Bubble About to Pop - Crash on the way

 

Bubble About to Pop - Crash: The bubble is just about to pop now. On 1 June – all US stock markets went down between 2.2% to 2.4%. This was just a minor correction, a mere wobble compared to what is just about to happen.

Printed Money: We have a very simple message. The $2 Trillion of printed US money has created a bubble – inflated things well beyond their real value. This has swollen US debt and a recession is now beginning.

Indices Down: All key indices this week pointed down. In our opinion the USA should already be in recession – it’s just that the quarterly numbers are not out yet. We wont bore you with all the details – suffice it to say we did not see any positive indices this week – they all stayed the same or worsened. The UK is also very close to a recession. In a few months, the markets will realise the extent of the growth problem and investors will dump shares because of fears of large drops in earnings. Meanwhile a few key negative things out there:

1  US administration has yet to agree to increase the $14.3 Trillion debt ceiling – time is ticking by and default would start in August if no agreement is reached

2  Greece needs to make its Euro 12 Billion debt payment in June – it cannot afford this – and a further bail-out is still to be agreed

3  The US stops QE2 on 30 June – there are no plans for QE3 and in any case, the USA cannot afford this – interest rates are due to skyrocket because people will demand a greater risk premium to hold dollars with declining value due to the inflationary bubble created

4  The summer slow-down is on us – economies always slow in the summer

5  Public sector spending cuts will start to kick-in

6  Inflation is now out of control – normally if inflation is 5%, interest rates should be 8%. Interest rates are only 0.5% - ridiculously and dangerously low. One can only assume Central Banks expect a recession later this year.

7  Food and energy inflation is running at 10-25% with taxes rising – if this does not lead to a recession, we don’t know what will

8  Oil prices are averaging $100/bbl on an 6 monthly basis, far higher than in 2008 – it led to a recession last time – why does anyone think it will be different this time, especially as western economies are now less robust?

9  Go away in May – the old adage is worth taking very seriously – this time millions of retiring baby-boomers will be getting their money off the table and heading for the hills for the very last time – expect to notice more retirement announcements early this summer as these people liquidate and head for the sun

10  Despite the Fed pumping $2 Trillion of fiat money into the US economy, it has barely created any jobs. US tax revenues is $1.3 Trillion a year with government deficit $1.3 Trillion – the US deficit is >10% of GDP - totally unsustainable. Even if the US government double tax rates, they would still be in deficit. And that's before interest rates go up - worried - you should be! Any other country would be bankrupt with such finances and the USA’s ability to keep printing money will soon be curtailed after the dollar crashes, and as foreign investors shift away from viewing the dollar as a safe haven. They must be sick and tired of the dollar being devalued on purpose. 

Peak Oil: This was 2005 (crude oil) or 2008 (all oil liquids) – for seven years we’ve been on a bumpy plateau and oil production is declining after massive supply disruptions to light sweet oil supplies from Libya (1.6 million bbls/day) and Yemen (0.4 million bbls/day). OPEC is not capable of making up for this light oil off the market – and high oil prices have now killed the western economic recovery. It always does, it always has and it always will. News this week broke via Gazprom that Russia’s oil production is now in decline – they have also reached Peak Oil – production will be down 3% this year. It's highly likely Saudi Arabia cannot increase production significantly – and in any case will not do so even if they could. If oil prices rise, demand will be destroyed as a recession takes hold so they will use this as an excuse for not exporting more oil. In any case, with their massively increasing population and oil demand internally, the Saudi’s need all the oil they can get to fuel their own economy - electric power for air conditioning and gasoline for cars – expect Saudi oil exports to drop (not increase). As global oil prices rise, there is an incentive for Saudi to hold oil back and get higher prices in future years – yes, expect OPEC exports to decline not increase. This is not a normal market.

Alternatives: The world is so reliant on fossil fuels that any immediate transition to renewable alternatives is wishful thinking. Not only are these energy forms far more expensive, the infra-structure has not been developed to make the switch possible in a 10-15 year time frame. In any case, such gigantic investment would be required - it would bankrupt most developed nations. Most renewable energy already relies on large subsidies - as Peak Oil affects hit and government have less money to spend, these subsidies will dry up even though at these times they will most be required. We're pretty much locked into fossil fuels. Nuclear power was about to see a gigantic growth period because this was moderately low cost, very low in emissions and considered safe - however, the Japanese nuclear disaster has made many countries think again. In Germany, they announced last week they would shut all their nuclear power plants by 2022. That means they will have to find 22% extra capacity from somewhere - a gigantic new investment and likely to drive energy prices far higher. It will also probably lead to more CO2 emissions because we frankly find it unbelievable they will be able to replace this capacity with renewable sources. Especially as new overhead pylons would need building and the locals will undoubtedly complain that this is polluting. Hydro-electric plants are no longer being built because of environmental complaints. Nuclear ditto. Shale gas has just been outlawed in France - because fraccing is now illegal. It all points to rapidly increasing energy prices, slower economic growth and energy crises in various countries. Shale Gas was the great hope a few years ago, particularly in the USA - the energy business has been hydraulically fraccing wells for 30 years, but now it seems many governments want to ban this practice - just when we most need this relatively cheap clean energy. What alternatives are there that are not killed off by various different vested interest groups? None. Expect power cuts -affecting hospitals, schools and homes - particularly in developing nations. As energy prices rise, overall GDP growth will drop in oil importing developed nations.

GDP Growth: To be quite explicit, we have modelled the effects of oil price based on economic costs (import-export deficits), historical trends and forward projections - the table below gives our view on the likely GDP growth at sustained oil prices levels. As you can see, anything over $100/bbl leads to stagnation in developed oil importing nations. Anything over $130/bbl will lead to recession. We are there or thereabouts at the moment - and we see a recession recommencing before oil prices drop back thus re-stimulating the economy. Just to re-iterate the direct relationship between oil prices and economic wellbeing. Ignore this at your peril - since all other output prices are either directly or indirectly linked to oil prices. The age of cheap energy driving consumerism and debt is over. This will change henceforth and western oil importing nations will battle to stay out of recession because of high oil prices.

Oil Price $/bbl	US GDP % growth rate	UK GDP % growth rate	India GDP % growth rate	China GDP % growth rate	Saudi GDP % growth rate
50	3.0	2.5	9.0	11.0	-4.0
75	2.0	1.8	8.0	10.0	-1.0
100	1.2	1.0	7.0	9.0	4.0
125	0.6	0.6	5.2	8.0	6.0
150	-1.2	-1.2	4.5	7.0	8.0

 

UK Trips Up Big Time: As for the UK, Chancellor Osbourne’s £2 Billion tax grab has stalled North Sea oil and gas investments to the tune of £10-20 Billion and this will increase declines in UK oil and gas production. Just when the UK needs more oil and gas, this ridiculous tax on "supply" will do the opposite. Meanwhile tax on "consumption" was dropped at the petrol pump – does that make sense? – we must be missing something!  Expect worsening balance of payments deficits as more projects are cancelled – we saw the first evidence of this last month as North Sea oil production crashed the most in ten years. Many jobs will be lost, particularly in Scotland. This tax was stupid. The UK has the most unstable oil tax regime in Europe – possibly the world. UK governments seem to want to destroy the goose that lays the golden eggs. And this tax is at the same 82% level on gas – and UK gas imports are now gigantic compared to ten years ago all leading to increased balance of payments deficits. When will they learn?

