What affect do Russia, China and Saudi Arabia economies have on the price of your house?

What affect do Russia, China and Saudi Arabia economies have on the price of your house?

Dear Reader

Is it that I've only just noticed or is it unusual for the Telegraph to now have a "Public Sector Net Debt" clock on their homepage? £1.5 trillion and counting, by approximately £1000 every 2 seconds.
 
 
Are they preparing us for something?  
 
I've often pointed out the dichotomy of headlines, most often between "news" papers of the Left and Right of our political spectrum.  Newspapers clearly write to please the political position of their demographic readership, which is why it's always interesting to read the headlines of both the Guardian and the Telegraph, Huffington Post and the Daily Express. Who knew the same story could be spun so many ways?  The contradictory headlines can also come within one newspaper itself. Today is no exception, with The Telegraph's Finance section running three contradictory stories, two directly above each other and the other a column to the right (as at 8:00 am today):
 
Story 1)  "FTSE rebounds as oil rallies above $32 and traders shrug off panic selling in China."
 
Story 2)  "Rush for the exits: why China's capital flight carnage will continue."
 
Story 3)  "Oil Prices: Saudi Arabia to go bankrupt."
 
So do I rush for the exits or do I shrug? We've seen this pattern before.  By now, I hope our readership is a little more savy than to be influenced by "youngish shrugging traders." But instead to read widely to see what the real financial and economic positions in the fields which could affect your portfolio, pension, savings and the general health of the U.K. economy.
 
As predicted, 2016 is bumpy to say the least and I believe it's going to get a whole lot bumpier.  Let's explore all three of these headlines further, because the FTSE's state of health, China's economy (linked as always to Russian super-power aspirations) and Saudia Arabian oil, all play hugely into the demand for an economic safe haven of Physical Gold and Silver.
 
"Three huge, vastly important countries on the world stage are in deep economic and political trouble—far worse than we may realize. China, Russia and the Saudis share some very nasty characteristics. They are secretive, autocratic, brutally repressive police states that ruthlessly crush free speech and political dissent. Things have gotten worse in China. Its economy is slumping, crushing the global commodity trade, and sending financial markets into a freefall.  President Xi Jinping’s answer thus far has been to increase repression and intimidate forces that could help move the People’s Republic away from heavy-handed and tone-deaf central planning. China’s days of easy growth are over; ten million people enter the labor force every year, and there’s nowhere for them to go. Like Russian President Vladimir Putin, Xi has found it easier to distract his people by stirring up trouble abroad rather than fixing problems at home. As for broiling Saudi Arabia and frigid Russia, what do they have in common? Oil, of course. The economies of both—the world’s #2 and #3 oil producers—are buckling under the strains of crude’s stunning collapse. Liked a caged animal backed into a corner, both are desperate—and lashing out in dangerous ways."  
 
As a very brief side note, I'll mention again a point I raised very briefly last week, and I hate to say it. When economies stagger as if drunk, war often follows and I am - clearly - by far not the only person to have their antenna heightened over this brewing concern.  I would highly recommend our readers keep their eyes on Putin, and by that, I don't mean the well-crafted media spin on Putin's involvement in "crushing ISIS."  I mean the thought-provoking analysis of why Putin would possibly be involved in the Middle East in the first place, supporting the U.S.'s enemies.  I mentioned some time ago that China and Russia are in the throws of a currency war with the U.S. and that war is being waged, currently, in oil. But that it is a means to try to release physical gold out of Russian's hands. The U.S is releasing massive amounts of stored oil and the price of oil is therefore collapsing:
 
I wrote about this 13 months ago in December 2014 in the following article entitled "Putin isn't that silly":  "So the Russian bear is suffering and it looks - as usual - as if it's all about Oil. Or is it?  The question in my head is why is the price of oil dropping, who is causing it and which nation(s) does that pressure?  If you're holding your Gold and Silver long, and think the price drop in Oil could affect your Precious Metal, don't worry.  Oil is often connected to the "shaking out of weak hands" in the Gold and Silver Physical market. We believe it is wise to keep holding onto your physical. In fact any price drop is what the Physical Metals Market like to call a buying opportunity. At the moment, Russia needs to sell foreign currency to buoy its system. But if the pressure gets really bad, the only option might have to be to sell it's Gold.  And that is what we believe Putin's opposite chess players are after.  Flood the global market with cheap stored oil. Push price of oil down. Russian has to sell gold at a discount. Buy Russian's Gold. Stop the flood of stored Oil onto the market. Gold price goes up. And Oil price goes up. It's clever. Because it looks all about the ruble and oil.  But it's not. I believe it's all about the ruble, and gold.  But we don't think Putin is that silly, hence the title of this week's blog. We're not saying we wouldn't like him to be but we think the bear unfortunately mustn't be underestimated. If he's backed too far into a corner there are all sorts of mutual alliances he might make in a counter move."

Since then, of course, that is exactly what Putin has done, in allying himself with Iran, Syria, Hezbollah, while moving massive military personnel and equipment into the powder keg of the Middle East.

