619: Inflation, currency wars and property
More objective guidance and insights for property investors. Our aim is to help you improve your investment returns, flag key risk areas and stimulate strategic thought so you can position your portfolio to maximize gain, for our five thousand website visitors a day and the thousands of people signed up to your Newsletter. This Newsletter cover one key topic:
Long Term Inflation Trends and Security Situation – for UK Property Investors
Inflation Basics: It’s important for property investors to understand the basic economics around inflation put into a UK along with a global context.
Dollar Fiat Beginnings: Ever since President Nixon took the US dollar off the gold standard in the early 1970s, the US dollar has been a truly fiat currency. The dollar had been hard linked to the presence of US gold reserves since the 1930s. The reason “trick Dick” took the US off the gold standard was because he wanted impunity to print as much currency as he wished in part to help fund the war in Vietnam – to build a bigger military. This set the scene for the gigantic build-up of US dollar currency – as successive politician printed ever increase amounts of currency and created gigantic debts – backed by the goodwill and reputation of the USA as a global leader, manufacturing power-house, with large resources and wealthy population – blessed with large quantities of oil and gas reserves.
Currency Wars: Things started to go astray during Bush’s tenure – and got far worse under Obama’s long tenure – firstly US oil production dropped from 1999, Chinese imports boomed and the US deficit increase massively as more debt was sold to the Chinese and other overseas countries in the form of bonds and treasuries. Obama was probably saved from a gigantic economic collapse by firstly increasing gas production in 2008 followed by increasing oil production from 2011 onwards. This put off the day of the major dollar currency and debt crisis. Trump took over last year promising to boost manufacturing and reducing Chinese imports – off the back of a currency war that was quietly occurring between 2008 and 2016 as most large developed countries were electronically printing their currencies as if there was no tomorrow – attempting to debase the value to stimulate their economies. Firstly the USA, UK then the Japanese – but China refused to de-peg their currency from the dollar which improve their competitiveness and increased exports to the USA. Interest rates dropped to around zero – and the bond market boomed as investors scrambled to invest this printed fiat currency in what they considered to be safe havens – the mighty US dollar and also the Yen and Euro. But how long can this continue when the USA, Europe, UK and Japan all have such monumental debts – the politicians have shown scant regard for debt and deficit control as they tried to buy votes through stimulating the economy using this printed currency.
Global Central Banking in Cahoots: People have known for many years Central Banks are just “kicking the can down the road” – and in a way – they are all in cahoots together – since if they all print then they create inflation and the illusion of growth and wealth whilst staying on an even playing field with their competitors in this new global monetary world where everything is interconnected. The poor get poorer as foot and fuel prices rise well ahead of real inflation. The rich get richer because they own the assets that are protected against inflation like property, art, gold-silver, oil and to a lesser extent company stock (a higher risk paper asset).
US Dollar and War: One truism is that every country that has threatened the mighty dollar as the global reserve currency has been invaded or bombed. Saddam Hussain with Iraq announced he would trade oil in Euros – and was promptly overthrown-invaded. Col Gaddafi with Libya announced the same and was boomed and overthrown. The Muslim Brotherhood challenged the USA and the dollar and were overthrown. Iran challenged and was sanctioned for years. Russia has challenges and has been sanctioned. Recently Trump installed the two ultra-hawks Mike Pompeo (Head of the CIA) to replace Rex Tillerson (a well-regarded negotiating businessman) and John Bolton (who is famous for instigating the invasion of Iraq and is a strong proponent of unilateral pre-emptive bombing strikes) to replace MH McMaster (a negotiator). Meanwhile we have Iran, Russia and China all talking about trading oil in a different currency to the dollar. China recently started trading oil future in their Chinese currency. This does not bode well for world peace. The whole US economy and debt pile is propped up and supported by the mighty value of the US dollar and its benchmark to oil production. The good thing for the USA is that it’s oil production has been booming putting the day off that the mighty US dollar will crash – but the bad news is that they have countries like Russian, China and Iran all talking about using other currencies to trade oil – which is like a red rag to a bull for the US political elite like Bolton and Pompeo. The US dollar has dropped around 20% in value against the relatively feeble UK Sterling since Trump came to power – and this could be the beginning a the US dollar currency crisis that people have be talking about for so many years. The thing is – the Chinese economy has been booming for years and their economy is now bigger than the US economy using some measures – and it’s likely to motor onwards and upwards – the global economic might of the US is being challenged by China along with its military might in places like the South China Sea – the busiest shipping channel for oil and manufactured goods in the world.
