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Fat, Stupid and Complacent

Performance( % Change)
  Current Level  5 Days  1 Year  5 Year 
Gold 425.70  -2.0%  +9.8%  +53.6% 
Silver 6.91  +0.6%  +19.1%  +38.5% 
S&P 1,171.35  +1.3%  +4.6%  -19.0% 
Nasdaq 1,967.35  +2.4%  +1.5%  -48.0% 
ISEQ 6,047.36  +3.7%  +14.0%  +11.7% 
FTSE 4,918.90  +2.4%  +8.2%  -22.8% 
EUR/USD 0.77  -0.5%  -6.8%  -29.9% 
OIL Nymex  50.96  +2.5%  +29.4%  +89.5% 

Weekly Markets

Stock markets were up for the week.
Interest-rate markets were unsettled and volatile with the news of General Motors (GM) and Fords (F) credit downgrading to junk status resulting in a large sell off and subsequent rise in yields.
Commodities and precious metals were mixed but largely up with oil being up some 2.5%.

Precious Metals

Gold was down by $8.70 or 2% for the week. From $434.40 to $425.70 per ounce.
Silver was up 0.6% for the week from $6.87 to $6.91 per ounce.
Platinum (July) was up 0.9% for the week: from $867 per ounce to $874.80.
Palladium (June) was down 1.1%: from $196 per ounce to $193.80.

BBC Business reported how gold prices could hit 20-year highs of close to $500 a troy ounce this year as its status as a safe investment haven returns. Despite being out of favour for many years due to soaring equity and property prices, investors are putting money back into gold which resulted in prices being pushed to their recent 16-year high at $454 per ounce. Concerns about the state of the US economy, allied to soaring oil prices and the threat of terrorism, are set to reinforce this trend in 2005.

The BBC quoted the Chairman of industry experts Gold Field Mineral Services, Philip Klapwijk who said that the $500 mark could be hit this year and that "Looking at the price in historical real terms shows that gold today is still cheap.... Our views remains that there will be a bias towards growth in investment demand for gold."

Besides rising oil prices and the threat of terrorism also cited for the continuing price rise were slowing growth and inflationary concerns in the US, huge demand from booming China, India and emerging markets in Asia and globally.

Ian Watson of Galahad Gold said "As China continues to create wealth, more of that money will go into gold".

This is true for all emerging industrialising economies globally whose populations have a far higher regard and respect for gold than they do for their own indigenous paper currencies and major paper currencies such as the dollar and the euro.

Bill Fleckenstein of MSN Money wrote how 'Stagflation is Back - and that is Good for Gold'. He outlined why he is buying gold bullion itself and not the more risky stocks:"A slowing economy and rising inflation are here. That's great for precious metals.... As readers of my daily column know, whenever I have made a metals purchase in the last four months, it has been of bullion, not shares. My bullion position is now more than twice as large as my Newmont position. Not because I've sold Newmont (other than the sales I made at year-end), but simply because all my additions have been in gold itself.

I've discussed my reasons why. Gold is gold, and mining companies are the beneficiaries of higher gold prices. But mining companies are businesses, and there are lots of things that make this particular business difficult. That said, they will be dramatic beneficiaries of rising metals prices, and doubly so if we reach a moment in time when energy prices actually decline.... I expect that gold will go much higher and that the company <Newmont> will reap the rewards. Should the right things set up, I will add to my Newmont position. But I may just buy more gold. Owning gold itself has less risk than owning a mining company, as well as being a better currency surrogate."

Jim Jubak also of MSN Money wrote an article detailing his concerns about increasing US government fiscal irresponsibility and how that will lead to higher inflation, higher interest rates and a slowing economy. Referring to the US government's recent re-introduction of the 30 year Treasury bond to fund their massive liabilities going forward, Jubak said "make no mistake about it -- the slide toward fiscal irresponsibility just got another coat of grease. And right now, with inflation hedges such as gold so out of favor, it's a good time to buy with an eye for the long-term."

