The Face of britain after 2010

Four major events will occur by 2010 that could have a devastating effect on your wealth.

First, let me show you exactly what these 4 landmines are, and where the biggest opportunities lie today...


Landmine #1: Even higher energy prices will crush the bull market in stocks
I'm sure you've felt the effects of rising energy prices in recent years. In 2006, for example, electricity bills in the U.K. rose 27% on average, and gas bills jumped 40%.
This was only the first sign of things to come. Energy costs are locked into a worldwide uptrend that will probably last the rest of your life. They are the product of a supply/demand squeeze, caused by the tremendous economic growth and industrialisation taking place in Asia. Unfortunately, it is a situation that will only get worse. In fact, our analysis suggests that within a few short years, the oil squeeze will cause energy prices to double, undermining both stock market returns and the world economy.

Consider, for example, that India's economy has been growing by more than 8% a year for the past four years, while China's annual growth rate has risen from 7% in 1999 to 10.5% today. That's nearly four times that of the U.K., and three times that of the U.S. This rapid Asian growth is pushing up demand for all types of commodities, including oil - which is why oil prices have climbed nearly seven-fold since 1998.

And yet, in Asia, per capita consumption of everything, including energy, is still very low compared to the West. While the average Brit consumes 10.4 barrels of oil per year and the average American burns through 26 barrels, the Chinese use only 1.5 barrels per person, and the Indians less than one barrel.
4.4 billion people all wanting fridges and cars means a HUGE demand for oil, whilst oil production is probably now in decline
As economic growth raises the average Asian's standard of living, his energy consumption will grow too. Soon every Chinese family will want a car. Every Indian family will demand a refrigerator and an air conditioner. Bearing in mind that China and India alone hold 4.4 billion people, the amount of additional oil needed to meet Asian demand will be staggering.
In fact, the International Energy Agency expects global oil consumption to rise by 50% in future years - largely as a result of Asian growth.
Rising oil demand would not be a huge problem - if oil production could increase by an equal amount. But no one has discovered a major oil field in nearly four decades. Instead, a growing body of evidence suggests that global oil production peaked in May 2005, and has already begun to decline.
American oil production, for instance, has been falling since 1970, despite the U.S. having the best technology in the world. Oil production on the North Sea started dropping in 1999, with the result that Britain is now forced to import oil from abroad. Today, we're also seeing oil output declining in countries such as Mexico, Kuwait, Russia, and Venezuela. Iran, currently the world's fourth largest oil exporter, has just introduced petrol rationing to avoid becoming a net importer in a few years!
In fact, the only countries where anyone believes oil output can still increase are Iraq (which we can't count on anytime soon) and Saudi Arabia. And Saudi Arabia is hardly a safe bet. According to analysis by Matthew Simmons, former energy advisor to U.S. President George W. Bush, Saudi Arabia has far less oil than it officially claims, and may be at its maximum production already.

I'm not saying the world will run out of oil, but from now on it will be harder and harder - if not impossible - to pump enough oil to satisfy demand. And that will lead to ever higher oil prices. Commodity expert Jim Rogers believes oil will reach $150 a barrel within a few years, more than twice what it costs today. If you think £1 is too much to pay for a litre of petrol, just wait. In a few years, it will seem like a bargain.
Of course, while the energy squeeze will certainly lead to economic hardship and lower profits for most corporations, it is also creating some spectacular investment opportunities.
Get ready to make triple-digit profits from oil shares!