Nothing Happened in 2017: 2017 was the year that lots of issues surfaced like North Korea, the South China Sea, Iran, Israel, Syria, Yemen, Saudi – but nothing much happened. We firmly believe that 2018 will be the year when things really kick-off in part because the world normally starts with a Currency War (2008-2015), then progresses to a Trade War (2017-2018) and ends with a World War. We are now getting close to where politicians get really nasty and get their militaries into action. Let’s face it – we have multiple threats – and it’s difficult to see them all staying in their respective boxes:
Syria – President Assad
Russia – President Putin supporting Assad and Iran
USA – President Trump
China – President Xi Jinping
North Korea – Kim Jong-un
Iran – President Hassan Rouhani - Iran supporting Houthi and President Assad
Venezuela – President Maduro - and his economic crisis
Yemen – Houthi supported by Iran, Saudi supporting the old government – a proxy war
Saudi Arabia – Crown Prince Salman (with Aramco IPO coming up)
The Two Alliances: When you look at the big picture – no surprize but it looks like the alliance of USA-Europe-Israel-Saudi-Sunni versus Russia-Iran-Syria-Qatar-Shiite. Trump wobbled early on but seems to very much now back the Saudi position against Iran and against Russia. Since late March we have the Trump-Pompeo-Bolton hawks in charge – we expect war to break out somewhere in the next six months. Meanwhile – when you look at Russia, Saudi and the USA now – the three biggest oil producers – they all want high oil prices – further Saudi plans a critical IPO for Aramco by end 2018 which requires a high oil price. In addition, Iran and Venezuela also need high oil prices – so that would be should get – and that’s what we have started to get as prices have risen from $50 end 2017 to $73 already in 2018 – into inflation danger territory.
Sanctions Snap Back: The first will be the so called “snap-back” of sanctions against Iran 12 May. Then more sanctions against Russia. Then a fall-out in May with North Korea as they agree to disagree. As Trump comes under increasing pressure at home with so many legal wrangling and investigations – like every person with bully like behaviours we have ever seen – he will “shoot out” to deflect attention and blame others – and this is most likely to be manifest itself in the form of some sort of war either with Iran, North Korea, Russia or more than one of these at the same time. The US will also continue to harass China who will feel threatened, won’t want to lose face– and could respond aggressively as well.
Bond Market Bubble: Back to the economy. The US bond market bubble could well pop shortly if the Chinese stop buying US Treasuries – note they are likely to slow or stop after being threatened by the US. Bond yields are dropping and bond prices-rates are rising likely signalling the reversal finally of the 42 year bond market bubble. As US borrowing costs rise, the dollar declines – this could create a vicious circle whereby the US government, states, companies and individuals can no longer pay their interest rate-charges – and liquidations start – that could trigger contagion. At the first sign of this happening – we believe the US will simply start printing currency again to prop up the whole system attempting to “kick the can down the road” just like they did in 2008 for a total of around 9 years – when around $10 trillion was printed. The so called “expanding the balance sheet” or “quantitative easing”. This US currency of course over a period of 9 years hit the world economy – the US exported dollars and inflation and this found its way into stock market bubbles, tech bubbles and property price bubbles mainly in the international cities where the international investors hang out and use their no cost fiat currency to protect against the ravages of inflation - they buy properties – this has certainly been a highly lucrative ploy for them. Look at New York, London, Paris, Tokyo, Hong Kong, Amsterdam and Sydney house prices for evidence of this. Along with the oil price bubble through to 2014 and the current tech bubble and bitcoin bubble.
