-- Posted Thursday, 4 September 2008 | Digg This Article
| Source: GoldSeek.com
By: Peter J. Cooper
This week I am holed up in Rome in the Centro Storico on the final leg of my summer vacation which has been something of a minor Grand Tour taking in Moscow, St Petersburg, Salisbury, Bath, London, Inverness, Edinburgh, Pisa, Florence and Rome. Travel broadens the mind and provides new insights as well as passing the time more pleasantly than the Arabian summer.
In Russia I noted the absence of economic crisis, in fact quite the reverse: a boom in the style of the UAE. But in the UK and now Italy there are clear and unmistakeable signs that all is far from well with the economy: Rome is short of tourists this year at the start of its busiest season; restaurants are empty and the normal long queues for key attractions have gone.
There are few English and American voices to be heard: depreciation of the dollar and pound having made Italy expensive. Perhaps there is just a surfeit of restaurants and bars but this looks like it will be a case of the survival of the fittest and leanest operations with the lowest overheads and debts.
A periodic downturn does any market good: raising competition and eliminating poor businesses. But this is a cruel process, with last-in first-out and financial strength also counting for at least as much as quality of product.
It is also a microcosm of what is happening across Europe now: discretionary spending is falling as inflation pushes up the cost of essential items. You can eat at home but you can not do without food entirely. Entertainment that costs money can be cut back in favour of free or cheaper pleasures.
Rome is full of the latter. A visit to the cathedral of St Peter’s costs nothing while the restaurants can be a bit pricey for some very standard fare; a hundred euros buys a pretty ordinary dinner for two, which could be recreated for a fraction of the price by shopping at a local supermarket, albeit without singing waiters and a view over a piazza.
In the UK the talk is of a rise in unemployment from one to two million and that seems a reasonable estimate in the gloomy concurrence of economic events now hitting the country after 15 years of growth. House prices are falling at their fastest ever rate, inflation is about to rise thanks to falling sterling and high energy costs and the City is in trouble due to the global financial crisis.
This conflagration of problems possibly makes the economic outlook gloomier than for 60 years as the finance minister suggested last weekend. The correction will be dramatic with house prices tumbling to perhaps 60 per cent of their all-time high, a major banking crisis and inevitably a stock market crash – possibly wiping 65 per cent off share prices as in the mid-70s.
So my main reflection on leaving Europe and heading back to Dubai from this Grand Tour is that the UK and the continent are doomed while the good times continue to roll in the Gulf States and Russia. If the later 1970s are any guide – and I always like a solid historical parallel – then this pattern could be maintained for rather longer than some British commentators would have us believe.
I can see oil prices correcting to perhaps $73.50 – a perfect 50 per cent re-tracement from the recent high – but think a bounce back to $150 is more probable. What the world needs for lower prices – as in the 1970s – is either a new source of energy or a dramatic improvement in the efficiency of energy use.
Both are possible in time, but will take time. And in the meantime the Gulf States and Russia will enjoy a golden age. This will not last forever. But the oil consumer nations will meanwhile go through a painful cycle of long recessions, inflationary bail outs of banks and high consumer inflation. That is where we have got to now.
The US presidential election is just a distraction from this reality and any temporary blip upwards should be dismissed as false and misleading. Strange is that not what politics is all about? The US nemesis will be 2009 whoever gets elected.
So any weakness in GCC stocks and real estate, oil shares or precious metals should be taken as an opportunity to stock up on asset classes that have an excellent future. Global stocks, real estate and bonds should be completely avoided, although cash might be useful to purchase the latter at a much later date.
As a final thought from Rome, this is the place where a great empire rose and fell and in the process devalued its currency. Yet in the Capitoline Museum today I saw gold and silver coins that have preserved their buying power over two thousand years - what else offers this protection against inflation?
Peter J. Cooper
http://arabianmoney.net/
-- Posted Thursday, 4 September 2008 | Digg This Article | Source: GoldSeek.com