Gold Rush Set to Continue in 2005 - BBC Business, 28-04-05
Stagflation is Back -- and that's Good for Gold - Fleckenstein, MSN Money
A Rush for Gold - News Finance, 8-05-05
High Inflation: Good time to buy gold with an eye for the long-term - Jubak, MSN Money, 6-05-05
Is The Gold Bull Market Over? - Barisheff, Safe Haven, 6-05-05
Stagflation, the remix - The Economist, 6-05-05
$500 Gold No Longer Looks Fanciful - Gold Field Mineral Services via Gold Eagle, 5-05-05
Gold price predicted to double - Yahoo Business, 5-05-05
Limited down side seen for Gold Price - Australasian Investment Review, 3-05-05
Demand for Gold Globally puts even more Pressure on Supply - Mine Site, 3-05-05
Gold May Rise as Alternative Asset to US Stocks, Survey Shows - Bloomberg, 2-05-05
Gold prices to defy fund sales with new role as 'inflation fighter' - The Standard
Barrick's Munk Says Gold Supply Crucial to Prices - Reuters
Gold bullion has exhibited a positive return over the long term - FT, 4-05-05


Oil was again massively volatile and ended up 2.49%. It was up by $1.24 for the week closing at $50.96 from $49.72. It is back above the psychologically important $50 mark. The Guardian reported on Matthew Simmons, an investment banker and adviser to President Bush predicting that peak oil may result in the oil price hitting $100 within three years precipitating an economic collapse.

"One of the world's leading energy analysts yesterday called for an independent assessment of global oil reserves because he believed that Middle Eastern countries may have far less than officially stated and that oil prices could double to more than $100 a barrel within three years, triggering economic collapse. Matthew Simmons, an adviser to President George Bush and chairman of the Wall Street energy investment company Simmons & Company International, said that "peak oil" - when global oil production rises to its highest point before declining irreversibly - was rapidly approaching even as demand was increasing."

Analyst fears global oil crisis in three years - Vidal, The Guardian, 6-05-05
'Peak Oil' Gathering Sees $100 Crude This Decade - Reuters
A Peak Oil supply tsunami alert - Asia Times

Finance ministers warn of oil threat - Taipei Times, 5-05-05
High value of oil a worry for Ireland - Business Week, 5-05-05
IEA chief warns companies will fail to meet demand - Financial Times, 4-05-05
High oil prices hurt world economy-IEA chief - Reuters, 4-05-05
Energy ministers say must cut oil dependence - Reuters via Swiss Info, 4-05-05

Other Commodities

Reuters Commodities Research Bureau's Index was down 1.1% from 304.88 last Friday to 300.46.
The CRB's year to date gains are 5.8%. The 300 mark is important psychologically.
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 was largely unchanged. 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 15.3% year to date.

Transport costs are increasing significantly in the US economy adding to inflationary pressures. Matthew Dalton of Dow Jones reported how "A group of U.S. power plant owners has sued railroad giants Burlington Northern Santa Fe and Union Pacific Corp. to prevent major rate increases they fear will result from a new policy for setting shipping prices from Wyoming's Powder River Basin.... The change comes as demand for rail services in general and coal shipments in particular have soared. Shippers say the prices being quoted by the railroads are double or even triple the old prices."

Michael Smith and Claudia Carpenter of Bloomberg wrote of soaring orange juice prices which will feed into food price inflation: "Jose Luis Cutrale, the world's largest orange-juice producer, said wholesale prices will surge in the next few months and may reach a six-year high as lower production in Florida cuts into global supplies. Orange juice on the New York Board of Trade, up 55 percent from a year ago, will rise 20 percent in the next few months to as much as $1.10 a pound.... said Cutrale, whose family owned company, Sucocitrico Cutrale Ltda., makes one in every four glasses of orange juice consumed on the planet."


The US Dollar Index was largely unchanged for the week. It was up from 84.44 to 84.59.

The U.S. Dollar Index is computed using a trade-weighted geometric average of six currencies. The six currencies and their trade weights are:


Currency Weight %













International currencies were mixed against the dollar for the week.

