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365: Property market London and UK - economic bubble waiting to pop

02-22-2011 team

London Prices Booming: Asking prices shot up by 3.1% in England and Wales in the month up to 18th February. It seems the normal seasonal quiet period from end Oct to end Dec was particularly slow because of the severe weather. The improvement is probably driven by a combination of the following reasons:

·         weather improved – leading to catch-up of pent up demand

·         record city bonuses – thence investment in all types of property (buy-to-let, large family homes, second homes)London Mayfair Investment

·         lack of supply – almost total stoppage of new building since mid 2008 – leading to reduced supply of additional properties

·         expanding population and continued high levels of immigration – 3 million immigrants arrived in the UK in the period 1997-2010

·         North Africa and Middle Eastern finance inflows into property as a safe haven against unrest in this region

·         Mortgages becoming slightly easier to acquire

·         London Olympics in 18 months time

·         taxes for the most wealthy have now stabilized    

Downside Domestic Forces: The counter forces on the downside continue to be:

·         threat of increases in interest rates – probably starting May 2011 (inflationary pressures)

·         public sector jobs cuts

·         low levels of private sector recruitment – and minimal wage risesThoughtful Investing

·         high fuel/energy and food prices

·         taxes increasing to reduce gigantic deficit left by the previous government

·         threat of further banker bashing and taxation for ultra-high net worth individuals that could drive these people to places like Geneva, Channel Islands, Malta, Bermuda etc

London Winner:  No surprise that London is leading the way with property price rises. Let’s face it, where do you think the city bonuses and North Africa money will end up? In higher end London property.

Yorkshire Surprise:  An interesting observation is how Yorkshire property asking prices rose by 6.7% last month. It’s possible the public sector jobs cuts will not have such a negative impact on property prices in the north than expected. But it seems clear that London will see the strongest property price performance in the next few years as the Tory policies encourage private enterprise – which should positivLittle Germany Bradfordely impact businesses in the south-east. The average earnings in London are £59,000 – this is about double those of Wales, South-West England and NE England. Over the longer term there should be some tax cuts starting in about 2-3 years time as the deficit is reduced to a level that then allows business to be stimulated. Remember that lower taxes normally lead to increases in tax receipts in a normal economic environment.

Late Bull Market – Yes Late: But don’t be taken in too much by the season up-swing in the UK property market. This is typical of a later stage bull market. Most bull runs last about 7 years. But we think this one will be the shortest on record – about 3 years. Because we are hitting against the Peak Oil ceiling – where the undulating plateau of oil production – about 87 million bbls/day – hits an increasing demand pull – that then leads to increases in oil prices, inflation, then interest rate rises then a crash. All the $2 Trillion of money that Obama has printed will not solve the problem. Indeed, it seems the Obama administration has just U-turned and announced budget cuts (presumably someone has actually highlighted the ridiculously dangerous deficit numbers).

Oil Price


Dollar Crash: We think by mid 2011 the dollar will drop, inflation take full hold, interest rates will rise, US unemployment to continue to rise and UK property prices will start to drop from June 2011 onwards. But until then, it should look quite good.  So this is our prediction:

·         Oil prices rise to $120/bbl by May 2011

·         Stock market crashes May-June 2011

·         Financial crisis July 2011

·         Property prices drop July 2011 onwards

·         Recession by Nov 2011

Recession Looms With Oil Over $100/bbl: Anyone that thinks the global economy can survive oil prices consistently above $120/bbl is being far too optimistic. Nothing has changHedge Fund Managered – except the European and US finances are far weaker than they were about five years ago. It’s all part of a consistent pattern of limited growth caused by escalating oil prices and Peak Oil. Also remember the US imports 10 million bbls/day – that’s $400 Billion a year in oil import bills going mainly to unfriendly countries. The public spending is $2.8 Trillion a year, but tax receipts are only $1.8 Trillion. That’s a black hole of $1 Trillion a year – gigantic. The US cannot afford $50/bbl oil never mind $100/bbl oil. The same is true of Greece, Spain, Portugal, Italy and many other oil intensive nations that have poor manufacturing, services and productivity.       

Massive Risks to Oil Prices: If you think the oil price is rather on the high side by stable at the moment and everything will be okay – just remember in the next year we’re likely to see the following:

·         Nigerian elections in April - potential civil war

·         Contagion of North Africa and Middle Eastern autocracies toppling – followed by a power vacuum, potential fundamentalists taking control and further tensions between these new states and Israel

·         Further evidence that Saudi Arabia cannot increase production levels (why else do they say the markets are adequately supplied by oil when prices are $108/bbl)

·         No additional oil supply response from any other country – reason – everyone is already flat out – further evidence of Peak Oil

·         Iran as OPEC President flexing its political muscle driving oil prices even high

·         Lack of US control and leadership over the situation – and escalating oil prices

Peak Oil - undulating plateau


Skyrocketing Oil Prices Will Lead To A Crash: It all adds up to higher oil prices, oil shortages, inflation, lower western economic growth and a likely recession by end 2011. But this time – the west will have no tools left to fight the recession. They will not be able to print any more money – who will want to buy dollars? Meanwhile there is also a risk the Chinese bubble goes pop – and since most of the global growth is coming from China at the moment, this could lead to overall lowering of GDP global growth and debt default in countries with large budget deficits. The picture is increasingly looking bleak. But it wont be evident for another few months – may be six months. Then all the hedge funds, investors and smart people will get their money of the table and run for the hills. They always do. Just in time for the summer holidaysSailing the Med on the proceeds of investing so they can breath a sigh of relief and sail around the Med in the huge boats. Meanwhile the average investor will be left high and dry as normal – nursing massive losses – as the bubble pops and financial contagion takes hold again – three years after the last crash. Yes, its Peak Oil – and its time to get real. And seriously consider getting your money off the table before end April 2011.   

Careful – Consider Selling Up: So be very careful if you are a first time buyer. And it’s not a bad time to sell. If you are close to so called “retirement” and definitely need the money – be even more careful. Any crash could set you back 5-10 years. Can you afford not to get your money off the table should be the question. Also, if there is going to be a crash, there is an amazing opportunity to

·         Sell close to a high

·         Watch the crash

·         Get in after the crash on a low (on the second or third panic dip) Black Swan

Action Required: The easiest thing you can do is do nothing. No decision or action. But if you are decisive and time it right, with the oil price going out of control, you could double your money in a year – by selling, watching, then buying back – whether this is property, oil, gold or any other major asset class that is affected by the $2 Trillion bubble that the Obama Administration created.   

Tunisian Black Swan: We hope this frank and honest appraisal helps with your investment decision. If you are sceptical of our prediction, please look back on our annual predictions and Special Reports to make your own mind up whether what we are saying is rational, logical, analytical and robust in its thought process. The Tunisian Black Swan is indeed taking hold fairly rapidly and its fairly predictable now how the contagion will unfold.    














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