As energy becomes more expensive, companies in the energy industry will see their profits expand exponentially. I would not be surprised to see some energy stocks double and triple in value in coming months. It's the one industry I feel you must have in your portfolio.
That's why, for the past five years, the team at MoneyWeek has been helping investors make money from leading oil shares. In August 2002, when many analysts were predicting oil prices to fall, in response to a "quick" victory in Iraq, we told our readers to BUY 4 oil companies poised to benefit from Asian growth and Venezuelan instability. By the end of 2005, oil prices had soared 115%. Those who heeded our advice made...
100% from Sibneft236% from Surgutneftgas275% from Lukoil300% from Premier Oil
One of our more recent picks, Heritage Oil is up 758% since we tipped it!
And as the oil squeeze continues, we'll help you find equally promising opportunities in the energy industry.
Opportunities such as 2 undervalued oil majors you can buy now for cheap, and watch skyrocket as the oil squeeze tightens.
Which downtrodden, overlooked industry could become the next big source of gains as oil prices rise.
The world's leading supplier of oil exploration equipment and services - whose fees (and revenues) are set to rise 75% this year.
Cutting edge developers of alternative energy, whose technology will become increasingly in demand as oil prices soar.
11 ways to cash in on the global rush to build nuclear reactors.
"Money Week encouraged me to go 100% oil, and I have gone £38K to £62K in a year." Garry Morrow, N Ireland
But while the oil squeeze may be the first of the Financial Landmines to hit the markets, it's by no means the scariest. You also need to be prepared for...
Landmine #2: The return of 1970s-style inflation will erode "safe" income streams, while making life more expensive
As oil prices rise, they add to the cost of everything - from getting to work each day, to transporting food to your table, to manufacturing virtually every product you buy. Another word for rising prices is, of course, inflation. And soaring inflation is the second landmine that will attack your savings over the next few years.
If you're old enough to remember the 1970s, then you know skyrocketing oil prices can drive inflation into double figures. During the 1970s, as OPEC embargoes forced oil prices from $5 to $40 a barrel, inflation in the U.K. averaged 13% a year - reaching a high of 27% in 1975. This time however, oil supplies are not tightening for political but for geological reasons - which means a solution will be much more difficult to find.
Every investor needs to pay attention to inflation, because rising inflation can cripple returns from nearly all investments, even those traditionally considered "safe." It increases expenses, reducing corporate profitability and share price gains. And it eats away at the returns from bonds and cash. For instance, if you keep your savings in bonds that pay annual interest of 6%, but the inflation rate climbs to 13%, then you will lose 7% of the purchasing power of your savings each year. That's what happened in the 1970s, and is likely to happen again.
Earlier this year the Consumer Price Index breached the Bank of England’s inflation target for the first time since it was introduced. It has since eased back a little, but don’t be fooled. Food prices are soaring, oil prices are higher than most experts believed possible this time last year, and crucially, the supply of cheap goods from China – which has helped keep official inflation down in the West – may be drying up, as manufacturing costs and soaring wages push up prices in the East. As energy and commodity prices continue to rise over the next decade, we expect to see inflation return to double figures once more. And when it does, the last place you want your money is in so-called "safe" investments, such as bonds. They won't be safe any more.
Of course, while rising inflation dampens the returns from most investments, it creates new opportunities in areas most investors will miss. Let me give you an example...
Be amongst the first to profit from the push for alternative fuels
Inflation is already becoming a problem in the food industry. Food prices are now increasing at a rate of 6% annually - the highest rate in a decade. Fish prices rose 12.6% in the past year. Vegetables are up 10.2%.
Several factors are causing food prices to climb - including rising wealth in Asia and climate change. But what may surprise you is that the oil squeeze is also a major factor. You see, as developed nations become more concerned about future oil supplies, they are promoting the use of new fuels made from agricultural products. Europe wants biofuels to meet 10% of energy demand by 2020. By 2012, half the cars made in the U.S. will be designed to run on 85% ethanol, a biofuel made from corn.
One consequence of producing more biofuel is that food becomes more expensive. For instance, the U.S. ethanol policy has already caused corn prices to hit a ten-year high in the spring of 2007. That's in spite of the fact that 2006 saw the third-largest crop on record. Protests took place in Mexico because the price of tortillas rose by 60% to 70%.
As the U.S. increases its ethanol production, corn prices will continue rising. And as they do, so will demand (and prices) for other grains, as people substitute wheat or rice for corn. Meat prices also climb, since most corn has traditionally been used to feed livestock. Higher meat prices will in turn raise demand for fish. And as more land becomes devoted to growing corn and other biofuel crops (such as rapeseed and tropical oils), less will be available for food production, adding to the supply/demand pressure, food prices, and inflation.
But while rising food prices are making life more expensive for everyone, they are also creating new opportunities for smart investors to profit. Taking advantage of these opportunities is an excellent way to preserve and grow your wealth as inflation rises. For example, we expect investors in food commodities and agriculture will make excellent returns as the push towards biofuels continues. That's why we'll keep you informed about such opportunities as...
