Jan 5th 2010 Happy New Year, .....and of course it is a new decade. Will it be a good one? Who knows? Ultimately it will be what you make it. I think we are in for hard times, but I am still looking on the bright side, because during hard times you can still prosper. The really hard times will be experienced by those who think the worst is over, and act accordingly. They will get sucked into bad deals, and will get crucified. If you know what's coming, you can be prepared. So, I maintain I am not spreading gloom and doom, I am simply saying there are some big holes in the road ahead, and charging off down the highway is going to lead to a busted transmission. But if you own an auto-repair shop, you're going to make some money. I am buying farmland, commodities, and green oil projects. I am also turning my own land over to growing things which people need. We have had a bad year weatherwise all around the world. Unseasonal snows in New Zealand and America; drought in India, China and Australia. The US corn crop has been cut in half, and the US provides the world with 40% of its corn, and a similar amount of soya beans. That's a serious shortfall. There is only a small inventory to call on from last year. The last time I looked, we had about six weeks' supply of corn. Under normal circumstances that should not be a problem, but when the harvest in Iowa gets stopped by snowfalls, we have a big problem. I cant see the property markets recovering anywhere in Europe or the US this year. In the US the mortgage re-sets are kicking in now, and that is adding serious pain to already cash-strapped US citizens. Short-term the American consumer is going bust. Long-term the American government is going bust. America is a mess, and this wont change any time soon, especially as the government is hell bent on doing as much as it can to destroy what is left of the American institutions and economy. Across much of America is the stark realisation that the country is going down the route that leads to communism. Large chunks of American industry, and most of the banking and mortgage market have been effectively nationalised. However, while the US heads into the mess that is state centralised socialism, China is gradually going capitalist. Apparently, roughly 40% of the US population is now dependent upon some form of state handout. You wont get a turn round away from socialism when nearly half the country is on support. Obviously there are rental returns that can be quite good. I am hearing reports of 10% net ROI. But when I can get 17% dividends on rock solid stocks, why should I bother? I will wait till the bottom is reached, which may be some time during the next five years. One thing you should not bank on is capital gains in American real estate. But what about the UK and Europe? Europe is in a mess too, and the currency union is showing signs of strain. I'm sure you've heard of the BRICS, but have you heard of the PIGS? I'm sure you all know who the BRICS are: Brazil, Russia, India, and China. They are at the top of tree, and are doing well. The PIGS are at the bottom of the pile in the industrialised west, and they are in serious trouble. They are: Portugal, Ireland, Greece, Spain. There are some other basket cases as well. Venezuela is a complete train wreck. (50% devaluation since I started this letter, and I seem to recall advising folks to steer clear of property on the island of Margarita some two years ago.) Zimbabwe has broken all records for awfulness, and the UK and Japan are two giants tilting over at such an angle it is a wonder they dont topple to the ground. Given such a bleak scenario it would be foolish to break open the champagne bottles for any other reason than to celebrate that we have at least come through another year without crashing into the ditch. The euro is too strong for the struggling members of the monetary union to cope with their sagging economies. Normally devaluation would help any exports from the more desperate countries, but they cant devalue. Printing money is one way out, but that is very much a short term measure, and the more money you print the more you are stoking the fires of inflation. With inflation being built into the recovery mechanisms, and food shortages promised around the world, we are not faced with a pleasant situation. It is going to get more and more expensive to survive. Maybe not this year. Maybe not even next year. Who knows? But the rise in inflation will kick in with a vengeance somewhere in the next 1-3 years time. With inflation will come rising interest rates. That is bad for property prices. Let me remind you of how I started this new year letter. I stated that if you knew there were bad things ahead you would be prepared, and therefore hopefully able to benefit from them. If there is inflation coming then houses will tend to keep their value while cash loses value. If there is inflation coming then interest rates will be going up, and your mortgage will cost more; lots more. Knowing this, you will know that the prudent person will not be selling at the moment, and neither should you be buying. If you have a house with a massive mortgage, then you should either reduce your mortgage or sell up now while the going is good. Anyone holding a mortgage for more than 80% of the value of the house is going to get screwed as interest rates rise. Generally speaking a 2% rise in interest rates will increase your mortgage payment by about 30%. Let's be reasonable about this, a base rate of 2.5% is very very low, and that would be the rate in the UK if there was a 2% rise. A 3% rate would not be high, but that's what a 2% rise will mean in euroland. I dont want to predict what rates you would be paying in an inflationary environment, but they certainly would not even be at that level. If inflation is coming, then your annuities will start to look sick, and so will your pension funds. You need to be very careful where you put your money. Remember, cash investments will start losing value when inflation starts to climb. The UK is printing more money than the European Central Bank, so inflationary factors are likely to be more pronounced in the UK. Property is one hedge against inflation, but a better hedge would be to invest outside the sterling area. But euroland is not currently a much better option as the euro is likely to sag in value as time goes on. The commercial base for the currency is decidedly risky, and so is the political base. I still favour Brasil, and I also like parts of Canada and Australia. The main problem with the property markets everywhere in what we choose to call The West is that now is precisely the time to be quick on your feet. The only way you can do that is to be out of the market right now. Wait for inflation to hit, interest rates will rise, and as they rise house prices will sag, and foreclosures will rise, and then a plateau will be reached, and eventually interest rates will start to come down. That will be the time to start looking at real estate again. You should buy when rates are dropping to a more comfortable level and there are bargains everywhere. You can then jump in, and sit tight for the next 7-10 years as the next boom makes you rich. For those of you thinking of doing your first deals now; be very very careful. I make no predictions about house prices for this year. I think we are close to a bottom in the UK, but I dont see prices higher by the end of the year. If they are, they will be held up by sky-hooks, which, as you know, aren't very reliable. In the meantime, have a good year. You can if you're careful. best wishes john Back to the Top

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