But as discussed with the first three headlines from the Telegraph, that is not going so well; Putin, China and their opposition player Saudi Arabia are being backed even further into a corner.  This is being kept out of the mainstream media on the whole and we, as an average person, might be forgiven for just thinking low petrol prices are a great blessing.  But it definitely feels like a rather ominous, international game is being played over my head: 

"Unlike the #1 oil producer—the United States—Russia and Saudi Arabia lack diversified economies, dangerously tying their economic, and ultimately political stabilityto crude. Last summer, Vladimir Putin’s own central bank predicted that Russia’s economy would collapse 6% if oil fell to $40 a barrel. Price today? $34 (It actually fell as low as $29 this week and is today hovering around $31.8). Too bad for Putin that oil and gas accounts for half of the Kremlin’s budget, and two-thirds of its export revenue. Let’s be honest: other than oil and gas, the world’s biggest country, spanning eleven time zones, has little, save vodka and weaponry, to offer the world. How badly does Russia need oil revenue? An estimated 67 to 70% of GDP depends on it, calculates Andrey Movchan, director of the Carnegie Moscow Center. Without this critical revenue, Moscow can’t pay for imports, which explains its dwindling foreign reserves and galloping inflation.  Guess who’s paying the price for this economic pain? Largely hidden from prying eyes, Russia is beginning to implode from within. Paula J. Dobriansky and David B. Rivkin Jr., senior officials under the last three Republican presidents, note the following in the Washington Post

“There is widespread labor unrest in cities where private-sector workers have not been paid for months at a time. There also have been months of strikes by long-distance truckers protesting extortionist road fees and corruption. Even fire and rescue first responders employed by the federal Ministry of Emergency Situations have not been paid in months. That emergency personnel in such major cities (and places where revolutions have started in Russia’s past) as St. Petersburg and Moscow, with responsibilities for handling public protests, have gone without pay underscores the precariousness of Russia’s finances and the risks it is forced to incur.” Even in a police state, the citizenry can erupt. In 1962, the Red Army mowed down scores, including children, during a labor strike. Does anyone doubt that Putin, the former KGB officer who called the collapse of the Soviet Union one of the great geopolitical catastrophes of the 20th century—a man who now praises Stalin—would do whatever he felt necessary to cling to power? The Soviet Union went quietly in 1991; Vladimir Putin will not."

Last, but not least, Saudi Arabia. Ever wonder why the Arab Spring—which toppled governments in no less than four countries and sparked often violent rebellion in a dozen others—barely touched the Royal Kingdom? Because for years, the Saudi government has used oil revenue to pay off its citizens. And I mean pay off. Here are the goodies that oil bucks currently provide:

• Free health care

• Free schooling

• No income tax

• Public pensions (90% of Saudis work for the government)

• Subsidized water/electricity

Do you ever feel as if specific regional, and even global, unrest is being masterminded?  "This wasn’t a problem when oil prices were high, but now the party’s over. CIA analysts say petroleum accounts for 80% of the Saudi government’s budget, 45% of GDP, and 90% of export earnings. So when oil falls below $29 as it did on Monday, you don’t have to be a math whiz to understand that the big squeeze is on. The government this month jacked up the price of gasoline 50% (it’s still absurdly low), and there’s talk of phasing out other freebies that simply can’t be covered with crude this low. With Saudi Arabia’s population at maximum combustible age—nearly half its 27 million citizens are age 24 or younger—this is a potential powder keg. All three countries have tried to distract their citizens by acting tough abroad: Russia in Ukraine and Syria, China with its expansion and saber-rattling in the South China Sea, and the Saudis with their proxy war with Iran. State-run media in all three fan the flames of nationalism, putting Putin, Xi and Saudi King Salman on a pedestal, while ignoring huge domestic problems. All three nations are increasingly wobbly. The cornered animal is a desperate animal."  (Market Watch, 22 January 2016)

And what of Russia's "ally" China, the last of the three named in today's contradictory U.K. headlines? "China's currency depreciation now, said Treasury Secretary Jack Lew in a CNBC interview from Davos, is more due to its economic slowdown. The thing is, though, no one really understands how they're handling it. "If they could be clearer about what they're doing, I think that it will be helpful. I can't tell you that I have 100% certainty of where they're going," he said. "I can tell you what they've announced as their policy. I can tell you what they've said in meetings, and I think their activities, their policies, and their communication have been confusing." So prepare for a wild ride." (Business Insider, 24 January 2016)

So, quite the opposite from "shrugging", these economic flags alone would be enough for me to contemplate the pros and cons of holding some physical Gold and Silver.  But here are some further staggering facts picked up in Indian news papers just a few hours ago, one of the world's largest "emerging" markets:

"Total gold supply dropped by 7% in the final quarter of 2015, due to an estimated 4% drop in global mine output, the largest quarterly reduction since 2008, and a shift to net de-hedging, compared with a year earlier.  Thomson Reuters, today published the GFMS Gold Survey: Q4 2015 Review and Outlook.  First published in 1967, the GFMS Gold Survey is the world’s most authoritative source of independent supply and demand data for the gold industry.  Physical gold demand rose 2% year-on-year in the fourth quarter of 2015, as a strong pickup in net official sector purchases. Jewellery fabrication posted a 2% year-on-year drop, largely on the back of disappointing demand in China, although this was partially neutralised by continued growth in India.  Gold prices are set for a gradual recovery in 2016, particularly in the second half, driven largely by improving fundamentals, as we expect to see a rebound in pent-up demand from Asia and a further contraction in global mine production."

