Weekly Commentary
In a warning which has relevancy for and could have been directed at householders in most of the western world the Irish Central Bank released it's quarterly bulletin warning of a "heightened vulnerability" of Irish households to higher interest rates or changes to their job status.

The Central Bank's head of economic research, Tom O'Connell, says householders need to factor in up to a 3% increase in interest rates, when assessing their ability to repay their debts. Over the past 10 years the level of debt has increased by 600%, largely as a result of speculation in the property market due to record low interest rates and banks making credit easier to access. Last year, John Hurley, governor of the Central Bank, warned that Ireland would become the most indebted country in the eurozone within a few years if private sector credit growth continued at the record pace which it clearly has.

The Irish Central Banks concerns were echoed by the President of the ECB, Jean-Claude Trichet who warned that the large increase in house prices was not welcome, not sustainable and created risks which we should be vigilant of. It is believed that he was referring to house prices in Ireland, the UK and Spain all of which have experienced exponential increases in recent years.

The Irish Central Bank and the President of the ECB's warnings were reinforced by a survey conducted by Standard Life which showed that consumers are borrowing too much and that mortgage holders have not considered or made provision for the likelihood of rising interest rises. It found that householders have been lulled into a false sense of security as they believe that the advent of the euro meant continuously low interest rates. It also found that householders are not taking a long-term view and that 71% of mortgage holders have no plans to accommodate increases in monthly repayments and thus may not be able to when interest rates begin to go up.

Thus, the Irish Central Bank, the President of the ECB and Standard Life join an illustrious list of other astute and highly respected economic institutions, publications and economists who have all warned about overvalued property markets being vulnerable to rising interest rates. The ECB, the IMF, The Economist magazine and respected economic commentators such as Garret Fitzgerald in the Irish Times, Damien Kiberd in the Sunday Times and David McWilliams in the Sunday Business Post (articles linked) have all recently voiced concerns about the Irish property market. However, their warnings have been dismissed by economists such as Austin Hughes of IIB Bank and Dan McLaughlin of Bank of Ireland. Dan McLaughlin has recently heralded the return of 'the Celtic Tiger' and said there was no need for concern because the current debt situation "was not unique to Ireland."

Only time will tell who will be proved right. So far the optimists have the upper hand in the debate but over the long term those advocating caution may be proved right. One way or another it is better to be safe than sorry and thus householders would be advised to be a little more prudent and prepare for a rising interest cycle by paying down debt and beginning to save again.

The Week in Quotes

"Everyone knows that payback time will come, but we are all hoping that miraculous intervention will bail us out. We want to warn ourselves and our neighbours, but feel that the act of warning itself may awaken the sleeping dogs. So we remain silent, stunned in the face of a rising debt monster."
David McWilliams, Sunday Business Post

"As regards households, with total debt, mortgage and non-mortgage, last year exceeded disposable income for the first time by an estimated 20%. There is a heightened vulnerability to adverse developments in income or interest rates, should circumstances change. Consumers could face serious financial risk if interest rates rise sharply or if they lose their jobs, such is the high level of personal debt in the economy."
John Kelly, Quarterly Bulletin, Central Bank of Ireland

"If it's not bad enough that other Central Banks are selling the dollar, the news that Bill Gates has shorted the currency should send a shiver down the collective spines of Federal Reserve governors. . . . . Rather worryingly, there have been some comments to the effect that it isn't in anyone's interest to provoke a dollar crisis. The implication of that is that the world can allow the US to behave like a kid in a candy store and that someone else will always pick up the tab. That is truly unsustainable."
Sheila O'Flanagan, Irish Times

"It is a bit scary. We're in uncharted territory when the world's reserve currency has so much outstanding debt. The old dollar, it's gonna go down ...I'm short the dollar."
Bill Gates, World's Richest Man

"Gold is an undervalued asset held by the I.M.F., and provides a fundamental strength to its balance sheet. Gold holdings provide the I.M.F. with operational manoeuvrability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the I.M.F.'s gold holdings are passed on to the membership at large, to both creditors and debtors. The I.M.F. should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies." "In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement: 1. Gold will remain an important element of global monetary reserves. . . ."
IMF, March '04

"In some parts of the euro area we see (house price) phenomenona that are not, in our view, sustainable and certainly are not necessarily welcome. The combination of ample liquidity and strong credit growth could, in some parts of the euro area, become a source of unsustainable price increases in property markets. Central banks have to react to asset price bubbles before they burst, not afterwards. There are risks there which could materialise and we have to be vigilant. I will not be alarming but I must observe that we have perhaps an appreciation of risks which is quite low...at the European and global level."