Crash: We expect the US stock market to crash by at least 30% by year end. The Dow should eventually drop from 12600 to 8000 - this is our central projection. Ditto the UK stock market - dropping from 6000 to about 4200. We urge all serious investors with stock market investments to sell up into cash now – before it’s too late. Then you can get back into the stock market after a crash. Don’t hang around in this market – you’ll be the sucker that gets caught. Be the first to leave the party, not the last.

Safe: And if you have a lot of cash, spread it around different banks in case one or two go under during or after the next financial crash. Or store it in a safe bank vault – forget the interest – it’s not worth anything anyway. Better still – put the money into a Swiss Bank account is Swiss Francs. Or in Canadian Dollars in Canada - a country well protected from Peak Oil.

Chinese Property Bubble: People have been talking about the Chinese property bubble for the last five years. Normally, if people say a bubble has formed, it's normally the case. Euphoria takes hold, and people see a fast rising market, speculators jump and board then try and find the top. Then everyone bails out - the canny investors first with the suckers last. Up until now, we thought this market was well supported by fundamentals, but since early 2011 we have changed our tune. The think there is 80% chance its a bubble and it will go pop. If and when it does, it could have a global repercussion because so much money, energy, resources, employment and speculation has gone into this mighty building boom. If it goes pop, other assets like oil commodities, coal, banking and resources companies would likely be affected. Particularly steel, iron ore, copper and cement -plus oil and gas that is needed for building. We also see the first signs of a property crash in China, not for sure, but it certainly looks spooky. So, this is another reason to get your money off the table for a while - if the Chinese property bubble goes pop, it could stimulate stock market declines globally - and trigger a wider recession in countries exporting to China.

Chinese Invest in London:  An interesting article describes evidence the Chinese are starting to invest heavily in London property - because prices are lower than Beijing. The Chinese are canny investors - this is certainly a sign that all might not be well as indicated in the mainstream in China at the moment. Undoubtedly China is a fast growing country with massive upside, but property prices have probably got too far ahead at this time, and there could be a rapid correct in some of the major industrial cities.

Property Investing: Some of the biggest smartest investors have liquidated stocks and shares and got into London prime property – not a bad strategy considering what is likely to happen. The buy-to-let market is also resurgent in the UK because so few first-time buyers can afford to buy their own properties now. They cannot get financing. Deposits are too high. Student loans drag them down. Weddings cost a bomb. Credit cards have too much debt on them. "Mum and Dad" cannot afford to help anymore. Banks prefer to lend to established buy-to-let investors. And of course rents have been rising fast because of a shortage of rental accommodation, shortage of private landlords and social housing. There is almost no building and the population is expanding rapidly - 1% a year in London for instance. So it does not take a rocket scientist to realise that the housing crisis – will and is causing rents to sky-rocket. Being a landlord is a rather unpopular profession and highly stressful – with problem tenants, high taxes, problems with regulation and councils, and a good deal of criticism mainly from either envious, jealous people, or people that believe buy-to-let investors are responsible for driving up house prices  – because of this, there is not much competition any more. Few landlords around. Hence rents go up. This is the un-intended consequence of all the regulations and tenant rights that have been put in place in the last 15 years. So yields are reasonably attractive. As you can understand, they have to be attractive because being a landlord is not exactly a pleasant or easy experience. So indeed, there are some good high yielding rental opportunities out there and very little competition.  We don’t think this will change any time soon because 15 years of governments have failed to improve the attractiveness of private letting for landlords. And capital gains tax also took another slice out of profits last year. If landlords pay for energy and council tax – these costs have also sky-rocketted.

Inflation: Also consider, property is generally thought to be one of the best hedges against inflation. If you believe governments will try and inflate their debts away, then as inflation kicks in, its likely property prices will follow suit. It does not take many years of 4% inflation to reduce debt burdens - for instance, after 10 years at 4%, debts in compounded real terms halve. If property prices rise with inflation, then equity levels shift markedly higher quite quickly, as the real terms debt level reduces - even if property prices do not out-pace inflation. That's one reason why so many wealthy people invest in property, and London property is the most popular place. London gets more visitors a year than any other city in the world - 20.5 million visitors. More than Paris, double that of Madrid. London attracts wealthy international families with its culture, transport, history, education and language - along with a cosmopolitan open environment. Expect international inflows of property investment cash to continue to stream into London - as a safe haven during problematic times. 

Land:  As the population rises from 7 Billion to 9 Billion in the next few decades and Peak Oil continues to affect the economic landscape, land prices will likely rise sharply. Anything growing production activity on land like forestry, water, mining or agriculture will prosper as food prices rise and food shortages become noticeable. Land is something tangible, physical that can be used to grow and sustain life – so fiat money and debt lose value, land prices will more than likely rise far above inflation. The very most wealth people normally invest in land – during hard times, land will always come in handy and be coveted. To have land in your portfolio seems sensible. In our view, we prefer land to gold. We like land like oil, gas and coking coal. Land can be used to generate energy. Land can be used to grow food and fuel. Peak Oil leads to higher land prices, especially good value farmland close to cities.

Key criteria point to recession and crash

 

Crash On The Cards: The US government came out 27 April as expected and advised they would end quantitative easing 30 June and continue with low interest rates in the medium term. They said inflationary pressures were under control and the US economy was improving.  All sound okay on the face of it.  It’s very important you read ahead now – for our objective assessment - we describe our view on why and when we think a market crash will occur.

Recession on the Horizon: All the indications we can see point to a stock market crash and another recession – it’s just around the corner. This is our opinion based on detailed analysis. We give a 70% chance of some sort of stock market crash in the next six months and will now outline the reasons why:

1. Fiat Money: Firstly - $2 Trillion of printed money has been pumped into the US economy which has hardly got the US economy moving. Unemployment is still rising. Real Estate prices are dropping, even though interest rates remain at 0.5%. One of the key reasons for this is that the private sector – now making gigantic profits – is not re-investing the proceeds because they are scared about what is just around the corner. They lack confidence to put large amounts of money on the table and are worried about interest rates rising. These companies are hoarded the cash, give some away as dividends to shareholders, and mainly invested overseas. Furthermore, a lot of this money has gone into speculation of commodities - further deteriorating the US economy by driving up energy input prices. 

2. Pumped Up Stock Prices: Because profits are high, this has fed through to stock market prices (price/earnings multiples) - the stock market has sky-rocketed to very dangerous levels since the early 2009 low point. The Dow has risen from 6600 to 12800 end April - up over 100%.

