PropertyInvesting.net: Property Investment Special Reports

293: Property Investors update

10-17-2009

PropertyInvesting.net team

 

UK Inflation

 

The good news last week was that CPI inflation dipped to 1.1% with Retail Price Inflation (excluding mortage payments) dropping from 1.4% to 1.3% - this despite oil prices rising from $37/bbl in Q4 2008 to $70/bbl in September 2009. It’s hardly surprising in view of the -4.5% GDP recession in the last year. But we were concerned inflation might actually rise from 1.8% this month because of the record amount of money being printed and oil prices rising. So it looks like interest rates rising has been put off for a while. But do not be fooled. If the economy starts taking off, euphoria starts kicking in, interest rates stay at 0.5% and oil prices start to sky-rocket, inflation we believe will be just around the corner and interest rates will then start to rise – and it could happen quickly. It’s rather uncertain how quickly this could happen. One thing we do not believe is that interest rates will stay at 0.5% for one or two years as many analysts believe. We think rates will start rising some time in 2010 – it’s just a question of when. And oil prices rising will be the leading indicator.

 

London and Finance

 

Despite the global (or at least western world) financial crisis, London has come out of the carnage so far remarkable unscathed. This is probably because of it’s eminence as a global finance centre. As stock prices have recovered and confidence has returned, people’s short memories have switched to a new bull run, increased risk appetite and focus on how to maximize returns. Bonuses are back. People’s enthusiasm for risk taking is coming back. Some lessons have been learnt but frankly, not much has changed. The ultra-rich have used the meltdown as an opportunity to acquire low priced assets. Smart hedge funds and banks have prospered. Other failed banks have been propped up by Governments. Governments are making money by selling bank asset’s back at higher prices. Many people have lost a lot of money. But it’s been a shift of wealth from one to another. Some wealth has evaporated as the asset bubble burst. Now a new bubble is forming.

 

Peak Oil Reminder

 

Regular visitors to the website will know our view on oil prices and Peak Oil. We believe Peak Oil “was” July 2008 for all liquids oil production at ~86.5 million bbls oil/day. For conventional crude oil production, the peak was probably before this at a rate of ~75 million bbls oil/day, in May 2005. We are now on a bumpy plateau. Our rather optimistic model - suggests this bumpy plateau at a rate lower than July 2008 will continue until about 2014 then start to drop fairly slowly at a rate of 2-3% per annum. Meanwhile demand in the developing world is rising and will start to sky-rocket shortly. Demand in the developed world will be static – some countries will be rising slightly, others like the USA, Japan and Germany will continue to drop. Nothing new – Japan and Germany for instance have seen declining oil demand for the last twenty years. Despite all the stories of so called demand destruction, the USA’s oil demand should rise next year and reach the level of early 2009 by end 2010. A recent story from BP describes their chief economist thinking there is 6 million bbls oil/day spare capacity - but we simply do not buy this assertian. Instead, we think there is more like 1.5-2.0 million bbls/day spare and this will be used up by end 2010 causing tightening of supplies and prices rising. No-one can accurately see the decline happening in most oil producing countries because OPEC control half production. A good example is Russia which reached arecord 10 million bbls/day last month, and all looks bright and freezy - but we think oil rates will start dropping next year to add to non-OPEC production decline. There is plenty of oil out there, but its difficult to get out of the ground. Most of the easy stuff has been produced. New discoveries made this year are 5-10 years off first oil production (e.g. offshore Brazil, Gulf of Mexico). Interestingly, almost all international oil companies, national oil companies and government very rarely exceed production targets - a good example of ExxonMobil that saw a 2% decline this year, but has been forecasting 3% growth every year for the last 4 years, including next. Production in now lower than it was 5 years ago. Pemex of Mexico is missing it's production forecast from a few year ago by about 2 million bbls/day. Is there any good news out there - production exceeding expectations?

 

Oil Exporter Use More, Produce Less and Export Even Less

 

What many people fail to realize is that many of the big oil exporters will become net oil importer soon. Mexico is a classic example – it’s likely to start importing oil by 2014 or earlier. Even Brazil with all its new discoveries we believe will struggle to ever export any oil, because of it’s own crude oil needs. Meanwhile oil demand in the Middle East continues to skyrocket as does Chinese and Indian oil demand – and demand in much of Africa and the Far East is also escalating at rates of 3-6% per annum. So the next oil supply crunch is just around the corner – as early as 2010. We believe we are seeing the first signs of this now with oil prices rising last week from $70/bbl to $78/bbl on 16^th October. OPEC claim to have 4 million bbls in reserve – but frankly, we just do not beliee this. The number of oil rigs drilling in Saudi Arabia is now 160 – it used to be 25 about 30 years ago. Why do they need so many rigs when they claim to have cut back oil production by 2 million bbls/day – because the underlying depletion rate is so significant that they are stuggling to build any spare capacity. Although there is still quite a lot of oil floating around in tankers waiting for a home, lack of investment in new oil fields in the last two year will lead to supply shortages we believe by end 2010. Thence oil prices will skyrocket again. The hedge funds, speculators and everyone else that is keen to make a good return will jump on this bandwagon when they see this happening regrettably and drive oil prices higher. To think this will not happen we believe is over optimistic and probably unrealistic.

