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511: Money Printing Manifesting Itself In Skyrocketing Property Prices

06-26-2014 team

 Dollars Flooding Back: As we predicted a few years ago, the Trillions of dollars in currency printing would eventually flood back to the shores of the US and UK in the form of massive flows of cash.

Rich Elite: Quantitative Easing was a way to pass ultra-low cost money to the rich banking elite and international investors – to shore up their finances and hope the “trickle down” would help the general population. But most learned financial people know that it leads to high inflation of commodities (oil, food, metals), luxury goods and real estate – all physical assets – particularly in areas where these rich elite live and invest. It hurts the poor. So we were absolutely not surprized to see property prices zooming up in international cities like London, Hong Kong, Dubai, Singapore, Sydney, Beijing and New York. All cities that house the super-rich elite that have access to the no cost printed currency. These elite live in the most prestigious addresses and are status oriented – they will only live in the top 1% of properties in the best cities.

Dollars Exported: $3 Trillion dollars of printed currency was exported all around the world – to boost economies like China, India and developing nations – creating bubbles in these nations. But when these countries get wealthy and their prices and currencies rise, this money is than exported back to the US and UK as floods of cash rush into real estate. This happened in the 1980s when the Japanese stock market boomed and the Japanese started buying large parts of the US downtown real estate. The Fed wanders why all this printed currency has not created inflation at home – it’s because all the currency went abroad initially – but its heading back to the US and UK now so expect property prices to rise further this year at least.  

High Returns Translated to Cash Then Into Real Estate: The super-rich elite have used swap trades, sure fire investments and speculation to make high returns – the funnelled the proceeds into safe haven real estate in places like Kensington in West London and Greenwich Village or Central Park in New York. They buy the property with cash.

Crumbling Countries: As oligarchic and autocratic regimes have crumbled in Africa and the Middle East – waves of money has been shifted from these countries to London and other global safe havens like Geneva, Singapore and Monaco, to protect the wealth of the super-rich elite. London must be about the safest place to hide away – unrecognized and tolerated by all around. A real attraction for rich families from all around the world escaping the mayhem – with excellent universities, shops, culture, theatres and attractions to boot.

Hardly Surprizing: The media and government have been making a big deal of the very high London house prices in 2014 – thinking they can control them by instigating various politically motivated policies. But in reality the overall UK economy is so weak if you take London out of the equation that any interest rate hikes would kill off any growth in the North or Midlands. Politicians and the Bank of England don’t want to admit this and don’t really want to target Londoners – because it’s not consistent with a market economy and most of them own property in London in any case, so they don’t have a vested interest in crashing the London property prices. But even if they did – waves of super-rich foreigners and the richest British citizens all want a central London property – and the city really isn’t growing in size – only in population – so property prices are bound to rise if the economy is doing well which it is.  If more high paid jobs are created, more wealthy Europeans, Chinese and Middle Eastern people are vying to purchase a central London property – prices will of course rise because demand is outstripping supply by about three times. Furthermore, practically no new properties in central London are being built for less than £500,000, so it’s hard to see prices crashing – unless Labour get into power and crash the UK and London economy again.

More Floods of Cash: Every time another overseas country goes pear shaped, like Syria, Ukraine and now Iraq – another flood of dollars enters the UK and is put into London property it seems. The super-rich don’t seem interested in buying flats in Leeds or Bradford. They must still see value in London property. They want to invest in the global city only. As Russians get more nervous about what’s happening at home and in Ukraine, money flows will increase from these two countries as well.

Fiat Currencies: So the unintended consequence of the fiat currency printing binge manifested itself as predicted in skyrocketing London property prices, high art prices, high food prices, high oil prices, high energy prices and stagnant low end wages. Many new jobs have been created and employment is at record levels – but the population has grown, foreign employment risen sharply and most of these jobs are menial service related low paid jobs – with many people working on 2-3 jobs to pay their bills – e.g. the high rent, transport and food costs in places like London. Overall private sector wages are only rising at 2% a year, this has been below inflation for all but one of the last 15 quarters.

