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621: Summer Panic - North Kore, Iran and Global Uncertainties

05-29-2018 team

North Korea: Firstly on North Korea. We prepared a Special Report during the Winter Olympics which said that the talks between North Korea and USA would go no-where and indeed they were cancelled 24 May – even assuming they go ahead – which is still likely - they will make little difference. Let’s be crystal clear. There is no way Kim Jong-Un will ever give up his nuclear weapons because this is the only reason he is still alive and in power. If he gives up his nuclear weapons – particularly now that Bolton, Pence and Pomeo are advising Trump – they will “take him out” just like they did Gadhafi and Saddam Hussain. Both had a nuclear programme that they curtailed then within 10 years they were both killed. North Korea does not trust the USA one bit – they have been at war since 1950 – were invaded by the USA then and the US threats have only emboldened and made them more determined to accelerate their nuclear and missile programme.  They are now very close to having a nuclear warhead that could reach the USA – the ultimate deterrent that would stop the USA taking Kim-Un out.

Frustrated Republicans: Meanwhile Trump and the Republicans are intensely frustrated that a weak US Foreign Policy in the Obama Democrat years allowed him to gain this nuclear capability almost without mention or challenge. The US government have now lost control of the issue and have no time left to solve it. Our view with so many dangerous men calling the shots – Trump, Salmon, Kim Jong-Un, Putin and Xi Jinping  – is that some form of war will break out in the next few months. There would be huge numbers of casualties – you have to ask the question whether Trump for the next 3-4 years will accept this bad apple Kim Jong-Un being able to threaten the US with nuclear missiles – our view is that Bolton in particular will persuade Trump to take some sort of action – just like he did with Bush on Iraq all those years ago. Yes – we are talking personalities now – not a country view. These men are extremely powerful and autocratic – so just don’t be surprised if there is a unilateral US pre-emptive strike on North Korea in the next few months – possibly starting with an electromagnetic pulse and cyber-attack that knocks out the North Korean computers.  
















Oil Price:  Ever since August 2014 when the oil price started to crash from $100/bbl to a low of $28/bbl by Dec 2015 the global western economies have been give a huge boost because of the reduction in the gigantic oil import bills that these countries have seen. At its peak in 2007, the USA was spending $500 billion on imported oil. This as we have described many times before is one of the key reason the western economies went pear shaped 2008 – they simply could not afford such an onerous bill. Oil prices crashed in 2008 from $110 to $50/bbl but then recovered to $100/bbl by 2011 – which help create the Euro crisis. The Euro finances were saved by end 2014 as the oil prices crashed because of a wave of US oil shale production and Saudi Arabia refusing the cut production. OPEC are now back in control helped also by the Russian – and the US oil shales production is now enough to fill the gap required in demand growth – particularly after everyone got used to cheap oil and accelerated buying huge SUVs and trucks all across the world. Airline travel has also boomed. The advent of electric vehicles is too little too late to make a difference for the next 5-10 years.   Oil prices are again going up. They reached $80/bbl mid May before dropping back slightly to $78/bbl for Brent crude.    

No New Projects: Its worth mentioning that almost not new oil development projects have been sanctioned in the last 4 years since oil prices crashed mid 2014. Furthermore, the last of the sanctioned projects came on stream early 2018 – in places like Brazil, Canada and Kazakhstan. It will be many years before new projects are worked up then sanctioned then built – new supplies are around 6 years away for all areas apart from the very expensive and short term US oil shale projects. The large national oil companies have invested very little in the last few years because of the low oil prices and strained country finances – think Iran, Venezuela, Saudi Arabia for examples of a go slow investment during this period. Furthermore, all the hype about electric cars plus growth in renewables and false stories of oil becoming the new oil – with stranded oil and gas resources is doing nothing to encourage investment from financial institutions and banks. The oil companies will be wanting to assure against good future markets before making any investment decision – which points to a severe tightening of supplies in the next few years.

Demand Destruction: The increase in oil prices are likely to affect demand – it will ease of a bit as prices go up. But supplies are also likely to be strained because of the lack of investment. Investors are still bitter from years of losses – and oil executive are not likely to go on a big rash of investments – bad memories of the downturn are still to proximal. The global GDP growth is around 4% per annum – which usually would mean energy consumption rising around 2% a year – or half of GDP. This is also around the annual percentage increase in the worlds population. During demand destruction – this does not mean demand will drop overall – is more likely to mean demand growing less fast at around 1% per annum instead of 2% or more. It would take a big recession to get energy consumption to go into reverse.

$80/bbl Oil Prices Required: All this means that oil prices are likely to stay fairly high – particularly as Saudi Araba wants at least $80/bbl for their forthcoming IPO of 5% of Aramco that they hope will value it at around $1.5 Trillion – they are hoping to raise $75 billion for a 5% stake within the IPO – a colossal sum of money. You can understand that every $10/bbl extra oil price – looking stable – will likely add 10-20% to the value of the company stake – which would be at least $7.5 billion (or 75 billion implied value for the whole company). The Saudi’s have come under some pressure from the USA to add more supplies – OPEC is are holding back around 1.5 million bbls/day – and Saudi is likely to agree with OPEC and Russia in their June meeting to relax quota cuts somewhat – but we really think they an Russia will want to see oil prices around $80/bbl through to the end of 2018 – to both improve their finances and raise money from the IPO.
Disaster for Big Oil Importers: For the global economy and all countries with significant oil imports this spells disaster. Its similar to the situation from around 2005 to 2014. All countries with weak manufacturing, low tax collection, high oil imports, high government debts, high government deficits and already high unemployment – along with low population growth with see their economies depressed. The extra burden of higher oil import bills will put pressure on inflation, depress GDP growth, depress tax revenues and lead to higher borrowing costs.