3. Increasing Deficit: But the US deficit has increased – not decreased. The USA is now running with a $1.4 Trillion annual deficit. It's spending is £3.0 Trillion but it's income from taxes despite these massive short-term profits is only $1.6 Trillion. This is about 10% of GDP – the same levels that Greece is currently running with – also the UK. Dangerous levels - not worthy of an AAA rating. The reduced April 2011 deficit to $45 Billion compared with a year earlier at $86 Billion we believe is large related to companies making big profits because of low interest rates. Once borrowing costs rise, the tax receipts will reduce and deficit sky-rocket.

3. No Plan To Reduce: But the USA has no concrete plans to reduce the deficit – instead the deficit has been revised up on a six monthly basis since the 2008 financial shock. Medicare, military and oil import expenditure is totally unsustainable and in our view will lead to a dollar crash and ultimately a financial crash. No wander Standard & Poors put the US on credit watch for a downgrade from their AAA rating. The US based Weiss Rating's end April advised that the US rating should be CCC in their objective view, just above junk status.

3. Dollar Standard: Remember that gold used to be the global currency standard. Then this was decoupled – after a brief period of UK Sterling being the standard - then the Dollar has continued to be the global currency standard since. It was initially backed by oil reserves, coal, gold, high-tech and a booming economy. This has changed since the 1980s beyond recognition - oil reserves have depleted, the high-tech boom has played itself out, and debt has sky-rocketted. Manufacturing has moved to China. But let’s just look at a couple of scenarios:

1  The Chinese currency decouples from the dollar – the dollar would crash as people bought the Chinese currency

2  Oil is priced by OPEC in a basket of currencies – the dollar would crash as people switched away from the dollar

3  The US gets a downgrade from its AAA rating – the dollar would crash

Risks: All three of these scenarios are not exactly likely in the next few years, but let’s just say in three years time if oil prices stay high, one could imagine one of these scenarios playing out – if not two - if contagion took hold. No other country can just print more money to get itself out of trouble and get away with it. It’s only because of the previous US reputation that the current Administration has managed to get away with this. But as the US declines as a super power and military power, it’s likely the dollar will continue a long decline and currencies like the Swiss Franc, Norwegian Kroner, Australian Dollar and Canadian Dollar will increase in value against the US Dollar – because these currencies are backed by hard assets and resources and run with healthy budget surpluses (oil reserves, gas reserves, coal reserves, metals or gold).     

Printing Pressed Stop: You see, the immediate problem is – when the Fed stops printing money 30 June and stops buying it's own debt – the interest rates will have to sky-rocket to attract investors against risky dollar debt, particularly as no deficit reduction plan is agreed. When interest rates rise, profits drop, businesses get into trouble and the stock market should therefore crash.  

Fiat Money: We believe the only key reason why the US stock market has doubled in two years is because fiat money has been printed and used by speculators on risky assets to make a fast buck. In a way, this was the Fed’s plan to stimulate investment into risk – to create some inflation. But it’s actually created a huge bubble that is very likely to pop very shortly. Why should the value of US companies double in two years - let's be honest and just admit it - it makes no sense. 

Dow Jones At Record: Every time we see the Dow Jones rise further above 12000 – we just think “bubble” and “when will it pop”. May be we are too simplistic or too honest – but it’s an accident waiting to happen and many normal small investors and pensioners are going to get severely burnt unless they get their money off the table quickly.

Getting Out: The first people to get out will be the big investment banks and wealthiest big investors. Anyone with pensions, unit trusts or small equity amounts will get burnt just like they always do. By the time the average punter realises a crash is on – it will be too late. It might happen in a few minutes or a few hours. Not enough time to react. When it starts, people in the know will talk it up as a buying opportunity, but it will only drop further. You have to get out now – now – yes – now – before the crash.

Printed Money Being Used In The Wrong Place: Another reason why we think the US is due for a hard fall is because printing money and increasing the public sector is a recipe for disaster. On top of this, the current administration seems intent on banker bashing and oil company bashing. After ten years of steady oil investment, US oil production actually started to increase in 2009 – but this has all been massively set back by the current energy policy which is frankly a mess. Plus the offshore ban on drilling. Oil import bills will keep rising and the Administration is very unlikely to survive through to the end of 2012 if gas prices are over $4/gallon. The average American uses ten times more oil than a Chinese person – and it affects their consumption patterns so much, it will likely lead to a US recession – especially if US based oil prices rise above $120/bbl. As employment drops, oil demand drops. Unemployed do not drive around and spend heavily at shops. They also don’t use energy at work. There is a very close correlation between employment and oil usage. Yes – look no further than the Fed if you want to know who pumped up the oil price and stock market prices – the fiat money – having an unintended consequence. Far from creating jobs, it’s developed a bubble, raised oil prices and created no jobs – surely someone in the Fed could have predicted this?  

UK Recession: As for the UK – it’s laughable how people looked at the meagre 0.5% GDP growth in the last quarter and say the country is growing. No – the snow in Q4 2010 had a massive economic impact keeping people at home and slowing business – then in Q1 people had to make large purchases and go about their normal business again. We believe, that’s the only reason why the UK grew 0.5%, it was just a rebound from a recessionary quarter. Everyone expected a bit of a rebound. In the last three quarters, there has been zero growth. Any hiccup in the next few months equals a recession. We already know there is a massive hiccup – namely high oil prices and all the security problems in North Africa and the Middle East. As the summer approaches – a slower growth period normally starts. Meanwhile the tax shock of increasing North Sea oil taxes will lead to many cancelled oil projects and a slowdown in oil production - we expect GDP to drop in Q2 and Q3. Then by end 2011 everyone will need to acknowledge that there is another recession. Despite Sterling massively declining in value in the last few years, exports have not really risen significantly and the service lead growth is likely to be temporary stimulated by the fiat $2 Trillion that the Fed has printed in the last three years along with a spike in commodities prices. It only needs a stock market correction to wipe out the UK service lead economic recovery. As oil prices and stock market prices drop - it will kill any service growth in the UK - this is our base prediction. 

Oil Prices Again: The other reason why we think there will be a stock market crash and recession is that oil prices rose over $120/bbl (Brent) in April – well over danger levels. It's been too high for too long. Goldman Sachs are right and Barclays are wrong in our view – it’s time to get out of oil and commodities now that prices have stayed well above $100/bbl for four months. It’s only a question of a few more months before inflation takes hold, prices start blowing off, import costs swell debt levels and a stock market crash triggers another financial meltdown. Every time oil prices spike – a recession happens – period. There is no example of when oil prices spiked and a recession did not start in western oil importing nations in the last 60 years. The simple fact is – our lifestyles and massive consumption use far too much oil for the value we create in western oil importing nations – too many people burning around in cars but not adding value – just burning expensive oil that is running short. Inefficient non value creating consumption we call it. Lots of people "swanning around" - delivering zero and eroding value.

