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527: European Stagnation Again - Currency Printing


01-22-2015

PropertyInvesting.net team

 

History of Printing: After the financial crisis in 2008, the European Central Bank put pressure on high deficit countries to reduce their public spending and therefore deficits in return for a bail-out whilst printing money through the back door with bond purchases. However, promised reforms have been few and far between in many EU nations and hence the European economy never really got out of a long depression of GDP that started in 2008. The oil price dropping, high unemployment, lower Chinese growth and impact of an aging population and high public spending has led to a further slowdown and strong deflationary pressures. The tension with Russia and declining Russian economy has also had an impact on confidence and investment – along with the Euro as a safe have currency. Hence the Euro has dropped sharply against the dollar. The Swiss recently announced a shock decoupling of their Swiss Franc/Euro peg of 1:1.20 that sent the Swiss Franc skyrocketing by 40% within a few hours, settling at about +30% increase in Franc value. This is significant because it sent a message that Switzerland were looking to go it alone and let the free market decide what the Swiss Franc was worth. It looks like the European money print binge is just about to recommence. For investors this means asset price might start heading higher when the new money hits the streets. This could include property in the main city capitals and prime areas.

 

European Printing: Furthermore, if the Europeans start printing along with the Japanese and Chinese – its odds on that within the next six months the US will start printing money again. Forget about interest rate rises, we are staring recession in the face again. This will mean that gold and silver prices could go shooting up again. Gold rose from $1180 to $1280 last week, with silver rising sharply from $16.50 to $17.70/ounce. We expect this to the early stages of a broad precious metals rally off the back of more QE expected in 2015 to stave off deflation and global recession. Remember, it’s 8 years since the last crash. So we are due another one. If the financial markets start to crash, the only tool the Central Banks seem to use is currency printing. If more money printing occurs, this will then eventually feed through like it did last time and like it always does to prime real estate in places like New York and London. The super-rich have access to the printed currency and use it to buy a real asset – namely – property.

 

Size of Printing: News on 22 January 2015 from Davos that the ECB will start their bond purchase scheme – in other words – printing Euro currency and expanding their balance sheet – to the tune of a gigantic Euro 60 billion a month for 19 months is a historic event that will shape property, commodities and gold/silver prices in years to come.

Not Worth The Paper Its Not Printed On: This means 1.1 Trillion Euro will be printed out of thin air. It is an admission of failure to reform after the last financial crash in 2008 and Euro crisis a few years later. The European mainland economy continues to stagnate and this injection of new printed currency is required to “keep the patient alive”. Its like a drug addict being promised massive fixes for 19 months. No wonder the "great and the good" are celebrating at Davos. That's a lot of free money to play around with. The Germans continue to have nightmares about Weimer Germany - could this result in the same consequence they ask themselves.

Super-Rich Elite:  As before – the effect will be to make the richer richer and the poor poorer because fuel and food prices will rise and asset prices will increase like property, commodities, gold and silver and the stock market. Whenever money printing commences, investors can expect to see a fairly good correlation with stock market and property prices rises – along with oil prices. More of the same. Luxury boat builders must be most pleased. 

Bubble Can Be Predicted - Joint In The Fun:  Our prediction is that starting in March 2015, this money will find its way into a new oil price bubble, along with gold and silver. This probably started a few weeks ago in anticipation.  Its worth pointing out there is an extremely good correlation between European Quantitative Easing and gold prices. Once the ECB stopped printing Euros last time in 2013, gold dropped from $1800/ounce to $1150/ounce. As the first possibility of more printing started to get talked about in November 2014, gold started edging up to $1200/ounce, and its now broken out as confirmation of more printing has occurred to $1300/ounce. We now expect acceleration once the actual currency starts to arrive in March 2015 – supporting gold prices far higher than $1300/ounce.

US Will Start Printing Again: Once the US economy slow and they start thinking their currency is valued too highly, they will also start printing again – another “race to the bottom”. So when Japan, Europe, likely then the UK and USA are all printing again, then we will see a big spike in gold and silver prices. This momentum is just starting. It certainly makes a lot of sense to buy gold and silver – since most people are very sceptical that interest rates will ever rise – and if they don’t and currency printing is the “order of the day” then gold and silver prices will skyrocket.     

