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240: Global Inflation-Deflation and Currency Value Picture


12-06-2008

PropertyInvesting.net team

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:

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.

What we believe will happen is that western economies will massively borrow and print money – drop interest rates and try and inflate their economies again from Sept 2008 to Sept 2009. This may avoid a deep recession, but when the economies finally get going – say end 2009, unless the central banks are careful, GDP will rise sharply followed by inflation and interest rates – this could then lead to a further slowdown and recession – or a least a de-stabilized economic situation. Watch out for oil prices – currently at $40/bbl – if western economies successfully inflate, then oil demand will rise sharply again and because we have likely now reached “Peak Oil” (a bumpy plateau of maximum oil production), oil prices could then skyrocket – possibly as early as 2010 – inflation and high interest rates could then kick-in again. Expect turbulence. As oil investments drop end 2008 and oil production drops because of decreased demand – we might find a big shock when demand recovers – that production does not! In fact, oil fields have depleted and oil production projects have been delayed through lack of bank funding. Thence oil prices could skyrocket again. Please note, from 2008 to 2030, some $26 Trillion of oil/energy investments are required to keep pace with energy demand – that’s about $1 Trillion a year – we can tell you – there is nothing even approaching this type of investment at this time – so expect problems in the future. The quicker we can convert to electric cars the better!

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 UK, USA and western Europe – remember the baby-boomers started retiring this year – and this increases until a massive wave in 2016. As we mentioned back in 2004, any time after 2007 will be higher risk – and we may be seeing the first signs of wealthy babyboomer pulling out their money and heading for the hills! Just make sure you’re not the last!

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 enquiries@popertyinvesting.net

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