All posts by David Allen

Peter Cooper: Why S&P might be wrong about a 20% fall in Dubai house prices

Posted on 25 June 2015 with no comments from readers

When a guy I know from the last property boom who managed to sell out and go home to Australia with $1 million wrote to me yesterday about the nice Ramadan deal he has just struck on a Dubai villa that means something.

I can’t help but think Standard & Poor’s is wrong in its latest prediction that house prices in Dubai are going to fall by 20 per cent. Sat in Paris the S&P economists are running their slide rules over Dubai and perhaps missing a few of the relevant facts in reaching such their conclusion.

Oversupply?

Property supply this year is running at twice recent annual averages. But then population growth of six per cent means demand for say 18,000 units while estimates for delivery are around 20,000. Not much of an oversupply there.

What about the Dubai economy hit by a halving of oil prices? Well prices are coming back and the UAE is running a deficit to make up the difference. Dubai salaries have been growing at a healthy pace this year.

Recently the property sale has faced an inflation in the real estate industry. Because, the population has increased much and so the sale also gets doubled. This makes the building constructors to earn more and more profit than what they expected. I really wonder people why not look here and worry about the population increase. The people should think about the economy of the country and their growth in the organization.

If anything the complaints I get are about rising inflation and how Dubai is becoming too expensive (click here). That’s not usually the sort of economy where house prices crash by 20 per cent.

There is also the worry about global interest rates being on the way up. But just how far will the Fed get in raising rates before it crashes global financial markets and has to put them down again?

House prices are starting to anticipate more expensive mortgages that may be longer in coming. Besides locking into today’s bargain mortgage rates makes perfectly good sense, and if you think they are going up why not do it now?

Then again there are still actions Dubai could take to keep its housing market afloat. For example, rent controls could be dropped like in Abu Dhabi. At the moment sitting tenants can keep their previous low rents running for years and investors just don’t like taking on that sort of risk.

Executive action?

The government could also ease back on the emergency measures it took in late 2013 to cap what looked like becoming a runaway boom after a 35 per cent surge in house prices.

Transaction fees might be cut from four back to two per cent. The cap on mortgage lending could be eased at the banks. Why not let them decide what risk the market should take in home loans? It is not rocket science.

Perhaps what S&P is saying is already in the price of a house in Dubai and you need to look further into the immediate future. Maybe the bargain hunters like my friend braving the heat of Ramadan, have the right idea again.

Peter Cooper is the editor and publisher of ArabianMoney and a 20-year veteran of Dubai business journalism.

Chinese rushing into physical gold in huge volume as stocks crash

Posted on 23 June 2015 with no comments from readers

The first signs of a rush to convert financial assets into physical gold in China have emerged with a spike in physical gold payouts at the Shanghai gold exchanges.

Withdrawals of physical gold from the Shanghai Gold Exchange and Shanghai International Gold Exchange jumped 41 per cent in the trading week 8-12th June from the previous week, while year-to-date withdrawals are up 20 per cent to an incredible 1,061 tones.

Massive rotation

To put that figure into perspective, that is higher than China’s entire last officially declared gold reserve. It represents a massive conversion of paper assets into bars of the precious metal.

The 8-12th June gold rush came before the Shanghai Composite began to sell-off late last week, quickly entering a bear market with stocks down more than 20 per cent. How much paper gold trading has been converted into the physical stuff in this market collapse?

The shift into physical gold earlier this month looks like the smart money getting out ahead of the herd. But where else can Chinese investors park their cash in an emergency?

Their fear must surely be that another deluge of money printing will be the response of the authorities. Chinese inflation has already been epic since the global financial crisis and the money printing that followed, just go there and buy things to find out.

Bubble profits

Indeed the stock market bubble itself is a product of money printing. Investors wishing to protect themselves from the next blast of inflation, or actually to profit from it are buying gold.

How long before this begins to affect headline gold prices? Surely as the stock market tanks we will not have to wait until the next batch of figures confirm what was happening in early June.

Gold will be the next asset class to go into a bubble now that the Chinese equity bubble is bursting.

Credit-fuelled US stock market now ripe for a major crash

Posted on 14 June 2015 with no comments from readers

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The chart below traces the performance of the S&P 500 over the past couple of decades and compares it to NYSE investor credit. Even the most ardent bull ought to have a sharp intake of breath.

Not since 1929 has this Wall Street roadmap looked anything like so dangerous. It’s credit expansion that turbo charges stock markets to the upside but history suggests that it always runs out in the end.