How to use exchange-traded commodities (ETCs) to profit directly from rising food prices - and the 2 best diversified plays.
The 3 food giants best positioned to pass on higher food costs to consumers, and grow their earnings (thanks to their dominant market positions).
5 agricultural businesses whose shares will soar as nations struggle to increase crop yields to meet rising food demand.
4 companies that will profit from America's ethanol rush.
How to make substantial profits from the weather-driven ups and downs of 7 key soft commodities.
Of course, you may be asking, "Couldn't the Bank of England halt the rise of inflation by raising interest rates?" In theory, yes. The problem is that raising interest rates high enough to curb inflation runs the risk of detonating a third financial landmine...
Landmine #3: The collapse of the property bubble will devastate householders and turn "buy-to-let" into "buy-to-lose-money"
Since 1776, real estate prices and the economy have followed an 18-year cycle. The general pattern is 14 years of stable or rising prices, followed by four years of recession. In the light of this pattern, MoneyWeek advised readers in 2005 that the property market would experience two final years of rising prices, driven by reckless lending, before the next downturn began.
Now it's two years later, and the property boom is reaching its peak. Worldwide real estate markets have become dangerously overblown. In the U.K., property prices have risen 156% since 1996. In the U.S., they've doubled. And record high prices are occurring throughout Latin America, Africa, and Asia. Even concrete dwellings in Afghanistan, without running water, now sell for $300,000 - six times their cost two years ago.
The risk, as with all housing booms, is that property eventually becomes unaffordable for the average buyer, leading to a collapse in demand. According to the Land Registry Office, the average house in the UK now costs £211,000. If someone were to buy such a house with a typical 6%, 25-year, variable rate mortgage, he or she would pay roughly £1,264 a month. Unfortunately, the average worker only earns £1,550 a month - which means their housing costs would eat up 90% of their earnings! Not many households can manage such payments.
Nor are the deals any more appealing in the buy-to-let market. Last year, 58% of all mortgages sold were to speculative buyers, including buy-to-let. Yet, rental property yields owners just 3% income on average. That's less than what you can make in gilts. If you have to pay 6% mortgage interest on your rental property, you are probably losing money.
In fact, the only motivation for investing in buy-to-let right now is the hope that property prices will continue climbing - so that you can make a profit when you sell. And the only thing that's kept property prices rising is today's extraordinarily low interest rates.
Alert! History tells us that interest ratescould now practically double
This leads us back to the problem of inflation. You see, the Bank of England has kept interest rates low in recent years because it has been trying to stimulate the economy and ward off recession. (The housing boom was a side effect.) For comparison, in 1991, the last time inflation was as high as it is now, interest rates were close to 10%. Yet today they are a mere 5.75%.
The problem with low interest rates is that they allow inflation to keep rising. This puts the Bank between a rock and a hard place. If it raises rates to curb inflation, it risks recession. And if it lowers rates to stimulate growth, inflation rises.
So far, the Bank has tried to maintain a balancing act, raising rates as cautiously as possible - a mere 1% since last summer. But even slightly higher rates makes keeping up the mortgage payments on the family home much more difficult. Home repossessions are already at their highest rate in five years. According to Dr. Neil Blake of Business Strategies, if interest rates rise by just 0.75%, we could see 55,000 repossessions. That would certainly put a cap on housing prices.
As property prices stop rising, owners of rental property and other speculators will see their potential profits disappear. They will cease buying, and instead try to cut their losses by selling properties as quickly as they can, forcing prices down even faster. The result would be the end of the property bubble, and a decline in property values.
Ultimately, we believe the Bank of England will fail in its balancing act. It will neither increase rates fast enough to contain inflation, nor keep them low enough to prevent recession. According to the 18-year cycle, 2007 will be the last year when economic growth will occur. After that, a new recession will begin. But this time it will happen alongside rising inflation.
The result will be stagflation, that nightmare of the 1970s that gives investors the worst of both worlds. It will be a time when both unemployment and the cost of living rise at the same time. What's more, we believe this period of stagflation will be accompanied by a 20% to 30% decline in property values. If you own rental property, you may have only a few months to get out while prices are still rising.
Again, however, there are steps you can take today to avoid being hurt by this third landmine. In fact, there are ways you can make a considerable amount of money as the property bubble bursts. My team can show you...
2 stocks to sell short when property prices plunge - turning other people's loss into your windfall.
The newest buy-to-let scheme which you must avoid, because it will cost average investors big time.
The one country where real estate prices will continue to soar over the next few years - and your 5 best opportunities to profit from this trend.
One type of property you absolutely must avoid during the coming downturn.
... and many other ways to protect and grow your assets as the economy moves into stagflation.
However, there is still one more landmine I need to warn you about...
Landmine #4: The impending US dollar crash & the end of paper wealth
Over the past five years, the American dollar has fallen some 20% against other major currencies. This is an important trend to watch because many of the biggest companies in the FTSE 100 earn a sizeable percentage of their revenues in dollars. A falling dollar could eventually drag down share prices.
