The Royal Bank of Scotland (RBS) has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us — be prepared,” said Bob Janjuah, the bank’s credit strategist. The same person that warned of the credit crunch.

A report by Morgan Stanley’s European experts stated “We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe.”

The European Central Bank and the US Federal Reserve are going in different directions over monetary strategy. This is overtaxing the global financial system and could cause a rate crisis.

Could the RBS be right? NetGain believes we have gone from a serious recession being impossible to it being possible. This change has been caused by the higher cost of energy coming on top of the credit crunch. If a serious recession is possible, when would it happen?

The effects of higher crude oil prices and subsequent gasoline costs are happening in two waves. The first wave hit the business community and is having a serious impact on the earnings of any business that uses transportation and energy, which is just about every business. Unemployment is a lagging indicator and increased unemployment is in the beginning stage. The second wave has just hit the consumer, who is in the confounded stage. They can’t believe this is happening.

Within the next six months, two changes could take place to provide the perfect storm for a serious recession: A sharp increase in unemployment and a major decline in consumer spending and travel.

Could a serious recession be avoided? Not when we get responses from our leaders like the following: 45 nuclear power plants by 2030, a windfall profits tax on oil companies, remove the speculators from the futures markets, etc. Those are feel-good political solutions whose results will be somewhere between neutral and harmful. Until there is a comprehensive bi-partisan energy plan, the income property investor needs three essential items when buying property.

1) A comprehensive due diligence analysis. That would include the seven critical areas identified in NetGain’s Economic Valuation System (EVS): Area, Location, Structural Integrity, Amenity/ Functionality, Capitalization Rate, Mortgage, and Leverage.

2) A real capitalization rate of at least 7%. Real means numbers that are supported by an operating history and rents that are comparable to the verified rental market.

3) Cash flow that is not subsidized and starts at the close of escrow.

NetGain adheres to strategies that maximize ROI while minimizing risk. Consistent with that approach, if the property doesn’t meet the three criteria listed above, don’t buy the property.

What if there is no recession? Then you bought a property after performing a comprehensive due diligence at a 7% capitalization rate with a real cash flow. The result is, while minimizing your risk, you have positioned yourself for an attractive ROI.