391: Fear and Panic – Just Started, No Surprize
08-04-2011
PropertyInvesting.net team
Peak Oil Again: High oil prices have finally got to the western oil importing nations. Manifestations of Peak Oil all over again. No surprises. Oil prices rose above $100/bbl in January 2011 and that was the trigger. It was only a question of time – dollar value transfer – before the western economies started suffering. Sure enough, 8 months later, just as we predicted, the sovereign debt crises worsened off the back of gigantic oil import bills, as a percentage of GDP in the USA, Greece, Spain and Italy. It’s absolutely no coincidence that all these countries import massive quantities of oil. Worse still, Greece, Italy and Spain also import huge quantities of gas, coal and even electricity.
UK Safe Haven: It’s also not a real surprise that, after the Tory Coalition acted decisively to put in place a credible deficit reduction programme, and because the UK imports only small amounts of oil and gas, the UK has now turned into something of a safe haven. Certainly international money has been piling into London property bought in UK Sterling as the severe Euro and Dollar jitters continue.
USA Confidence Lacking: In comparison, the USA in the next two years is promising practically no budget cuts. It’s incredible – with a debt of $14.3 Trillion. The political turmoil and posturing did huge damage to the US reputation, credibility and confidence. This is not to be underestimated. Furthermore, US investment confidence lacking with the current administration lurching the one crisis to another – banks and companies are hoarding cash – and taking this out of the USA. Apple Inc has $60 Billion cash, almost all of it overseas. The US still wants to keep spending even more money as well as printing it. It’s fighting the tide of Peak Oil prices – with an oil import bill of $350 Billion a year. No wander the USA is heading for recession. Canny investors know a bubble was created, this was an opportunity to make capital gain, and they are of course all getting out now and heading for the hills. No surprises.
US Real Estate: As un
employment rises and growth dips into another recession, there will be increasing foreclosures once more, particularly in manufacturing dominated areas. As world markets lose faith in the dollar, interest rates will rise. The printed money will start feeding through into high inflation in 2012 which will further raise interest rates. This will then put pressure on banks and mortgages and cause even more foreclosures and real estate price drops – particularly in areas that rely on long suburban commutes to work with high gas prices doing damage to these real estate areas. Suburban areas of Detroit, New Jersey, Pittsburgh and Philadelphia spring to mind with regard to depressed real estate prices. Las Vegas will be hit further – far from industry and airline flight dependant – in the middle of a desert. The best places to retain property are likely to be Texas (growing population, oil companies, agriculture) and North Dakota (oil shale production, farming commodities). As the dollar declines, foreign investors will lose both in real estate value and currency value. Not pretty.
Prediction: So what about the future. Well, as we describe in our Special Report of Wednesday 3rd August, the meltdown has just started. It will continue. The contagion will take hold and almost certainly lead to a re-structuring of the Eurozone. Italy, Spain, Portugal and Greece are likely to be forced out – because the bail-outs will just be too large to cope. They will also be politically unacceptable to German and French voters. The only thing that could save this is if oil prices crash well below $80/bbl quickly. Indeed, this process has begun, but we think it’s probably too late to save the Euro currency and it’s also uncertain how low oil prices will drop to help deficits.
Euro Stagflation: The European Central Bank will be forced to buy bonds, print money and keep rates very low. This will fuel inflation, and with it commodities prices after a correction will start going back up again.
Repeat of 2008: This crisis has all the hallmarks of a repeat of 2008 – and this time instead of the banks, it’s the government holding the bank debt who are most exposed – as there is no-one to bail them out. Just like early 2008, the stock market went up like into a bubble, along with oil prices – and by mid-year the cracks started to appea
r as no-one could afford the oil bills. By end year, the whole thing had imploded. Ditto 2011 we’re afraid. This time at sovereign level.
Crash: A lot of money is just about to be lost – and investment bankers are already selling up and heading for the hills. Frankly, if you are not out of the market now – best get out right now. It will only get worse. Don’t hang in waiting for an improvement – it just wont happen, sorry. It has to drop 30% before any improvement – or bear relief rally could start.
QE3 and Fiat Printing Presses: It’s possible there could be some relief rally after the US government announces QE3 – more printed money. But the first two attempts failed miserable, so the markets will probably not respond as favourably to such an announcement this time, especially as inflation is on the horizon for 2012. US debt is over 100% of GDP, unemployment has risen to 9.2% despite $2 Trillion of money injection and almost no growth exists – by end 2011 the USA should be back into recession.
Concept: In summary, and this is a very simple concept:
· We reached Peak Oil (crude) in 2005 – and are bumping along a Peak Oil plateau that is controlling and constraining economic growth in western developed oil importing nations
· Governments will start the printing presses again shortly – but even if they don’t – inflation will start to ravage economies in 2012
· Its inflation all the way, with interest rates rising in response
· Stock markets have just begun a 40% down correction in the last few days
· Oil prices will also crash temporarily – then rally back up again
· Commodities prices will drop lower for a while, then re-commence their bull run
· We are 60% of the way through a stock market bear run of 17.5 years
· We are 60% of the way through a bull commodities run of 17.5 years
· Get into cash, gold soonest (then oil, silver and other commodities after prices have dropped after about 3-8 months)
· Get out of the stock market – unless it is a high quality revenue generating gold mining stock – a large gold focussed miner
Yes It’s Bleak: This bleak picture is just the start of a recession in western developed nations – with focus on USA, Spain, Greece, Italy, Ireland and Portugal – and possibly Belgium. Japan will also be hit further.
Bear Trap Bubble Will Deflate: The $2 Trillion of US printed money created the bubble in stock markets and commodities. Western stock markets will crash. Commodities prices will drop back, then correct back upwards once more to re-commence their longer bull run – as inflation takes hold in 2012. The bull market for commodities is likely to last until about 2017.
Gold Safe Haven and Swiss: The safest thing to do is buy physical g
old bars and coins and put into a secure safe deposit box in a Swiss or London Bank. Be careful with your cash, because there is always a significant chance we will get another “Lehman Brothers” incident – out of the blue – a large bank folding. Hence not even cash is safe – and in the long run, with inflation raging, its value will be destroyed in 5-10 years. But at least it won’t drop 10% in a day, unless the bank folds of course.
Panic Has Just Started: Wish we could be more confident, but it’s bleak, we are at the “start” of a panic. The trick will be to spot the bottom, then get in aggressively to pick up bargains. But this is way off yet. We would not feel confident in buying into the market unless prices dropped 30% from their current high levels. There are simply no bargains around at the moment – except possibly gold.
Investment Framing: Hope this has been helpful in framing your investment options. As you probably know, we’ve been very optimistic over the last six years, and at this point we are most pessimistic. Our eyes are on a situation where popular fear and panic have got prices back to more realistic levels – and therefore present some investment opportunities. We’ll flag when this time might be, but for the present – it’s watch, wait and see.