 

Positioning Your Portfolio of Assets

 

To make the best returns, one needs to position a portfolio of assets to be in the right things in the right place at the right time. Then just watch the asset prices rise.

 

As previously described, in oil exporting nations, asset prices will rise. In oil importing nations, economies and asset prices will be hit hard as oil prices rise, inflation rises, interest rates and costs rise then property prices drop. So we advise following our ranked list of countries that are most positively exposed to high commodity prices. And avoid those most negatively exposed to high commodities prices.

 

Top of the list for us are Norway, Canada and Australia – all politically stable countries with very high transparency, low crime rates and educated workforces. As oil, gas and metals prices rise – so should property prices in these hugely resource rich countries.

 

Bottom of the list are Greece, Italy and Spain – these countries have an aging population, declining population, no oil, gas, coal or metals to speak of, are not well known for financial services or manufacturing and have high social and labour costs – they are also set to further suffer from the high Euro value with declining exports and lack of competitiveness. That said, we love Italy and Spain for holidays and the people are great. But this will not save them from very low growth rates and stagnant property prices in the next ten years.

 

US Deficit and Crisis

 

To hedge against the massive US deficit on a global level, we believe it is currently best to purchase assets and property in London, Canada, Norway and Australia – and consider purchasing oil/gas/metals equities in these countries that will likely have a strong currency as oil prices rise. Other cities where oil/metals/commodities money gravitates to are Geneva, Monaco, St Petersburg, Moscow, Houston, Toronto, Calgary, Dallas-Irving-Fort Worth, Perth, Olso etc. 

 

The shift away from the US dollar being the key commodities trading currency is likely to occur we believe in the next ten years – and as early as 2015 - as the threat of the currency switch to a basket including Yen, Euro and Middle Eastern currencies increases – more pressure will be exerted on the US dollar value. We are highly skeptical that the new US Administration will be able to or is even interested in reducing the massive $1.3 Trillion per annum deficit through cost cutting. Instead, by printing money and creating inflation, the perceived value of the debt would reduce over time if it could be controlled and capped on an annual basis. This will ultimately lead to the dollar decline – possible to half its current value in the next five years. By printing money, inflating the economy to reduce the real terms impact of the massive deficit, foreign investors will take flight and invest money in stronger currencies such as the Euro, Canadian dollar, Australian dollar, Yen and possibly even UK Sterling if a new government in June 2010 starts tackling the massive UK deficit (it’s even possible the existing government could start to reduce it, though this is less likely).

 

Just to put this US deficit into perspective, year-to-date government spending is $2.9 Trillion, while tax revenue is only $1.6 trillion. However, that’s small change when compared to the massive unfunded liabilities (e.g. not covered by an asset of equal or greater value) of Medicare, Medicaid, Social Security, and prescription drugs. Liabilities from this trio total $105.7 trillion. Each US citizen costs $6000 per annum in medical costs currently – and this is set to rise further. These are gigantic numbers. Hence if oil prices rises to $150/bbl, another $0.6 Trillion pr annum will be leaving the country – and regrettably this is probably enough to tip the countries financial system over the edge again.

 

 

 

 

 

 

 

 

 

High Oil Price = High Inflation = High Interest Rates = House Prices Dropping

-and low GDP growth and high unemployment-

 

 

However, expect the following currencies to increase in value as commodities price rise:

1. Australian Dollar
2. Norwegian Kronar
3. Canadian Dollar
4. Russian Ruble

 

Trends

Here is a simple summary of the trends we describe:

• US budget deficit worsens
• US dollar declines
• Oil and metal prices rise
• Inflation Rises
• Yen and Euro increase
• Property prices in all major western oil importing nations decline or stagnate
• Property prices in all major oil exporting nations increase
• Interest rates rise
• Correction when oil prices rise above $150/bbl, recession and prices drop to new higher baseline of $70/bbl.

