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244: It's the oil price again - it caused the recession

12-26-2008 team

Any wonder we have a global financial meltdown on our hands. has used it's proprietary oil income/deficit mathematical model to calculate that in the 12 months to July 2008, $1.2 Trillion of wealth was transferred from North America, South America, Asia Pacific and Europe to the Middle Eastern and African oil exporting nations. The oil import bill for USA and Korea for example was in the range 4.5% to 6% of total GDP when price spiked at $147/bbl - a massive burden by any measure. This is two thirds of the total estimated losses from the credit crunch. This is almost double the $0.7 Tillion US bail-out costs. Oil importing nations were not able to handle this massive outflow of cash - so the whole lot came tumbling down.

Now there has been a massive reversal with oil prices crashing to $35/bbl - these import bills have declined to only ca. $0.35 Trillion per annum. The whole boom and bust has now had a very negative medium term impact on the Middle Eastern and African economies. Every time oil prices spike, it leads to recession in major oil importing nations - 1971, 1981, 1991 to name three periods when this happened.

Speculative positions in commodities - hedge funds long positions - have unwound as banks and investors have needed the cash to cover losses in asset prices dropping - and derivatives and hedge fund positions that have gone wrong. Shares in the UK are now 20% below their level of about ten years ago - a miserable investment performance especially considering inflation has averaged 2.5% a year (hence shares should be at least 40% higher in today's money terms even if asset prices had not increased).

What 2009 will bring is uncertain. It is likely zero percent interest rates will have a positive impact but not enough to get economies growing again - then governments will be forced to start printing money to revive the economies - massive fiscal stimulus packages. Then the economies will start to motor again after possibly by mid 2009 - but inflation will then start to kick-in relatively quickly and there is then a significant chance the whole lot could go pear shaped. Be warned - yes, there could be property price increases - but it could be over a 1-2 year period before there is another downturn.

India and China will lead the world economic growth in the next ten years - its very important we see these economies starting to motor soon, otherwise their could be a prolonged global recession or worse, depression.

Unfortunately, whenever there is economic hardship, political and social instability breaks out. So we believe 2009 will see more wars, terrorism, social unrest, riots and demonstrations. Out of the crisis there will likely come some good like:

Remember after 9/11 - many people down-shifted - moved abroad or to the countryside - but most came back, joined the mainstream again. It's boring being on the periphery! Expect a net inflow of UK citizens back to Britain as the pound collapses, pensions become less certain, healthcare costs rise and unemployment in places like Spain and France rise - UK citizens will find it harder to get work then the locals. But just as afetr 9/11 and the boom and bust, when things looked very bleak and it was difficult to imagine things would recover - then thingsdid recover. One could argue it's worse and different this time, but remember SARS, Russian financial crisis, Iraq and all the other problems of the last ten year - invariably things tend to improve after a shock. So don't be too surprised to see property prices bottoming out in 2009 then starting to edge higher. price to earnings multiples are bearly above their long term average (4.5 - with average of 4). When banks start lending at low interest rates - and borrowing costs and inflation area low, why wouldn't property be trading at 4.5 time earnings (remember when interest rates were 15% and inflation was 10% in 1989?).

It's getting closer to when investors should be entering the market again in UK and USA....










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