The EUR was down marginally by 36 points for the week to close at 1.2822 from 1.2858.

The YEN was unchanged for the week closing at 95.31.

The "emerging economy" currencies continue to perform well. The Brazilian real traded to a 35-month high and the Mexican peso a 13-month high against the dollar. For the week, the Polish zloty jumped 3.6%, the Brazil real 2.8%, the Turkish lira 2.7%, the Czech koruna 1.9%, and the Chilean peso 1.7%.

On the downside, the Iceland krona sank 1.7%, the British pound 1%, the Swiss frank 0.9%, and the Australian dollar 0.7%.


The treasury and bond markets sold off with a consequent rise in yields.
The 10-Year Treasury note yield was up 6 basis points for the week to 4.26%, surging 2.6% higher after GM and F's downgrades.
Five-year Treasury yields were up 5 basis points, ending the week at 3.95%.
Two-year Treasury yields ended the week up 7 basis points to 3.72%.
Long-bond (30 year) yields were up 11 basis points to 4.63%.
The spread between 2 and 30-year government yields widened 5 to 91.

Greenspan warns on Fannie, Freddie again - Business Week
US Treasury Considers Reviving 30-Year Bond Sales - Bloomberg
Return of US 30-Year Bond May Revive Fiscal Discipline Debate - Bloomberg
Record budget deficits could mean return of 30-year Treasury bond- Boston Globe

General Motors and Ford Reduced to Junk Status

In a one-two punch for financial markets, Standard & Poor's cut General Motors Corp.'s and Ford Motor Co.'s debt ratings to junk status on Thursday, citing brutal global competition and flagging sales of the automakers' most profitable vehicles the hugely energy inefficient gas guzzlers. We predicted this some weeks ago.

The volume of GM debt has investors worried that some institutions, including insurance companies and state pension funds, would be forced to unload their GM bonds because of rules requiring them to only hold investment-grade securities. The forced sale of such volumes of corporate bonds would inevitably make borrowing more expensive to companies and corporations globally. GM bond yields surged to 11.4% and Ford's to 9.5%.

Dominic O'Connell in the Sunday Times reports how Sean Egan, founder of the rating agency Egan-Jones, which predicted the downgrade, said the companies now faced big problems in paying for their financing. "GM's borrowing is probably up 2% now. They have $300 billion of debt, so that's $6 billion extra for a company that earned $2.8 billion last year," said Egan. "Funding alone is enough to make GM go belly up."

"The fact is they (GM and Ford) suck," said Egan. "The strengths of the US manufacturers used to be attractive products, efficient manufacturing and efficient distribution. They are not offering that now." Some industry experts say the only solution is Chapter 11 - the bankruptcy proceedings under which US airlines have dealt with legacy costs.

The chances of GM ever returning to its glory days were slim, said Egan. "This isn't cyclical, it's a structural change. Seventy years ago there were 30 US car companies. GM and Ford won through, then they became fat, stupid and complacent. The seeds of destruction were sown not in the last couple of years, but decades ago."

Still Think Ford, General Motors Can't Go Bust? - Gilbert, Bloomberg, 6-05-05
GM and Ford are cut to junk status - FT, 6-05-05
General Motors Debt Is Cut to Junk by S&P Amid Sales Slump - Bloomberg, 6-05-05

There has been a steady deterioration in large US corporations achieving the best credit rating - the AAA rating.

In the late seventies this number was 58. By the late 1990's that figure was down to 22.
By 2001 there were only 9 companies in the United States of America that receive the top triple-A rating.

The nine companies were as follows:
1. American International Group (recently downgraded)
2. Berkshire Hathaway
3. Bristol-Myers Squibb
4. Exxon Mobil
5. General Electric
6. Johnson & Johnson
7. Merck
8. Pfizer
9. United Parcel Service

Moody's ratings, from top to bottom, are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C, with intermediate steps between.

Standard & Poor's scale is AAA, AA, A, BBB, BB, B, CCC, CC and C. The two agencies usually have similar ratings on companies.

