240: Global Inflation-Deflation and Currency Value Picture
Will it be deflation, or inflation?
Unlike previous recessions in 1971, 1981, 1991 and in certain countries 1999-2001, this financial and economic crisis is of global proportions and impact. Economies with free trade are far more inter-dependent now. Globalization has lead to outsourcing of goods and services to low cost centres in all parts of the world. Because of this, all economies are likely to slow more in tandem with each other. As a general rule, one would expect all GDPs to drop by about 3% on average as a very rough rule – so China’s GDP would drop to 9%, UK drop to -0.5%, Italy to -2%. Furthermore its across all asset classes, prices and growth have dropped – examples:
Metals and commodities prices
Factory gate prices
Because of this, interest rates across the board will dramatically drop. Rather than one particular currency crashing. We are seeing a massive unwinding of (often speculative) positions and deflation of asset bubbles – across almost all asset classes. All currencies will come under pressure – and it’s difficult to predict which ones will go completely out of favour. Oil prices crashing puts oil exporting nation’s currencies under pressure. Meanwhile – increased debit and attempts to bail out western (oil importing) nation’s banks will theoretically put these economies currencies under pressure. The next impact could be – all currencies stay more or less where they are against neighbouring currencies. Who would buy the Russian Ruble at the moment – even with interest rates at 12%? Or would you rather buy dollars with an interest rate of 1.5%? No-one really knows the answer.
So for property prices – there could be one last big inflation after this likely fairly brief recession – but it could be short-lived – and the canny investors will probably be looking to monetize at least part of their portfolios as the property prices start taking off – well before interest rates spike up again.
Don't be surprized to see a big surge in growth around February 2009 is interest rates in USA and Europe approach zero, in Euroland they drop to about 1.5% and mortage rates are cut (after a few month delay). Fiscal stimuli and other measures will likely start feeding through and things could pick up quite quickly. This is not mainstream thinking - but of you look at the shear size of stimuli, it should in theory start having a positive impact. But - be warned - inflation could then start kicking in again quickly. Turbulent times ahead - after a very benign period from early 2001 to mid 2007.
All those who believe inflation will again rear it's ugle head again - probably caused by high oil and commodities prices - consider being gold (currently $750/oz), plus oil-energy companies shares. If you believe in deflation, cash is king as asset prices would continue to spiral downwards and wages would be cut an commodities price would also continue to fall. In the moderate camp, assuming we come out of recession mid 2009 and inflation remains under control (<3%) - probably because oil prices remain low (<$70/bbl) - then house prices could recover fairly quickly and economies would get back to some degree of normality. We frankly don't know which scenario is most likely (never mind which one it will be) - it will probably become clearer in the next six months. Until then - the unknown is what spooks investors and will keep business confidence down. But if stock markets recoverin January, banks stablize and unemployment does not rise too much - the upside scenario - expect people to put 2008 behind them pretty quickly. In this scenario - people will call the bottom shortly and start looking forward to the New Year as the S&P, Dow and FTSE index rise say 10-15% by year end. If we see another big trough like in November (20th) and October (28th) - the gloom could set-in for the long haul an people will start talking more seriously about a Depression.
And for all those living in
Check the website Special Reports end of December for our 2008 predictions and some more detail and analysis on what the expected next economic cycle will look like If you have any comments on this special report, please contact us on firstname.lastname@example.org