Weekly Markets

It was another volatile week in the markets. Stock markets were up marginally after big swings. Bonds sold off with a corresponding increase in rates and commodities and precious metals were up with oil surging more than 6%.

Precious metals were up for the week due to increasing fears of both inflation and or stagflation. These concerns were voiced by Alan Greenspan and written about by the editor of the Financial Times, in Time Magazine, CNN Money, MSN Money and host of other international financial media outlets. Greenspan said that there did not 'seem' to be a risk of a return to a 1970's style stagflation with soaring energy and inflation and low growth. He warned that:

"A persistent budget deficit could lead to a higher equilibrium for interest rates and that the wide U.S. current account deficit was unsustainable.... A positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget. Without spending constraints, deficits could continue to rise as a percentage of total national output and "unless that trend is reversed at some point, these deficits would cause the economy to stagnate or worse."

Stagflation scare troubles markets - Editorial, Financial Times
It's Worse Than You Think - TIME Magazine, 25-04-05
Murmurs of stagflation hint at challenge for Fed: Echo of 1970's - Wolk, MSNBC, 25-04-05
'Stagflation' lite? - CNN/Money, 25-04-05

Precious Metals

Gold was up 2.22% for the week. It was up $9.40 from $424.30 to $433.70.

Silver was up 3.71% for the week; from $7.00 per ounce to $7.26.

Platinum (July) was up 0.8% for the week: from $866.0 per ounce to $873.

Palladium (June) was up 0.7%: from $199.55 per ounce to $201.

Platinum and palladium prices reached the highest levels for a month, spurred on by buying from speculative funds amid expectations of strong Chinese demand. Platinum reached $873 per ounce, the highest peak since March 21, and palladium advanced as high as $203 for the first time since March 16. Platinum jumped "after strong buying... in response to the Chinese growth data", said James Moore, an analyst at the specialist website www.TheBullionDesk.com.

China's runaway economy showed no signs of slowing in the first quarter despite the government's best efforts.

Asia's second-largest economy grew 9.5% in the first three months.

(More on the bullish fundamentals and technicals for gold in Our Commentary section below.)

Oil

Oil was up 6.4%, surging $3.33 for the week closing at $55.39. Concerns over gasoline inventories, production problems, China's continuing breakneck growth rates and instability in Russia, Venezuela and the Middle East were all blamed for the surge. Bloomberg reported how "China, the world's second-largest oil user, boosted crude-oil imports 23 percent in March, damping traders' expectations that a slowdown in the nation's demand would help lower global prices from records."

Reuters reported how expectations that oil may remain above $50 per barrel this year are increasing the perceived risks of "stagflation," a combination of high inflation and economic recession, some analysts say. Few forecast a return to the acute economic pain of the 1970s. But with crude oil prices still above $50, more analysts are seeing symptoms and warning that even a mild case of stagflation could be painful. For 2005, the average world oil price will be about $52.23 a barrel, IMF analysts forecast earlier this month. On Friday, crude oil was trading around $50.15 per barrel in New York, while U.S. stocks were around five-month lows.

Other Commodities

Reuters Commodities Research Bureau's Index rallied 2.8% to 306.53 from 299.45 last Friday.
The CRB's year to date gains are 8.2%. Since hitting a low of 182.83 in October 2001 it is up some 70%.

The Reuters CRB Index ( the 17 basic components include hard tangible assets such as Metals, Textiles and Fibers, Livestock and Products, Fats and Oils, Raw Industrials, Foodstuffs). One of the CRB index's greatest strengths is the fact that there is an equal weighting of all of its 17 components. This weighting assures that no price increase in any single commodity, like oil, can significantly skew the entire index. Significant moves in the CRB are only possible when the majority of its component commodities are moving in unison with a particular primary trend. Oil, silver and gold only account for 3/17th of the entire index.

The Goldman Sachs Commodities Index surged 5%. The GSCI is a world production-weighted commodity index which next year will be composed of 24 liquid exchange traded futures contracts. The GSCI includes energy, industrial metals, precious metals, agricultural and livestock products. It is up 22.1% year to date.

Base metals prices rallied, owing to a falling dollar and indications that Chinese demand would remain strong.