Enough to Tip Many Economies into Recession: The danger signs are there for all to see. The rise in the oil prices will be the tipping point for some of the economies that are more excessive with their use of oil versus their growth and manufacturing. The worst effected countries are likely to be – Greece, Italy, Spain and Portugal – all countries that produce almost no oil or gas and have excessive oil-gas import bills when compared to their GDP-population and manufacturing – they are very oil intensive without producing much.

Italy: Italy is a particular concern because they have a far new left socialist and far right nationalist coalition that is almost formed - that will be challenging the European parliament in a similar way to what the Greeks did in 2012 and we all know how that ended – very badly. Many companies will be considering moving out of Italy with this unstable populist government in charge and unemployment is bound to rise in our option – with the country tipping into recession within the next 6 months also off the back of high oil import bills. Avoid Italy like the plague at this time. Its all just starting to kick off – we can’t see it ending well and forecast a bug downturn for the next 12 months at least .

Spain - is now suffering from a corruption scandal – and if their centre-right government is replaced by a centre-left that is also less hard in the regionalist Catalan government – they this constitutional crisis could break out again – with another run on Barcelona by business exiting because of all the uncertainty.
UK in Perspective: When you look at these cases – it puts the UK into perspective. Yep – we have considerable uncertainty with how we exit the European Union – but al least we are not reliant on the Euro as a currency and when you consider Russia on the doorstep of Poland, the mass uncontrolled immigration problems in mainland Europe along with the festering debt issue and centralist governing model where countries lack control over their economies – our view is that by mid-2019 – driven by high oil prices – we will be looking at the European Project starting to look very shaky again.  The gigantic potential bail-outs of Italy, Portugal, Spain and Greece cannot be orchestrated by the Franco-German axis – they do not have the financial resources for it. The UK leaving does not help either since the UK economy is around the size of France. We think if more large bad Euro debts rear their ugly heads by mid 2019 – many in the UK will be looking in satisfaction that the timing of Brexit was superb – just in time to avoid the massive onslaught of bad Eurozone debts. We’ll be off the hook.














India: Its worth pointing out that India always does particularly well during low oil price periods since it has only small amounts of indigenous oil and gas production and giant oil and gas import bills. We expect the higher oil prices to slow the Indian economy and create inflation – be careful if India for the next few years. Only term though, India economy will in decades to come become huge – because it has 1.5 billion people – and the middle classes and educated masses are expanding rapidly like China did 2000-2015. If they manage to organise themselves like the Chinese in manufacturing and hi-tech businesses – they will be a huge powerhouse by 2035. Property investment in the best parts of Mumbai and New Delhi is probably a good bet though our advice is – best to be a local to reduce your changes of corruption-getting ripped off. You really need to be “on the ground” because legal title is not half as secure as in the UK.

For global property investors – its worth considering that the rich get richer and this is likely to continue for decades to come. Because the super-rich can move around the world and avoid high taxes – they can leverage up their resources to make even more money. This has been going on for a century now – and there is no reason to believe it will change with the internet and globalisation becoming even more predominant. Meanwhile central banks have concluded it seems that whenever there is a slowdown in the economy – they just start the digital currency printing presses – they add some numbers on a computer – simple. They create more money supply and keep interest rates ultra-low. They means the super-rich can use this no cost currency to park in real esate around the world. They key thing here is that these key investors that shape the market – DO NOT buy properties in places like Blackpool, Hull, Clydebank and Swansea – they tend to invest only in the mainstream global centres. For the UK this is London and possibly central Manchester. Globally we will list some of these places that are truly global – the reason for listing them is that these cities will see prices rise far faster and higher than in non-mainstream areas – using the bubble printed fiat currency that is swamping the world and leading to inflation.

New York

Summer Recession and Panic Once More: Finally – just to flag that the big summer slowdown is just starting end May. This is when the key movers and shakers in the financial business investment world start to retrench and go on holiday. Other workers go on holiday and GDP in the big northern economies always seems to start to slow end May. This year – the run up in oil prices from $50/bbl in December to $80/bbl mid May start to do severe damage to the global economy in the next few months – so expect many countries tipping into recession by August 2018. At this point we expect a big shift into Gold and Silver as people take fright and start to panic – the key area of concern are:

Italy – government
Spain – corruption scandal/government
Israel-Palestine-Iran-Syria war
North Korea – USA
USA - China
Russia - USA
Saudi Arabia – Iran

Kick-Off: It looks likely the world will start beating up on Iran and North Korea shortly – but the ramification will likely be huge. Fingers crosses it does not kick off around when the World Cup starts, but its looking increasingly likely with so many unstable autocratic leaders out there.

We hope you have found this Special Report gives some context for your property investment and some pointers to where safer higher returns might be achieved. If you have any queries, please contact us on 


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