The eurozone crisis will end in panic - here's why

 

It's make or break time for the eurozone. Again. Stop yawning at the back there. Seriously, this time it's really important. The International Monetary Fund (IMF) says so. And our own chancellor, George Osborne, is warning the Europeans to "get a grip". Even Barack Obama has been on the phone to Angela Merkel. Although given that the US is on the verge of defaulting on its debt too, she might have told him to clean up his own backyard before complaining about the state of hers. Anyway, apparently the French and the Germans have agreed on a solution to the crisis. We'll find out all about it later today after Europe's leaders have all had their latest chinwag in Brussels. But whatever their cunning plan happens to be, I can tell you now that it's not going to work…   There is no palatable solution to this crisis "We have found solutions to previous crises and we'll find a solution now as well", said French foreign minister Alain Juppé, according to the FT. Well, now, that's not really true, is it Alain? The reason this crisis has erupted is because you didn't find solutions to the previous ones. If you had, then we wouldn't still be rattling on about the eurozone nearly two years after Greece first blew up. All the previous 'solutions' were fudges, and whatever comes out of the meeting today is almost certain to be a fudge too. Depending on the precise nature of the fudge, the market may cheerfully lap it up for now, or it might see through it right away and sell off heavily. But whatever happens, this crisis is not going to end today. In fact, I think this will end in a panic: what the pundits like to call a 'disorderly' resolution, rather than an 'orderly' one. As I've said before, this isn't because I have some blind pathological hatred of the European project, though I'm not a fan of it either. It's because all of the solutions that would draw a convincing line under this mess are unpalatable to at least one or more powerful parties involved. There are three basic solutions. The first is 'extend and pretend'. You sweep everything under the carpet, and hope that, given enough time, Greece gets its act together. This is what everyone has been trying to do. It has failed miserably. Greece isn't going to be able to repay its debts, regardless of how much extra time it gets. Despite that, this is what today's fudge will probably consist of, whether it's about buying bonds with the European Financial Stability Facility (EFSF), or a 'voluntary rollover' of Greek debt, or even a 'bank tax' designed to help fund a new Greek bail-out. The big problem with this option is that it doesn't really provide a solution for the 'too big to fail' countries, like Spain and Italy. There simply isn't enough money in the eurozone to stand behind all that debt, which is why the fear is spreading. The second solution is for the European Central Bank to print money and buy the debt of any country that's struggling: quantitative easing euro-style. Or you can issue joint eurozone bonds, backed by the full faith and credit of every country in the eurozone. What would this mean? It would mean a much weaker euro. It would mean rich countries – let's call them Germany – would pay a tax in the form of either inflation (in the QE option) or higher borrowing costs (in the joint bond option) in order to repay Greece's debts. Markets would no doubt rebound, but in the long run this would also send the gold price soaring. This would also inevitably require closer political integration. Because this is the equivalent of giving Greece a free pass to spend what it wants. No one would be happy about that. So you'd need to have some sort of central body actively dictating economic policy. But it's hard to see how that would work. There were already economic 'rules' on debt in place that European countries (including us) are meant to stick to. They haven't of course. And what sort of sanctions can you threaten a country like Greece with? You can't toss them out of the euro, because that's what you're trying to avoid in the first place. The logical conclusion is that you have to have a central European policy-setting and tax-collecting body with serious enforcement powers that supersede sovereign governments and their citizens. That's going to be a hard sell to the voters, to say the least. Why not throw Greece out? So what's the third option? Well, you evict Greece, and maybe some of the other countries too. You make sure everyone who needs to know, knows that it's going to happen. You prop up the banks that need to be propped up, and you throw Greece to the wolves. The other problem countries get the message, redouble their efforts to reform their economies, and the euro survives, stronger than ever before. This might seem the most sensible route. After all, some of these countries should never have been in the euro in the first place. But there's a problem here too, which again comes down to politics. If Greece is chucked out, or allowed to leave the euro, it puts the whole project of closer political union under threat. Because if you establish a mechanism by which one country leaves, then others can do the same thing. The fact is, lots of people don't like the idea of being part of a United States of Europe. After all, any time they allow citizens to vote on it, they have to insist on at least two referendums before the voters make the 'right' choice. If you show the voters an exit door from the euro, then that strengthens the 'no' camp in every member country. So the real fear among the 'elites' is not a 'Lehman' moment. It's the worry that if you kick Greece out, every other euro member will want to follow. What does this mean for you? This is the very definition of being caught between a rock and a hard place. There are no good options here. That's why I suspect the choice will be made for politicians in the end. Because a genuine crisis will erupt, and something will have to be done. What should you do? I'd build up a watch list of stocks you'd like to buy for a start, particularly in the eurozone. When a panic comes, it's handy to know exactly what you want to 'buy on the dips' so that you can take advantage. I'd stick with gold – it might be due a correction, but this turmoil could also send it much higher in the long run. And I'd stick with our usual defensive stocks: they're best placed to cope with all this.   Market update The FTSE 100 built on Tuesday's rally yesterday, as investors seemed cautiously optimistic that the US would reach a deal to extend its debt ceiling. The index climbed a further 1.1% to close at 5,853. Banks were again among the top performers. Barclays was the day's highest climber, rising 5.2%. Lloyds gained 4.1%, RBS added 3.1% and HSBC was 2% higher. Retailers were among the few fallers, however. Sainsbury lost 0.9%, Marks & Spencer fell 0.5% and Wm Morrison was 0.3% lower. Biggest faller of the day was commodities giant Glencore, which lost 1.3%. In Europe yesterday, the Paris CAC 40 rose 60 points to 3,754, and the German Xetra Dax was 29 points higher at 7,221. In the US, the Dow Jones Industrial Average and the S&P 500 each slipped 0.1% to 12,571 and 1,325 respectively, and the Nasdaq Composite was 0.4% lower at 2,814. Overnight in Asia, Japan's Nikkei 225 gained five points to 10,010, and the broader Topix index was flat at 860. China's Shanghai Composite lost 1% to 2,765, and the CSI 300 fell 1.1% to 3,059. Brent spot was trading at $117.87 early today, and in New York, crude oil was at $98.49. Spot gold was trading at $1,598 an ounce, silver was at $39.53 and platinum was at $1,773. In the forex markets this morning, sterling was trading against the US dollar at 1.6162 and against the euro at 1.1344. The dollar was trading at 0.7019 against the euro and 78.77 against the Japanese yen. And in the UK, retailing group Kingfisher, which owns the B&Q and Screwfix brands in the UK, plus Castorama and Brico Depot in France, reported a drop in like-for-like sales of 0.5% for the first half of the year. Performance was worst in the UK, where B&Q's like-for-like sales fell 6.7%. In France, sales were up 3.7%.

