You see, I like to think of myself as perhaps the most bearish contributor on The Right Side (though Manraaj Singh gives me a good run for my money), but I’ve just done something extremely bullish with my own money.
I’ve taken the plunge and am wading into the property market.
I’m in the process of buying a place in Wimbledon in this housing bear market. Is this my attempt to call the bottom? No. Do I now think the woes of the British economy are behind us? Good Lord no!
Believe it or not, I’ve bought the place because I like the area and want to live there.
Of course, with the expense of buying it’s impossible not to think about the financial commitment and, in time, I predict it will be a good investment. In a lot of time. For now though, I’m pleased as punch. The reason for this is because my monthly outgoings have been cut in half. I’ve taken on a mortgage at an absurdly low rate. A rate that I fixed for as long as I could.
Why?
Because I believe that we are going to enter a period of massive inflation leading ultimately to sustained rate rises. And I’m not the only one. The Telegraph’s Liam Halligan is at the fore of the pro-inflation crowd noting that in the Bank of England’s recent inflation report, “It has stopped warning of deflation because it is no longer credible to do so. In truth, it never was. CPI inflation remains at 2.9pc – way above the Bank's target, as it has been for 31 of the last 33 months. As sterling has fallen, import prices have surged. In an open economy like the UK, that's highly inflationary.”
That means that in the long run there is only one way for rates to go. Up. Indeed, it is time for us all to be protecting ourselves from the spectre of inflation. If you’re not buying a house there are other ways to protect yourself. But first, more on the debate…
Inflation versus deflation
As my colleague Bill Bonner recently put it, “Zimbabwe or Japan, that is the question.”
In the Japanese corner are the deflationists. They believe the UK economy is heading into a spiral of lower output causing job losses, price cuts and wage cuts, ad infinitum. It’s a very ugly problem that is the stuff of Mervyn King and Gordon Brown’s worst nightmares.
In the Zimbabwean corner, are the inflationists predicting that our policy makers’ desperate and relentless bailouts and buy-ups will “put cash in the hands of those who might spend it”. And that is inflationary.
There is merit in both arguments, however it is only the inflationists that have momentum behind them. You see, it is the express wish of the government that we have a return of inflation. It’s what quantitative easing is specifically designed to create. Deflation is a worse problem than inflation and a deflationary spiral would be crushing for the economy so the government is taking every step it can to prevent it. They are recapitalising the banks, cutting interest rates, putting spending money into the hands of pension fund managers by buying their bonds, giving £2,000 to consumers to go and buy cars AND helping the same poor consumers buy a house through the HomeBuy Direct scheme.
It’s all inflation-stoking and the real question is when, not if, it will take hold.
What to do when inflation does kick in
When thinking about how to protect your wealth and profit from this coming storm, first think of the consistent hallmarks of a high inflationary environment:
Food, petrol and your energy bills all get more expensive. The interest rates tend to shoot up as well.
To address rising asset prices, invest in stocks and hard assets like gold. Stocks are a good counterweight to inflation as they have the potential to appreciate in value greater than the rate of inflation. Meanwhile gold is a true store of wealth that is not devalued by inflation.
And with rising interest rates – the Bank of England’s conventional monetary response to high inflation – you would do well to sell any bond holdings you may have. Receiving a fixed rate of interest is not wise when the official base rate rises. It makes bonds less and less attractive. Conversely it makes having a low fixed-rate mortgage more attractive, but I’m not here to gloat.
Of course, property is also considered to be a good inflation hedge. Here’s hoping…
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is investment director of The Fleet Street Letter. Theo is currently putting together a comprehensive anti-inflation strategy. Find out more about The Fleet Street Letter here.
MARTKET NOTES
Investors propel silver higher
BY SHIVVY ARORA
While the crowds focus on gold, wise investors are also keeping a close eye on silver. The white metal has been on a roll this year, clocking in gains of 23%.
Investors have pushed silver’s big recent run this year via exchange-traded funds (ETFs). Take a look at the chart below.
It shows the iShares Silver Trust ETF (red line; ticker: SLV) for the past six months. You can clearly see the current rally, where the metal is flirting with the $14 mark. Since Dec last year, it’s moved up from approx. $9 to $14, marking a 61% gain. With the exception of April 2009, it’s also consistently traded above its 50-day moving average (orange line) – a good technical sign.
Investors have been piling into silver ETFs, pushing prices up
Source: Financial Times
A bullish view on silver seems to be supported by the "smart money". A report from the Commodity Futures Trading Commission observes that traders are hugely reducing their short positions, i.e. selling a borrowed commodity with the expectation that the asset’s value will fall. This will lead to more buying.
However, investment demand won’t soar to previous highs until industrial demand for silver picks up again. Total fabrication of silver – i.e. the conversion of a raw material into a finished product – has been falling over the past 12 months. So despite investors buying more, the price of silver is likely to move sideways in the immediate future.
And when the economy does indeed pick up, it’s likely that silver prices will have plenty of room to run.
The Daily Reckoning- The greenback is going into the toaster oven
BY BILL BONNER
Baltimore, Maryland
Wednesday, 20 May 2009
Everything is happening just as we thought it would. Stocks are rising. And people think they see better times coming.
Whoa... this is eerie! Following the great crash of ’07-’09 cometh the rebound. Hesitant, cautious at first…
Then, people begin to believe it. They begin to see the “green shoots” of a revival. Stock prices rise. The green shoots sink deeper roots and flower. Pretty soon, people think they are in knee-high clover.
Confidence is rising. Consumers, house-holders, investors – all think the worst is over. And if the worst is over, better times must be coming. If better times are coming, prices should be rising. And investors should be making money. And businesses should be expanding.
It’s all happening as forecast. Except that businesses aren’t expanding. The underlying economy is not really getting better. It’s actually getting weaker. But we’ll talk about that another day.
Today... we issue a warning: watch out, the greenback is going into the toaster oven...
Yesterday, the dollar held steady at $1.36. Meanwhile, the Dow gave up 29 points... after a strong day yesterday. Oil rose over $60. And gold gained $5 to 926.
First, here’s what Nouriel Roubini had to say in the New York Times:
"We may now be entering the Asian century, dominated by a rising China and its currency," Roubini contends. "This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades, America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable."
Yes, it could take more than a decade. But investors could take a big loss any day. All it would take is a sudden move by China... or a shocking inflation figure in the US... or a Treasury bond auction that didn’t go as planned…
Read on...
To read the Daily Reckoning in full, click here.
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