Bond alert flashing red

The longer the party the bigger the hangover after that happens. Global bond warnings have been flashing red for the past few weeks and the professionals are alarmed although few retail investors really get the message.

Unstable bond markets are the canary in the coal mine singing its warning of poison gas coming the way of the stock market. So too is the smaller and smaller number of shares supporting the S&P 500 index at its current lofty levels.

S&P 500 index is usually maintained by large companies which have heavily priced shares and a change in the value of even a single share leads to a significant change in the index also. When the share values of a company at one of the highest positions go a step down in price, more than one share of a company at the lower positions might be required to gain in rice to off-set the reduction in the total index. In summary, the change in the index may be because of a few shares of the largest companies which are big in terms of their market value.

If shares of Bitcoin Code software alone takes the plunge, the shares of two emerging platforms with half the price, but double the number will off-set the balance. However, if the number of smaller shares if far less and there is no other gain in the market cap, the prospects of a recovery are gloomy. Drawing parallel conclusions to this, the present day index is held by smaller shares, more in number and lesser in price. There may be multiple shares of the same type and value and if there is a downfall in a single type, it is enough to burst the bubble of the index.

One small uptick in Fed rates or a Greek default as soon as tomorrow and this great bubble is over and what has gone up so far will have a long way to fall…

Posted on 14 June 2015Categories: Banking & Finance, Bond Markets, GCC Stock Markets, Global Economics, Hedge Funds, Investment Gurus, Investment Management, Personal Finance, Sovereign Wealth Funds, US Stocks

Why are the central banks buying so much gold unless they still fear inflation?

Posted on 10 June 2015 with 6 comments from readers

Why are global central banks buying so much gold unless they still fear inflation? The World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves in the first quarter of this year and that’s a whole lot more than they used to buy.

In fact even since 2010 the central banks have increased their share of global gold demand from just two per cent to 14 per cent last year. It’s one reason why gold prices have held up recently despite a shift from retail investors to speculation in the final stages of the US and Chinese stock market bubbles.

Inflation hedge

For central banks gold is the classic hedge against monetary instability and against inflation, that is to say unwanted devaluation that puts up the price of goods in the shops. Gold will hold its value while paper money devalues and the nominal price of gold goes up and up.

Emerging markets, and we have to class China as an emerging this case albeit the world’s second largest economy, are playing catch up with the developed world in terms of gold reserves. They only hold around 10 per cent of foreign exchange reserves in gold by comparison to 70 per cent or more for countries like the US and Germany.

Monetary experts say around 15 per cent might be enough to maximize the benefits of gold holdings, and even the relatively new European Central Bank has 25 per cent of its reserves in Maynard Keynes’ ‘barbarous relic’.

The pressure to buy gold for reserves is becoming even more acute as the legacy of money printing is starting to turn into rampant global inflation, manifest first in equity and real estate prices. This is actually desirable because it is the only way to amortize the colossal debts of the world without bankrupting everybody.

But central banks know that if they are to manage another episode of inflation without it turning into a highly destructive hyperinflation then gold is the answer. Nowhere is this more evident that in the People’s Republic of China where official gold reserves of 1,054 tonnes are but a paltry one per cent of foreign reserves.

Chinese gold reserves

This figure has not been revised since 2009 and there is a lot of speculation about what it might be today. Could China now be closer to the US total of 8,000 tonnes in its vaults? It’s been an open secret for several years that China has been buying up any gold it can acquire.

Indeed an official announcement about the scale of its gold reserves is widely anticipated by gold bugs as a major inflection point for the price of gold, and that’s the main reason it has been kept secret of course. The Chinese wanted to buy their gold at low and not much higher prices.

Still the question remains: just how high will gold prices go when the precious metal becomes far more important again as a linchpin of the global economic system? $7,000 an ounce? $12,000? $24,000? Or $65,000 as one article suggested recently?

Franco-Nevada boss says Dow:gold ratio points to prices being at an upward tipping point led by inflation in China

Posted on 09 June 2015 with no comments from readers

Pierre Lassonde, chairman of Franco-Nevada Corporation and a former Chairman of the World Gold Council tells Financial Sense Newshour that gold is at a tipping point with China a key decider in which direction it goes. However, he’s strongly of the opinion that gold prices have already bottomed at $1,040 an ounce.