Stagflation All The Way

Super-Cycle:  We believe western economies are about 60% of the way through an 18 year bear stock market. This began in March 2000. The crash of 2008 was part of this overall down cycle – the final 40% leg of this bear market will lead to significantly higher inflation along with a commodities bull run through to about 2018. As inflation rises, living standards will be eroded, interest rates will rise, the stock market will drift laterally or down and probably ending in 2018 at a lower level than in 2011, but inflation adjusted this level will be down some 40% from today’s levels. We also expect a mini-stock market crash in the next six months – down by about 25%, but this will just be a correction in an overall lacklustre bear market leading to a low somewhere in 2018. We’ll expand on this in our next Newsletter mid July – because it is critical to describe this in depth – as context to property investment and other asset purchases. Investor often shift out of the stock market into property and commodities (oil, gold, coal, metals, food) as a hedge against inflation. And in our view, for the next 7 years, it will be “inflation all the way” – corresponding to disappointing GDP growth in western developed nations. So called “stagflation” before the end of the bear market in 2018.

 

Strategy to Inflate: As western national governments look to reduce their sovereign debt mountains, they will view inflation as the best way forward (possible the only way forward) to try and reduce this mountain in real terms. It’s politically more acceptable to have inflation at 5% and wage increases at 2% - thereby reducing disposable incomes by 3% a year and the debt mountain than having inflation at 0%, telling people they need to have wage reductions of -3% and having the debt mountain stay the same size. This we believe is one of the fundamental reasons why the Bank of England has “let” inflation rise to 4-5% without raising interest rates. At least they will argue that there is some form of GDP growth, albeit this might only be in the 1-2% range. And with this growth, tax receipts should keep rising. But please realise that inflation will lead to slow growth and declining living standards while it rages away.

 

Option to Print Money: The big lever of printed money has not worked very effectively in the UK – and the Bank of England’s must be looking over the pond with horror at what is happening in the USA and think, there is no way they want to follow them down this road of escalating debt mountains, higher taxes, drifting to default and declining currency value – all leading to even higher inflation and eroded living standards. The other problem with printing money is it declines the value of national currencies – on the one hand this leads to lower import costs as import prices rise, hence stimulating domestic manufacturing. However, if your manufacturing efficiency is poor and the declining currency value upsets your foreign investors who then shy away from buying your new debt, then you can get into a real pickle. This is the way the USA has been heading for many years now with a massive acceleration in the last 3 years – it’s only so much the international investor can take and when the Fed stops printing money in 8 days time, we think interest rates in the USA will have to rise – and these will depress the economy. China is now only investing 25% of it’s foreign reserve into new dollars – it is divesting away from the dollar. Frankly, we think the Fed’s strategy will end in disaster – a US crash later this year (see Special Report 382).

 

Middle Ground: There is a middle ground and the Bank of England seems to have found it, for right or wrong, namely:

 

1   GDP growth 1-2% (attempted recovery)

2   Bank of England interest rates on hold at 0.5%

3   Mortgage Rates at 5-6% meaning the banks make gigantic profits to rebalance their damaged books

4   Inflation controlled in the range 4-5% - being used to reduce disposable income by stealth (rather than ask for wage reductions and higher taxes)

5   Stop printing money and target slow steady growth and re-balancing from public to private sector employment

6   Allow Sterling to float and settle in the middle area

7   Keep Credit Agencies happy with plans for deficit reduction

 

Stagflation: This what we describe as good old fashioned “Stagflation” – a stagnant overall economy, with fairly high inflation and reducing living standards for most people. It’s probably the best we can hope for. The reason we describe this central scenario is that it directly links to the property market and your investment strategies – and the market for rental supply and demand. We will explain.

 

Low Lending: Bank lending remains low as demand is low and banks remain reluctant to risk lending to sub-prime borrowers. Deposits are high, interest rates on mortgages are very high (relative to BoE rates, a massive 5% above-premium) and the banks would rather hoard their cash ,mountains because of new regulations dictating higher collateral, and a pessimistic view of recovery hopes – they don’t want to get burnt again if the property market dips and personal home defaults start up again.

 

Buy-to-Let Growth:  Meanwhile, the buy-to-let sector has shown a bit of a resurgence – partly because of increased rental demand and rental prices, and partly because banks have done analysis to prove that buy-to-let investors are generally lower risk than individual home owners as far as credit rating is concerned. Buy-to-let investors rarely default – analysis from the 2007-2011 period shows.

 

Landlord Misery: Meanwhile increasing tenant powers, increasing regulations, increasing energy, council tax and hassles have driven many buy-to-let investors out of the business. Its a tough task with many stresses so there are not enough buy-to-let investors to feed the growing buy-to-let sector in southern England and some parts of the north, Wales and Scotland. So rents continue to rise – particularly in London – at well above inflation. Rents are rising at about 8% per annum (against inflation in range 4-5%. Meanwhile property prices remain stagnant in most areas – and hence yields are rising.

 

Higher Yields As Demand Rises: So the message is, as long as you can handle the hassle and are good at managing properties, buying high yielding rental property in good southern England areas with rising rental demand is probably a pretty good strategy – even with the threat of property price drops ever present. It’s a risk because property prices can fall sharply if another recession begins, but ultimately, a lot more rental property will be require in London in future years because so many 20-40 year olds have given up aspiring to own a property because of:

 

1   high student loans (average £30,000)

2   high wedding costs (average £20,000

3   increasing student fees

4   inflation and tax eroding disposable income

5   high deposits (25% of £150,000 – £37,500)

6   rental being only slightly more expensive than servicing a mortgage without any risks

7   young people would rather holiday, have fun, enjoy life and travel these days

8   money from the bank of mum and dad to help with deposits dried up after the 2008

financial meltdown and reduced pension with jobs losses

 

More Rental Less Home Ownership: All of these factors are unlikely to change any time soon. In London, the property market is supported by gigantic financial inflows from wealthy immigrants and investors. In the provinces, this is not the case, so areas far from London will be more affected by the factors mentioned above.  Hence one can see that property prices should remain broadly the same in northern areas as rental prices rise as the younger population increases. Buy-to-let properties will be held by only a more select group of wealthy people, in the 45 year plus age group. These buy-to-let investors will probably grow old with these properties as time moves on. Some of the 20-40 year olds will possible get to buy property in the early 40s, but many will remain in rented accommodation – similar to Germany. The argument that everyone should have a right to own a property will fade away as people are more worried about their jobs, having enough money for food, holidays, a car and retirement. This sounds rather bleak – in a way it is – particularly for low growth areas well away from London. Times are likely to get worse through inflation lowering disposable incomes by stealth.