 

 Peak Oil - World Oil Production Consumption

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This is only our view and a scenario we call our base – we all have our own opinions and we can acknowledge if you think differently. We have tried to be objective, realistic and helpful in our analysis for UK, US and other international property investors. What we will see around the corner is something that will not have been experienced before any time in history:

 

• Decline oil production – not enough oil to meet demand (OPEC production will not be able to keep up or make up the gap of lowering Non-OPEC oil production)
• Increasing inflation
• A run on the dollar
• Oil prices rising as a hedge against the declining dollar (this has started)
• Most likely another financial crash in western economies after oil prices top $150/bbl again

 

Anyone that thinks the US deficit will drop significantly in the next few years? Likely answer - no.

 

Anyone that thinks oil prices will not rise as the dollar continues to decline? Likely answer - no.

 

So the scene is set for another commodities bull market as China sucks in more oil/gas/coal/metals to continue building its economy for it’s 1.2 billion population – to attain living standards and car usage on par with that in the USA and Europe.

 

Again, anyone think the Chinese will hold back? Likely answer no.

 

If you are skeptical about how much oil China might need, ready our Special Report on the subject (500 million cars by 2050).

 

It all points in one direction. Be careful and shrewd with your investing.

 

Brazil – Rio - Olympics

 

Is there anywhere left that looks like a low risk high growth area? Well – Rio de Janeiro takes some beating. With the new oil finds, Olympics, projected high growth rates, expanding population and resources of the country, with Rio being the playground of this huge county, it is well set to see property prices rise strongly along with the currency value (click here to read our Special Report on Brazil). And closer to home, we have London Olympics in 2012 to get excited about – it will transform this part of East London.

 

Country Ranking

What we have prepared are two tables. The first table is a Pure Peak Oil Profits table that ranks each country on:

• amount of oil exports (green) or oil imports (red)
• amount of gas exports (green) or gas imports (red)
• demomgraphs moderately expanding population (green) or declining population (red)
• stability - a summation of political, country risk, security and threat of war - green is stable, red is unstable

The rating is intuitive and qualitative - using our experience and judgement. You may not agree with all of the criteria ratings - however, we believe its a fairly measure of the countries that will do well from Peak Oil and those that will suffer the most fron Peak Oil. No surprise that Norway and Canada come top. These two countries have huge oil and gas deposits, growing but relatively small populations (or oil revenue per person) and are very politically stable with excellent security. Expect their currencies and property prices to rise as oil prices rise.  

 

	Oil	Gas	Demographics	Stability	Overall
Norway	10	10	8	10	38
Canada	10	8	8	10	36
Brunei	10	10	8	8	36
Australia	6	10	8	10	34
UAE/Dubai	10	8	7	6	31
Algeria	8	10	8	5	31
UK	7	7	7	9	30
Russia	10	10	3	6	29
Saudi Arabia	10	8	7	4	29
Brazil	7	7	7	7	28
USA	2	9	7	9	27
China	5	6	7	5	23
India	4	4	8	4	20
Korea	0	0	7	7	14
South Africa	0	2	7	3	12
Portugal	0	0	4	8	12
Japan	0	0	3	8	11
Spain	0	0	3	8	11
Italy	0	0	3	8	11
Greece	0	0	3	8	11

 

Legend
Big opportunity - positive
Opportunity - positive
Neutral - hedged
Threat - negative
Severe threat - very negative

 

	Oil	Gas	Coal	Metals	Finance	Manufa-cturing	Agricul-ture	Know-ledge	Demo-graphics	Stability	Overall
Canada	10	8	9	9	9	5	8	10	8	10	86
Australia	6	10	10	10	9	5	8	10	8	10	86
USA	2	9	10	8	10	5	10	10	7	9	80
China	5	6	10	8	8	10	7	8	7	5	74
Brazil	7	7	7	9	7	7	9	7	7	7	74
Russia	10	10	9	8	7	5	6	7	3	6	71
Norway	10	10	0	0	7	5	4	9	8	10	63
UK	7	7	1	1	10	4	7	9	7	9	62
India	4	4	9	5	7	7	4	8	8	4	60
Brunei	10	10	0	0	6	2	4	7	8	8	55
UAE/Dubai	10	8	0	0	8	5	1	8	7	6	53
South Africa	0	2	10	10	3	5	6	5	7	3	51
Japan	0	0	4	2	8	10	5	10	3	8	50
Algeria	8	10	2	2	4	3	2	4	8	5	48
Saudi Arabia	10	8	0	0	7	3	1	6	7	4	46
Korea	0	0	4	0	7	10	3	8	7	7	46
Spain	0	0	0	1	8	4	8	8	3	8	40
Italy	0	0	0	1	7	3	7	8	3	8	37
Greece	0	0	0	1	6	4	6	7	3	8	35
Portugal	0	0	0	1	5	4	7	6	4	8	35

 

 

 