"Clearly what we have ... is that there is a level of lack of savings which has to be corrected, certainly in the United States and we all agree on that. The industrialized world as a whole is in deficit, that is the current account deficit, and there is no offsetting of the US current account deficit by the other industrialized countries and that of course means that we are asking the rest of the world to finance us. Sharp moves in the dollar-euro exchange rate are unwelcome and are not contributing to economic growth. It doesn't seem to be that it's acceptable as a sustainable, long-term feature of the present functioning of the global economy."
Jean-Claude Trichet, President of the ECB

"Our study suggests that Irish mortgage holders may indeed have been lulled into a false sense of security by the current low interest rate environment. Most mortgage lenders have allowed for increases in interest rates in their assessment of borrowers' ability to repay their loan, but our survey finds that the majority of home owners have not factored in the possibility of an interest rate increase. If this happens they will have to make sacrifices and cut back on discretionary spending."
Michael Leahy, Chief Executive, Standard Life

"As a country we have become complacent about the sustainability of the current economic boom, casual even. So many businesses appear to have grown used to the period of easy money that few real questions are being asked about future realities."

"All major sectors of the real economy are operating at a frenetic pace fuelled by what seems like a boundless supply of very cheap credit. But even the continued availability of such credit does not mean that people want to go on piling up personal debt in a country that has endured a prolonged asset price bubble and which has become a hugely expensive place to live."

"Less predictable issues . . . . include the collective decision of citizens to "stop borrowing incremental amounts" because debt servicing is pre-empting enough spending power. Or the possibility of externally generated shocks to the Irish labour market which could leave a proportion of highly leveraged people high and dry, prompt distress selling of assets and generally sap confidence."
Damien Kiberd, Sunday Times

"But borrowing when rates are low is fool's gold. The worst time to borrow is when interest rates are at historical lows, because they will only rise over the course of the loan, so you are in for negative surprises. The best time to borrow is when rates are at historic highs - as they were in the early 1990s - because as the rates fall, the value of all other assets will rise."

"Any fall in prices would lead to bad debts, profit warnings, share price collapses, and bank takeovers. No chief executive of an Irish bank would survive such a scenario, so there are good careerist and personal, as well as corporate, reasons for double-digit lending to a workforce whose personal income is only rising by 2 or 3 per cent. Sometimes, we fail to see that banks are simply selling money. Therefore, instead of being the guardians of prudence, the banks can become the agents of profligacy."
David McWilliams, Sunday Business Post

Market Analysis

Precious Metals
Gold futures closed at their lowest level in four months Friday to mark a one-week loss of some 2.4% percent with traders assessing the weaker-than-expected January employment report and the possibility of short or medium term strength in the dollar. The price decline was currency-based selling and the potential for gold sales or revaluation by the International Monetary Fund, analysts and traders said. April delivery gold at the New York Mercantile Exchange's COMEX division fell $2.60 to $415.90 an ounce, after dealing from $419.50 to $415.50, which was the contract's cheapest since Oct. 13. March silver fell 4.2 cents to close at $6.635 an ounce, trading between $6.71 and $6.605. Spot silver hit $6.61/64, off from $6.65/67 previously. Friday's fix was at $6.655. April platinum lost 80 cents to $866 an ounce. Spot platinum last changed hands at $862/866.The recent weakness in gold may result in gold testing support at the 200 day moving average at $413 if this is convincingly taken out to the down side look for gold to consolidate in the $400's before resuming it's long term uptrend.