 

Civil Disorder Threat: The big threat is that riots and major public disturbances will break out – like in Greece, leading to credit rating agencies downgrading the UK credit from its AAA rating. This would lead to even higher interest rates as Sterling crashed, and another deep recession. The best the UK can hope for is that the public sector jobs cuts work, tax cuts lead to higher private sector investment and growth and jobs, and the population stays engaged in working through the monstrous debts the Labour party left behind in their 13 years of profligate spending. In a way, we are all paying back the debts caused by wastage of money during this period.

 

Back to Peak Oil Stagnation: One of the reasons why we do not see things improving rapidly if at all is that we are now more of less past Peak Oil (or at least Peak Cheap Oil). This is the point of maximum global oil production. The end of cheap oil was 2003 when prices rose above $25/bbl and this corresponds with the decline in the living standards we have seen since then in most western nations. Debts rose rapidly as oil escalated to $147/bbl in July 2008 before the financial meltdown – as unsustainably high oil prices hit the global economies – another oil price shock.  We have updated our model of global oil supply and consumption through to 2015 and it looks like a very tight market will remain until then as China, India, Brazil and other developing nations increase their consumption whilst the western nations get squeezed. So the fundamental economic situation to stimulate a string recovery in UK, Europe and the USA is simply not there – period. Strong recovery could only come with oil prices at ~$50/bbl. Any oil prices over $100/bbl should lead to Stagflation as we are seeing. The only stock and shares that would normally increase in this situation would be oil, gas and mining stocks.

 

High Oil Price Leads to Stagflation: We’ll expand on this theme in our next special report, though we thought we should mention this because – as we forecast high oil prices to remain (unless a severe recession starts again), then inflation will continue to be a big problem – hence it will be “stagflation all the way”.

 

Property As A Hedge Against Inflation: For the smart investors, consider that your savings will erode over time by ~2-3% a year. Stocks and shares are likely to remain depressed and risky with lowering dividends. Cash in banks could also be risky if banks fold. And investment in property would lead to reducing debt levels in real terms over time. So as a hedge against inflation, property is probably better than most people think. Even if property prices do not keep pace with inflation, over time, your equity would rise and debt levels reduce – and if you have a high rental yield, you could still do quite well in the long run. This is why so many wealthy people put their money into property, as a hedge against inflation. If you could purchase property at ~25% below market value with cash, you do particularly well. This is one of the reasons why the rich get richer, and middle income people stay the same or get poorer.

 

Central Location Close To Jobs: So our overall steer is, if you are looking to invest in property, buy-to-let is still a good option but only in UK areas with growing micro-economies and large private sectors like central London and Aberdeen. You have to make sure you buy high yielding property at a good price in areas close to rail, tube, bus, roads, retail and leisure facilities with many high paid jobs close by. A well presented property should then attract a good low risk tenant at a good rental price.  Specific examples:

 

FW: Five reasons to buy gold and silver stocks now

 

 

