I too believe in a return to fundamentals, a return to an average price to earnings ratio of 3-4.

How will this be achieved? Through stagflation and falling property values. UK property will be 30%-40% down in real terms on 2007 prices within three years. Talk of a 25% rise is utter tosh.

The bubble has well and truely burst. 2007 was the year of 125% mortgages, 8 times price to earnings mortgages, shared ownership schemes, websites that will find you a stranger first time buyer to go halves with and HSBC's buy with up to 4 friends mortgage. Classic top of the bubble developments.

The fundamentals for commodities are a totally different story. A short term correction is underway but what will follow is a huge upward trend over the next 10 years. The next decade will be defined by commodity price increases. Why-

1) Commodities in 2001-2004 were at their lowest inflation adjusted price since the great depression of the 1930's.

2) Commodity bull market last at least 15 years. Sometimes up to 25 years in length. For commodities to be over now would represent the shortest bull market in history. Not likely considering the low they came from!

3) Demand is increasing globally but far more importantly supply is falling long term. The world simply cannot build enough new oil rigs in time (average 10 years to get to production) or grow enough crops to feed the increasingly westernised diets of Asia.

4) The global trend for higher interest rates and inflation results in falling property prices worldwide but is great news for commodities which rise in line with both interest rates and inflation.

No investor can ignore the commodities cycle we are in. At least 20% of ones wealth should be in them if only to cover the losses from property.

Jim Rogers and Mark Shipman books are must reads for anyone who want to increase their wealth over the next decade.

I am afraid property is the last place to do this.

I finish on an extract from The next big investment boom (Mark Shipman) that says it all -

'The business and finance section of my local bookstore contained some 400 plus titles including How to be a Property Millionaire, Retire Rich with Property, The Buy-to-Let Bible, Buying to Rent: The key to your financial freedom, Property Ladder: How to make pounds from property, Profit from Property, plus many more dealing with the subject of investing in property, yet there wasn't a single book on commodities.

The apathy towards the commodities story is a massive stage one signal.'

The story for the next ten years is of a pricked global property market unravelling contrasted with the greatest bull run in commodity prices we will ever see. I know where I am positioning myself financially.

Thanks Tom - given your perfectly rational view - why do you only have 20% in commoditites? Surely 100% would be the right level?

Cheers
Neil

Hi Neil,

Because at my age (29) I believe in building up a diversified set of assets first.

I don't want to be overexposed to any particular asset and certainly not property which will be severly hit by global inflation and the requirement to raise interest rates. Once diversified then one can specialise in a certain area.

Also commodities are highly volatile and as they say the market can remain irrational for longer than you can stay solvent! Hence 100% in commodities or stocks is unwise.

This does not detract from the fact that commodites are the best long term asset class at present and will remain so for at least 10years.

The 20% is also a decent % hedge for any property or stock investor.

As for holding UK property, I agree with yourself and don't plan to sell but certainly don't plan to buy anything new or upgrade my main residence not until the bottom is reached which is a good 3 years away. What is stopping UK property going the same way as Germany over the last 10 years and halve in real terms over the next decade??? The supply and demand situation? I'm not so sure.

There are very few decent places to invest in property at the moment globally. 1/2 of these are outside of the EU and hold too much risk. CEE has a few decent spots but aren't they already overvalued???? Are we saying that the price to earnings ratio's no longer apply here? Is property now in a new era where these FUNDAMENTALS no longer apply? I don't think so.

Just my thoughts.

Hi Tom - I agree with most of this.

In my experience many clever economist have come-a-cropper by focusing on price to earnings.

Instead, it is the loan affordability vs disposable income.

In countries with low marginal upper tax rates (ie flat tax countries - that appear across the central EE region) disposable income can grow very fast.

So can credit availability - which until recently was non-exisitant.

So, I agree with the loan affordability vs disposable income - but not price vs earnings.

Cheers
Neil

ps. This also explains why UK is going nowhere exciting - and why these fundamentals still apply to CEE - although I do accept that a large number of locations are fully priced up - and you have to look for the right deal.

Neil,

I would be more inclined to invest further with PS in CEE if I could see some figures for affordability and disposable income to justify that units are affordable to the local population.

i.e. what does a typical person buying a 1 bed earn and what percentage of their salary is going on it?

The affordability issue is one area not really covered in the prospectus, which are excellent otherwise.

Thanks.