More importantly, the U.S. dollar has been the world's reserve currency for many years. A collapse, or even a serious run on the dollar would threaten the stability of the world's financial system.
Unfortunately, the fundamentals for the dollar are uniformly bad. In the first place, economic growth in the U.S. appears to be slowing. This year, the IMF expects the U.S. to underperform Europe. The Federal Reserve will therefore be under pressure not to raise interest rates (or even lower them) at the same time that rates are rising in Europe and Asia-Pacific. This makes the dollar less attractive to investors seeking income.
At the same time, inflation is rising in the U.S. at the highest rate in 10 years, just as it is here. Rising inflation is simply another way of saying dollars are becoming worth less - another reason not to own them.
Investors must also be concerned with the high level of government debt in the U.S., which currently exceeds $8.6 trillion - the largest debt anyone, anywhere, at any time in history has ever amassed. Would you want to lend money to such a spendthrift? Most likely holders of U.S. bonds will be trading them in over the next few years in exchange for something more secure. And this will put further downward pressure on the dollar.
And then there's the problem of the U.S. current account, which shows the balance of goods, services, and money flowing into or out of the country. Since 1990, the U.S. has been incurring ever higher deficits in its current account. Right now, the deficit stands at 6% of GDP. This is the level at which any smaller nation would experience a run on its currency. It's clearly unsustainable.
The rule of thumb among economists is that it takes a 10% drop in a currency to cause a 1% drop in the current account/GDP ratio. According to the Economic Policy Institute, this implies the dollar needs to fall at least 30% to 40% to reach a sustainable level.
Of course, when the dollar falls, other currencies go up. So you can protect yourself somewhat by investing in securities not denominated in U.S. dollars. Don't buy U.S. bonds. And don't buy shares in companies whose earnings are in dollars.
The real danger: a meltdown of the global financial system
The real danger, however, is that a collapse in the dollar would cause investors around the world to lose faith in the financial system, and in all forms of paper (or electronic) wealth. There are in fact no other currencies ready to take the dollar's place as the world's reserve currency. The Euro is the most likely candidate, but Europe has its own problems, including a declining population, social unrest due to immigration, and an out-of-control welfare state. The Bank of Japan is viewed as incompetent. China is hardly ready to step into the role of the world's financial bulwark. And the pound is laboured with similar problems to the dollar, including rising government debt and a record high current account deficit.
In a serious dollar collapse, most likely all currencies would lose value. The result would be skyrocketing worldwide prices for tangible assets. In other words, inflation.
If that occurs, the only people to preserve wealth (and make money) will be those who own commodities of all kinds, including metals, food, and fossil fuels such as oil.
And so we have come full circle.
Well, almost.
You see, there is one currency that would survive when all others are failing. It's the oldest currency in the world, and the only one whose value does not depend on any nation's financial management skills. That currency is... gold.
The one asset you can profit from in any financial storm
Gold traditionally gains value during periods of high inflation and declining currency values. During the inflationary 1970s, gold was one of the best investments. In the 1990s, when inflation was low, demand for gold waned and gold companies cut back on exploration. But since prices bottomed in 1999, gold has more than doubled in value. As a traditional store of wealth in most of Asia, gold is enjoying rising demand as that part of the world develops. Whilst in the West, increasing interest in "safe haven" investing is drawing more investors to the precious metal.
One reason we like gold is because gold can gain value in both inflationary and recessionary times. If central banks allow inflation to rise (by keeping interest rates low), currencies will lose value relative to gold. But if the banks raise interest rates too high (triggering a recession), gold will retain value better than paper assets, so its price will still rise. In other words, gold provides insurance against all types of economic woes.
Don't get me wrong. I'm not saying you should trade in all your investments for gold coins and bury them in the cellar. But keeping just 10% of your investments in gold or gold-backed securities can insure your savings against any weakness in the financial system. If the next few years turn out half as grim as I expect, you will be very glad to have some gold.
That's why MoneyWeek gives you the information you need regarding the best opportunities in gold, precious metals, and other commodities that can weather the coming financial storm.
For example, back in 2001, we recommended Merril Lynch's Gold & General Fund as an easy way for investors to get exposure to gold. Since then, this unit trust has produced a 165% gain. And our three top gold stocks are showing gains of 94%, 44%, and 174% respectively.
6 ways to profit from gold and precious metals
And in coming weeks, you can look forward to getting more great tips on gold and precious metals, such as...
Which gold mining stocks are currently underpriced.
How to profit from mergers & acquisitions in the gold industry.
Why some gold stocks have produced enormous gains in the last two years - and where to find similar opportunities right now.
The 10 mystery metals set to deliver major profits - and the shares that will benefit.
Why this precious metal (which is NOT gold) could be the single best investment you can own today.
Which precious metal ETF looks set to lag its fellows - and the one that's most likely to lead.