Recommended article: Is this the start of the next bear market? Yesterday's close: FTSE 100 down 0.4% to 6,002... Gold up 0.87% to $1,528.90/oz... £/$ - 1.6004 We're back in the buy zone, folks, for gold, silver and the mining stocks. It might be another week or three before we hit rock bottom. Then again we might already have seen it. But I'm confident we're in the zone. A number of boxes on my check-list have been ticked. For those that like a flutter, it's 'dipping your toe in' time. Here are five reasons you should be buying in now...   1. It's early July I don't know why it happens – I can offer suggestions – but I don't really know why it is that July and August repeatedly prove to be the best time of year to buy precious metals and precious metals stocks. The simple strategy of accumulating over the summer and off-loading early the following year keeps on working. This first chart shows gold (black line) and the CDNX (the composite of the Toronto and Toronto Venture Stock Exchanges – blue line), which I use as a proxy for junior miners. The vertical red lines mark the month of July. As you can see, with gold (the black line) a low for the year repeatedly comes in the July-August time frame. The strategy of buying gold in the summer and off-loading early the following year has worked every year since 2001, with the exception of 2007-08. Our juniors proxy, the CDNX (the blue line), is not as consistent as gold. But if the low doesn't come in the July-August time frame, it comes the following October. If not one, then the other. It's remarkably consistent in that regard. Again the year that broke the rules was 2008. 2. The COT Report looks bullish for silver The COT report shows the commitments of the futures traders on the Chicago futures exchanges. Broadly speaking, the fewer open positions (open interest), the more bullish the set-up, because the more potential buyers there are still to come into the market. In a strong uptrend the open interest will expand – the new buyers are stronger than new sellers. A rising trend with declining open interest suggests that the market is being pushed higher more because short sellers are exiting positions than because new buyers are establishing positions. That's a sign that a move is tiring. In general, I have found the COT report to be a better identifier of lows than of tops. And the open interest in silver hasn't been this low since late 2008, when silver was trading below $10. In other words, to me it looks as though buyer demand for silver can only go up. Back in the spring, when silver had its mega correction, I said the most bullish setup would be for $33 to hold. It has held. It's been repeatedly re-tested and it has held. Not only has it held, but the weak hands have now been flushed out, as evidenced by the COT open interest. So there is a lot of room for new buyers to come into the market. A lot of people sold silver at $50. But were they clever enough to buy back in at $33? If not, there could be a scramble. I am also extremely impressed by the way the gold-silver ratio has stayed below the key 45 level. Silver has stayed strong relative to gold. We have had a run over the last two days, so some caution is recommended. But I am feeling very bullish about silver in the intermediate term. I expect a retest of $50 before year-end – or perhaps even sooner than that. 3. We've almost reached our friend the 144-day moving average again Since the bust of 2008, the 144-day moving average – which shows the average price over the previous 144 days – has been the best gold indicator I have found. (Hats off to the trader Michael Hampton who first alerted me to it). Gold repeatedly pulls back to it during sell-offs, and it has marked an optimum entry point. The average currently sits at $1,441 and rising. Gold began the week close to it at $1,480. I daresay the twain shall meet somewhere in between at some stage over the next month. Then again, $1,480 held after the spring sell-off. It held during the weakness of the past ten days. That may be the low. 4. Gold stocks are cheap Gold stocks remain cheap compared to gold. Of course, there are all sorts of reasons for gold stocks under-performing. Rising mining costs, foreign exchange fluctuations squeezing profits, and general poor sentiment towards equities are just a few. And just because they're cheap doesn't mean they can't get cheaper. But valuations are starting to look compelling even to a cynic like me. With the horrible exception of 2008, gold stocks are as cheap relative to gold as they've been in eight years. And if you look at the ratio between gold and the junior mining stocks, with the CDNX as proxy (see below), junior gold stocks are as cheap as they've ever been, bar a few months in 2008. 5. I can't find a bull out there There are the permabulls. But that's it. I don't use a technical measure of investor sentiment, as some do. I follow investor chat boards. I listen to interviews. I read a lot. I go to presentations. I talk to people. My reading of investor sentiment is nothing scientific, just a judgement based on what I'm seeing and hearing. There is no elation out there. There was last autumn, but not now. There is a feeling of fatigue, wariness and cynicism. There is also a feeling that 2008 is coming again. Maybe it is. In which case, all bets are off. But what if it isn't? In general an atmosphere of fear and loathing is a better atmosphere to buy into than one of celebration. All in all, I think there is a strong case to be buying into precious metals and precious metals stocks for an intermediate-term trade into early next year – or for longer if that's your style. It looks to me like we are entering the second phase of the financial crisis. When the banks were bailed out in 2008, we noted that all that was happening was that debt had been moved from the balance sheets of private corporations to those of governments. The next phase would be marked by sovereign debt default. We are there now, whether it's southern Europe, or the US's issues with its debt ceiling. They might be able to put it off for a few more months, but it is coming. It is all incredibly bullish for gold. Sooner or later gold will pull its related stocks up, like a fierce mother with an errant child. I have published a new Gold Report, which comes out today. I've deliberately tried to time the release to catch a summer low, so that investors have plenty of time to position themselves ahead of the normally sleepy summer months for an autumn run. We'll see if that works.   Market update Click here for the latest stock market news and charts. The FTSE 100 ended its run of gains yesterday, slipping 0.4% to close at 6,002. Banks were again among the worst performers. Barclays was the biggest faller of the day, losing 3.8%. RBS fell 3.4%, Lloyds fell 2.1%, and Standard Chartered was 0.7% lower. But HSBC bucked the sector trend to rise 0.1%. Highest climber of the day was government contractor Serco, which added 3.9%. In Europe yesterday, the Paris CAC 40 fell 17 points to 3,961; and the German Xetra Dax was eight points lower at 7,431. In the US, the Dow Jones Industrial Average gained 0.5% to 12,626, the S&P 500 added 0.1% to 1,339, and the Nasdaq Composite was 0.3% higher at 2,834. Overnight in Asia, Japan's Nikkei 225 slipped 0.1% to 10,071, and the broader Topix index fell 0.4% to 870. In China, the Shanghai Composite lost 0.6% to 2,794, and the CSI 300 was 0.4% lower at 3,101. Brent spot was trading at $113.97 early today, and in New York, crude oil was at $97.34. Spot gold was trading at $1,530 an ounce, silver was at $35.93 and platinum was at $1,722. In the forex markets this morning, sterling was trading against the US dollar at 1.5983 and against the euro at 1.1175. The dollar was trading at 0.6992 against the euro and 80.95 against the Japanese yen. And in the UK, manufacturing output rose by 1.8% in May, according to the latest figures form the Office for National Statistics - its fastest rise since March 2010. Analysts had forecast a rise of 1%. Year on year, output is up 2.8%.

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Property Insights mid-Dec 2010

 

Oil Bull Run Has Just Started: For those of you who have been visiting the website for the last five or more years – this might not be a surprise to you. We are just entering a Peak Oil induced "oil price bull run". As global economies recover from the shock of the last oil price spike in July 2008 and the financial meltdown that it helped cause - the global economy will hit the roof because oil supplies have peaked. Essentially, it won't matter if oil prices are $80/bbl, $120/bbl or $200/bbl – oil production will hardly budge. There is very little spare supply left – and Chinese oil demand continues to grow at 6% per annum (or 15% per annum for oil imports in view of their own oil production). Not enough oil is being exported from the oil exporting nations – mainly OPEC countries. But one of the key things to remember is that when oil prices sky-rocket, it has always led to a recession in western nations. Hence this time around, we certainly don’t expect anything different. The only question is – how far the oil price will rise before it comes back down again. It could be $100/bbl, $150/bbl or even $200/bbl – difficult to say. It will come down only when demand from western countries – namely USA and western Europe – drops caused by a recession or zero growth. 

 

$100/bbl: So expect from now on oil prices rising well over $100/bbl this winter – helped by cold weather, spooked financial markets, USA printing money like there is no tomorrow, the declining dollar and speculators parking this printed money in oil as a hedge against the declining dollar and increasing inflation.

 

Boom-Bust for PIGS: Higher oil prices will increase inflation, increase borrowing costs and ultimately reduce GDP growth in western oil importing nations – it will take six months to feed through. It always has done – the fundamental have not changed.  Any sustained oil price above $100/bbl will lead to debt default in the PIGS Euro countries and more financial misery – with Greece, Spain, Italy, Portugal and Ireland being most exposed. So be careful, the action is just starting. And we’ll keep you posted as things develop on the website.

 

Peak Oil Was Six Years Ago!  Remember, Peak Oil was 2005 (crude oil) and July 2008 (all oil liquids including synthetic oil from sugar, natural gas and corn, during the China Olympics). For six years, oil production has been flat. Yes - even though oil prices rose from $40/bbl to $147/bbl from 2005 to 2008, oil production did not increase - the market does not function when resources deplete to such an extent that the “easy oil gas gone”. Like an old oilfield, sometimes one can pump money-investment in, but not much happens in return. It’s like a clapped out car – more gas/fuel will not make it go any faster – so the investor would take their foot well off the accelerator otherwise they would be wasting fuel (or money-resources). 