Peak Oil

Peak Oil Susceptibility Index
-  impact of high hydrocarbon prices -
Country	Hydrocarbons Production Surplus Tons Oil Equi/ Person/ Year
Kuwait	39.73
Brunei	39.63
Norway	38.64
UAE	24.76
Turkmenistan	20.91
Saudi Arabia	17.95
Libya	17.79
Kazakhstan	15.66
Oman	10.86
Australia	7.35
Trinidad & Tob	6.98
Venezuela	5.05
Bahrain	4.98
Azerbaijan	4.96
Qatar	4.55
Algeria	4.18
Canada	4.11
Russia	3.77
Iraq	3.67
Angola	3.22
Iran	1.92
Colombia	1.40
Syria	1.25
Vietnam	1.17
Nigeria	1.07
Malaysia	0.99
Ecuador	0.97
Mexico	0.80
South Africa	0.69
Equatorial Guinea	0.68
Bolivia	0.56
Indonesia	0.55
Denmark	0.46
Argentina	0.46
Yemen	0.42
Egypt	0.24
Sudan	0.18
Rep. of Congo	0.15
Myanmar	0.13
Turkey	-0.01
Bangladesh	-0.03
India	-0.11
Brazil	-0.12
China	-0.13
Pakistan	-0.14
Romania	-0.29
New Zealand	-0.57
Poland	-0.60
Czech Republic	-0.60
Thailand	-0.71
United Kingdom	-0.80
Greece	-0.98
France	-1.15
Ukraine	-1.58
Netherlands	-2.24
USA	-2.39
Germany	-2.67
Italy	-2.71
Spain	-2.87
South Korea	-3.95
Japan	-7.81
Legend
Positive impact	Economic Benefit
Neutral impact
Negative impact
Strongly -ve impact
V.worrying impact	Economic crisis

 

Happy investing…

 

 

 

 

 

 

 

Appendix

Rio Olympics 2016

Rio won the 2016 Olympic bid on 2nd October 2009. We enclose a few photographs illustrating this major achievement for Brazil and South America.

 Rio Olympics 2016

 

 

 

 

 

 

 

 

Rio Olympics 2016 Brazil

 

 

 

 

 

 

 

 

 

 

 

Rio Olympics - Pele and Mr Lula

 

 

 

 

 

 

 

 

Rio Olympics 2016 - Barack Obama hopes were dashed for Chicago's bid

 

 

 

 

 

 

 

 

Adriana Lima - Bazilian supermodel - happy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

World Famous Rio Carnival in April each year - a stunning show of costumes, arts and cultural experiences that draws people from the world over.

Rio Festival 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Graziele Massafera

 

 

 

 

 

 

 

 

 

 

 

 

Rio Carnival Men

 

 

 

 

 

 

 

 

 

Brazil Carnival Rio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Samba

 

 

 

 

 

 

 

 

 

 

 

Brazil festival carnival man

 

 

 

 

 

 

 

 

 

 

 

 

Men Carnival Rio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Viviane Rio

 

 

 

 

 

 

 

 

 

 

 

 

Veronica star

 

 

 

 

 

 

 

 

 

 

 

 

Quiteria Chagas

 

 

 

 

 

 

 

 

 

Raissa de Oliveira

 

 

 

 

 

 

 

 

 

 

 

 

Thatiana Pagung

 

 

 

 

 

 

 

 

 

 

 

 

NATALIA GUIMARAES by Dubiellla

 

 

 

 

 

 

 

 

 

 

 

 

Angela Bismark

 

 

 

 

 

 

 

 

 

 

 

 

Rio Carnival

 

 

 

 

 

 

 

Carnival Rio Men - preparing for Samba

 

 

 

 

 

 

 

 

 

 

Queen Carnival Rio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rio Carnival

 

 

 

 

 

 

 

 

 

Rio Carnival

 

 

 

 

 

 

 

 

 

 

 

Rio Carnival night daner

 

 

 

 

 

 

 

 

 

Brazil Carnival Rio de Janeiro 2009

 

 

 

 

 

 

 

 

 

Adriane Galisteu

 

 

 

 

 

 

 

 

 

 

 

 

Viviane Araujo

 

 

 

 

 

 

 

 

 

 

 

 

Samba Stadium

 

 

 

 

 

 

 

 

 

 

 

 

Rio Angela Bismarck

 

 

 

 

 

 

 

 

 

 

 

 

Brazilian Samba Dancers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Karna Valresimleri

 

 

 

 

 

 

 

 

 

Dancer Rio

 

 

 

 

 

 

 

 

 

 

 

Rio samba dance

 

 

 

 

 

 

 

 

 

 

 

Rio Carnival

 

 

 

 

 

 

 

 

 

 

 

 

Viviane Araujo

 

 

 

 

 

 

 

 

 

Grand Rio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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