Mr. Lassonde also discusses the Dow-gold ratio and how this has helped investors know when to buy and when to sell. But his big call is to watch out for inflation made in China to send gold prices into the stratosphere.

Chinese inflation

He opines: ‘They’re finding themselves to be not as competitive as they used to be especially against India, Bangladesh, Indonesia and other countries. And what could cause inflation to really perk up in China is a devaluation of the renminbi.

‘Now if they devalue the renminbi, you’re going to have real inflation in China; you’re going to have Chinese rushing to the gold exchange market and you could have a real run on gold at that point in time…’

Peter Cooper: China’s policy response to its equity crash to be inflationary and boost gold

Posted on 08 July 2015 with 1 comment from readers

What do we know about how central banks respond to stock market crashes? Typically they lower interest rates and ease monetary conditions in liberal fashion and worry about the inflationary consequences later.

So now that China is seeing its own version of the 1929 Wall Street Crash should we not expect the same? In 2009 China greeted the global financial crisis with a stimulus package equivalent to half its GDP.

Policy response

It would be easy enough now to cut interest rates and devalue its currency to ease the pain to follow such a massive stock market event. This is the textbook response to the deflationary impact that such heart attacks have on an economy.

Credit is already seizing up in China and trade is being affected. Commodity prices are in free fall, from oil to iron ore, copper and nickel. Printing money and doing it quickly is the only way to slow this down.

The danger is that pumping money into an economy causes bubbles. Indeed the stock market bubble in China that is bursting now is the direct effect of the policy response to the global economic crisis in 2009, six years ago.

Where will the money go this time? Likely the same place as last time: precious metals. Gold went on a tear from under $800 to $1,923 an ounce between 2009 and 2011, and that was the best performing asset class apart from silver, up from $8 to $49 an ounce.

Domestic inflation

China also created a great deal of domestic price inflation raising local price levels to the point that Western visitors no longer found anything cheap. We can expect more of the same again.

However, after a major stock market crash like the one now happening in China there are usually major aftershocks in the real economy, in the banking sector in particular.

Central banks know this and learnt from the 1929 Wall Street Crash the imperative of keeping the banks functioning. That said bad debts still have to be purged and businesses go bankrupt and people get ruined in the process.

This is called a recession, not something China has suffered for decades. It will mean a major slowdown in demand for everything China has been buying from the rest of the world: industrial commodities, German cars, luxury goods, and even tourism.

Fire sales will depress the price of some goods temporarily but a combination of a destruction of capacity and money printing will prove inflationary, and that is usually the only way to revive an economy from this sort of trauma.

Precious metals

Investors in gold and silver will get very rich – as prices will soar as Chinese inflation takes off – but it will be very hard for anybody else. In truth, over-inflated global stock markets will have to follow Chinese equities into a major downturn in a contagion like the 1930s.

How long this lasts and how deep the damage proves to be will depend on just how good global central banks are at managing macroeconomics. We are about to find out.

But forget about the Fed ever raising rates for years. The pressure will be in the reverse direction. How long to QE4?

Peter Cooper: Why Greece is not going to get a bail-out and rescheduling like Dubai in 2009-12

Posted on 07 June 2015 with 3 comments from readers

What the leaders of Greece really want is something like the bail-out and debt rescheduling that happened in Dubai after the global financial crisis from December 2009 to late August 2012. Dubai then recovered dramatically with its stock market doubling in 2013 and house prices rising the most in the world that year.

The emirate has not really looked back since, albeit the authorities sensibly cooled a second housing boom before it got out of control and thought very carefully about which mega-projects to revive and which to leave unbuilt. Dubai’s business model has held up well despite a halving of oil prices, the hotels are full and Emirates Airline just reported its second-best profits in 30 years.

How Athens blew it

Greece would love to do a Dubai. But it is not going to happen. Where is the Abu Dhabi to come up with $20 billion in cash overnight to plug the immediate black hole? Would any creditor in their right mind trust the Greeks to implement a comprehensive restructuring plan for damaged sectors, like they did with the $25 billion Dubai World restructuring?

The problem of course is that the Greek crisis has been running for five or more years, ever since the global financial crisis. They have been given far more than $20 billion and have just piled debt on top of debt to reach the mountainous sum of $348 billion. On IMF estimates Dubai never got beyond $115 billion and change.

Besides Dubai is a very different economic model to Greece. It’s a low-tax, highly profitable business hub for the southern Gulf of Arabia and way beyond with superb business and government leaders. Turning around a hot business entity like Dubai was far from easy but it was not mission impossible.