 

Investors Take Note: So for the smart investors - review our Special Reports on Peak Oil - and consider getting into oil investments as a hedge against property price declines in western oil importing nations. We are now into danger territory - there could be a short bull run on stock markets for about six months before high oil prices start to choke the economy off again. Watch out!

 

Attractive Investments - Peak Oil positive exposure (or good hedge)

1  Biomass, forestry, land, food

2  Buying physical oil and oil futures

3  Gold, mining and metals

4  Oil, gas, coal exploration, development and production companies

5  Energy conservation, metering

6  Electric battery, charging, services, motors

7  Electric cars

8  Solar power in China

9  Property in oil centres (London, Aberdeen, Moscow, UAE, Olso)

 

Unattractive Investments - Peak Oil negative exposure 

1  Western banks

2  Western retails companies

3  Shipping

4  Power stations

5  Airlines

6  Property in far flung places and USA and PIGS countries

7  Holiday homes

8  Car companies (powered by petrol-diesel, large cars)

9  Solar power in USA and PIGS (will not be able to afford to install it)

 

Low Growth West - High Growth East: Low cost oil, gas and energy has been the driver behind the massive western economic growth after WWII - as industralisation, construction booms and infra-structure developments led to huge wealth from USA to Greece, Spain to Norway. It was easy to build, transport and manufacture using lo cost energy. But things are changing. Input costs are rising and competition from eastern low cost centres is intense. Jobs are being lost in many of the oil importing western nations. The populations are aging. High social and public spending costs are acting as a huge drag to these economies. The fundamentals are not good. China will suck more and more resources into their super economy and India with 1.5 billion people is following just behind. 3 billion people all wanting the same standard of living as western Europeans and Americans. Resources will be shared. Growth in China will be 10%, but growth in the western world could stagnate completely. The best protective measure is to focus property investment in resource rich countries like Canada, Norway, Australia and possible London/UK. It's pretty simple and basic really. There is no point exposing your hard earnt cash to developed countries with aging populations, declining populations, high oil/gas/coal/metals import bills, and industry without any financial or manufacturing acumen.

 

1  Oslo yes, Rome no

2  Ontario yes, Washington no

3  Perth yes, Athens no

4  London yes, Madrid no

 

As oil prices rise, and the global financial systems start to shake again, with the Euro destablizing and US dollar declining - just consider the underlying causes. Shift to commodities rich countries. Shift away from countries that import all their commodities - unless there is a very good reason!

 

New Areas: There are huge oil resources available for exploitation in the world, but they are either:

 

1   In technologically demanding, environmentally sensitive and expensive areas (Arctic, Deepwater)

2  Environmentally damaging and water/cost intensive (Oil Sands)

3  Politically and economically challenging areas for western companies to access (OPEC countries)

 

It's Too Late:  It's already too late for development to boost oil production significantly above today's levels. The boost in 2010 oil production came from oil developments kicked-off in 2006-2008 when oil prices were rising from $70/bbl to $147/bbl. By 2012 we will see the affects of the crash in 2009 and Gulf of Mexico spill in 2010 feeding through - whilst OPEC countries go slow on investing - to save oil for future generations. Expect flat oil production and demand increasing until the next western recession. For those expecting Iraqi production to save the day, it took 5 years for Saudi Arabia to increase its production capacity by 2 million bbls/day with no security threat or disruptions. Iraq has huge potential but production today is about 2.2 million bbbl/day – the same for the last 3 years. We expect production eventually to rise to about 5.5 million bbls/day by 2020 – possibly a little more, but this will not be enough to fill the gap in declines from other areas. The same is also the case for Brazil – it’s too little too late.

 

Renewables: In western Europe, government are trying to stimulate renewable energy investment, but frankly, again it’s too little too late. Part of the reason why it’s too late is that – during low oil price times when surplus money is (or was) available for investment in alternative energy sources, no such investments were made. Now high oil prices have hit, and deficits have increased. Just when investment is required – the money has run out. This is a pretty crude analysis of what has happened, but we think it’s fairly accurate. The UK is now getting more serious about trying to get alternative energy sources to help bridge any gap in energy requirements cause by the closing of old nuclear power plants and restrictions on coal burning– at least the UK has 80% of its oil needs and 60% of its gas needs produced indigenously from the North Sea. In a way, this is a bit depressing that, despite all the oil revenues, the previous government still managed to work up a massive deficit from public spending increases. It will be easier that most big oil/gas importing nations for the UK to sort the problem out – which is why in the longer term, we are far more optimistic about the UK than we are about Ireland, Spain, Italy, Greece and Portugal.  

 

2  UK Property Market Update

 

Surveys: About 80% of the property price surveys are pointing to a drop in house prices. There are few that report any significant increase in activity or prices. Some of this is the season demand drop just before Christmas. But the underlying trend of mortgage approvals, employment and availability of finance is no good. First time buyers are few and far between. Most of the new generation of 22-35 years old are resigned to living in rented accommodation. Its more difficult for them to find parents that can help them out because deposits are so large, University fees and loans also need paying off and their parents have been subjected to the onslaught of higher taxes in the last four years of the Labour government as the financial crisis hit mid 2008 and the deficit got out of control. None of this looks like changing in the near term. Instead, as prices have dropped, buy-to-let landlords have been bottom feeding and then renting these properties out with reasonable rates of return because of the fairly low interest rates. But with inflation running at 3.3%, the possibility of interest rates rises at the Bank of England and lending banks early next year, plus higher unemployment expectations – buy-to-let landlords are not exactly falling over themselves to get into the market. It only happens when a very obvious new opportunity presents itself. All these leads us to the conclusion that house prices will slowly slide for a month or two – there could be a slight rebound in February to through to early June as bankers bonuses feed through to more investment in property in the London and SE area.

 

Summer Blues: Come the summer 2011 – we expect prices to continue dropping again because:

 

1  Market goes quiet as people enjoy the summer and weather after a long hard winter

2  Inflation rises to 3.7% putting pressure on an increase in interest rates

3  Unemployment continues to drift higher as public sector jobs cuts take hold

4  The Eurozone continues to be affected by the PIGS countries debt contagion

5  The US economy continues to drag along

6  Oil prices rise over $100/bbl and put western economies into a slow growth mode

 

At least for London there is the 2012 Olympics to look forward to, but it’s difficult to say whether there will be a significant improvement in the economy by mid 2012 at this time – much of this depends on whether the oil price stay in check below $100/bbl or not. If it’s well above $100/bbl by mid 2012, this will mean China is roaring ahead but it could also mean that western Europe and the USA is heading for trouble again, particularly in massive oil/gas/coal importing nations like Greece, Italy, Portugal and Spain.