Commodities
The Reuters/CRB index, a broad measure of commodity futures markets (basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs) closed down slightly yesterday at the 281 level for a drop of 1.1% for the week.

After trading between about $3,020 and $2,986, three months copper London Metal Exchange (LME) was trading at $2,973 a tonne, down $33 from Thursday's London kerb close. Aluminium was at $1,820 versus $1,830. Most other metals fell, with zinc losing $10 to $1,278 and lead down $10 at $917. Tin was untraded, but indicated at $7,820/30 versus $7,980. Nickel dropped $305 to $14,450. LME base metals crept lower Friday, due to technical selling and a firmer US dollar, which prompted light liquidation before the weekend, traders said. The metals complex was expected to remain quiet next week as major players in China, the major diver for the metals boom since last year, are on holiday to celebrate the Lunar New Year, the traders said.

Energy Prices
Oil prices steadied, ending a three-day losing streak as dealers weighed OPEC's threat to cut output against healthy supplies of crude and gasoline in the United States, the world's biggest consumer. U.S. crude oil futures gained 3 cents to $46.48 a barrel, halting a slide that had shaved $1.75 off the price since Monday. U.S. oil inventory data on Wednesday showed still robust crude oil supplies and higher gasoline stocks, easing concerns about meeting demand in the late spring when motor fuel consumption picks up.

In London, Brent crude also ended little changed, settling up 4 cents at $43.89, after trading $43.66 to $44.48. NYMEX March heating oil settled 0.23 cent higher at $1.2742 a gallon, after holding support at $1.27. Resistance was seen at $1.30, above the day's high of $1.2930. NYMEX March gasoline settled 0.79 cent lower at $1.2605 a gallon, with support holding at $1.25. It posted its session high at $1.28, with resistance charted at $1.30.

The US$ and Currency Markets
In currency markets, the euro briefly fell to its lowest level in almost three months below $1.2900 before settling at $1.2975 for a weekly gain of 0.5 percent. The deficit in the current account was a record $164.7 billion in the third quarter and this has made many including Bill Gates, Warren Buffet, George Soros and many foreign Central Banks voice their concerns about the long term health of the dollar. The gap means the U.S. must attract about $1.8 billion every day to compensate for the shortfall and maintain the dollar's value, according to Bloomberg calculations. The current account is a measure of trade, services, tourism and some investments. The White House predicts the budget shortfall will reach $427 billion this year. President George W. Bush pledges to halve the gap by 2009. Despite the long term trend for the dollar likely being down it may be that the dollar is experiencing a short or medium term correction or rally.

Stock Markets
For the week, the Dow rose 2.77 percent or a healthy 289 points, the S&P 500 rose 2.7 percent and the Nasdaq rose 2.5 percent. The Dow and the S&P 500 last week gained back almost all of their losses in January, although the Nasdaq is still down 4 percent since Jan. 1. Friday was the strongest day of the week for stocks despite the release of the January employment numbers which were weaker than expected, although the economy only added 146,000 jobs - many fewer than the 200,000 analysts expected - experts say the news could mean that the Federal Reserve might temper its eagerness to raise rates and this will ease fears of the impact of rising interest rates on the debt laden US consumer.

Bond Markets
Similiarly, U.S. Treasury prices jumped as another month of mediocre job creation eased fears the Fed might pick up the pace of interest rate increases. January payrolls showed the net creation of 146,000 jobs, well short of forecasts of 190,000 and market chatter of an even higher reading. Longer-term debt led the way as the lacklustre job gains and softness in average earnings suggested the labour market will not be a cause of inflation anytime soon. Thirty-year bonds powered 1-21/32 higher to 113-19/32 for a yield of 4.49 percent, down from 4.58 percent late on Thursday and the lowest since mid-2003. The benchmark 10-year Treasury note spiked up 23/32 to 101-11/32, taking yields to 4.08 percent from 4.15 percent on Thursday. Shorter-dated debt also climbed but more modestly. Two-year notes rose 3/32 to yield 3.29 percent from 3.32 percent.