"The days when LME stocks were falling across the board seem to be behind us," said analysts at the specialist website BaseMetals.com. By Friday, three-month copper prices rose to $3,267 per tonne on the London Metal Exchange Friday from $3,156 a week earlier.

Three-month aluminium prices climbed to $1,868 per tonne on Friday from $1,861.50.

Three-month nickel prices gained to $15,875 per tonne on Friday from $15,600.

Three-month lead prices advanced to $944 per tonne Friday from $911.50.

Three-month zinc prices moved up to $1,303 per tonne Friday from $1,268.50.

Three-month tin prices stood at $8,150 per tonne Friday from $8,100.

Rubber prices remained pressured this week as rain fell in producer countries following the recent end to the low harvest season.

In Osaka, the RSS 3 June contract dropped to 141.90¢ on Friday, from 143.60¢ a week earlier.

Singapore's RSS 3 June contract stood at 129.75¢ on Friday, from 129¢.

Cocoa futures crumpled as steps aimed at achieving peace in leading producer Ivory Coast gathered pace.

"The success of the peace process and expectations of a better-than expected mid-crop are weighing on prices," Refco analyst Ann Prendergast said.

Rebel and government troops who faced each other across Ivory Coast's front lines for more than two years began Thursday pulling back their heavy guns under a revived disarmament deal.

On Liffe, London's futures exchange, the price of cocoa for July delivery dived to £815 per tonne on Friday from £840 a week earlier.

On the CSCE, the New York futures market, the July contract dropped to $1,496 per tonne on Friday, from $1,528.

Coffee prices rallied after fund selling had sent them plunging to the lowest level for two months the previous week.

"There is no immediate term shortage, despite reports of drought reducing the 2006/07 crop by as much as a third," Prendergast said.

On Liffe, Robusta quality for July delivery rebounded to $1,065 per tonne on Friday from $972 a week earlier.

On New York's CSCE market, Arabica for July delivery advanced to 122.20¢ per pound on Friday, from 114.10¢.

Sugar prices rebounded on rumours of renewed buying by Russia and large orders made by Indonesia.

"Indonesian officials authorised 227,000 tons of raw sugar and talk of Russian buying continued," Prendergast said.

By Friday on Liffe, the price of a tonne of white sugar for August delivery climbed to $244.80 on Friday from $238.50 a week earlier.

On the CSCE in New York, a pound of unrefined sugar for July delivery stood at 8.38¢ on Friday from 8.16¢.

Soya and grains prices gained from Chinese buying.

Meanwhile expectations of more humid weather in the US in the coming days gave support to wheat and maize prices, US Commodities analyst Don Roose said.

On Liffe, wheat for May delivery stood at £67.30 per tonne on Friday from £68 a week earlier.

In Chicago, the price of wheat for May delivery edged up to 310.25¢ per bushel Friday from 309¢.

Maize for May delivery climbed to 210.25¢ per bushel on Friday from 207.25¢.

Soyabeans for May delivery advanced to 637.50¢ per bushel on Friday from 619¢. May-dated soyabean meal - used in animal feed - rose to $197.30 per tonne on Friday from $188. Bloomberg's Koh Chin Ling reported how "China, the world's biggest grower and consumer of wheat, may miss its winter crop forecast for the grain to be gathered in May and June as drought spreads in the country's biggest wheat producing regions. Drought is spreading in Hebei, Shandong, Shanxi, Henan and Shaanxi, China National Grains and Oils Information Center said..."

Cotton prices progressed amid solid demand.

"Cotton futures remain supported by demand," Prendergast said.

New York's July contract increased to 54.40¢ per pound on Friday from 53.35 the previous week.

The Cotton Outlook Index of physical cotton stood at 56.55¢ on Thursday from 55.85¢ a week earlier.

Wool prices weakened due to a stronger Australian dollar and lower Chinese demand.

"The Australian Wool Market finished this week with prices 0.5% lower, on average," the Australian Wool Industries Secretariat said.

"Buyers remain positive about the market, with widespread competition from local and overseas top makers, although this week China was not as dominant as previous sales."