 

Property Insights August 2008

UK socio-economic trends update

When evaluating where to invest, it's important to latch onto trends that will help support house prices in future years. This helps reduce investment risk and increase returns. As demographic and social changes take place in the UK – along with the more frequently report economic trends, these factors can have a major impact on property price movements.

Property prices will rise if:

Supply Side:

• property supply is low
• property building levels are low in the area
• planning and environmental restrictions are severe
• all building and brownfield land is used up
• all large houses for flat conversion opportunities have been finished
• new greenfield areas are not allowed to be used for building
• the area has protected status (World Heritage Site, Area of Outstanding Natural Beauty, National Park)

Demand side:

• Population growth is high through:
• migration of existing citizens
• immigration of new citizens
• high birth rates from existing citizens
• high birth rates from new immigrant citizens
• New jobs are created – particularly high paid knowledge based jobs
• Outsiders moving into the area – e.g. people buying second homes (holiday homes, pied de terre, second homes for weekend use)
• Positive change occurs in the area that cause wealthy people to move in, through:
• infra-structure developments
• new offices
• new roads
• new jobs
• regeneration
• Education – universities and schools in an area are excellent, improve and have expanding numbers
• Scenery and appeal – if the area becomes popular because of its scenery, quality of life and leisure pursuits (e.g. surfing coastal property in Cornwall, Dorset World Heritage Coastline, golfing communities)
• Wealthy influx of international people – e.g. West London
• Wealthy influx of UK citizens – e.g. wealthy baby-boomers retiring to Cornwall
• Big growth in business – financial and/or services sector is the preference (over manufacturing, retail or public sector)

A property investor needs to consider these criteria – the overlapping spheres of influence, and then select an area with the highest chance of meeting these criteria – as many as possible! Then decide which area to invest in, and within this area, what type of property to invest in. The questions are:

• What type of property will have a supply shortage in future years (prices will rise)
• What area will become far more popular to live in, in future years (prices will rise)

Some of the analysis can be determined by looking at regional population growth figures. In summary, in the UK, the regions projected to have the largest population growth are Greater London and all regions close to the capital. Any area south of the line from the River Severn to the River Trent will see populations expand considerably up until 2025. The NW of England and Wales will only see moderate expansion. NE and North will only see minor expansion, with West Yorkshire higher than the surrounding regions.

To compound the supply-demand imbalance that the south will experience, it's often more difficult to get planning permission to build in the south – environmental restrictions are at least as severe if not more severe than the north. It's difficult to imagine large scale home building programmes getting off the ground in the south – where the homes will be most in demand. So we believe there will be a severe supply crunch in the next ten years that will drive property prices up further in southern counties. This might start taking effect by end 2009.

A few examples of areas of interest – where overlapping positive criteria emerge:

Oxford : An expanding wealthy student population. Severe environmental and home building restrictions. Excellent place to live with good schools, colleges, historic city centre, good communications to London by road and rail. Increasing population. Fair amount of new business moving in. Commuting to London. Protected green belt. Close to the lovely Cotswolds. Increasing population with many migrant eastern Europeans putting further pressure on housing. Wealthy retiring baby-boomers also like Oxford because it has a nice city centre atmosphere, lovely countryside and yet it's still close to London for all those business contacts. Okay, prices are already high, but we believe they will rise further. An interesting play is to buy a 5 bedroom terrace in one of the up and coming areas still close to the University, then rent to students (high yields, they normally pay, more respectable than they used to be, with reputations they need to keep). Then hold the property for ten years, then renovate the property, add a loft room as an example, then sell as large family home (now only 18% capital gains tax).

Hackney South (Haggerston) - London : An expanding population – very high immigrant population (>50%) with high birth rates (75% of births to non UK others). House prices are relatively low compared with other parts of London. New infra-structure projects include:

• East London Line railway (Haggerston)
• Kings Cross High Speeds One rail link (1½ miles away)
• Stratford International (1½ miles away)
• Olympics (1½ miles away)
• City of London financial centre (1½ miles away)

As more wealthy city people move in, house prices are likely to rise. Good quality Victorian flats and houses in quiet streets are a good play. Low priced ex-council flats could be worth a look if they are secure, close to transport links and crime levels in the blocks are not too high. Anywhere near the new Haggerston station is likely to be a good investment. Hackney has come up a long way from the depressing period of the 1970-1985 period when many properties were boarded up and no-one wanted to live there mainly because of high crime rates. But regeneration is ongoing and all the infra-structure development close by will help see the area improve further and help the area join the mainstream London property market. Hoxton is already very trendy and expensive – this effect will ripple to areas north and east as transport links improve and better access to high paid city jobs help drive up demand and prices.

Winchester : Excellent public and state schools. Extreme to severe environmental and home building restrictions – almost impossible to build new houses. Excellent place to live with beautiful countryside, low population density, historic city centre and colleges, very good communications to London by rail (55 minute commute). The population in Hampshire is increasing, but not much room left in Winchester. Consultants and small businesses moving in. Protected green belt and areas of outstanding natural beauty in the South Downs. Close to the south coast for boating and beaches, plus shopping in Southampton and Portsmouth. Wealthy retiring baby-boomers also like Winchester because it has a nice town centre, lovely countryside, very low crime levels and yet it is still close to London for all those business contacts and old friends. Prices are already high, but we believe they will rise further. An interesting play is to buy a large central terrace house and convert to upper end apartments for retiring baby-boomers and/or wealthy parents of Winchester college kids. Any splitting would of course need planning permission, so don't put in an offer before talking openly to the local planning offices (getting some assurances that permission would be granted). A quick renovation and splitting would only be subject to 18% capital gains tax – rather than the old 40%.