Other than an elite status a 'Triple-A' rating to an organization means reduced cost for borrowing. But nowadays companies prefer to leverage their debt against their equity and take on more debt to show an increase on their return on equity.

According to Moody's Investor Service only around 6% of the debt in the 2.6 trillion investment-grade corporate bond market carries the top rating. This is down from 10% in 1990 and 25% in 1979. The reason for this is perhaps competition and a greater willingness on behalf of organisations to take on more debt. This made sense in the benign economic environment of the late 1990's with high growth, low inflation, falling commodity prices and declining interest rates. Should these benign macroeconomic fundamentals give way to a deflationary or stagflationary economic environment, which we are already seeing signs of, this debt may become problematic.

There is concern about a recent, widespread decline in ratings across the credit spectrum. The demise ranges from double-A and single-A companies to the large number of companies falling into the BBB/Baa range. This is the lowest investment-grade category, and anything rated B/Ba or lower is below investment grade, or "junk."

Should GM or F go into bankruptcy there may be systemic implications for the wider financial system as their massive debts create huge counter party risk.

Other Credit, Monetary and Money Supply Indicators

Broad money supply (M3) rose $19.1 billion ($73.2bn in 2 wks) to a record $9.60 Trillion (week of April 25). Year-to-date, M3 has expanded at a 4.3% rate, with M3-less Money Funds growing at 6.5% pace. For the week, Currency added $1.8 billion. Demand & Checkable Deposits jumped $14.9 billion. Savings Deposits dropped $31.9 billion. Small Denominated Deposits added $3.7 billion. Retail Money Fund deposits rose $4.7 billion, while Institutional Money Fund deposits dipped $0.5 billion. Large Denominated Deposits increased $3.5 billion, with a five-week gain of $63.3 billion. For the week, Repurchase Agreements jumped $18.3 billion, and Eurodollar deposits rose $4.5 billion.

Bank Credit rose $4.3 billion, increasing the year-to-date expansion to $313 billion, or 14.2% annualized. Securities Credit is up $99 billion, or 15.8% annualized, year-to-date. Loans & Leases have expanded at a 13.3% pace so far during 2005. For the week, Securities declined $7.1 billion. Commercial & Industrial (C&I) loans gained $4.8 billion. Real Estate loans dipped $2.7 billion. Real Estate loans have expanded at a 14.9% rate during the first 17 weeks of 2005 to $2.67 Trillion. Real Estate loans are up $318 billion, or 13.5%, over the past 52 weeks. For the week, consumer loans added $0.9 billion, and Securities loans jumped $13.5 billion. Other loans dropped $5.3 billion.


The Stock Markets performance was mixed but largely up.

The Dow Jones Industrial Average was up 1.5% for the week.
The S&P 500 Index, of more significance than the DOW, was also up 1.3%.
The Nasdaq Composite was up 2.38% for the week.

The broader market largely outperformed the major indices.

The Transports were up strongly 3.1%.
The more defensive Utilities were down 1%.
The Morgan Stanley Consumer index was up 1%.
The Morgan Stanley Cyclical index was up 2.3%.
The small cap Russell 2000 and S&P400 Mid-cap indices were up 3% and 2.3% respectively.
The NASDAQ100 and the Morgan Stanley High Tech index were up 2.5% and 3% respectively.
The Semiconductors were up 3%.
The Street.com Internet Index and NASDAQ Telecommunications indices were up 4% and 2% respectively.
Biotechs are up 3.5%.
Financial stocks were mixed.
The Broker/Dealers were up 2% but the Banks were up only marginally.
The XAU Index of large precious metal mining stocks was up 2.6%.
The HUI (AMEX's Gold BUGS index) a basket of unhedged gold and silver stocks rose more than 3.7%.

US insurance giant AIG said on Sunday said that an in-depth examination of its operations had turned up additional accounting frauds going back to 2000 that would reduce its net worth by $2.7 billion, $1 billion more than it had previously estimated. AIG said that it currently expects to file its 2004 accounts no later than May 31, 2005, which will allow it adequate time to complete its review and restate its financial statements, and allow its auditors PwC time to complete its audits.
AIG's Improper Accounting Inflated Worth by About $2.7 Billion - Bloomberg, 3-05-05


The week was dominated by the re-election of Tony Blair and the Labour Party and increasing concern regarding the health of the UK economy ; by the Federal Reserve raising interest rates for the 8th consecutive time since June and by the superficially strong looking US jobs number.