So, let's crystallize out the important facts: 

  • Physical Gold supply dropped by 7% 
  • Mining of Physical Gold by 4%
  • Demand for Physical Gold rose by 2%

And as a footnote, I'm not surprised China isn't interested in gold jewellery, as that is the most expensive way to invest in Physical Gold and Silver. But I would be interested to find out how many bullion bars and coins China is buying. But those figures are never really public knowledge. Which means those figures will be higher than the U.K.'s general population buying of Physical Gold and Silver bars and coins.

Whenever a product in an un-manipulated market follows this pattern the price should rise, it is simple supply and demand.  

I cannot emphasize enough how key I believe Russian and Chinese activity will be, both in the Middle East and against the U.S. in the coming years.  China devalued it's yuan in an attempt to attack U.S. exports, so the U.S. floods the oil market in a counter move and on the "war" goes. Who knew a war could be so quiet?  Watch for it to get much louder.

 

Now, as many of our readers know, I like to follow cords of thread to see where they lead.  And one thread leaps out at me this week.  If the super rich of China, Russia and the oil nations are suffering from the collapsing oil price, how will that trickle down, or gush, to the average U.K. investor?

The answer is housing. The London high-end housing bubble began to slow down late last year. It is, I believe, an early warning sign of a slow and larger market spread, maybe not for a year or so, and it will be heavily related to when our own interest rates begin to rise.  “Foreigners have been the biggest source of demand in recent years, but that appears to be waning,” said Hemant Kotak, an analyst at Green Street Advisors. Almost 30 percent of new properties in the district have languished on the market for more than a year, according to real estate data provider Lonres, who didn’t include sales by developers. That compares with 12 percent in London’s best districts. High prices and an increase in sales tax are deterring international investors who bought half of all new homes in central London in 2013. Currency turmoil in emerging markets is also weighing on sales. Locals are unlikely to mop up the rising supply, especially given expectations of interest-rate increases over the next few years.”  (Bloomberg Business)

This adds to the common sense view not to over-stretch on a mortgage.  The interest rates can only really go one way:

Chart showing the history of UK Interest Rates

So, when I read facts like this this morning, it doesn't make me happy:  "The average loan taken out by first-time buyers was up 3.4pc to £128,000.  At the same time, the average income of British homebuyers fell 2.9pc to £38,820. However, low interest rates, coupled with an increasing number of high loan-to-value loans on offer from banks, helped more buyers access mortgage finance."  (The Telegraph, 27 January 2016)  Did we learn absolutely nothing from 2008?  With all the facts of international economic movement, I believe it is precisely the time to get out of debt, not in it.  The U.K'.s interest rate is currently 0.5 % and has been since 2009.  The average interest rate is around 5%.  So, it would be logical to add those contingencies into taking out what is probably the biggest loan of one's life, that will be a legal obligation over one's income for the next 25 years!  I believe our interest rates won't rise imminently, maybe not even this year and I'm not alone: "As fresh fears stalked global markets, Mark Carney signalled that 'now is not yet the time to raise interest rates.' In his first speech of the year, the Bank of England Governor said that collapsing oil prices, lingering low inflation, slowing UK growth and a 'weaker' global economy meant the Monetary Policy Committee is in no hurry to follow America's lead and raise interest rates. Rate-watchers eyes are now on the next Super Thursday in a fortnight's time, when a fresh quarterly Inflation Report, MPC decision and minutes will arrive.  His comments arrived in a week in which inflation ticket up to a still negligible 0.2 per cent but the oil price sank to trade below $30. Predictions for a first rate rise have now drifted out to late 2016 or even later into 2017."  (This is Money, 22 January 2016)

But if you're taking out a mortgage this year, 2017 is only 1 year in to your 25 year term. It would be, I suggest, illogical and ill-prudent to assume our historically low interest rates will last anywhere near 5 more years, let alone 25.  

I remember speaking to a gentleman with a fair amount of disposable income at the London Property Show a few years ago. After a factual conversation re: the supply and demand for Physical Silver, as well as for Gold, he announced he was going to seriously research the pros and cons of diversifying part of his investments into Physical precious metals - looking to hold long - and thanked me for bringing those facts to his attention.  "This has been an interesting talk," were his last words, with the smile of an elderly gentleman who enjoyed a thoughtful, unrushed and focused conversation.   I hope our blogs and newsletters continue that tradition, of giving our readers and clients much to research further.  

In conclusion, during the time it took me to wrote this piece this morning, our U.K. public sector debt went up by £5 million! Staggering. Are over-stretched mortgagees any different to over-stretched countries? 

Prepare for an eventual collapsing house of cards. Call the Bleyer Team on 01769 618618, email [email protected] and browse our extensive range of Gold and Silver bars and coins with our online purchasing facility.   

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