Peak Oil – Bumpy Plateau: As far as Peak Oil is concerned, some of the Peak Oil doubters point to an interesting statistic that oil production in March was higher than at any time in the world’s history. We’d like to explain our view on this – because we are of course Peak Oil advocates. What we have always said is that – since mid 2005, oil production has been on a bumpy plateau. The first peak was for crude oil in 2005. The second peak was July 2008 for all oil liquids (including biofuels and natural gas liquids that rose in production levels whilst crude declined somewhat). The third peak is about now – because oil prices have skyrocketed to $125/bbl (Brent) and everyone is producing at maximum rate – except Saudi Arabia. This is the bumpy plateau we have been describing for the past five years and this oil production spike will be temporary, probably only a month. It will drop back by year end. We are on a plateau – and the downside risk of a sudden big drop in overall global oil production is far higher than a rapid expansion of oil production. Time will prove us correct on this one – we maintain our view – based on our unique world oil production model (of every oil producing and consuming country) that total oil production will stay within a +/-10% bracket from 2005 levels through 2011 – that’s a plateau in our opinion – not an increase.

Diesel Shortages: The other aspect of oil worthy of particular note is that there is a shortage of light low sulphur crude oil – the feedstock that is ideal for refining into diesel. There is consequently a shortage of diesel globally. Diesel usage has sky-rocketted in the last ten years – for trucks, cars, tractors and power generation (temporary and semi-permanent). We see light high quality oil prices continuing to increase as diesel shortages intensify – until the recession begins again in western developed nations. Russia is suffering diesel shortages, as are India and China – a serious situation that is little publicised. This will lead to lower productivity, higher prices and be another factor helping tip the west into recession.

Greece:  The trigger for the crash could very well be Greece. There interest rates have sky-rocketted recently to 25% because everyone is half expecting default – or debt re-structuring. If there are problems re-structuring this debt – it could trigger another bout of Euro-contagion and a financial meltdown – not just in mainland Europe but also into the USA and UK. The underlying reason why Greece has not been able to get its deficit below 10% of GDP despite massive austerity measures – is because of it’s huge oil, gas, electricity and coal import bills compared to its output production. Greece does not produce much, but consumes masses of commodities – a consumer economy built on very shaky foundations. But they are not the only ones.  Further afield are Portugal, Ireland and possible Spain and even Italy - other examples. These countries had economic booms when they joined the Euro off the back of low interest rates, a high value currency, business reputation of Germany/France and tourism plus a fiat property boom. Now it’s all ended. Oil prices have risen. Tourism is declining. Public sector cuts are dragging the economies into recession. Aging populations with big pensions contributing little to the country will drag these economies down even further. Ultimately if France and Germany dump these peripheral countries from the Eurozone as the Euro experiment fails – their currencies will halve in value, with it their property prices - then inflation will start as import bills rise. But at least the economy will be re-balancing and tourism will rise as the cost to visit drops for British, French and Germans visitors. Frankly – we cannot see a pretty end to the Greek debt issues if oil prices stay above $100/bbl.

Peak Oil: Again, it’s another sign of Peak Oil – the underlying cause of the Euro-contagion is actually Peak Oil. The Europeans import $1 Trillion of oil a year – that’s massive. As much as the US annual deficit. And they simply cannot afford this oil – especially if they do not manufacture anything worthwhile like Greece. Sorry to be so harsh, but if you have any property in Greece, sell it quickly in Euros and get your money out – before not only the property crash happens in earnest but also the currency crashes as well - as Greece is booted out of the Euro. The same is also true of Portugal – where property prices are unsurprisingly now in free-fall - again, if they get dumped from the Euro, they will halve in value again – and yes, we are being serious. The smart property investors got out of Portugal a long time ago. And don’t be tempted either by Spain and Italy at the moment – there is a significant chance these far larger economies could go a similar way as well if severe contagion takes hold. The remaining Euro block could be Germany, France, Austria, Holland, Finland and Denmark. 

Ireland: As for Ireland, it's a complete basket case. A deficit reported this week of -25% is horrendous and expect property prices to drop in all parts of Ireland. Irish property prices would also drop in Euro or Sterling terms far further if Ireland left the Euro of course. In some ways, Ireland looks in the worst shape – a massive property boom with bubble that popped with a government that dear not increase corporate taxes and does not want to seriously reduce the public sector deficit. Regrettably the economic hardship is likely to spill over into Northern Ireland and one might expect security to deteriorate regrettably – it often happens in a recession. The correlation between economic wellbeing (employment) and security is high and the many years of hard won peace are being risked now from this economic hardship and a disparity in wealth between different groups.  Of course, any increase in security risks will send house prices tumbling in Northern Ireland – it already started back in 2008 and does not look likely to stop at least in the medium term especially after recent security set-backs.

Baltic Dry Dock Index: We checked this index end April. It’s looking dangerous. As you might know, the Baltic Dry Dock Index is often used as a leading indicator of future recessions. It worked very well in predicting the 2008 recession - it crashed 12 months before Lehman Brothers in August 2008. In the last few months, the index has steeply dropped 40% and is languishing close to 5 yearly lows. It points to a recession just around the corner or at a minimum a severe slowdown.

Dow: The Dow Jones rose steadily into the 12800 range end April – and it all looks stable on the face of it. But from our intuition and experience – this is just when one needs to bail out and head for the hills. We think the Fed is propping the whole lot up – buying on the dips. Giving it support. We don’t know this for a fact – it’s just a bit of intuition. It all looks suspiciously stable if you know what we mean.

Sell In May And Go Away: As they say, sell in May and go away. We expect a massive sell-off in May. The period up until end of May is a very risky period. If the stock market can survive without a crash through into June, then it could just hang in there for a while longer. But our logic would suggest that people will bail out in May – for the summer. All those retiring baby-boomers will want to pull their money off the table one last time – before the printing presses stop end June. Then relax on their boats in the Med and Florida. So get out while you still can!

We hope this guidance has been helpful. We also hope we are wrong. No-one likes to see a crash. Just make sure you reduce your exposure to it as much as you reasonably can. We just cannot see things rising much further – and we really think things are due for a big drop.      

 

2.  Young Go East For High Growth Excitement

 

Now we switch tact. Look at opportunities, particularly for young people in the East.

 

The World Is My Oyster: The world is now a truly global economy. For educated people with financial acumen, the world is your oyster. A conventional view of the world would suggest staying in your home country being norm and one would normally start business, employment and/or wealth creation in one’s base country. But if you have only loose family and friendship ties to your base country – let’s say – a Western European country – you would normally stay put in the country. But the future of high growth business is almost certainly in the developing expanding countries. High growth countries in the last century were for example the USA in the 1940s or the UK in the 1980s and Spain/Portugal in the 1990s

Looking forwards in this century, the high growth countries are likely to be:

  China 2000 to 2020

  India 2005 to 2040

  Vietnam 2005 to 2040

  Mongolia 2005 t0 2040

  Brazil 2000 – 2020

Growth: If you can join these rapidly expanding economies – integrate and speak the language – and use you educated financial acumen to develop a business, it’s likely you could be rich beyond your wildest dreams if you jumped into these economic hotspots now.