The Jobs Number

The US Labour Department reported that 274,000 new jobs were created in April outstripping Wall Street's projections.

"It's a Catch 22 that the market is in - this (jobs) number is good for today, but it will lead to slower growth in the future because the Fed still needs to raise interest rates," said Peter Boockvar, equity strategist at Miller Tabak & Co. "Also, the payroll number, while good, is still looked at as a lagging indicator. This does not completely negate the weaker economic data we have seen over the last couple of weeks."

Some financial pundits have begun to question the validity of US governmental departments and how the bureaucrats may be 'accentuating the positive'. Of the 274,000 jobs claimed to have been created in April, 257,000 of those "jobs" were courtesy of the CES (Current Employment Statistics) business birth/death "plug" number used by the Bureau of Labor Statistics.

John Crudele of the New York Post said that the BLS was using a 'suspicious lever' in their job calculations. Thus it seems likely that the jobs were not real jobs rather assumed jobs based on spurious reasons as outlined by the BLS themselves. http://www.bls.gov/web/cesbd.htm.

The Fed Rises Interest Rates

Last Tuesday the Fed put out a news release at 2:15pm saying that it was raising the Fed funds rate for the eight consecutive time by a quarter percentage point to 3%. By 3:00 pm, the stock market was trading at its lows on heavy volume. Investors had rendered their verdict on the Fed's action and accompanying statement, and it was not favourable. Then, with less than five minutes to go until the market closed and with stocks on the ropes, the Fed for the first time ever released an additional sentence which put the concerns about inflation in a more positive light. The additional sentence said "Longer-term inflation expectations remain well contained." The DOW rallied 175 points after the Fed's unusual follow up.

For the Fed to leave out a sentence inadvertently is very unlikely. The Fed has been issuing statements following interest-rate meetings since February 1994 and this is the first error made in any of those statements.

Many long time traders and observers of the markets were surprised and concerned by the surprise late intervention. The Fed's credibility is increasingly being questioned after the they unprecedentedly changed their statement. Many traders felt this was very significant and may lead to questions regarding Alan Greenspan and the Federal Reserve's credibility going forward.

Many financial pundits and economists believe the integrity of in the US financial system has been aided by Greenspan's ability to maintain confidence in it even when serious questions and challenges arose. Greenspan's admiring pundits have spent years oohing and aahing over every syllable and word emanating from the man's mouth as if he were some infallible God like creature.

This confidence is now being eroded and the normally supine financial press are now asking the hard questions. Has Greenspan left rates too low for too long thereby fostering large asset bubbles and letting the inflation genie out of the bottle?

The revised statement shenanigans is of importance not because of it's short term positive impact on the stock market. Brazen manipulation like this does not happen in a vacuum; it is an indication that the Federal Reserve is backed into a corner and as Stephen Roach, Chief Economist of Morgan Stanley succinctly put it 'trapped'. They need to raise interest rates and reign in inflation but increasingly realise that higher interest rates are already crimping economic growth and will negatively affect the US consumer and the now all important housing market.

Blair, Labour & Increasing Concerns re the UK Economy

The week saw the re-election of Labour and Tony Blair for his third term. Opposition to the war in Iraq may have led to Blair's majority being significantly weakened and the knifes are already out for Tony Blair and he looks likely to be succeeded by Gordon Brown in the short to medium term.

The story the Labour politicians tried to drum into the UK populaces heads during the election campaign was that unemployment is close to an all-time low and the wider economy is in great shape.

Few people have objected to these claims, but a growing tide of evidence from the labour, retail, manufacturing and housing markets is telling a different tale.

