mentioned. He sees a 30-50% peak to trough fall for these markets on the basis of various supporting charts based on real house prices, price/rent, price to mortgage and price to income ratios.

He also points to slowing demand factors – the £30,000 non-dom fee and slowing bonuses. On the supply side we see mortgage finance disappearing faster than you can say: “Have you heard about our latest 2-year fixed offer?”

According to Moneyfacts there are nigh on 1,000 less mortgage offerings in the marketplace today than there were one week okay. It should be noted that still leaves near 5,000 deals out there but we see clearly which way the wind is blowing. And the latest Bank of England report does nothing to dispel the view. The credit squeeze is set to intensify over the coming three months it says. And as the Guardian notes more lenders are demanding a 10% deposit down. That’s an average £25,000 in London which is a tall order when savings rates are close to nil. Little wonder HBoS now see a 30% fall in housing transactions this year though one factor not mentioned in his analysis is employment levels. The UK’s is at a record level, though with 11,000 City jobs likely to go according to the CBI, this is unlikely to last.

Another speaker at the event, Marco Annunziata, chief economist at Unicredit, sees a mild recession for the US but that there will be sluggish growth coming out the other side. He foresees another 50bps coming off US interest rates taking it down to 1.75%. The crisis won’t be over until the housing market stabilises said Alan Greenspan. A point echoed by Annunziata. That inflexion point – when the US housing market actually stabilises – could be an interesting one for the financial markets generally and the dollar. Interesting to note among the speakers and audience today, there was a change of sentiment towards the dollar from net bearish to cautiously bullish. Annunziata notes the narrowing of the US current account working in the greenbacks favour and forecasts “stabilisation” in the US in the second half so adding to this editor’s sense that 2008 will prove eventually to be, to borrow and mangle one of the oldest footballing clichés: a year of two halves.

Not a stance that is shared by the pound where both the housing market and the precarious state of the consumer make it ripe for a fall. With cheap re-mortgage deals drying up, consumers binged on credit card debt and personal loans in February reported the London Evening Standard last night. Behaviour akin to an alcoholic turning to meths when the whisky bottle’s been drained.

And what of the Eurozone? William Rees-Mogg notes two Europe’s in his commentary below. A view at least partially reflected by speakers this morning. You’ve got Germany surprising on the upside and doing just fine thanks notes Annunziata. France is “so so” and the likes of Spain and Italy are heading for big trouble. The net result is the Eurozone slowdown will continue and may intensify and the hawks at the European Central Bank led by Jean-Claude Trichet may cut rates later in the year. Presently, there’s no chance given the EU inflation rate is 3.5% and any such talk would give Trichet and co. palpitations. Such a move implies a euro weakening against the dollar with Unicredit forecasting €1.40 by year end.

Going forward the financial sector will shrink relative to the size of the economy reckons Munchau and what’s left will be “more intrusively” regulated. Hedge funds and private equity houses will be part of the shrinkage as the money migrates to the major names and marginal players go out of business. As to real estate and equities. Expect a long bear market.

Regards,

Rob Mackrill
The Daily Reckoning