Serious Money: It was easy to make serious money in the UK from 1980 to 2007 through accumulation of property and stocks and shares. Ditto for the USA. But these countries now face years of slow growth or even recession. They are already wealthy, developed, high cost and low growth – using massive quantities of imported high cost oil. Opportunities are lower and competition is fierce from highly educated individuals – with huge numbers of educated people trying to do the same thing. Western developed oil importing nations will suffer from Peak Oil and slow growth, aging populations and in some cases, declining populations – this will all lead to economic stagnation.

High Growth Streams: Countries like Mongolia – rich in natural resources and bordering on massively growing China – would expect to see annual growth rates of 5-12%. China up until 2020 a growth rate of 8-12%. India up until 2030 a growth rate of 7-12%. Any reasonably run business should expect to see rapid expansion – catching the growth wave moving forwards. It’s partly to do with low wage costs and partly to do with low oil input costs compared to a unit of GDP growth. If you join a high growth country, you would be inserted into a growing arena of opportunity – so even if your business was not best in class – it would likely still grow strongly, also because the population is growing and overall country GDP is growing so strongly – catching up with western developed nations that are likely to stagnate.

Developed Cities - High Standard of Living:  If you preferred to be in a more developed city– Hong Kong, Shanghai, Mumbai or Singapore could be good bases. In Australia, Sydney, Perth and Melbourne are all booming off the back of resources require for China and the Far East.

Young Entrepreneurs: The bottom lines is – if you are an entrepreneur who likes adventure and can learn another language, there are amazing opportunities in countries like India, China, Mongolia, Vietnam and Brazil.  You would have to watch out you were not taken advantage of – being a non local. You would have to develop a network of business contacts. But it could be incredibly lucrative living in such a country and starting a business. Particularly if you can identify a gap in the market and organise a good business. Or just invest in the best companies in that country that churn out healthy 5+% dividends on a consistent basis – and look like they will growth for many years to come.

Relocate: We’re not about to relocate abroad. But we’re not 20 years old and unattached either! If you are 35+ years old, it might be too late because you have a partner, family, friends and become set in your ways. You are already thinking about retirement when you are in your late 40s. You could be married at 33. But if you are smart, young, adventurous and entrepreneurial – it’s certainly worth considering joining a high growth country and either starting a business or investing in the very best – honest - businesses in these wealth creating nations.

Where Will The Growth Be? Is there anyone out there that thinks the UK will grow faster than China, India, Vietnam or Brazil in the next 20 years? It’s almost certain that the latter countries will grow far stronger and faster than the UK. |So if you are 21 year old, out of college, smart and entrepreneurial – why wouldn’t you consider joining the high growth stream?  So many of these countries like Vietnam, Thailand and Brazil – almost all of the people are just lovely. A great place to live.  If you are not wedded to the UK or USA – it’s certainly worth considering.

Businesses that are likely to be particularly successful in these developing countries are:

1  Property – residential and commercial

2  Tourism

3  Internet – high tech

4  Renewable energy

5  Oil, gas, coal, metals, commodities

6  Construction

7  Power generation

8  Organised food and agriculture

9  Water

10 Shipping and transportation

11 Storage and infra-structure

12 Retail – for the new middle classes

13 Investment and business services

 

Western Europe Stagnates: These countries will have construction and properties booms just like the USA had in the 1960s, Spain in the 1980s and peripheral Eurozone countries between 1995 and 2005. As Peak Oil prices western oil importing developed nations out of the global economy – these new developing countries will use the remaining resources to catch up with the west. It’s not rocket science.

Resources and Far East: Mongolia has a massive mining and resources boom – not surprising being on the doorstep of China. To get a piece of the action in this country could be very lucrative. In the 1970s – people used to laugh at Mongolia. Now – they are a real developing powerhouse. China will make sure they succeed.  Getting into mining and power either as an investor, business owner (or even consultant on rate and commission) could put you on the path of stellar returns – rather than battling against stiff competition and slow growth back home.  

Insights: The short article is really meant to stimulate some insights and thoughts – particularly for the younger people.  The question might be “why wouldn’t I want to join a high growth exciting developing county” rather than “why would I...”.    To follow the high growth - think "resources-energy and the Far East". Start young in a high growth arena, and by the time you are 35 years old, you should be made.

 

Healthlinx Limited (HTX.AX) key developments

Latest Key Developments

Healthlinx Ltd Announces Issue Of Shares
Thursday, 30 Dec 2010 12:49am EST 

Healthlinx Ltd announced that it issued 1,347,709 ordinary shares for a total consideration of AUD100,00 and 202,156 unquoted options at an exercise price of AUD0.1018. Ordinary shares and unlisted options issued pursuant to a Convertible Note Agreement for up to $7.23 million between the Company and SpringTree Special Opportunities Fund, LP, a New York based investment fund, and originally approved by shareholders on November 26, 2009 and further approved on October 11, 2010. 

Healthlinx Ltd Announces Part 1 Of Second Study Confirms Superior Efficacy Of OvPlex Ovarian Cancer Diagnostic
Tuesday, 14 Dec 2010 05:23pm EST 

Healthlinx Ltd announced that reports initial analysis of part 1 of its multinational ovarian cancer biomarker study confirms a statistically significant increase in diagnostic performance of OvPlex over CA125 alone. Enhanced performance of OvPlex was also established specifically for early stage (Stage I-II) disease. These data represent preliminary statistical comparisons of area under the curve (AUC) of receiver operator curves (ROC) generated from Part 1 of the second larger multi-national, multi-centre biomarker study. Biomarker measurements in over 500 samples have been completed to date, which represents a subset of the full OvPlex study that will include a total of 1150 samples which will be collected in Australia, Singapore and the United Kingdom. Measurement of all OvPlex biomarkers was performed in over 500 samples as part 1 of the current biomarker study and the epithelial ovarian cancer patients and normal subjects (case / control) have undergone independent preliminary analysis (Emphron Informatics Pty Ltd) in order to draw comparisons with our previous OvPlex trial. The primary end point for the study is to undertake a ROC analysis of control subjects versus all epithelial ovarian cancer patients. Part 1 of the study demonstrated that OvPlex significantly outperformed the diagnostic capability of CA125 alone. 

Healthlinx Ltd Announces Early Results In OvPlex Ovarian Cancer Biomarker Study
Thursday, 11 Nov 2010 05:23pm EST 

Healthlinx Ltd announced that stage 1 of the multi-centre, multi-site second study for OvPlex has returned excellent initial data for the two new biomarkers AGR2 and HTX010 being evaluated for accuracy in diagnosing ovarian cancer. To date, AGR2 and HTX010 data have been analysed in over 400 case and control samples. Both AGR2 and HTX010 demonstrated statistically significant elevations in circulating plasma concentrations in both early stage (Stages I-II) and late stage (Stages III-IV) ovarian cancer patients. These data are significant as they confirm and reinforce previous findings from several smaller pilot studies and now pave the way for HealthLinx to use these markers in its OvPlex multimarker panel. Previous modelling with these biomarkers demonstrated improved diagnostic efficiency of the OvPlex panel. In combination with the other OvPlex biomarkers the Company expects a marked. Based on these data, HealthLinx will now move forward with plans to further develop and partner the AGR2 immunoassay as a clinical diagnostic tool with a range of potential applications related to cancer diagnosis and monitoring. 