Interest rates have increased significantly and the housing market continues to show signs of slowing down. Jobs are being slashed at some of Britain and Ireland's most established employers, including MG Rover, Marconi, Waterford Wedgwood and, most recently, US computer giant IBM.

The City Investment bank ABN Amro's economic research department are ranked number one for their economic analysis by the respected 'Institutional Investor' due to their economic realism. They can not be easily dismissed as being 'gloomy'. ABN Amro predict that unemployment will rise more than 525,000 over the next three years as a result of large-scale job losses in retailing, manufacturing, construction.

Large job losses in Ireland and the UK are a sign of things to come as our manufacturing base is being eroded. Ireland, the EU, the US and all the more affluent economies of the world simply cannot compete with low wage, low currency, low cost economies of China, India and other emerging markets and economies. One of the largest costs industrialised nations face is energy costs and given the reality that is peak oil it would be sensible to begin lessening our dependence on foreign imported fossil fuels and start switching to solar, wind, tidal, biomass and possibly even a limited use of nuclear power.

This switch would be costly in the short term but would create jobs in these vital emerging sectors; would lessen the blow of losing many manufacturing jobs and make our industry and economy far more competitive over the long term.

Bubble, Bubble, Property Price Trouble - Barrington, The Insider, Sunday Business Post, 8-05-05
What jobs will be left when I grow up? - O'Connell & Smith, The Sunday Times, 8-05-05
Beware Brown unleashed - Smith, Economics Editor, The Sunday Times, 8-05-05
Bankruptcies reach another record in England, Wales - BBC Business, 7-05-05
500,000 British jobs in danger - This is London
Homes: U.K. went cold; U.S. could too - CNN Money, 4-05-05
Stagflation, the remix - The Economist, 6-05-05
Blair faces tougher economic outlook - RTE Business, 6-05-05
Waking to a sobering reality - Scotsman, 6-05-05
After the party comes a big hangover - Scotsman, 6-05-05
Britain's Brown can't sleep through this nightmare - The Times, 6-05-05
Consumer slowdown 'will cost UK half a million jobs' - Independent, 6-05-05
Unilever says Europe still 'very challenging'  - RTE Business, 6-05-05
Slowdown ahead, says Credit Suisse - The Telegraph, 5-05-05
US factory sector growth slows - RTE Business, 3-05-05
UK voters see tax rising after election - RTE Business, 3-05-05
UK retail sales post sharpest fall in 13 years - RTE Business, 3-05-05

It may be prudent to reduce exposure to property and equities and increase one' allocation to more defensive conservative asset classes such as cash deposits and gold. The announcement by Rabobank that they would offer people 3% interest rates on their new online savings accounts is important. Rabobank said its deposit account is offering the highest variable interest rate in the country at 3%, about 10 times greater than what is being paid out on ordinary current accounts.

Aileen Power writing in the Sunday Business Post in an article entitled 'The Safe Way to Save a Small Fortune' quoted prominent economists who advocated a more risk averse conservative investment approach. Alan McQuaid, chief economist of Bloxham Stockbrokers said that "The last two years have been good for equities, but we are heading into uncertain times. The global economic outlook is for a slowing US GDP and high oil prices. The days of massive returns from equity markets are gone, which doesn't mean that deposits are offering great returns either. If you have a fixed deposit account, it looks like a good bet."

Austin Hughes, chief economist of Irish Intercontinental Bank echoed McQuaid, "I would be inclined to leave the money on deposit. I don't expect much excitement from stock markets. The SSIA play has long been about the government freebie worth 9.7 per cent per year. As we get closer to maturity, people will want more security from their returns. If you plan to leave it as a long-term investment, you could leave it in equities, but they need time to outperform. The worry is that your investment may mature on a stock market dip which will make a difference to your total return. Even over a two-year view, I would expect interest rates to have moved higher and would thus favour deposits over equities and bonds."

Given the deteriorating macroeconomic fundamentals in the US and UK a greater culture of saving should be encouraged. An increased allocation to more conservative assets classes such as deposits and gold is a more prudent risk averse investment and saving strategy.

Opinions of the Week

"Stagflation the Remix. It's not the 1970s, but the modern version could prove equally tricky.