Gold Breaks Out: We now expect gold prices to rise from $1300/ounce to something like $2000/ounce within two years and oil prices to recover during this period from $48/bbl to something like $80//bbl in two years. European property prices should see the benefits – and food prices will also start to rise along with consumer goods prices. It will create inflation – the wrong type – but it will be good for the average investor with assets. It will not be good for poorer people with no assets that spend heavily on fuel and food.

Trickle Down:  We’ve been writing about “currency printing” for many years now – this new wave of bond purchases is giant – its free money – designed for the super-rich to speculate in the “hope” there will be some “trickle down”. But most people know this “trickle down” is pretty minimal.  So expect to see prime real estate prices continue their march higher in London with this new no cost money floating around. It should help property prices in Madrid, Rome, Monaco, Geneva, Marbella, Paris and Munich – the riches parts  of prime European real estate markets. Just don't expect any trickle down to NW Scotland or west Wales - or to low-mid level wages that will stay suppressed, partly because of inward migration creating more competition driving wages down in real terms. The top of the hierarchy with access to the zero cost printed currency will be of course the main beneficiaries. Cue the Davos celebrations! 

UK Hedge: The UK is rightly often seen as a good hedge – or bridge between the USA and mainland Europe. If and when Europe experiences recession and tension with neighbours like Russia, then investors will switch to the UK particularly if the USA’s economy is performing well. The UK is an island, has financial policies that it is in control – like interest rates, money printing and taxation – and is less likely to get sucked down by the regulations and red tape from Brussels.

 

US Printing: The European currency printing binge will see the Euro value decline and then the USA will see this as a threat to its own economy - the US economy will slow down and then they will also start currency printing again - we believe by say early 2016. All this printed currency will have to find a home - and just like last time, it will find its way into high end property in London as the super-rich have the access to this zero cost currency to then invest (or speculate) with. The printing does cause inflation - bubbles in asset prices - and property is normally the asset class of choice. Just don't be surprized to see London property prices in medium to high end areas continue to shoot up as this international market drive by currency printing continues apace - as long as the Tories stay in power - e.g. personal taxation does not disproportionally increase.

 

London a Magnet: For international investors and super-rich people that travel the world - London remains a magnet because:

  • it is a fascinating city with many attractions
  • excellent education - schools and universities
  • cosmopolitan, open and safe environment
  • access to mainland Europe and USA - with connections all around the world
  • maritime climate (no severe winters and cool summers)
  • theatre, shops, restaurants
  • historic building and strong culture

Internationalization:  The internationalisation of London will continue as the middle classes grow in places like China, India and Brazil - making London the main destination - and entry point into Europe for many of these people. The business environment at this time is also more progressive and friendly than places like France, with less red tape and regulation. this attractive young talent and entrepreneurs from all around the world. 

 

Dynamic Young Highly Educated People:  London is experiencing at present is a dynamic internationally drive economy off the back of a population boom, lowering unemployment, lower inflation with rising real wages with booming house prices as a consequence of a housing shortage. If the Tories win power in May this is set to continue. There simply is not enough property to go around. Smart international people coming to settle in London also want to own their own property - and this will put upward pressure on prices further. The new Crossrail development will see house prices in places like Whitechapel, Ealing, Woolwich and Abbey Wood shoot up dramatically in the next five years. Its these new 25 year old international people with excellent educations starting or contributing to businesses, along with existing Brits, that will drive property prices in the mid-upper ends when they have families and kids in 5-10 years time. Places like Shoreditch and Whitechapel will see big price rises because of these young families starting up. 

 

Election Outcome Critical for London and UK Property Prices: So for 2015, if the Tories win another term in May, and with money printing expected by end 2015, we see London property prices rising sharply by in 2016. But sadly if Labour win power, all bets are off because of higher taxation and public spending will lead to a Sterling decline, recession, food-fuel inflation with asset price deflation. The house prices have started tracking the opinion polls - expect this to continue. But don't be caught out with buying London property just the election just before Labour win either a Coalition or Majority victory - you will see prices dropping at least 20% in such circumstances.

 

We hope you have found this short Special Report insightful and helpful to mould your property investment strategies. If you have any questions or queries please contact us on  enquiries@propertyinvesting.net    

 

 

 

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