A weaker US dollar makes Australia's wool exports more expensive.

The Australian Eastern index slipped to A$7.26 per kilo on Thursday from A$7.30 the previous week. The British Wooltops index dipped to 391 pence Thursday from 392p a week earlier. - AFP

Currencies

The US dollar index was down some 1% from 84.45 to 83.50.

Most currencies were up on the dollar for the week.

The euro was up 1.41, from 129.12 to 130.53.

The Japanese yen and Korean won were both up some 1.4%. "Commodity" currencies like commodities themselves had a good week. Commodity currencies are the currencies of countries who are major exporters of materials and commodities. The South African rand was up 3.5%, the Brazilian real 2.7%, the New Zealand dollar 2%, and the Australian dollar 1.7%.

The total cost of the war in Iraq and subsequent occupation is soon to surpass the $300 billion mark. The US Senate moved toward approving a further $81 billion for wars in Iraq and Afghanistan on Thursday. President Bush fired his economic advisor Lawrence Lindsay because he had the honest audacity to say the war would cost $200 billion. It turns out Lindsay underestimated the costs by some 50% so far.

One billion is a lot of money. Let's put one billion dollars in perspective. It has nine digits in it and for purposes of illustration:
A billion seconds ago, it was 1959.
A billion minutes ago, Jesus was alive.
A billion hours ago, our ancestors were living in the Stone Age.
A billion dollars ago was only 8 hours and 20 minutes, at the rate Washington is spending today.

Real small government and real conservative Republicans are horrified by this fiscal irresponsibility and the damage it will do to the US economy in the long term. Much of the world's financial press have been slow to point out the glaringly obvious fiscal irresponsibility and it's implications preferring to focus on micro economic events and hope that broader economic challenges facing the global economy resolve themselves. 'Hope' is the operative word here.

This US administration would give drunken sailors a good name. At the 1984 Republican convention, Reagan said Congress was spending like a drunken sailor, then said, "at least the the drunken sailor is spending his own money."
All spending will have to be paid back and at higher interest rates to foreign US debt holders in Japan, China, UK, Korea, Taiwan, Hong Kong, OPEC, Switzerland and the mysterious huge buyers of recent times in the Caribbean.

Richard Duncan the author of the best selling 'Dollar Crisis' has pointed out that the Japanese government bailed out the US government by printing fiat Yen to the astonishing figure of some 1% of Global GDP. These yen were used to buy US Treasury or debt in order to engineer artificially low interest rates in the US so that the consumer and housing frenzy of recent years would continue. The Japanese government, like most governments, were short sighted and desperately wanted to keep their export dependent growth going so that they could get Japan out of it's 16 year recession. Thus short term economic gains were substituted for long term economic gains and unfortunately this will result in long term economic pain.

The US is now the largest debtor nation in the world. This profligacy will be paid back by the American people in the form of higher taxes and higher interest rates.

This does not bode well for the long term health of the US dollar as global reserve currency nor for the US economy.

Bonds

The treasury and bond markets sold off with a consequent rise in yields.

Two-year Treasury yields ended the week up 13 basis points to 3.63%. Five-year Treasury yields added 5 basis points, ending the week at 3.92%. Long-bond (30 year) yields rose 4 basis points to 4.76%.

The 10-Year Treasury note yield was up 1 basis point for the week to 4.25%.

Long-bond yields declined one basis point to 4.58%. The spread between 2 and 30-year government yields dropped to 95.

The interestingly named Hamish Risk reported for Bloomberg that "Trading in contracts that insure against companies defaulting on their debt surged to a record in the past week as investors sought protection from the biggest decline in corporate debt in more than two years. Deutsche Bank AG, JPMorgan Chase & Co. and Morgan Stanley, among the top five traders of credit-default swaps according to Fitch, said in the past two days they handled record volume of debt-insurance contracts... 'Volumes have been astronomical,' Lisa Watkinson, a member of Morgan Stanley's structured credit product management team. . . said... 'People who in the past haven't traded credit derivatives have become active.'"

Stocks

The Dow Jones Industrial Average was up 0.7% for the week to 10,157 after last week's 3.6% drop.
The S&P 500 Index, of more significance than the DOW, was also up 0.83%.
The Nasdaq Composite was up 1.26% for the week after last weeks 4.56% drop.