Healthlinx Ltd Executes Commercial Agreement With Millipore
Tuesday, 28 Sep 2010 07:06pm EDT 

Healthlinx Ltd announced that it has signed a commercial agreement with Millipore Corporation, one of the research reagent companies to license HealthLinx’s AGR2 monoclonal antibody. The worldwide non-exclusive licence agreement allows Millipore to market and sell the monoclonal antibody for research purposes only, with upfront fees and royalties to flow back to HealthLinx. 

Healthlinx Ltd Signs Exclusive OvPlex License Agreement With Medison Pharma Limited
Monday, 6 Sep 2010 07:51pm EDT 

Healthlinx Ltd announced that it has signed an exclusive OvPlex license agreement with Medison Pharma Limited, an Israeli marketing company. Under the terms of the agreement Medison Pharma will endeavour to register and commercialise OvPlex in Israel. Israel is now the fourth jurisdiction to secure an OvPlex licence following Australia, United Kingdom and Singapore. Under the agreement Medison is granted exclusive rights for 10 years to market, distribute and sell the OvPlex panel in Israel. 

Healthlinx Ltd Announces Issue Of Shares Pursuant To Conversion Of Convertible Note
Wednesday, 1 Sep 2010 06:32pm EDT 

Healthlinx Ltd announced the issue of 1,584,786 fully paid ordinary shares. The total consideration for the issue is $100,000. The shares on conversion of Tranche 11 of $100,000 made in accordance with the Convertible Note Agreement between the Company and SpringTree Special Opportunities Fund, LP as announced on October 5, 2009 and approved by shareholders on November 26, 2009. 

Healthlinx Ltd Commences South Korea OvPlex Study For KFDA Regulatory Approvals
Tuesday, 31 Aug 2010 07:47pm EDT 

Healthlinx Ltd announced that it has finalised research agreements with its collaborators in South Korea to begin the 220 patient study required for South Korea Food and Drug Administration (KFDA) approval for the distribution of OvPlex. The trial will be conducted by Principal Investigator Professor Byoung-Gie Kim of Samsung Medical Center and Sungkyunkwan (SKK) University School of Medicine. Professor Kim assisted HealthLinx in securing further key institutions to participate in the trial including the highly reputable Asan Medical Centre and Seoul National University Hospital. Collectively the three hospitals have over 12,000 beds and support the three gynaecological cancer research centres in the country. It is anticipated that the study will take approximately 12–14 months to complete and then submissions to the KFDA will commence. The company is also in final negotiations with one of the largest privately owned, centralised laboratories in South Korea to partner the technology for commercial distribution. When the terms sheets are finalised, the market will be informed accordingly. 

Healthlinx Ltd Progress On Prostate Cancer Diagnostic
Monday, 21 Jun 2010 08:23pm EDT 

Healthlinx Ltd announced new data that may be the basis for the Company’s development of a new and more accurate prostate cancer diagnostic compared to what is currently used. PSA is the most commonly used biomarker for diagnosis of prostate cancer and is the most widespread form of prostate cancer screening tool with a specificity of 63.1 per cent and low sensitivity of 34.9 per cent. This poor performance highlights the need for a statistically improved more effective method to detect prostate cancer. Prostate cancer is the ninth most common cancer and is often associated with over-diagnosis and unnecessary surgery. The market opportunity for a diagnostic for prostate cancer is greater than USD350 million per annum based on the PSA test. Globally there were 679,000 new cases of prostate cancer identified in 2002 with 221,000 men losing their lives. Although some data suggest modest survival benefit from PSA screening, there is a strong un-met clinical and market need for a product that can increase specificity. Early data suggest that one of HealthLinx’s biomarkers shows significant potential for fulfilling this un-met market need and justifies priority development. 

Healthlinx Ltd Announces Launch Of International Study On OvPlex Cancer Test
Monday, 14 Jun 2010 06:30pm EDT 

Healthlinx Ltd announced that it will launch a major international trial on the OvPlex test, that will see 1150 samples screened using the current five biomarker panel and an additional two biomarkers including the recently described biomarker AGR2. The multi-site, multi-centre trial that is partially funded with $750,000 from the Victorian Government Victoria’s Science Agenda Investment Fund, aims to test whether the two new biomarkers can increase the sensitivity and specificity of OvPlex to greater than 97 per cent. The study has been powered to allow direct determination of sensitivity and specificity and will include collaborators from Australia, Singapore and the United Kingdom. The current OvPlex test relies on measurement of five biomarkers found in human blood and delivers 92% sensitivity and 94% specificity for the diagnosis of early stage (stage I & II) ovarian cancer. The trial will involve 1150 women and begins on June 15, 2010. The first stage of the study will use 450 samples secured through collaborators that include the Victorian Cancer Bio Bank, West Australian Research Tissue Network/SJOG Pathology and University Hospital Singapore. 

StoneBridge Securities Completes Private Placement Of $0.750 Million In Healthlinx Ltd
Monday, 7 Jun 2010 06:41pm EDT 

Healthlinx Ltd announced that Stonebridge Securities Limited has successfully completed the placement of 7,500,000 ordinary fully paid shares at 10 cents each plus free attaching options, as announced on June 1, 2010. The placement includes 300,000 new shares. The purpose of the issue is to further support the commercial roll out of the OvPlex cancer test over the next 12 months. 

 

Positive Criteria for Property Prices in 2011

 

For 2011, there will be a number of criteria that will pull property prices one way or the other, which we outline below:

 

Positive Criteria for Property Prices in 2011

1.  More competitive and more abundant mortgages after credit squeeze affects die away

2.  UK coming out of recession

3.  Increased employment by mid 2010

4.  Increase in private sector bonuses

5.  Lack of house building

6.  Increasing population

7.  Pent up demand from three years of low market activity – please needing to move

8.  Likely change of government

9.  2012 Olympics London

10. Javelin trains and East London Rail service-orbital London

 

Negative Criteria for Property Prices in 2010

1.  Higher VAT, national insurance, petrol duty and tax on bonuses

2.  Increase in inflation feeding through to higher interest rates and higher costs

3.  Increase in unemployment likely peaking around March 2011 

4.  High oil prices and energy prices - feeding through to inflation and higher interest rates

5. Public sector jobs losses continuing through 2011 and lower or freezes on public sector wages

6.  Possibility the UK Coalition may break-up

7.  High levels of deposit required

8.  Low lending to salary multiples

9.  Heat oil, petrol, diesel adversely affects rural areas and house prices in remoter parts 

 

Overall, we believe the positive factor more or less cancel out the negative factors and prices will remain fairly subdued and fluctuating around current levels through 2010 on an overall UK national level. However, we predict property prices in the more wealthy southern and London areas will be stronger than in northern areas that are more exposed to public sector and manufacturing sector jobs losses and spending cuts.