Like the disco era it dominated, stagflation has a distinctive beat: slow growth, rising inflation, high oil prices and weak labour markets. In the 1970s this nasty combination haunted the global economy. Could it be making a comeback?

Today's world economy does seem to be playing some similar tunes. In the statement accompanying its latest interest-rate hike on May 3rd, America's Federal Reserve fretted about both price pressure and a slowdown in spending. On May 4th, the European Central Bank kept interest rates unchanged, but worried aloud about oil prices and slowing growth.

The evidence is mounting that global growth has slowed. In America, output grew by an annualised 3.1% in the first three months of 2005, the slowest pace for two years. More recent figures, from weak retail sales to soggy consumer confidence, suggest this "soft patch" may be getting softer by the day. In Britain, the latest numbers - in retail sales and manufacturing - point to weaker growth. And in the euro zone, sluggish economies are looking ever more lethargic.

Yet even as growth is slowing, price pressures are looming. In America, consumer prices rose 3.1% in the year to March, up from 1.7% a year ago. In Britain, inflation jumped unexpectedly in March. And in the euro zone, consumer prices are still rising faster than the 2% goal that the European Central Bank targets. With output slowing and inflation stubborn, it is small wonder that the concerns about stagflation are back in fashion."
Editorial, The Economist, 'Stagflation, the Remix'

"Contrary to a common belief, equities didn't simply trend sideways through the 1970s before moving to new highs with the great bull market starting in 1982. This illusion is caused by inflation that plagued the period. Deflating the S&P 500 with the CPI (Chart 1) reveals that the market peaked in 1969, not 1973, before falling 64% over the subsequent 13 years, ultimately bottoming out in 1982. Stock prices failed to exceed the 1969 peak until 1993, 24 years later, and didn't move convincingly through the 1969 level until 1995. At this point, the weary, and rather aged, investor still faced capital gains taxes on a phantom 300% gain wholly due to inflation. Covering this tax liability likely extended the true recovery period to within shouting distance of the bear market in stocks beginning in 2000, the most recent peak in equity markets."

Jeffrey L Ferguson, 'Bear's shadow falls over financial markets', Asia Times, 5-05-05

"Does the Fed watch the markets when it makes its statements? Damn right it does. Two minutes before the close yesterday the Dow was down 25 points. The Fed didn't like that reaction to its rate boost. The Fed then did something that in half a century of watching markets I've never seen before. The Fed announced that they made a mistake and added that they had inadvertently left out the statement that inflation expectations were "well contained." On that, the Dow reversed and closed up 5 points. Talk about manipulation -- that was FLAGRANT!"
Richard Russell, Dow Theory Letters

"Bubbles can keep inflating as long as there's cheap credit.... On a nationwide basis, the market value of real estate is now close to 200% of disposable income. The previous high in that ratio was in the late '80s, when it climbed close to 160%.... A ratio close to 200% cannot last more than a few months. It is the equivalent of Nasdaq trading over 5000."
Paul Kasriel, Chief Economist, Northern Trust, quoted in the The Financial Times

"In the UK, house prices are selling for 6 times average earnings of the guys buying the houses, a mortgage so huge that it is more than three standard deviations above the earnings norm (3.6 times annual earnings). But it is not just in the UK, but also in Sydney, Australia, where mortgages are routinely made at about 4.8 times annual earnings. In Boston, a whopping 6.5 times annual earnings (over 2 standard deviations), and for the United States as a whole, about 4.3 times annual income, versus an historical average of 3.4 times income, and is three standard deviations above the mean....

The Australian residential real estate market could be the canary in the coal mine - that is, a harbinger of bad things to come for a lot of us. Sydney house prices rose earlier and faster than any other. Australia also raised its rates earlier and further than England.... And both of these foreign markets have a large proportion of floating rate mortgages, so it would reasonably be expected that the effect of higher rates would impact prices faster.

The Aussie canary is already swooning a bit. Sydney prices are well off their highs although as yet far from a real bust. But the real bust is certain to arrive because ALL bubbles do indeed move all the way back to or below the trend that existed prior to those bubbles forming.