The Dow Industrials have now come back to 10,000, a level they first closed above on March 29, 1999. That's no net progress over 6 long years and is actually a loss when the all important inflation is factored in. 10,000 remains an important psychological support and any daily close below it should result in the DOW testing support at 9,700.

The Transports were up 2% after their loss of 6% last week. This was unusual considering the oil price surge.
The more defensive Utilities were up 2.6%.
The Morgan Stanley Consumer index was down about 1%.
The Morgan Stanley Cyclical index was up 2%.
The small cap Russell 2000 and S&P400 Mid-cap indices were up 1.5% and 1% respectively.
The NASDAQ100 was up 1% and the Morgan Stanley High Tech index was up 3%.
The Semiconductors were up 2% after last weeks 8% drop.
The Street.com Internet Index and NASDAQ Telecommunications indices were up 3% and 1% respectively.
Biotechs have been very volatile of late and were up very marginally
The Broker/Dealers were down 2% and the Banks were down 1%.
Financial stocks will struggle in an inflationary rising interest rate environment.

Even brokers are warning that there will be slim pickings this year. It may be prudent to reduce exposure to property and equities and increase exposure to more defensive conservative asset classes such as cash deposits and gold.

Commentary

Dennis Gartman, the respected investment analyst specialising in commodities, has again reaffirmed his bullishness on the price of gold in all currencies and especially the EUR. Sorry to keep mentioning Gartman, but his opinions carry a lot of weight on Wall Street and in the markets in general appearing as he does continuously on CNBC, Bloomberg and the financial press and with his larges institutional following and contacts.

Gartman had this to say in his daily financial letter: "We are losing confidence in all currencies generally, and find ourselves quietly accepting the position that the "gold bugs" have long accepted: that the currencies of the world are fiat... confidence in the EUR is anything other than strong... given... the abject silliness of EU rules and rule making, we find it quite nearly impossible to be bullish of the currency... Then too, the dollar has little technically and/or fundamentally to prove its merit... Perhaps we are best then wending our way toward gold as a currency."

The following chart from investment consultancy Zeal Intelligence illustrates the obvious bull market in gold which began in 2000. The bull market is easily seen in the rising white 50 and more importantly the rising black 200 day moving averages and by the pattern of continuously higher lows and continuously higher highs.

Rudimentary technical analysis involves establishing what the trend is and 'making the trend your friend'. As long as gold remains in it's trend channel between $375 and $455 the trend is clearly up.

Will this trend continue?

We along with many commodity and currency analysts believe so. However, the future is unknowable and the future price movement of all asset classes, including property, is unknowable. They may rise, stabilise or they may fall and past performance is no guarantee of future returns.

Gold and silver may go down in value. Although over the medium to long term we seriously doubt it. But one does not invest or save in precious metals solely to make a profit or return. Rather gold is the safe haven or financial insurance part of a properly diversified prudent investment portfolio. Gold is and always has been safety, security and protection and while it may well help grow one's wealth, this is not it's function.

Gold is vital in order to protect against deflation, inflation and stagflation and other forms of macroeconomic and geopolitical uncertainty. Gold protects and preserves wealth.

There is a misconception in Western societies that gold is the preserve of the super rich and should not be considered as an asset class by the man in the street. This is nonsense. The beauty of gold is that it is not elitist. Most people these days can afford to save a few bob and gradually buy a few gold coins whether they be old Gold Sovereigns or modern Gold Krugerrands.

This is one of the great advantages of investing in gold. One can buy in small increments and gradually amass a larger position thereby reducing risk. This is obviously not possible with property where one must buy the property in one fell swoop, often amassing a considerable amount of debt in the process, and if not careful one can buy at the top of the market.

Individuals who are unfamiliar with investing or saving in precious metals can 'dip their toe in the water', so to speak and get familiar with the process and the market. Once they have done this and if their gold bullion appreciates in value then they can proceed to gradually make further investments.