Gravesend: Ebbsfleet opened last year – direct trains to Paris, Kings Cross and Brussels will provide a huge boost. Improvements to the A2 will help. This previously down-at-heel Victorian town will see prices continue to rise as more wealthy commuters move in. Excellent local public schools help (Cobham Hall is an example). The area has a Grammar School system – so if your kids are bright, you get top quality education for no cost! By 2010 it should be possible to commute from Gravesend to London Kings Cross in about 22 minutes! It will be quicker to get from this seaside town to Kings Cross than Fulham! Some jewels are the Windmill Hill area of Gravesend – with nice views, park, Georgian homes and still close to the centre of town. On the outskirts to the south are some large homes with gardens. Purchase of properties for wealthy commuters is likely to see good returns. Down at heel Northfleet is worth a look. Prosperous Southfleet – a lovely village within 5 mins drive of the new station is a sure winner. Istead Rise is also worth a look. As are the many countryside villages between Southfleet and Meophem on the North Downs – an area of outstanding natural beauty in the Garden of England.

Areas to avoid: From 2002 to 2007, house prices shot up in the north and Midlands of England. They were correctly playing catch-up to escalations experienced in London and the south and south-east. They were also stimulated by massive government public spending injections for hospitals, schools, public sector jobs generally and general re-generations funds. However, much of this funding is now coming to an end as the cash strapped government starts to rein back public spending and stop public sector jobs growth (which has been unsustainable). Meanwhile, the manufacturing sector that saw growth of up to 5% per annum in recent years is start a severe slowdown and is likely to slip into recession later this year as the UK economy, Euro economies and global economies GDPs slow. Furthermore, although price / earning ratios are relatively high in the northern counties compared with London and the south, this masks the fact that people in the north have a higher mortgages as an average loan to value of their properties. Because rates have gone up, we expect more loans payments distress in the north than the south and hence this will likely hit northern property prices in the next few years. Overall, it does not look positive for the north in the coming few years. But there are a few bright areas in the north:

• Manchester – continued business expansion and infra-structure developments, plus airport, road and re-generation improvements
• Derby - £2 billion to be spent in the centre on regeneration up until 2020, close to East Midlands Airport, M1, Peak District, River Derwent – with Toyota, Egg and other companies expanding
• Bradford – continued large scale regeneration, historic interest, proximity to Leeds and Leeds-Bradford Airport, improving from a low base.
• Bury – can only improve, possibly the most distressed town in the UK, centre of interest from the prince of Wales in regeneration and improvement. Low priced property, with proximity to Manchester a plus.
• Blackpool – regeneration, retiring baby-boomers from NW England, entertainments, leisure and some new businesses (even has an airport)

In Scotland, we believe many areas will do well. Wealthy baby-boomers moving from England to places like Inverness will help property prices. We see Aberdeen continuing to boom as oil prices stay high – any area within 50 miles of the Granite City will do well. Dundee will continue to regenerate from a low base – and is close to very expensive Edinburgh.

Want to make serious money – read this

To be an ultra-wealthy investor, you need to follow certain traits that will differentiate you from the average person. This is based on our experiences in property investing and wealth creation. Property investors on the whole are not your average person – anyone who has attended a property show or auction will attest to this. In general, property investors tend to have the following traits:

• like to be in control of their finances and agenda
• are creative both financially and practically
• are imaginative
• consider the future – look at trends, predictions and plan for the future
• can have dominant personalities
• action focused – and able to take risk without having sleepless nights
• not necessarily team players or good with people – though the best investors are good with people
• disciplined and hard working
• able to sacrifice time with family and friends in pursuit of their goals
• can be selfish
• often individualistic
• set challenging targets and goal
• continually looking to improve
• highly motivated
• tend to have a capitalist attitude and values
• positive “can do” attitude
• enthusiastic about making money and owning property
• are proud to be a property investor, but feel they don't need to tell the world about it 
• ignore family and friend's advice – “able to go it alone” 
• careful with money
• like negotiating
• well educated
• widely read
• more likely to be married with children or highly motivated singles
• like to learn new things – open-minded
• not scared to go with their own views
• intuitive
• show leadership and/or managerial traits

If you have any of the following traits below, you will likely be a less effective property investor and either find it more difficult to make money or not find the time or energy or have the inclination to do so:

• risk averse
• not creative
• left wing socialist
• unimaginative
• can old handle a employed job – prefer to spend all spare time with family, friends and hobbies
• do not plan for the future
• non action oriented, reactive 
• give all your time and energy to other people
• listen to family and friends advice – always seeking to please them
• negative outlook
• worry a lot about small things
• wasteful with money
• drink too much, smoke too much, take drugs
• don't like negotiating
• low motivation levels
• do not read
• watch popular TV programmes for more than an hour a day
• more likely to be single or divorced
• sometimes or often from low education or deprived background 
• get depressed over small things 

One of the single biggest factors holding back most people from become rich, even if they want to become rich, is their family or spouse. Sorry to have to say this, but we're try to help and be frank and objective. This does not mean to say you will need to change partner or friends, or drop your family – such actions can be even more damaging financially and ruin your life since family and friends are so important for one's well-being. A few tips on how you can manage the relationship with your family and friends:

• Family and Friends: Do not talk about your epic property investing exploits with family and friends – they may subconsciously want to bring you down to earth or be genuinely upset or worried you may change if you become wealthy (or course you have no intention of doing so, but perception is more important than fact).
• Spouse-Partner Communication: You need to try and make your spouse understand your goals, how achieving wealth will help both of you, and how the world will not fall apart if you have any challenges during your property investing exploits. Try and not hide things – women are very perceptive about hidden secrets and your nervousness will be spotted. And men can get envious of women who do well in property investing – do not brag about it too much if you are a successful women investor. And remember, if you end up splitting, then the wealth will be spilt including the properties – it could be a financial disaster. Safeguard your marriage or partnership as a top priority – it's economically very important! As well as being good for the kids and your lifestyle of course.
• Parents: If you are from a modest background and want to be super-wealthy, if you live close to your parents, do not expect to be super-rich. The peer pressure you will receive in subtle ways will lead to you holding back from taking huge risk. After you've made a packet, you can move back close to your parents. But you need to unshackle yourself from any views that might get in the way of making serious money, unless your parents are business people and understand (95% of parents are employees or public sector workers, so don't expect your parents to understand private entrepreneurial business, goals, finance and the fun of making serious money!). Unshackle yourself from old norms and old expectations.
• Negative Poor People:   If you surround yourself with negative people that have no money, expect to end up the same. Nothing wrong with poor people of course – they work hard, many have come from disadvantaged circumstances and live day-to-day – many admirable hard working families. But if you get distracted or influenced by other people's negative, risk averse or worried behaviours – you will never be truly wealthy. How can you expect a poor person to understand property investing fundamentals, plans, goals, values and business models – they probably have zero interest, and may feel envious or even jealous of your exploits. They will think it's okay for you because you have money. They will not understand they you do not need money to make money. Any of your convincing them otherwise will probably land you in trouble – so keep your mouth shut and try and find like minded individuals that you can learn from, share good practice and get enthusiastic with.
• Culture : In some cultures, it seems to be frowned upon to talk about making serious money. The poor will complain about the wealthy as if they have been ripped-off by them – jealousy and envy come to the fore. The UK is one of those countries where it's difficult to openly discuss business with many people. The reason is probably because 95% of the population are employees (working for other people) of which half work for the government (public sector). Both private and public sector employees are “not” businessmen or women – because they do not own their own businesses. They work in a protected environment for investors who own the business. However, if you are a public sector worker who owns five buy-to-let properties, you are a business person. But do not expect your public sector colleagues to understand what drives you, financial spreadsheets, business plans, investments, value creation and the like. Best keep your mouth shut or you'll end up confusing the heck out of them! Better to find a club, forum or like minded friends to share your practices with.  In the USA, the culture is far more receptive to business – there are more small businesses, more private sector employees and less public sector employees – many people migrated into the USA and started with nothing then became wealthy through private business (George Soros is a good example).