Where will Greece earn its money from in the future to meet any rescheduling plan that its creditors care to create? They won’t even agree to cut supplementary pensions, reform a notoriously lazy civil service or undertake serious privatization, let alone tax reform or measures to shore-up confidence in the banking system.

Academic claptrap

How is private business supposed to take any confidence in an ultra-leftist government of former academics? They are running a mile and taking their money with them. Last Friday another 800 million euros disappeared from Greek bank accounts, the stock market slumped by five per cent and Greek debt yields spiked to 11 per cent.

Time is running out too. Telling the IMF where to stick its payment last week was not a bright negotiating tactic. It makes it easier to say no. Can European leaders now put humpty dumpty back together again after this great fall?

Well as the old English nursery rhyme says: ‘All the king’s horses and all the king’s men could not put humpty together again’. Financial markets just don’t seem to have got it just yet. Gold prices will go much higher as the real Greek tragedy now unfolds.

Peter Cooper is the editor and publisher of ArabianMoney and a 20-year veteran of Dubai business journalism.

Bank runs have started in Greece remember how queues at Northern Rock flagged up the global financial crisis?

Posted on 01 June 2015 with no comments from readers

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Hearing that Greeks withdrew 800 million euros from banks in just two days last weeks amid scenes of chaos in branches and long queues in the summer sun brings back memories of the first bank run in two centuries in the UK at Northern Rock that signaled the imminent global financial crisis.

Then it was the subprime mortgage crunch that did for the banks. In Greece a whole nation is about to go bankrupt. Is you have money then you certainly don’t want to leave it in a bank to be converted into drachma that will plunge in value.

Worth less euro

The euro may be worth 25 per cent less than it was a year ago in dollar terms but it is still a hard currency by comparison to anything the Greek Government can cook up in a crisis. Even the local authorities in Greece are furiously spending whatever cash they have on outstanding contracts, knowing that it won’t be long before the government seizes whatever they have got.

The Greek debt crisis has been at boiling point for how long now? It’s over four years since we started reporting on it in earnest.

However, clearly even the monumental patience of some long suffering Greeks is fading and this summer a panic mentality is starting to takeover. Once the crowd all decides to rush to the exit door at the same time, or into the bank, then the debt bubble really is about to burst and this becomes a self-fulfilling prophesy.

Germany calling?

Can Germany put up enough cash to fill the gaping hole in Greek bank accounts? Does it have the political will to do so? Even the International Monetary Fund is beginning to distance itself as far as possible from the sinking Greek ship of state.

Of course the real analogy is not Northern Rock in the UK but the pulling of the plug on Lehman Brothers in New York that triggered the 2008 crash. At the time the authorities thought they could contain the fall-out. They could do no such thing.

Will it be any different this time? Actually central banks don’t have as many policy levers to pull. They are out of ammo with the enemy at the gate, or at least in a queue at a Greek bank. Time to hold gold, not paper money?

If the dollar is no longer king then gold is going to replace it

Posted on 30 May 2015 with no comments from readers

How do you read the recent strength of the US dollar and its fall back again after the news that GDP shrunk by 0.7 per cent in the first quarter? A classic double-top perhaps?

Did the dollar top out in March with its spectacular spike to $1.04 to the euro followed by a five per cent crash? That was the conclusion of HSBC’s currency experts, with the proviso that something like the bankruptcy of Greece could still push the euro underwater again. So where do currency speculators turn for the next momentum trade?

An increasing number of professional money managers think gold will be where the retail punters go to next and it’s true gold has been trading more like a currency than a commodity recently. If the dollar is no longer king, then gold looks like a worthy successor.

But, even before this prediction started to materialize, there has come the much worthier, or perhaps, the permanent successor of the dollars and other fiat currencies, which is nothing but the ‘powerful cryptocurrency’! Believe it or not, they are set to rule the future and therefore, invest in them to join the wagon of rulers, later! Eager to know how? Then, view it now!

Correction done

For a start, gold is at the bottom of a correction of more than three years and attractively priced for an upward move. It topped out at $1,923 in October 2011 and seems to have bottomed out around $1,140 an ounce.

Gold has actually already held up very well with the rise of the US dollar and came second only to the dollar last year in performance against all other currencies.