Gold's liquidity - the ease with which people can buy and sell it is one of it's great advantages. Property can sometimes be difficult to sell with properties sometimes remaining on the market for longer than expected and sometimes sales can actually fall through at the last minute. This is not the case with gold which can be sold quickly and easily.

We along with our colleagues throughout the world are market makers which means we will always 'make a market' in your bullion product - providing you have brought it from us or it is one of the many internationally known and recognised bullion coins and or bars.

Opinions of the Week

"A persistent budget deficit could lead to a higher equilibrium for interest rates and that the wide U.S. current account deficit was unsustainable... A positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget. Without spending constraints, deficits could continue to rise as a percentage of total national output and "unless that trend is reversed at some point, these deficits would cause the economy to stagnate or worse."
Alan Greenspan, Fedreal Reserve Governor, Testimony to Senate Budget Committee

"Are consumers already starting to adjust? Last week's soft official retail sales figures for March confirmed the change of mood among British shoppers. For the past two years, in fact, consumer spending has barely outstripped GDP. In the final three months of last year it was weaker.

Why is this? Higher interest rates have played a part, as has the squeeze on real incomes described here recently. But maybe, just maybe, people are starting to get wind of the need to save more. And perhaps, too, the penny is starting to drop that the next few years will not be nearly as good as the last."
David Smith,'Economic Outlook: The penny drops on savings' The Sunday Times

"Yet beneath this rosy gloss, there was a tone of edginess to the G7 conclusions, and a palpable sense of unease seemed to have infected the Washington gatherings. Despite their avowed confidence in the outlook, the G7 ministers called for "vigorous action" to tackle global imbalances. An outbreak of jitters is well justified, and the G7 delegates are not alone in their sudden apparent nervousness. It is shared by some of the more influential and authoritative observers of the world economy.

Paul Volcker, the former Chairman of the US Federal Reserve and one of the most respected figures among international policymakers, is among those who are deeply worried. In a recent analysis in the Washington Post, he wrote: "Circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot." The dangers highlighted by Mr Volcker were illustrated with crystal clarity in last week's World Economic Outlook assessment from the IMF. The core problem is the divergent performance of the world's big economies, with the present global expansion dependent on the continued robust growth of the US and China, while the eurozone struggles and Japan's latest revival threatens to stall.

This uneven pattern of growth has left world prospects dependent on a US expansion fuelled by America's extravagant consumers and fiscally lax Government. The world is reliant on an America that is living far beyond its means, with national spending exceeding income by more than a fifth over the past five years. The result has been that the US has now gone from being the world's biggest creditor to its biggest debtor in just two decades, with an annual current account deficit expected to reach 7 per cent of GDP by the end of this year, and annual government borrowing of more than $400 billion (£210 billion).

This American profligacy can be sustained only by the continued confidence of investors in the US economy, and their willingness to keep accumulating American IOUs."
Gary Duncan, Economic Agenda, 'Disaster looms, but no one seems to care' - The Times Business, 25-04-05

"A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch. And given the parlous state of the Japanese and European economies, it seems unlikely that they will be able to pick up the slackparticularly if many European countries are coping with the fallout from their own housing bubbles.

Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise."
Global Agenda, House Prices: Will the walls come falling down?, The Economist, 25-04-05

"Artificially low interest rates stimulate massive capital spending in China, which lowers China's unit labor costs far more than if interest rates were high. Declining unit labor costs then lead to a fall in Chinese export prices and worsen the competitive position of the U.S. even further."

But things not made in China have gone up, if not dramatically, at least theatrically. That is, they've been pushed upwards by Alan Greenspan's absurd performance - playing the role of someone who's protecting the dollar, while he actually shoves a knife it its back. The Economist describes the U.S. central bank as "the world's giant printing press."