Labour Threat: We expect more of the same as long as the Tory Coalition stays in power – higher property prices, higher employment, stronger private sector and a rebalancing from public to private sector employment. But all bets are off if Labour get into power – because taxes will rise, the public sector will expand again, deficits will rise, interest rates will rise then the economy will eventually go pear shaped like it has done in France. Anyone that things differently is probably not being honest or objective – Labour always have and always will tax and spend too much and it always ends in tears – with a financial crisis, with the Tories picking up the pieces. This time we have Ed Miliband and Ed Balls – who are both far further left than Tony Blair and Gordon Brown ever were – the latter two created the deepest financial crisis and recession in the UK’s history, so we dread to think what it would be like with the two Eds at the helm which looks quite likely in our view at this time. Even though they are doing a poor job in opposition, Labour still lead the Tories by 2% and the Tories need a further 2% more than Labour to gain the same amount of seats because they have bigger constituencies – boundary changes now favour Labour in the urban areas.

Great Depression:  For the time being, as the UK continues to come out of the great depression from 2008 to 2012, it will seem like things are finally beginning to improve. The reason we call it the great depression is that for all but southern England, Aberdeen and Manchester  - it has been a technical depression from 2008-2012. That’s all quarters in all these provincial regions having negative growth for four years running.

Black Swan?  But now we have a potential Black Swan event coming along in the form of ISIS in Syria and Iraq. It’s been five years since the last major recessionary spike down or crash, so we are due for another correction now. The reason why we describe it in such a manner is that the SE Iraq oil fields produce 3.5 million bbls/day of crude oil, mostly exported into the Persian Gulf. Most people assume this area which is Shiite dominated will continue to flow oil. But if Iraq suffers a prolonged civil war which would likely then affect the flow of crude from this area, then Saudi Arabian would not be able to take up the shortfall (it may have 1 million bbl/day in reserve only) and hence oil prices would sky-rocket. If this happened, the global economy would suffer a massive shock and many countries would fall into recession – particularly those with high oil import costs such as Western Europe and many developing nations in the Far East. The only reason why oil prices did not skyrocket after the 2008 crash and the QE currency printing binge was because out of shear coincidence or good luck – the US oil shale fraccing boom saved the day with an additional 3.5 million bbls/day of crude supply. This also created many jobs in the USA and staved off an economic meltdown post 2008, for a while at least. There are early signed the oil boom in the US is starting to slow – so we expect a tightening of oil supplies with Iraq oil production dropping, tensions with Russia, Syrian crude being all but shut-in, Libya struggling to produce more than  1/3rd of their original oil production, Sudan suffering and Egypt investment in go-slow mode. The only possible increase could be another 1 million bbl/day from Iran if sanctions are lifted this summer. We expect to see oil prices rise form $105/bbl to about $125/bbl – danger levels – then food prices and general inflation will start to rise, then either interest rates will rise or economies will dip into recession or both by early 2015.

Crash on Horizon if Iraq Goes Pear Shaped: The global economy all looks pretty stable at this time – but the Black Swan to watch out for is the oil fields of Iraq – whether they stay producing 3.5 million bbl/day or crash to a fraction of this. This would be the difference between $105/bbl oil and $125/bbl (or more) oil. This will be the reason why the US will be so keen to prevent the situation from escalating since they don’t want to see the global economy crash because of the insurgency. As we all know, if large oil fields are involved, the USA gets involved. Libya has large oil field – the USA got involved.  Syria only has very small oil fields and the US did not get involved, but Iraq’s oilfields in the SE of the country are giant and some operated by US companies so we find it difficult to imagine they would sit back and watch these being taken over by insurgents.

High Risks: Its certainly going to be a very interesting period coming up in the next year for the UK property investor with: 1) the threat of a Labour victory; 2) the threat of Iraq going pear shaped; 3) tensions building in the South China Sea (as we predicted Dec 2013); 4) tensions escalating with Russian.

Hopefully all these will settle down – but significant risks are bubbling up and if oil prices rises above $125/bbl – expect the next global recession to start then more money printing.  

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