 

Property Price Predictions

 

1    London  +2%

2    SE England +1.5%

3    East Anglia +1%

4    Scotland +1%

5    SW England 0%

6    NW England -1.5%

7    Midlands -2%

8    Wales -3%

9    NE England  -3.5%

10  Northern Ireland -5%

Other criteria

US Dollar to the UK£    $1.65 / £1

UK£ to the Euro    £1 / 1.17 Euro

Oil price  $93/bbl early 2011 rising to $112 by June 2010 then dropping back to $90

UK Gas price 45p/therm

UK Interest Rates – rising from 0.5% in Mar 2011 to 1.75% by end 2011

FT rising to 6050 by early May 2011 then dropping in June to 5000 then closing same end 2011

UK Inflation CPI staying at 3.2% or thereabouts all year 

UK GDP staying at 2% through 2011 (on quarterly annualized basis) 

Security outlook – Iran and North Korea key hot-spots (Pakistan remains a concern).

Euro interest rate – staying at 2% through 2011

US Interest rates rising from 0.25% early 2010 to 1% end 2011

UK unemployment – rising slightly through 2011

Wage inflation – staying at ~2.3% through 2011

GDP growth London 2.7%, North 1.2%, Midland 0.8%, Scotland 1.3%. Wales 0%

GDP China 9%, GDP India 7%, GDP Africa 3.5%, Global GDP 3.0%, UK 2%, USA 2%, Euroland 2% - as a whole over 2010

Iran and North Korea developing nuclear weapons capability will be a key issue – lack of global leadership not helping resolve. Terrorism threats reduce as oil prices rise and economic situation in most of the Middle East improves. Security situation in Iraq improves considerably as government representation and political will wins over as expanding oil exports improve economic picture for the population as a whole.   

USA debt situation is likely to deteriorate further. Dollar declines as the Obama administration continues to print money devalues the currency and causes bond rates to rise sharply. Chinese and other international investor become increasingly frustrated with declining dollar value. Further talk of valuing oil in a basket of global currencies causes dollar to drop further and forces US loan interest rates to rise.

Inflation starts to become a serious issue by March 2011 and interest rates in western nations rise. All commodities prices rise. Oil, gas, copper, sugar, wood prices all rise. Oil production continues on a bumpy plateau – oil shortages start showing by mid 2011.

Greece, Portugal, Ireland, Spain and Italy continue economic stagnation exacerbated by high oil prices (oil import costs). Further Euro debt contagion and potential bail-outs for Italy, Portugal and Spain if oil prices rise >$120/bbl.  These countries need to leave the Euro to devalue their currencies and regain competitiveness. France and Germany continue to drive the European economies through manufacturing and commerce expertise – peripheral Euro-zone countries suffer as the Euro stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus, high performing sovereign wealth fund and high transparency and environmental standards.

As oil prices continue to rise, Dubai/UAE and Middle Eastern economies continue to grow strongly.   China continues it’s boom with GDP 9%. Brazil and India also boom with GDP at 7% and 9% respectively. 

Property Commentary

 

Prime West London will see the largest UK price increases of about 4% driven by higher city bonuses, foreign investors taking advantage of the low sterling values and relative cost in Euro, Middle East and Far East currency terms.

 

The Tory–Lib/Dem Coalition will be further strained by a concerted effort by some newspapers to target Lib-Dem politicians in an attempt to destabilize the Coalition and cause a snap election. As the Tories gains political momentum, the following general policies are enacted:

 

1.  Higher rate taxes are lowered after a few years

2.  Private sector and financial services are encouraged

3.  Public sector cuts through pay freezes, jobs cuts, efficiency improvements and project cancellations

4.  Manufacturing and remaining heavy industry will not necessarily benefit

5.  Market economy stronger, competition more intense

6.  Social and housing benefits costs reduced

7.  Large infra-structure projects rationalized

 

Such measures tend to benefit London and SE England and increase the north-south divide. Rural areas will be particularly badly affected by public sector jobs cuts along with northern and western areas. Manufacturing will continue its long term stagnation – with a decline in Sterling in value in 2009-2010 not having the desired positive export impact.  Massive global wealth will continue to feed into London – boosting financial services and positively impacting West End prime property demand and prices along with property in surrounding central areas.

 

We expect the property market to pick up by mid January until end May then rapidly cool and stagnate for the rest of the year. Any increase in property prices in the first five months of the year in most areas will be wiped out by a slide in the second half of 2011 as interest rates rise, inflation takes hold and oil prices continue to escalate.

 

If oil prices rise above $120/bbl then a recession in western developed nations six months later is highly likely in view of debt levels and fragile banking systems. Hence if oil increases to $120/bbl by mid 2011, a “western developed nation” recession will occur by Dec 2011.

 

London will start to feel the positive impact of the upcoming Olympics in 2012 in 2011.  800,000 additional people swelling London’s population in the next ten years and lack of building will support prices. The positive impact of the East London Rail, Javelin High Speed Rail links from Kent and other rail/tube upgrades will benefit the city and property prices close to new stations (e.g. New Cross Gate, Brockley, Gravesend) will continue to rise.

 

________________________________________________________

 

Look-back on 2010 Predictions

For good order we now look-back on our predictions for 2010. Overall we were close on most of the predictions.

Property prices in 2010 (in order of decrease):

1  London  +3%

2  East Anglia +3%

3  SE England +1.5%

4  SW England +1%

5  Scotland +1%

6  Midlands -2%

7  NW England -1%

8  Wales -1%

9  Northern Ireland -3%

10 NE England  -3%

Very close - general regional trend correct – London saw prices rise about 5% year-on-year whilst the north saw a slight drop (as close as one can realistically get looking at all indexes)

Other criteria

US Dollar to the UK£    $1.5 / £1    Very close, ended year at $1.55 / £1

UK£ to the Euro    £1 / 0.88 Euro   Not close – ended year at 1.173 (Euro was far stronger – debt contagion was averted or deferred for some months )

Oil price  $75 early 2010 rising to $102 by end 2010  Rose to $94/bbl by end 2010 - close

UK Gas price 48p/therm  Very accurate – averaged about 48p/therm

UK Interest Rates – rising from 0.5% in Feb 2010 to 3.25% by end 2010  Stayed at 0.25% - missed by a long margin – despite inflation rising to 3.2% the BoE kept rates at record lows!