"In no other two-year period since 1975 has liquidity increased by so much," says The Economist of the period 2003-2004, in which "global liquidity" - a measure of America's monetary base, including notes and coins, plus bank's reserves held at the Federal Reserve, plus foreign exchange reserves held by central banks around the world."
Bill Bonner, Small Stocks, Big Trouble', Daily Reckoning

"Stiglitz predicts dollar will cease to be world's reserve currency. In his keynote address to CSFB's Asian Investment Conference yesterday (March 15), Nobel Prize winning economist, Joseph Stiglitz predicted the demise of the US dollar as the world's reserve currency. The former World Bank Chief Economist told the audience: 'Reserve currencies must serve the role of being a good store of value. The dollar is no longer serving that function and there are alternatives.' Stiglitz said from the perspective of a European, if they had held dollar assets, they would have seen those assets decline in value by 40-50% in terms of their own currency, the euro. 'That's the same thing,' Stiglitz pointed out, 'as if they had seen their purchasing power eroded by 40-50% by inflation. This exchange rate instability is therefore as destructive to a currency's suitability to be a reserve currency as inflation is.' He pointed out that there are now alternative reserve currencies. 'There is obviously the euro, and in the future possibly even the Chinese yuan.' Stiglitz said the dollar's right to reserve currency status cannot be taken for granted, and its loss of this status is likely. 'We've seen it before with the gold standard and with sterling,' he added. His view on the dollar formed part of an overall pessimism he felt about the US economy. Listing figures for the trillions that would be required for Medicare, the privatization of social security, the war in Iraq and the cost of making Bush's tax cuts permanent, Stiglitz said: 'We are looking at a larger and larger fiscal deficit. The hope that it will be cut in half in the next five years is just not borne out by the details. It will be very difficult to make the magnitude of cuts necessary to make that happen.' Stiglitz added that policy decisions were also proving a longer term problem for the US economy."
Steven Irvine, Death of the Dollar: Stiglitz predicts dollar will cease to be world's reserve currency Finance Asia

"We are losing confidence in all currencies generally and find ourselves quietly accepting the position that the "gold bugs" have long accepted: that the currencies of the world are fiat.... Perhaps we are best than wending or way towards gold as a currency."
Dennis Gartman, Contributor to CNBC, Bloomberg and Financial Media, Gartman Newsletter

"The most straightforward interpretation, it seems to me, is that a crisis is imminent in which the viability of the financial markets is called into question -- one in which there is a flight to quality (such as government bonds) as well to hard assets (such as gold). This isn't as far-fetched as it may sound, scary as it otherwise is. It is a scenario to which Richard Russell, editor of the Dow Theory Letters, has been giving serious credence for a number of months. Needless to say, Russell is not part of the bearish consensus that currently prevails in either the gold or bond arenas.

As Russell sees it, the world financial system currently is so precarious that the monetary authorities must "inflate or die." And even if those authorities do inflate, as they show every sign of doing aggressively, Russell says it is not at all clear that they will succeed. The "die" option in the "inflate or die" trade-off, of course, is a deflationary collapse. Bonds would do well if that were to happen, needless to say. But it is not out of the question that gold would too, if in that collapse investors lose enough confidence in the monetary system.

Unfortunately for those of you who would rather not contemplate such a scenario, Russell can't be dismissed as a Chicken Little-like adviser perennially saying that the sky is falling. His stock market timing performance over the past 25 years is one of the best of any of the newsletters monitored by the Hulbert Financial Digest.

Furthermore, Russell's warnings were echoed recently by what would otherwise appear to be an unlikely source: Former Federal Reserve chairman Paul Volcker. In an op-ed piece for the April 8 edition of the Washington Post, Volcker wrote that "under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it."

So those who dismiss the contrarian interpretation of the gold and bond sentiment data may be doing so at their peril."
Mark Hulbert, 'Bottom for both Gold and Bonds?' CBS Marketwatch, 22-04-05

"I would like to address an issue that is receiving increasing attention lately: the U.S. current account deficit. Not since joining the Federal Reserve Board have I seen this topic show up in the financial press as frequently--and so often with such ominous overtones--as it does these days. Several reasons for this come to mind. Most obviously, at about 6 percent of gross domestic product, the current account deficit is now larger than it has ever been in our nation's history; that, by itself, attracts attention. Also, because the current account deficit reflects the excess of our country's imports over our exports, the deficit's descent into record territory has helped crystallize fears that the economy is losing competitiveness and that U.S. jobs and incomes are suffering as a result. Finally, the larger the current account deficit becomes, the greater the number of observers who believe that a correction, and one with significant implications for the U.S. economy, is imminent. Such expectations have contributed to, and in turn have been reinforced by, the slide in the dollar over the past few years.

