Archive for March, 2011
The US Equity market in less than two years, as measured by the S&P500, has doubled from its post crisis March 2009 low. Volatility has sunk. US Unemployment remains high. The Fed is fueling a speculative boom with the riches accumulating to the few. US Labor struggling to get back to a decent or any work and the geopolitics paint a complete opposite picture to the market euphoria. All the while clouds in the global geopolitical sphere continue to gather pace. While in the west we measure progress many times by the rise or fall of the markets alone on a daily basis – For the people of Egypt the long struggle for jobs, social justice has only begun. On Feb 13th, the military council abolished the constitution… timetable to nowhere is all we can see… as the military positions to further consolidate its stranglehold on the people. Unrest potential is building in the Arab world. From the lands north of Sahara- Northern Africa. From the Nile to the Euphrates. From the Mediterranean to Mesopotamia. The two ‘I’s, Israel-Iran, eyeing each other and global players are taking positions. China has a new world status and it could test its newly found powers, all the while weaknesses are building into its own economic system that risk world destabilization. Change in the status quo in the middle east and elsewhere where pressures have been building for some time now can have seismic implications for growth of the world economy. Rather growth stalling at best with uncertainty keeping long term investment plans at bay and hungry jobless populations or democratically starved plutocratic nations citizens pressuring for reforms. Global aggregate demand on the government side is pressured to collapse as spending at current intervals is unsustainable. The pace of implementation of structural reforms is slow and major structural reforms measures are still to be taken. Will the Fed stimulus policies continue to keep the economy from faltering? We take the view that the higher you are the greater the fall and the highs we are now are not compatible with the struggle to put bread on the table for most families. Even in the most affluent of Nations. Ours. The Baltic index has closed at near quarter century lows. Ship oversupply? Yes. Australia flood impact? Yes. Trade used to be the life blood of world economy. Now it is finance. Speculative flows of money looking for a quick domicile for short term gain. Capital has always ruled the world but money movements of such intensity is a relatively new phenomenon that our econometric models do not have much historic data to go by. All is so synchronized now around the world. The supply of funding for excess speculative building abundant from the central authorities. Yet Trade the heart pulse of human global endevours and interactions since time in antiquity- trade- global trade- is telling us otherwise. Something is happening. Something big. The amount of trade is clearly going down as things look up in government, central banks and brokerage house reports. The Greek ships have been taking much to China but lately they come back many times empty. Yet the forward looking equity markets of our Western World…measures of progress in the eyes of many.. vain quests of financial engineering yet once more.. have been marching higher. Fundamental and technical traders follow the same momentum of a rising tide on stimulative action not structural reform. This is not healthy. The system has yet to cleanse itself. Something has to give…..
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The supreme art of war is to subdue the enemy without fighting – Sun Tzu, The Art of War
Much is made in the news of the risk of inflation. We can’t step far outside our doors without being faced with the challenges it brings. From shockingly high petrol prices to rising agriculture costs hitting our shopping bills, the fear is setting in. However, when we strip out these volatile elements, just how much of a problem is core inflation? Instead, with economic growth precariously fragile, when it does become a concern, won’t we be left fighting a ‘war on two fronts’? It’s time we start to notice the ‘Elephant in The Room’.
An Anaemic Recovery
The economic recovery remains weak. Still driven by the consumer, the environment for spending is tenuous. Retail sales for December were downgraded and January’s figures can only be described as “unspectacular”. We saw the first increase in the claimant count in four months (which would have been even higher had people not given up the job search entirely). Moreover, earnings growth slowed to the lowest rate in six months (from 2.5% to 2.0%). With Hometrack, the property analytics business, foreseeing homebuyers facing a continued struggle to obtain mortgages in 2011, the outlook for spending and GDP growth looks tough.
Consumer Companies Highlight the Headwinds
Highlighting the problem were the many consumer companies missing Q410 earnings estimates and downgrading their forecasts for this year. Diageo, Colgate-Palmolive and P&G were among those that struggled to meet expectations. Falls in demand were blamed, with the situation looking none the rosier going forward. Renault predicts the demand for cars in their home market of France will fall by 8%. In addition, rising input costs is adding to woes. Pepsi is budgeting for a whopping 8 – 9.5% increase in the amount of capital they will spend on oil and agriculture commodities, which contributed to the firm lowering their forecast for earnings growth from low double digits to high single digits. The question on everyone’s lips is – can they continue to pass on higher costs to the consumer? With the aforementioned weakness, the most likely answer is “no”.
Inflation ‘Illusion’ Tempting Risky Action
So just how much of a problem is inflation, when compared to the weakness of the recovery? True, headline Inflation has held stubbornly above the Bank of England’s target at 3.7%. However, stripping out food and energy prices, core inflation falls to 2.9% and recent reports show that after excluding taxes, we hit the 2% jackpot. Regardless, the political environment poses a risk. The MPC (Monetary Policy Committee) is under immense pressure to defend its credibility after keeping rates on hold for 23 months consecutively. Markets are now pricing in a 25bps rise in May. Crucially, these expectations alone have consequences. In one week alone, more than 10 mortgage lenders pulled their best fixed rate deals – hitting credit availability to the already weakened consumer ‘spenders’.
Only an idiot fights a war on two fronts. ~ Londo Mollari, Babylon 5
Stagflation – A ‘War on Two Fronts’
This is the crux of the problem – promoting growth can at times risk inflation and fighting inflation can risk weakening growth. Currently the biggest challenge of the two is strengthening growth. If the recovery remains weak, then when inflation rises and poses a far more serious challenge, the government will not be able to implement policies to fight it without dragging the economy into another recession. The possibility of stagflation is real. In this situation the government will feel even more pressure to raise rates but unemployment will still be high and so if rates rise, many will suffer. At the moment the MPC have a “wait and see” attitude – let’s hope this continues and they don’t succumb to ‘peer pressure’ too soon.
One of the most lucrative investments is investment in real estate. Although, the process may seem quite simple to you, but it is not so. The way you evaluate a property while buying for investment purposes is not the same as the way you will evaluate a property while home buying. When it comes to investment property you have to think like a business owner and not a home owner.
Thus, there are various tests that you must out the property you are buying through, before you purchase it. 2 of the most important tests are as follows.
1. Testing for a good neighborhood: Location is a very important factor when it comes to purchasing a property. The property you buy should have the availability of basic amenities in close proximity. You must also check if the area in which the property is situated should not be prone to crime. You must check all this because no one would like to stay in a place where the crime rate is high and there is no proper availability of essential facilities. So no matter how well decorated the property you buy, is from within, it will not sell well in the real estate market because of the location factor.
2. Testing for the need of extensive repairs: Before you buy a property it is essential that you check what sort of repairs are required in the house. Find out if these repairs are an extensive repair that is structural repairs or they are merely minor repairs that you can tackle. You must not buy properties that need structural repairs, this is because you lose a lot of money and the percentage of profit reduces.
These are the 2 tests that are very essential before you buy any property.