Investments: Buy Energy Sell real estate

Winds of change are constantly blowing on our economy into different directions. What direction the economy ends up taking is difficult to see day to day. But slowly the trend becomes visible akin the pattern of the sands on the beach.

Some indisputable truths are visible: Energy prices are increasing, interest rates are increasing, inflation is increasing, real estate has been on a tear upwards for the last 3 years.

Before I continue further, let me remind you that all markets go in cycles. Nothing goes up forever and nothing goes down forever. Bubbles form when crowds become irrational and chase for profits. Bust cycles follow with people who chased the tail end getting burned the most.

Energy prices are going to go up for the long term. Oil in the $20-30 dollar range will never be seen again in our lifetimes because exploration costs and refining costs alone are above $25 a barrel. Add the increasing global demand from emerging markets (China, India etc) and you can see why both supply (decreasing) and demand (increasing) is going to push prices to knew highs.

In the short-term, oil may retreat. That I anticipate. Oil related stocks and investments have gone up quickly recently and a correction should be around the corner. Nothing ever goes straight up. But in the long term, buy energy.

Interest rates are increasing and it has to stomp inflation. There has been a lot of speculation on housing with people flipping condos and houses like stocks. This has largely been fueled by the low interest rates. But as the rates increase, demand will slow. The overblown bubble will burst. People stretched on their mortgages with a tiny down payment and floating rates will get hurt the most. Its unfortunate that such events happen but history shows it always happen when people flock to a place where there seems to be endless flows of easy money. If you own several homes hoping to flip them, I advise you sell them while the market is still good because by the time the masses see the bubble bursting, they will be flooding to the emergency exits and those slow to move will get tramped on amidst the frenzy.

Recession?

Yes, the horrible R word. I don't know for sure if we will be entering a period of recession in the near future but there is a possibility. Higher oil prices affect everything that we do beyond just at the gas pump. Food gets more expensive to produce, transportation of goods get more expensive, utility bills increase, holidays get more expensive - EVERYTHING becomes more expensive. What's the immediate result? People spend less. The economy slows.

Spending slows, people hold back in buying that new condo, they go to the mall less and they go to restaurants less. The weekly high prices they pay at the pump decreases their appetite to spend.

The cost of businesses due to higher energy prices also increases. Combined with slowing spending, companies may close shop or would need to cut cost and unfortunately workers lose their jobs. This viscous cycle continues.

Could all this trigger a global recession? Possible. Slowing spending in the west would hurt many economies around the world including China and India whom sells most of their goods here. The world's economies are intricately bonded to each other.

The end result is be very careful and diligent with your investments. We are entering a difficult period.