An interesting exercise is to list all your friends and family, note down who is a private business person, then make efforts to discuss business with them only – don't distract your other family and friends with your exploits – you'll confuse them at best, and upset or destroy your friendships with them at worst.

One thing that does not matter is whether you are extrovert or introvert. Extroverts tend to make quick decisions, are less worried about taking the plunge and like meeting people and talking lots! They like listening to themselves and do not listen or absorb other people's views well – this can be dangerous but if they have introvert advisors to keep them on the straight and narrow (e.g. an introvert solicitor and accountant) they can make very quick progress to huge wealth. Extroverts are also more likely to take accessive risk and go bankrupt! Introverts tend to evaluate all risks and are more cautious with decisions - decisions are rational, objective and well thought through. They can lose opportunities because of this, but are more likely to steadily create wealth (without going bankrupt!) rather than experiencing a roller coaster ride to wealth creation. Introverts like space, time to think, and do not use emotion for decision making. They like listening and find "in your face" extroverts annoying and irritating. Both extroverts and introverts - as long as they are both motivated, can become super wealthy.

Think Like the Rich – Action Like the Rich

If you want to be rich your need to firstly “think like the rich” then “action like the rich”. This begins with:

• honouring commitments
• performing business with honesty and integrity
• improving your reputation
• seeking to learn and understand whilst being able to make your own decisions
• setting goals and striving to achieve these goals
• being action focused
• being generous when you have made money
• valuing time more than money
• being efficient in the use of time
• leveraging other people to make you money (contractors, employees, consultants, helpers)
• leveraging money to make great net worth (loaning and investing)
• concentrating on build up of net worth (rather than earned income)
• being prudent with expenses
• treating your partner, children and family as number one priority and respecting them
• being disciplined and honest with your accounting and management of business affairs
• discarding your “baggage” – old norms (e.g. "your family has always wanted you to settle down and get a nice steady job")
• taking managed risk whilst managing mental worries and concerns
• identifying gaps in the market where value can be easily created
• making other people feel important
• being thoughtful about health, eating and exercise
• being careful with personal safety and security
• learning from mistakes whilst taking responsibility for your own misjudgments
• never a victim – always an opportunity
• glass is half full not half empty
• proactive positive “can do” mindset

If you can follow these traits of the rich, you will almost certainly become rich – even ultra-rich. It requires dedication, effort, focus and constant thought. Your goal to become rich should drive your behaviours from a day-to-day standpoint.

If you have too many negative thoughts – you need to consign these to the dustbin. You only live once, time is running out, and it's no use putting off that first important action – before you know it, you'll be old and you won't have the energy, health or time to get rich anymore. It takes time and patience. The earlier you start the better.

We hope this has given you some helpful insights into the psychology of the rich - and a steer on how to use a rich person's winning mentality to achieve your investment goals and wealth targets.

Oil Price and Economy Update UK

The good news for all property investors is that oil price have dropped from $147/bbl earlier this year to $108/bbl this month. We still believe oil prices will rise back again and stick with our prediction we made June 2007 that oil prices will be ca. $125/bbl by end 2008. The lowering of the oil price and slowing of the global economy should lead to inflation dropping and should allow interest rates to drop by year end. We expect a 0.25% (or possible 0.5%) drop in UK rates by January 2009. We also expect stagnant GDP growth for the next 6 month, the moderate growth after this. As previously advises, the UK is about eight month behind the US cycle. The USA is just starting to come out of their trough and we believe the UK will follow suit around March 2009. So hang on for a while then expect to see improvements by mid 2009.

In London, we see jobs losses in the financial sector for the next 6 months, but not heavy. Meanwhile the city continues to grow in GDP and population. With the Olympics 4 years away, East London is seeing big new investments and much regenerations. It will be exciting times as the city gets the global attention and continues to prosper from international finance and business.

We're a bit downbeat about parts of the north. A flood of public sectors jobs and buy-to-let investors bought properties for low cost and prices have sky-rocketed. By 2005, the prices in Newcastle city centre apartments were not much different to those in Stratford East London. We expect the south and London and the SE to see prices rising by end 2009 whilst the north stays subdued. There are likely to be exceptions – Derby, Bradford, Manchester (Salford, Trafford Park ) all look attractive because of regeneration projects, population growth and inward investment (with low prices).

UK Market Update

Nationwide reported prices dropping by -1.3% in July. Similar trends were report by Halifax and Hometrack (-0.9%, less than July's -1.2%). The Land Registry recorded -0.6% in July. All indicators were down. The market continues to correct and it's likely further drops will occur up until at least year end. Many areas of London rose 25% up until June 2007, and have corrected back about 10% so far. The tough conditions for raising finance (credit crunch) is making the market slow further, and it's not until the banks confidence levels rise and they start lending to one another that conditions will improve. Inflation at 4% and interest rates such at 5% don't help. Meanwhile growth in the economy has ground to a half with manufacturing entering a phase of recession. Expect a rough ride for the next 6 months at least. But bargains are out their for investors flush with cash, or with ample financing possibilities.

Spice Girl's Property Empire