Certainly, the many retail owners of gold in Germany have felt its benefit in protecting them from the 25 per cent depreciation of the euro. Indeed they have profited from it. When the dollar crashed by five per cent last month, gold was up two per cent on the same day. The best trade was selling the dollar and buying gold.

Traders are always keen to spot a new trend. They create the momentum that carries prices higher. If the dollar has topped out and is now on the way down, then gold is coming off its recent bottom and going up.

Gold was previously tracking the US dollar’s advance but has now decoupled and should go in the opposite direction. Gold is after all the classic hedge for dollar weakness. There’s another reason to think the price of bullion will surge from here.

Goldman Sachs

The argument that higher US interest rates are coming is what has kept the price of gold down. That’s what the Goldman Sachs research department has been telling us.

Now that the Fed has taken its foot off the pedal for interest rates gold prices should no longer stay low. The April minutes of the Federal Reserve’s committee meeting hinted that a June rate increase is highly unlikely, though September could happen. Does it not begin to feel like traders are being strung along from one meeting to another?

The reality of the US economic recovery also grows more dubious by the day. The March jobs number was half the expected tally. Consumers aren’t spending and housing market activity is subdued. The strong dollar is taking its toll on US exports and the oil price crash has crippled high- paying employers in the shale oil industry.

Heading off in the opposite direction to Europe and Japan by raising US interest rates is hardly going to help this fragile recovery. Indeed, it risks crashing an already overvalued Wall Street. The Fed is going to move more slowly than advertised. It also reads these articles.

Grexit or not?

Then again, could the European economy pick up thanks to a lower euro, cheap oil and perhaps some unexpected progress in Greece? The bullish dollar trade has become so crowded recently that it is vulnerable to any good news from the eurozone, or could the dollar actually fall on a Grexit because all the bad news is already written into the euro?

Once investors wake up to the fact that interest rates are actually going to stay low for much longer, then logically gold prices should be heading up and up. The threat of rising US interest rates to the gold price is gone. How much threat is there of the Fed raising rates when the US economy contracted in Q1 and could already be in a recession?

A Greek exit from the euro and national bankruptcy may also be finally about to happen. That would be a hugely positive event for gold as a safe haven asset. Some experts say this will add $200 to the price of gold. Where else do worried Germans park their cash in a euro crash?

Gold is about to have its run – as a speculative currency vehicle as the ultimate money that no central bank can print. Where do central banks go when currency markets give up on them? Back to the only true money and that’s gold.

Why a Greek default would be disastrous for Greece and the rest of the world

Posted on 25 May 2015 with no comments from readers

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Bold talk about Greece being able to rebound after a default forget one thing: a default would pulverize the Greek banking sector, and what is dead cannot stand up let alone rebound.

Let us talk about the great depression of 2008. That was the year when the livelihood of the most common man was also hit. Millions of fresh professionals who were all geared up for entering the high-paid white collar jobs and those who had put a huge chunk of their earnings in the prospering stock markets were literally thrashed. In the place of offer letters, they witnessed mass termination of employees across all grades of position and lack of financing for taking the real estate aspirations forward.

Hardcore miners were not ready to accept even the genuine opinions that Bitcoin Code is not a scam and they chose to remain inactive instead. The aforesaid examples were just the tip of the tragic iceberg, but strong enough to represent the population who lost their grounds. The whole world including the US took many years to at least replenish the lost economic balance. Following the footsteps of this world crisis was the Greek crisis that overturned the life of the Greek in 2009. The crisis started as a disturbance in the structure of Greek economy, thought to be due to the 2008 depression, but soon fattened into ‘The Crisis’. Failing policies, uneven and unmanaged costs, mounting debts of the International Monetary Fund and gross governing ignorance took the government to a standstill.

The authorities felt short of funds for routine functions, let alone the money to pay off the debts and private investments also ceased to arrive. However, die-hard efforts brought the country nearly on the track by 2014.

Greek interior minister Nikos Voutsis told a TV program on Sunday that Greece will not have the $1.8 billion it is due to repay to the International Monetary Fund next month unless it strikes a deal with international creditors over further rescue funding. ‘This money will not be given,’ he said. ‘It does not exist.’

Christopher Pissarides, Regius professor of economics at the London School of Economics, says that a Greek default would be ‘disastrous’…


Video link click here!

Posted on 25 May 2015Categories: Banking & Finance, Bond Markets, Global Economics, Hedge Funds, Investment Gurus, Investment Management, Personal Finance, Sovereign Wealth Funds, US Stocks, Video Channel