Inflation All The Way: Which brings us onto the theme of general inflation. When the US dollar crashes, then other currencies will have to crash with it and the only way to save the day will be for the US Fed and all Central Banks is, in concerted way, to start the electronic printing presses again – but if it looks very wobbly we will get the bank of last resort to step in – which is the World Bank/IMF. They can prop up the Fed if they have to – they have crisis contingency measures to do this. The debts went from person, to state-company, to national then international – with multiple fiat currencies – the last option now is the IMF.
Property Hedge Against Inflation: The key point for property investors is – don’t expect inflation to go away. We might get a burst of deflation in the form of a short sharp crash, but we then think we will get more currency printing and inflation once more after about 18 months. The trick would be to ride out the storm. This could be tough since if interest rate rise sharply for a while and you are highly indebted – then you may not be able to handle the interest rate charges, hence to protect yourself you need a store of cash or gold and silver in case of such a crash. If there is a crash, gold and silver prices will sky-rocket. You need ready access to your cash and gold-silver – physical gold-silvers stored in a safe location and you have to assume that a bank holiday could occur whereby you cannot get money out if there is widespread panic like 20087 but worse. You need to survive the downturn, because if you make it with your physical properties/assets – bricks and mortar – to the end of the crisis – then as the money printing kicks in again – international cities – the property prices will once more soar making you relatively very wealthy.
London Long Term Prices Far Higher: In London for instance, property prices have peaked from their highs in late 2016 – prices have dropped around 8-15% in the more expensive areas, partly because of fears – many unfounded – about the impact of Brexit. If there is a crisis and recession in the next few years, of course prices could drop sharply – may be by 25%. But long term, again we think it’s going to be inflation all the way. A £500,000 London flat in 2018 is likely to cost around £1,000,000 in ten years time – as the global population booms, more currency is printed and very few homes are built in London. Lets be honest to say – if London has 10 million people living in the city, and 3 million in central London, the global population is 7 billion with more mobile higher educated increasingly middle class people arriving all the time – many wanting to settle in London because its such a fantastic global destination – it does not take a rocket scientist to realise that demand will be greater than supply and prices will rise sharply in future years. These well monied international people don’t want to live in Middlesbrough or Bury, they want to live in central London and network with like-minded young people. Newspapers like The Guardian are willing London house prices down as much as possible – but there are simply too many people who love London and things like Brexit simply won’t impact that in the medium to longer term.
Turbulence Then Inflation: In summary – expect a year of turbulence – too many crazy politicians running countries that are all looking very aggressive and assertive at this time. There is highly likely to be some trigger soon that will spark a serious show-down. Hopefully these national leaders will back into their respective boxes – but we fear they won’t. As war breaks out – the printing presses will start to fund the war efforts – oil prices will rise sharply as will inflation. Longer term, the people who have good legal title to property will probably be the winners – don’t lose sight of this. Property is the best hedge against inflation, fiat currencies and government debt increase. After currency crises and economic crashes, its often the property owners that are left standing and all the paper assets have gone up in smoke. Anyone really worried should buy gold and silver right now – sliver in particularly is the bargain of the century at $16.50/ounce – three times cheaper than in 1980 meanwhile the money supply has gone up around a hundred fold. Also remember for every person on in the world, there is only 1/14 of an ounce of silver – so 1 ounce costing around £20 for a coin is 14 peoples worth of silver. Silver is used for medical, electronic, jewellery and monetary purposes – why would you not want to buy at least a few hundred pounds worth of sliver? If you have offspring or nephews – buy them some sliver coins for Christmas! And buy yourself some at the same time!
We hope this Newsletter has been helpful to frame the current security situation and its impact on inflation and thence property prices. If you have any queries, please contact us email@example.com