Although views differ as to when a correction will take place, nearly all agree that the current trajectory of the U.S. current account deficit is unsustainable."
Roger Ferguson, Federal Reserve Chairman, 'U.S. Current Account Deficit: Causes and Consequences'

"There's something BIG coming up in the markets and in the US economy during the months ahead. If you look at the market action, if you listen to 'the language of the market,' you can almost taste it."
Richard Russell, Dow Theory Letter

"What few seem to have noticed, however, is that a mild form of stagflation -rising inflation in an economy still well short of full employment - has already arrived. I shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong."
Paul Krugman, New York Times

"An unbalanced global economy is at risk of becoming unhinged. Beset by record imbalances between current account deficits and surpluses, it doesn't take much to derail a system that is already in serious disequilibrium. Such a possibility now seems less remote in the face of a confluence of powerful blows -- an energy shock, threats to European unity, an outbreak of overt hostility between China and Japan, and the rising tide of US-led protectionist sentiment."
Stephen Roach, Global: Tilt!, Morgan Stanley

"Whisper it: the economist who wrote a famous book predicting the tech bubble would burst has just brought out a second edition with a new chapter on the property bubble. The Insider takes no pleasure in telling you this, but Robert Shiller, the author of Irrational Exuberance, reckons the property bubble has already burst in Australia, is currently bursting in Britain and will inevitably burst here as well...

Shiller's book is a timely reminder of the herd psychology that has driven investment bubbles for centuries.

He is scathing about the extent to which the authorities are silenced by the phenomenon of a bubble to the point where they fail to point out the obvious. "As the price increase during a bubble goes on through time, people constantly reassess their opinions," he writes. "People who thought there was a bubble, and that prices were too high, find themselves questioning their own earlier judgments, and start to wonder if fundamentals are indeed driving the price increase. "Many people seem to think that if the price increase goes on for years after some experts have called the price increase a bubble, then maybe the experts were wrong." Worse still, he argues, the longer the bubble continues, the more difficult it becomes for public figures to speak out for fear of being seen to get it wrong. He notes that "public figures incur a substantial risk of embarrassment if they go on record saying that stock market or housing market returns might be low or negative in coming years".

You only have to look at the response in Irish property, banking and media circles to successive warnings from the Economist magazine and some other authorities that Irish property is wildly overvalued to get a sense of how difficult it can be for the one who declares that the Emperor has no clothes.

Even so, Shiller reckons that public figures should speak out about their doubts. "It is a serious mistake for public figures to acquiesce in the ups and downs of market valuations, to remain silent about the implications of valuations and to leave all commentary to the market analysts who specialise in the nearly impossible task of forecasting the market over the short term and who may share interests with investment banks, broker dealers, home builders or realtors," he writes.

Just as the collapse in the stock market prompted investors to question certain dubious accounting practices at the likes of Enron and WorldCom, Shiller told the Insider that five years from now we will be looking back at a period of "lending scandals". And while his research is based primarily on trends in the US, the similarities between lending practices in the US and here are striking. Shiller is particularly scathing about the tendency of financial institutions to overlend to unsuspecting borrowers in a period of low interest rates whether in the form of lending more, or for extended terms or on an interest only basis.

His message is that these poor lending practices will return to haunt lenders and borrowers when interest rates rise. The interest rates are most likely to increase substantially, putting the borrower in a real bind in the future, Shiller argues. But just because Shiller is bearish on property doesn't mean he is bullish on equities. Even after five years of relatively stagnant stock market performance, he reckons US equities are still overvalued. So, how are people to make money for their futures? "People should be thinking about their human capital," he writes. "The way to make money is to work. There is no easy out." Ouch!"
Kathleen Barrington, The Insider, 'Chilling Analysis of the Property Boom', Sunday Business Post, 25-04-05

"Errare humanum est, in errore perservare stultum." - "It is human to make a mistake, it is stupid to persist in it." - Seneca

Opinions and Quotes can be found in articles in the News and Commentary sections of www.gold.ie