We have been accused. We are too pessimistic, said one of our readers lately, that when there is good news, all we do is put a negative spin on it.
But the truth is that there is good news out there. Good news, house prices are falling – according to a recent report on the BBC, 28 per cent of people questioned in a survey want to see house prices fall – yet only 22 per cent said that they wanted to see rises.
The price of oil is too high, and may well rise in the short-term, making us feel worse off. Yes that’s bad news in the short-term, but in the longer-term it’s good because the higher the price of oil, the more economically attractive it is to invest in alternatives. The overriding factor that has delayed the takeover of renewable forms of energy has been lack of investment – and thanks to the high price of oil, that is set to change.
Wages are not going up with inflation – that’s bad because we are feeling worse off – yes, that is true, but in the long-term inflation only becomes the nasty beast that brought the economy to its knees in the 1970s if wages rise in tandem with increasing prices.
A year ago we were warning that the global economy was out of balance. Consumers in the US and UK especially had been borrowing too much, while in China, Japan and the OPEC countries, savings were too high. This was resulting in massive trade deficits in Britain and America.
We are now seeing this unhappy situation reverse. At last consumer borrowing is falling, at last economies on both side of the Atlantic are looking at more sustainable ways of expanding.
If we learn the lessons of this episode in the economic cycle, and don’t shrink from the bad news, then the recovery, when it comes, will be all the stronger. The danger lies in not facing the facts now. The real bad news would only emerge if we buried our heads in the sand and said, “Hey, it’s really not that bad out there at all.”
Oil is surging in price, but many argue that it’s being pushed too high by speculation. For some, oil appears to have replaced gold as the hedge against inflation. Maybe oil is becoming the new money.
Well maybe, but what is far more likely is that it will unwind. Whenever prices rise for no better reason than that they rose the day before, then you know a bubble is in the making. And bubbles burst.
Neither oil nor house prices will prove to be exceptions to that rule.
And it’s all that bad news which will eventually cause the price of oil to crash. We are due to enter what’s called the driving season in the US. It will be interesting to see how the demand for oil moves over this period, but it seems reasonable to assume oil will not see the spikes in demand it normally experiences at this time of the year.
Sure, oil may well rise some more, it could even pass the $200 dollars mark as was predicted last week, and the economic pain which follows will be unpleasant, but then oil will fall, and with that we will see the seeds of the recovery.
It won’t fall all the way back to $20, or less, the global economy is surely too big for that to ever happen again, but don’t be surprised if it comes close to halving from today’s price.
But don’t expect the rebound to come too soon. If 2009 sees a marked pick up it will be a surprise, and it is far more likely that 2009 will be the nadir for the UK, and 2010 may yet prove to be a tough one for the euro area and China.
Falling house prices will be first, then falling oil prices will follow. Then, or so it must be hoped, food will fall in price too, especially as world-wide agricultural producers react to the high price of food by putting more resources into food production. The recovery will begin when house prices reach bottom; by the time oil has reached bottom it will be a boom.
Fortunes can be made and lost during an economic downturn, markets always overstate the bad news during the downturn, just as they overstate the good when times are buoyant.
The main opportunity is around the corner, but please don’t just bury your head in the sand in the meantime.
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