All bubbles burst; there are no exceptions. We have never seen a single exception in any financial market. Bubbles form; bubble burst; prices revert to the mean - this is the natural order of the financial universe."
Jeremy Grantham, Chairman of Grantham, Mayo, Van Otterloo (GMO)

"Thanks to the decrease of interest rates, the prices of stocks, bonds and residential real estate have generally increased. Asset price inflation, in other words, has swelled individuals' and households' balance sheets.... Americans - and in differing degrees, Australians, Britons and Canadians - are tending their fields less diligently and are eating more of their seed corn. Here, then, is the example par excellence of an improperly diagnosed ailment that continues to receive insufficient attention. Many people are consuming their wealth (which is more meagre than they suppose) in order to finance today's lifestyle; in so doing, and in cahoots with their governments, they have decided to ignite a short-term, meagre and debt-fuelled boomlet rather than address long-term problems. To the very limited extent to which the impairment of capital in these countries has been diagnosed, policymakers have treated it incorrectly.

In short, policies that encourage saving and investment - and do not sanctify spending and consumption - are required. But to expect politicians to change their profligate spots is to suppose that leopards will become vegetarians. As a result, potentially severe disorders have been bequeathed to the future."
Chris Leithner, 'The Illusion of Household Wealth', Leithner & Company Limited

"The credit boom is still on schedule to collapse in early 2006, taking the economy and the stock market down with it."
Peter Eavis, Senior Columnist, 'Selloffs Suggest a Looming Credit Crunch' , The Street

"The downturn in spending means that retailers face the most difficult set of trading conditions in living memory".
Kevin Hawkins, Chairman of the British Retail Consortium

"Optimists argue that the current slowdown will prove temporary. We disagree and think the worst is yet to come."
James Carrick, Economist, ABN Amro

"GOLD is making a comeback on world markets as increasing demand and a shortage of supply push up prices.
A symbol and guarantee of wealth since ancient times, the precious metal is again fashionable among investors facing uncertain times.
As global stock markets wobble, interest rates rise and the US dollar falls, one Australian analyst is predicting gold will double in value as producers scramble to overcome supply bottlenecks and possibly find new deposits."
Jim Dickins, 'A Rush for Gold'- News Finance, 8-05-05

"I don't know what billionaire Warren Buffett thinks about Irish property prices, but I reckon he'd sit up and take notice if you told him people were prepared to spend $22 million an acre (EUR17 million) for the privilege of living in a Dublin 4 semi-d.

The Sage of Omaha issued stern warnings about the residential real estate bubble, the destabilising effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States.

Buffett also expressed concern about the trade deficit and the US dollar, warned that he did not see a clear future for pharmaceutical stocks, and said that GM and Ford motor companies face severe trouble over pension and health costs.

But it was his remarks on the property bubble that caught the Insider's attention. This is the second time in recent weeks that a leading US authority has warned about a real estate bubble.

Last month we spoke to US economist Robert Shiller, a professor of economics at Yale university, after he issued a new edition of his book, Irrational Exuberance, with a chapter on the property bubble....

And while demographics, interest rates and all-important psychological factor are still supporting a strong property market in Ireland, the significance of these latest warnings on property valuations from Buffett and Shiller should not be underestimated."
Kathleen Barrington, The Insider, 'Bubble, Bubble, Property Price Trouble', Sunday Business Post

"The last two years have been good for equities, but we are heading into uncertain times. The global economic outlook is for a slowing US GDP and high oil prices. The days of massive returns from equity markets are gone, which doesn't mean that deposits are offering great returns either. If you have a fixed deposit account, it looks like a good bet."
Alan McQuaid, Chief Economist, Bloxham Stockbrokers quoted by Aileen Power, 'The Safe Way to Save a Small Fortune', Sunday Business Post

"A slowing economy and rising inflation are here. That's great for precious metals."
Bill Fleckenstein, 'Stagflation is Back -- and that's Good for Gold', MSN Money

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

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