FT rising from 5350 Jan 2010 to 5550 by end 2010   FT closed 2010 at 5850 - higher than expected

UK Inflation CPI rising from 1.6% early 2010 to 2.9% end 2010  Very close, inflation rose to 3.2% by end 2010

UK GDP rising from 0% early 2010 to 2.2% by end 2010 (on quarterly annualized basis) Accurate –more or less  spot on

Security outlook – worsening – far more tensions in Middle East and increase in tensions South Asia - with Iran in key role.   Indeed, Iran was a key security concern though North Korea also joined the list

Euro interest rate – 2% rising to 2.75% by end 2010   Rates stayed at 2%

US Interest rates rising from 0.25% early 2010 to 1.25% end 2010   Rates remained at 0.25% 

UK unemployment – dropping from March 2010 slowly - Unemployment actually rose slightly through 2010

Wage inflation – rising from 2.8% end 2009 to 3.7% end 2010  Wages inflation was somewhat more subdued at ~2.8% throughout 2010

GDP growth London 2.2%, North 1%, Midland 1%, Scotland 1.5%   Yes, London had higher growth than Midlands and Scotland

GDP China 10%, GDP India 6.5%, GDP Africa 2%, Global GDP 2.5%, UK 1.7%, USA 2%, Euroland 2% - as a whole over 2009 – Very accurate, almost spot on

Continued economic hardship in Middle East and South Asia along with lack of global leadership will lead to increased tensions and further degradation of security in the Middle East and South Asia – disenfranchised radical groups. Iraq security and economic well-being will improve further. Overall global terrorism will increase. The Iran nuclear issue will be the key security point in 2010 – with significant risk of being a trigger event.  Iran was a key issue but overall security levels did not deteriorate significantly.

USA and UK will both come out of recession, but debt overhang will stifle any strong recovery because of increasing tax and massive public spending programmes making these economies less competitive and efficient. Interest rates will rise sharply mid 2010 as inflation starts to get out of control. All commodities prices will rise. Oil, gas, copper, sugar, wood prices will all rise. Oil production is on a bumpy plateau – oil shortages may start showing end 2010.  Generally fairly accurate.

Greece, Portugal, Ireland, Spain and Italy will suffer long recessionary or periods of stagnation – there will be national calls for some of these countries to leave the Euro – so as to de-value their currencies and gain competitively. France and Germany will continue to drive the European economies through manufacturing and commerce expertise – peripheral Euro-zone countries will suffer as the Euro stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus. 

As oil prices rise, stability of Dubai will improve – growth will resume end 2010 and by end 2011 the current financial turmoil will be a distant memory. China will continue to boom at GDP 10%+. Brazil and India will also boom. 

___________________________________________________

 

For Reference Commentary made end 2009 – for Property Prediction 2010

 

Prime West London will see the largest price increases of about 5% driven by higher city bonuses, foreign investors taking advantage of the low sterling value and relative cost in Euro, Middle East and Far East currency terms.

 

One point to consider is the expectation that there will be a new government of Tories by mid 2010. We’d give this a 50% chance of a Tory majority, 25% change of a hung parliament and 25% Labour stay in power. Based on a Tory victory, what normally happens when Tories get into power is:

 

1.  Higher rate taxes are lowered after a few years

2.  Private sector and financial services are encouraged

3. Public sector will be cut through pay freeze, jobs cuts, efficiency improvements and project cancellations

4.  Manufacturing and remaining heavy industry will not necessarily benefit

5.  Market economy stronger, competition more intense

6.  Social costs reduced

7.  Large infra-structure projects rationalized

 

If such measures did not benefit London and SE England we would be surprised – these are also the traditional Tory strongholds. So we would expect to see mid to upper end southern property perform rather better than they would under Labour. Meanwhile lower end northern property – with proximity to public sector jobs and manufacturing jobs would expect to perform worse under Tory than Labour. So the period of stimulating northern prices by public sector jobs growth has likely come to an end. But the positive affects on prime London property could be significant. Okay, these are only trends – but they are based on previous actions implemented over many decades by both parties.

 

We expect the property market at the start of the year to be fairly active from mid January to early May with first time buyers re-entering the market after many years of very low activity. Interest rates will start rising likely March in response to increasing inflation – this will be the big story of 2010 – inflation. Record low interest rates and billions of printed money will feed through – if oil prices rise to $100/bbl as we expect – then inflation will start loosing control. And interest rates will need to be jacked up very quickly. This would then stall out any housing recovery fairly rapidly by end 2010. We see this scenario as about 50% chance by end 2010. If oil prices stay between $50/bbl and $80/bbl – then inflationary pressures will be far more subdued. And we would be far more confident that house prices in London and southern England would continue to rise in a sustainable manner.

 

London: There are some areas of the UK that look particularly attractive at present. London is of course one of these – with the Olympics in 2012, financial services industry that should stablize and then prosper after the Tories get into power mid 2010 and the 800,000 extra people expected in the next ten years, with very low levels of building. Crossrail, new High Speed Rail links, East London Rail Line and large redevelopments in various suburbs all point to higher prices. Talk of a mass movement of banking staff to overseas areas is, we believe, a little premature – if you were the head of a big bank, would you not first of all wait five months to see if the Tories get into power? Remember most banking staff have kids in public schools – it takes a year to properly implement an overseas move. Plans may be being formulated, but we believe the trigger would be a Labour victory – and this is unlikely.

 

Cornwall: This county is an interesting study. One tends to think of such counties as full of local agricultural workers and fishermen – with a few rich Londoner buying holiday homes. But the demographic make-up is far more varied. Many Midlanders, northerners and London-southern people migrate to Cornwall to start small businesses, retire, telecommute, or start work in the public sector. The population has the largest growth of any county in the last 35 years – about 25%. This is forecast to continue to rise – it’s hardly surprising because:

 

1.  It’s a very beautiful place

2.  Five hours by car or direct train to London – not so far

3.  Improved airport links (Newquay)

4.  Continuous stream of wealthy Londoners buying holiday homes

5.  IT improvements – more consultants living in Cornwall and working in London

6.  Lots of interesting people, arts, culture, scenery, beaches, sand, seas, sun, surf

7.  Warmest UK place by far in the winter – longest winter days in UK with brightest sun

 

Add to this that there is almost zero building in Cornwall because of strict planning and you have a recipe for increasing property prices. Yes, despite property prices being about 10 times the average indigenous worker wage, we believe prices will continue to rise above trend to the average UK prices. For inland hotspots, Truro ranks highest with the best schools in the county, a Cathedral city, Cornwall’s capital and beautiful shops. Good rail and road links help. For coast destinations, the riches areas will probably rise as fast as the poorer areas. So the very most select areas are Manaccan, Mylor, Rock, Padstow, Mousehole, St Ives, Helford, Mawman Smith, Fowey, Helford, Looe. For more down-at-heal value, Newlyn, Newquay, Perranporth, Portreath, Penzance, Bude are good examples. Be careful with Newquay though – keep an eye to make sure there is no threat to flights being cancelled since this would adversely affect property prices in the immediate area. The same is true of direct trains to London – it’s a low chance these will be stopped, but always possible – this would be rather catastrophic for property prices through Cornwall. One would hope rail times would instead improve – but higher oil prices are not good news since long distance travel by car becomes far more expensive. Hence Cornwall is fairly exposed to the effects of Peak Oil.